Commissioner of Income-Tax, Gujarat Vs.
A. Raman & Company [1967] INSC 153 (18 July 1967)
18/07/1967 SHAH, J.C.
SHAH, J.C.
SIKRI, S.M.
RAMASWAMI, V.
CITATION: 1968 AIR 49 1969 SCR (1) 10
CITATOR INFO:
RF 1972 SC 29 (4) E 1973 SC2330 (13) F 1974
SC1358 (10) RF 1975 SC 703 (11) AFR 1976 SC 203 (1,4,12,15,16) F 1977 SC 757
(31) RF 1977 SC2129 (12) R 1979 SC1960 (6,14) RF 1986 SC 649 (16,47) RF 1986
SC1853 (19,21)
ACT:
Indian Income-tax Act, 1961, s.
147-Conditions for the exercise of power to re-open assessment.
Constitution of India, 1950, Art. 226-Powers
of High Court to issue writ when Income-tax Officer's jurisdiction to issue
notice under S. 147 of the Indian Income-tax Act, 1961 is questioned-High Court
must not re-appraise evidence.
HEADNOTE:
The assessee firm consisted of two partners
who were managers of their respective Hindu Undivided Families. The firm sold
its goods to the aforesaid families and the families again sold the goods on
their own account. In income-tax proceedings for the years 1959-60, 1960-61 and
1961-62 the firm and the Hindu Undivided Families were separately assessed in
respect of their incomes.
Subsequently the Income-tax Authorities took
view that the sale of goods by the firm to the families was only a device to
divert the profits of the firm and on this view issued notices under s. 147 of
the Income tax Act, 1961 requiring the assessee to show cause why the
assessments for the years 1959-60, 1960-61 and 1961-62 should not be reopened.
The High Court of Gujarat in a petition for a writ under Art.
226 of the Constitution quashed those notices
and restrained the Income-tax Officer from taking proceedings in pursuance
thereof. With special leave granted by this Court, the Revenue appealed.
Held:(i) The High Court may issue a high
prerogative writ prohibiting the Income-tax Officer from proceeding with
reassessment when it appears that the Income-tax Officer had no jurisdiction to
commence proceedings because the conditions precedent do not exist. [12G-H;
13B-C] Calcutta Discount Co. Ltd. v. Income-tax Officer, Companies District 1,
Calcutta, & Anr. 41 I.T.R. 191, followed.
It is however not open to the High Court
exercising powers under Art. 226 to set aside or vacate the notice for
reassessment by itself re-appraising the evidence. [15B] (ii)The condition
which invests the Income-tax Officer with jurisdiction has two branches: (i)
that the Income-tax Officer has reason to believe that income chargeable to tax
has escaped assessment; and (ii) that it is in consequence of information which
he has in his possession and that he has reason so to believe. The expression
'information' in the context of which it occurs must mean instruction or
knowledge derived from an external source concerning facts or particulars, or
as to law relating to a matter bearing on the assessment. If he has such
information the Income-tax Officer may commence proceedings under s. 147(1)(b).
But to commence such a proceeding it is not necessary that on the materials
which came to the notice of the Income-tax Officer, the previous order of
assessment was vitiated by some error of fact or law. [13C-G] (iii)In the
present case however the pre-conditions for the issue of a notice of
re-assessment did not exist. The law does not oblige a trader to make the maximum
profit that he can out of his 11 trading transactions. Income which accrues to
a trader is taxable in his hands: income which he could have, but has not
earned is not made taxable as income accrued to him.
Avoidance of tax liability by so arranging commercial
affairs that charge of tax is distributed is not prohibited.
[15D-G]
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 768 of 1966.
Appeal by special leave from the judgment and
order dated December 18, 1964 of the Gujarat High Court in Special Civil
Application No. 332 of 1964.
B.Sen, S. K. A Iyar, R. N. Sachthey and S. P.
Nayar, for the appellant.
S. T. Desai and 0. C. Mathur, for the
respondent.
The Judgment of the Court was delivered by
Shah, J.-The assessees--M/s A. Raman & Company-are dealers in "mill
stores" in the course of their business they sell " mill stores"
to other dealers including two concerns trading in the names of M/s A. M. Shah
& Co. and M/s R. Ambalal & Co., which are owned by the Hindu undivided
families, managers of which are the only partners of the assessees.
For the assessment years 1959-60, 1960-61 and
1961-62 the assessees were originally assessed by the Income-tax Officer,
Circle-1, Ward-A, Ahmedabad, while the partners of the assessees and the Hindu
undivided families which traded in the names of M / s A. M. Shah & Co. and
M / s R. Ambalal & Co. were assessed by Income-tax Officers in other
Circles.
