Malegaon Electricity Co. (P) Ltd. Vs.
The Commissioner of Income-Tax, Bombay  INSC 153 (11 August 1970)
11/08/1970 HEGDE, K.S.
CITATION: 1970 AIR 1982
R 1986 SC1857 (7) F 1987 SC1768 (3,5)
Indian Income-tax Act, 1922, s. 10(2)(vii)
and s. 34-Full disclosure of material facts to Income-tax Officer within
meaning of s. 34(1)(a), what amounts to-Failure to show excess of price for
which assets sold in return and further failure to show written down value
amounts to failure to disclose facts-Tribunal must determine whether any
profits are made under section 10(2) (vii)-Without this being first determined
the High Court in reference under section 66(1) cannot decide whether there has
been failure to disclose material facts.
The appellant was a private limited company.
The business and assets of the appellant were purchased by another company
under agreement dated September 9, 1951. In the original proceedings for
assessment to income-tax for the assessment year 1952-53 the appellant brought
the transactions of sale to the notice of the Income-tax Officer and placed
before him certain relevant documents and also furnished the information asked
for. Setting off the unabsorbed depreciation brought forward against the income
as found by him the Income-tax office determined the income of the appellant
for the said assessment year at 'NIL'.
Sometime later the successor-in-office of the
said Incometax Officer issued a notice under s. 34(1) (a) of the Indian
Income-tax Act, 1922 to the appellant after obtaining sanction from the
Commissioner of Income-tax. He hold that the appellant had not disclosed its
profit under s. 10(2) (vii) of the Act resulting from the sale of its assets
and determining the said profits at Rs. 4,88,386, he made a reassessment. The
Appellate Assistant Commissioner confirmed the order. The Tribunal, however,
held that the material facts were all disclosed to the Income-tax Officer at
the time of the original assessment and a mere change of opinion did not
justify proceedings under s. 34(1)(a). At the request of the Commissioner of
Income-tax the Tribunal referred to the High Court the questions (i) whether in
the circumstances of the case it could be held that in the original assessment
proceedings the assessee had made a full disclosure of material particulars;
and (ii) whether having initiated proceedings under s. 34(1) (a) the Income-tax
Officer could have later relied on s. 34(1)(b).
HELD : The law casts a duty on the assessee
to 'disclose fully and truly all material facts necessary for his assessment'
for the relevant year. ,Further the explanation to section 34(1) says that mere
production before the Income-tax Officer of account books or other evidence
from which material facts with due diligence could have been discovered by the
Income-tax Officer will not amount to disclosure within the meaning of the
section. In the present case the price realised at the sale in excess of the
written down value of the assets sold, had not been included as profits in the
return submitted by the assessee. It had also not shown the same in section 'D'
of Part I of the return. The assessee had not shown either in its return or in
any of the documents submitted to the Income-tax Officer.
the written down value of the assets sold.
This failure amounted to a failure on the part of the assessee to disclose
fully and truly the material 762 facts necessary for its assessment. From the
cryptic statement of the Income-tax Officer in the original assessment order
that 'no adjustment is necessary' the Tribunal was not justified in drawing the
interence that the Income-tax Officer had considered all the facts. [766 F-G]
V.D.M.RM.M.RM. Muthiah Chettiar v. Commissioner of Incometax, Madras, 74 I.T.R.
183, held inapplicable.
Calcutta Discount Co. Ltd. v. Income-tax
Officer, Companies Distt 1, Calcutta, 41 I.T.R. 191, distinguished.
The High Court should not have and this Court
would not answer the questions referred under s. 66(1) of the Act because those
questions ,could not be answered without first deciding whether a part of the
sale price received by the assessee amounted to profits under s. 10(2)(vii).
[768 C-D] [Tribunal directed to decide first whether the assessee had any
profits failing within s. 10(2)(vii) and thereafter decide the appeal]
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 1345 of 1967.
Appeal from the judgment and order dated
February 10, 1966 of the Bombay High Court in Income-tax Reference No. 19 of
A. K. Sen, Vasant Mehta , and Ravinder
Narain, for the appellant.
Jagadish Swarup, Solicitor-General, S. Mitra,
S.-K. Aiyar and B. D. Sharma, for the respondent.
The Judgment of the Court was delivered by
Hegde' 'J. This is an appeal by certificate under S. 66A(2) of the Indian Income-tax
Act, 1922 (to be hereinafter referred to as the 'Act'). The assessee is a
Private Limited Co. The assessment year with which we are concerned in this
case is 1952-53, the relevant accounting year ending on March 31, 1952. The
assessment for that year was completed by the Income-tax Officer ,on August 4,
1953. He determined the assessee's business profits ,of the year ended on March
31, 1952 at Rs. 33,096/subject to the assessee's claim of unabsorbed
depreciation brought forward to the extent of Rs. 42,000/and odd. After setting
off the unabsorbed depreciation to the extent of Rs. 33,096/-, he determined
the assessee's total income for the assessment year 1952-53 at 'Nil'. In the
course of the assessment proceedings, the assessee -company informed the
Income-tax Officer by its letter of July 2, 1953 about the sale of the assessee
company to the Amalgamated Electricity Co.