The cases of assessees, of the partners of
the assessees and of the two Hindu undivided families trading in the names of
A. M. Shah & Co. and R. Ambalal & Co. were later transferred to the
Income-tax Officer, Group Circle-J, Ahmadabad. That Officer by letter dated
March 20, 1964 informed the assessees that he was convinced from a perusal of
the assessment records of the assessees, their partners and their individual
Hindu undivided families, that the partners of the assessees had contrived to
divert profits of the assessees to their respective Hindu undivided families
and had tried to "evade proper taxation", and on that ground he
called upon the assessees to submit their objections, if any, to the reopening
of the assessments for the years 195960, 1960-61 and 1961-62. The assessees in
reply contended that the Income-tax Officer had no jurisdiction to reopen the
assessments since the Hindu undivided families of the two partners and the
assessees had submitted "effect and complete returns of income"
supported by their books of account, "quantity details" of purchases,
sales and expenses, and had given all material facts and relevant information
necessary for assessment at the time of each assessment.
The Income-tax Officer issued three separate
notices under s. 147 of the Income-tax Act, 1961, requiring the assessees to
show cause why the assessments for the years 1959-60, 1960-61 12 and 1961-62
should not be reopened. The High Court of Gujarat in a petition for a, writ
under Art. 226 of the Constitution quashed those notices and restrained the
Income-tax Officer from taking proceedings in pursuance thereof. With special leave
granted by this Court, the Commissioner of Income-tax has appealed to this
Court.
In support of the claim of the Income-tax
Officer, to reopen the assessments, reliance was placed in the High Court on
cl. (b) of s. 147 (1), of the Income-tax Act, 1961. The material part of s.
147(1)(b) may be read:
"If(a) (b)notwithstanding that there has
been no omission or failure as mentioned in clause (a) on the part of the
assessee, the Income-tax Officer has in consequence of information in his
possession reason to believe that income chargeable to tax has escaped
assessment for any assessment year, he may, subject to the provisions of
sections 148 to 153, assess or reassess such income or recompute the loss or
the depreciation allowance as the case may be, for the assessment year
concerned.
Explanation 1-For the purposes of this
section, the following shall also be deemed to be cases where income chargeable
to tax has escaped assessment, namely:(a) where income chargeable to tax has
been underassessed; or * * * * *" Under s. 147(1)(b) reason to believe
that income chargeable to tax has escaped assessment in consequence of
information in the possession of the Income-tax Officer is a condition
precedent to the exercise of his jurisdiction to assess or reassess the income
of the assessee. If that condition does not exist, steps taken by the
Income-tax Officer to assess or reassess the income will be without
jurisdiction.
It was held by this Court in Calcutta
Discount Co. Ltd. v. Income-tax Officer, Companies District I, Calcutta &
Another(1) that the High Court in appropriate cases has power to issue an order
prohibiting the Income-tax Officer from proceeding to reassess the income when
the conditions precedent do not exist. At p. 207, K. C. Das Gupta, J., delivering
the majority judgment of the Court observed:
"It is well-settled however that though
the writ of prohibition or certiorari will not issue against an executive 13
authority, the High Courts have power to issue in a fit case an order
prohibiting an executive authority from acting without jurisdiction. Where such
action of an executive authority acting without jurisdiction subjects or is
likely to subject a person to lengthy proceedings and unnecessary harassment,
the High Courts, it is well settled, will issue appropriate orders or
directions to prevent such consequences".
The High Court may, therefore, issue a high
prerogative writ prohibiting the Income-tax Officer from proceeding with reassessment
when it appears that the Income-tax Officer had no jurisdiction to commence
proceeding.
The condition which invests the Income-tax
Officer with jurisdiction has two branches: (i) that the Income-tax Officer has
reason to believe that income chargeable to tax has escaped assessment; and
(ii) that it is in consequence of information which he has in his possession
and that he has reason so to believe. Since the learned Judges of the High
Court have concentrated their attention upon the second branch of the condition
and have reached their conclusion in favour of the assessees on that branch, it
would be appropriate to deal with the correctness of that approach.
The expression "information" in the
context in which it occurs must, in our judgment, mean instruction or knowledge
derived from an external source concerning facts or particulars, or as to law
relating to a matter bearing on the assessment. If as a result of information
in his possession, the Income-tax Officer has reason to believe that income
chargeable to tax had escaped assessment, the Income-tax Officer has
jurisdiction to assess or reassess income under s. 147(1)(b) of the Income-tax
Act, 1961.
Information in his possession that income
chargeable to tax has escaped assessment furnishes a starting point for
assessing or reassessing income. If he has that information, the Income-tax
Officer may commence proceedings for assessment or reassessment. To commence
the proceeding for reassessment it is not necessary that on the materials which
came to the notice of the Income-tax Officer, the previous order of assessment
was vitiated by some error of fact or law.
The High Court exercising jurisdiction under
Art. 226 of the Constitution has power to set aside a, notice issued under s.
147 of the Income-tax Act, 1961, if the condition precedent to the exercise of
the jurisdiction does not exist. The Court may, in exercise of its powers,
ascertain whether the Income-tax Officer had in his possession any information:
the Court may also determine whether from that information the Income-tax
Officer may have reason to believe that income chargeable to tax had escaped
assessment. But the jurisdiction of the Court extends no further. Whether on
the information in his possession he should commence 14 a proceeding, for
assessment or reassessment, must be decided by the Income-tax Officer and not
by the High Court.