(Belgaum) Ltd. (to be hereinafter referred to
as the Belgaum Co.'). It also brought to the notice of the Income-tax Officer,
the following documents:
763 (a) Appropriate extract from the minutes
of the meeting of the Board of Directors of the Belgaum Company held on
16-4-1951 agreeing to purchase the assets of the assessee company;
(b) Resolution passed on 19-9-1951 by the
Board of Directors for the assessee company deciding to sell the concern to the
(C) Agreement dated 19-9-1951 between the
said two companies;
Later on in response to a letter from the
Income-tax Officer, the assessee company informed him the manner in which the
sale price of Rs. 9,35,24-6/15/8 was determined. It also submitted a statement
of unabsorbed depreciation. That statement set out the depreciation accrued as
well as that allowed. The entire consideration for the sale was paid in cash on
October 4, 1951 and the profits earned by the assessee for the period of six
months ended on September 30, 1951 were paid over to the Belgaum Company. In
completing the original assessment, the Income-tax Officer observed:
"On going through these documents and
the copies of the Resolution passed by the shareholders of the Amalgamated
Electricity Co., it is seen that no adjustment is necessary in the matter. The
position of the company's total income is determined as under........" We
may mention at this stage that the consideration received by the assessee
company for the sale of its assets was much more than their written down value.
Yet the assessee company did not show in its return any profits under s.
10(2)(vii) of the Act nor did it show the
price received in excess of. the written down value of the assets sold in Part
I of Section 'D' of the Return.
Sometime later the Income-tax Officer found
out that the profits deemed to have been earned by the assessee company under
S. 10(2)(vii) had not been assessed'. Hence after obtaining the sanction of the
Commissioner, he commenced proceedings under s. 34(1)(a). After hearing the
assessee, the Income-tax Officer reassessed the assessee on August 26, 1957
determining its total income for the assessment year in question at Rs.
4,48,893/on the, basis that the profits earned by the assessee under s.
10(2)(vii) were Rs. 4,88,386/-. He rejected the contention of the assessee that
the notice issued by him under s. 34(1)(a) was invalid inasmuch as it had
placed before him all the primary facts necessary for the assessment. The
assessee unsuccessfully contended that there was no basis for his conclusion
that there was any failure on its part to disclose fully and truly all material
facts necessary for its assessment. The Income-tax Officer opined 764 that the
failure of the assessee to disclose its profits under S. 10(2)(vii) brought the
case within the, scope of S. 34(1)(a). In appeal the Appellate Assistant
Commissioner concurred with the view taken by the Income-tax Officer. lie held
that the assessee had a statutory duty to submit a return showing all profits
including the-deemed profits under S. 10(2)(vii).
On a further appeal to the tribunal, the
impugned assessment was challenged on various grounds. It was urged before the
tribunal, on behalf of the assessee that no portion of the price realised by
the sale of its assets came within the scope of s. 10(2) (vii) and further even
if any portion of that price can be considered as deemed profits under s. 10(2)(vii),
it was impermissible for the Income-tax Officer to initiate proceedings under
S. 34(1)(a) as the assessee had placed all the primary facts before the
Income-tax Officer and therefore it cannot be said that it had not fully and
truly disclosed all material facts. On behalf of the Revenue, it was urged
before the tribunal that the part of price realised by the sale of the assets
should be deemed as profits under s. 10(2)(vii); those profits had 'not been
included in the return of the assessee nor has the assessee placed all the
material facts necessary for determining its tax liability; therefore,, the
income-tax Officer was justified in initiating proceedings under s. 34(1)(a)
and at any rate the impugned assessment can be justified under s. 34(1)(b). The
tribunal did not go into the question whether any part of the sale proceeds can
be considered as deemed profits under s. 10(2)(vii) but it held that the
assessee had placed before the Income-tax Officer, all the primary facts
necessary for its assessment and therefore it cannot be said that it had failed
to disclose fully and truly all material facts. It observed "There can be
no manner of doubt that all primary facts regarding the transaction of the sale
of assessee's assets were placed by the assessee before the Income-tax Officer
at the time of the original assessment. The then Income-tax Officer appears to
have applied his mind to the facts of the case and after doing so he arrived at
the finding that no adjustment in regard to the surplus arising out of the sale
of the assets was necessary.
Whether or not there was any profit under s. 10(2)(vii),
and, if so, whether it was taxable was an inference to be drawn from the facts
which were fully placed before the Income-tax Officer. The mere omission of the
sale transaction from section D of Part I of the return of income would not
enable the Departmental authorities to hold that the assessee had failed to
disclose fully and truly all material facts necessary for its assessment. In'
-;dew of the fact that all the relevant facts were available 765 to the
Income-tax Officer who made the original Assessment, the present assessment on
those very facts amounts to merely a change of opinion by the Income-tax
Officer. There has been no suppression of any material information at the time
of the original assessment and as such the action under section 34(1)(a) cannot
be sustained." It rejected the contention of the Revenue that the impugned
assessment can be justified under s. 34(1)(b) as according to it the facts
proved in the case do not bring the case within that Provision and further the
Income-tax Officer did not proceed under that provision.