The Income tax Officer alone is entrusted
with the power to administer the Act: if he has information from which it may
be said, prima facie, that lie had reason to believe that income chargeable to
tax had escaped assessment, it is not open to the High Court, exercising powers
under Art. 226 of the Constitution, to set aside or vacate the notice for
reassessment on a re-appraisal of the evidence.
The High Court in this case was apparently of
the view that the information in consequence of which proceedings for
reassessment were intended to be started, could have been gathered by the
Income-tax Officer in charge of the assessment in the previous years from the
disclosures made by the two Hindu undivided families. But that, in our
judgment, is wholly irrelevant. Justification of the Income-tax Officer to
reassess income arises if he has in consequence of information in his
possession reason to believe that income chargeable to tax has escaped
assessment. That information, must, it is true, have come into the possession
of the Income-tax Officer after the previous assessment, but even if the
information be such that it could have been obtained during the previous
assessment from an investigation of the materials on the record, or the facts
disclosed thereby or from other enquiry or research into facts or law, but was
not in fact obtained, the jurisdiction of the Income-tax Officer is not
affected.
The High Court was also of the view that the
inference raised by the Income-tax Officer that the Hindu undivided families of
the assessees had made profit by sale of articles purchased from the assessees
larger than the profit which the assessees had made, was not justified, since
there was no evidence on the record about the price at which similar goods were
sold by the assessees to other merchants and about the profit which those other
merchants made by sale of those goods. But in a petition under Art. 226 of the
Constitution the taxpayer may challenge the validity of a notice under s. 147
of the Income-tax Act, 1961, on the ground that either branch of the condition
precedent does not exist, but an investigation whether the inferences raised by
the Income-tax Officer from the information are "correct or proper"
cannot be made. Counsel for the Commissioner is, therefore, right in contending
that the High Court entered upon an investigation of matters which were not
within their competence.
But the appeal of the Commissioner must still
fail. The case of the Commissioner on the materials placed before the High
Court, suffers from a serious infirmity on the first branch of the
jurisdictional condition. The averments made in the affidavit filed by the
Income-tax Officer in that behalf do not establish the existence of that branch
of the condition. In reply to the averment by the 15 assessees that the
Income-tax Officer had no reason to believe that income had escaped assessment,
the Income-tax Officer stated:
"In the course of the discussions I had
at the several meetings hereinabove referred, I also learnt that in the earlier
years also the petitioners (the assessees) had effected such sales to the said
Hindu undivided families, and that over and above the margin of profits earned
by the petitioners (the assessees) from the Hindu undivided families, the Hindu
undivided families had earned substantial profits on the resale of such goods.
1, therefore, came to the conclusion that the creation of the Hindu undivided
family business was merely a subterfuge or a contrivance by the partners of the
petitioner firm (the assessees) to divert the huge profits made by the
petitioners (the assessees) on imported articles".
The plea raised by the Income-tax Officer is
that income which could have been earned by the assessees was not earned, and a
part of that income was earned by the Hindu undivided families. That according
to the Income-tax Officer was brought about by "a subterfuge or
contrivance".
Counsel for the Commissioner contended that
if by resorting to a "device or contrivance", income which would
normally have been earned by the assessee is divided between the assessee and
another person, the Incometax Officer would be entitled to bring the entire
income to tax as if it had been earned by him. But the law does not oblige a
trader to make the maximum profit that he can out of his trading transactions.
Income which accrues to a trader is taxable in his hands: income which he could
have, but has not earned, is not made taxable as income accrued to him. By
adopting a device, if it is made to appear that income which belonged to the
assessee had been earned by some other person, that income may be brought to
tax in the hands of the assessee, and if the income has escaped tax in a
previous assessment a case for commencing a proceeding for reassessment under
s. 147(1)(b) may be made out. Avoidance of tax liability by so arranging
commercial affairs that charge of tax is distributed is not prohibited. A
taxpayer may resort to a device to divert the income before it accrues or arises
to him. Effectiveness of the device depends not upon considerations of
morality, but on the operation of the Income-tax Act. Legislative injunction in
taxing statutes may not. except on peril of penalty, be violated, but it may
lawfully be circumvented.
If the goods were nominally transferred to
the Hindu undivided families the latter acting merely as benamdars for the
assessees, and the profits were earning in truth by the assessees, income
earned by sale of the goods by the Hindu undivided families may be held
chargeable to tax as income which has escaped assessment to tax in 16 the hands
of the assessees. In the present case,, no such case was attempted to be made
out in the affidavit filed by the Income-tax Officer. We hold, therefore, that
on the materials on the record, the Income-tax Officer. had no reason to
believe that income chargeable to tax had escaped assessment for the three
years in question.
The order passed by the High Court is
therefore confirmed.
There will, however, be no order as to costs
in this Court and the High Court.
G.C.
Appeal dismissed.
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