At the instance of the Commissioner of
Income-tax the tribunal submitted the following questions-for the opinion of
the High Court of Bombay:
"(1) Whether in the circumstances of
this case it can be held that in the course of original assessment proceedings
for the assessment year 1952-53, the assessee company omitted or failed to
disclose fully and truly all the material facts necessary for its assessment
for that assessment year ? (2) Whether, where as a matter of fact, action for
reassessment proceedings had been initiated on the belief that the provisions
of s. 34(1) (a) were properly applicable to the facts of the case Department was
precluded from sustaining the validity of the reassessment made on the grounds
that the reassessment fell as well within the scope of s. 3 4(1 ) (b) ?"
The High Court answered both these questions in `favour of the Revenue., Hence
In our judgment the tribunal erred in
declining to decide the question whether any portion of the sale price came
within the scope of s. 10(2) (vii). That question should have been examined. at
the very outset for the purpose of considering whether the assessee had placed
before the Income-tax Officer truly and fully all material facts necessary for
-the purpose of its assessment. If it is found that any portion of that sale
price are profits then in our opinion the High Court was right in holding that
the assessee had failed to place before the Income-tax Officer during the
original assessment truly and fully all material facts necessary for the
'purpose of assessment. Admittedly the price realised at the sale 'in excess of
the written down value of the assets sold, had not 766 been included as profits
in the return submitted by the assessee. It had also not shown the same in
section 'D' of Part I of the return. It may also be noted that the assessee had
not shown either in its return or in any of the documents submitted to the
Income-tax Officer, the written down value of the assets sold. Hence not only
the Income tax Officer was not told that the assessee had earned any profit
under s. 10(2)(vii) nor even the essential fact viz.
the written down value of the assets sold was
supplied to him so as to enable him to -find out the price in excess of the
written down value realised by the assesee. It is true that if the Income-tax
Officer had made some investigation particularly if he had looked into the
previous assessment records, he would have been able to find out what the
written down value of the assets sold was and consequently he would have been
able to find out the price in excess of their written down value realised by
the assessee. It can be said that the Income-tax Officer; if he had been
diligent could have got all the necessary information from his records. But
that is not the same thing as saying that the assessee had placed before the
Income-tax Officer truly and fully all material facts necessary for the purpose
of assessment. The law casts a duty oil the assessee to 'disclose fully and
truly all material facts necessary for his assessment for that year'. Further,
Explanation to Section 344(1) says :
"Production before the Income-tax
Officer of account-books or other evidence from which material facts could with
due diligence have been discovered by the Income-tax Officer will not
necessarily amount to disclosure within the meaning of this section".
If the assessee had disclosed to the
Income-tax Officer, the surplus price realised by it over and above the written
down value of the assets sold or in the alternative if it had informed the
Income-tax Officer the price realised as well 'as the written down value of the
assets sold, then it, could have been said that the assessee, had done its duty
and it was for the Income-tax officer to draw any inference on the facts placed
before him. But the failure of the assessee to disclose to the Income-tax
Officer the fact that the price realised by it by sale of its assets was more
than the written down value of those assets or at least the written down value
of those assets amounts, in our opinion, to a failure on its part to disclose
fully and truly the material facts necessary for its assessment. From the
cryptic statement of the Income-tax Officer in the original assessment order
that "no adjustment is necessary" the tribunal was not justified in
drawing the inference that the Income-tax Officer had considered all the
In Support of his contention that the
disclosure made by the assessee was true and full in all material particular
and hence 767 no proceedings could have been taken under s. 34(1)(a).
Mr.A. K. Sen, learned Counsel for the
assessee relied on the decision of this Court in V.D.M. RM.M.RM. Muthiah
Chettiar v. Commissioner of Income-tax, Madras('). In that case the question
that arose for decision was whether the assessee's failure to include in his
return the income of his wife and his minor sons admitted to the partnership of
which he was a partner assessable in his hands under s. 16 (3) (a) (ii) can be
considered as a failure to disclose.
truly -and fully all facts material for the
This Court came to the conclusion that the
omission in question did not come within the scope of s. 3 4 (1 ) (a).
Therein this Court observed that in the form
of return prescribed under rule 19, of the Indian Income-tax Rules, 1922,
framed under s. 59 of the Act, there was no clause which required disclosure of
the income of any person other than the income of the assessee, which was
liable to, be included in his total income. Nor was the assessee required under
s.22(5) of the Act, in making a return, to disclose that any income was
received by his wife or minor child admitted to, the benefits of partnership in
a firm of which he was a partner. Hence by not showing the income of his wife
and minor children, the assessee cannot be deemed to have failed to disclose
fully and truly all material facts necessary for his assessment within the
meaning of s. 34(1)(a) of the Act. Therein this Court further observed that s.
16(3) of the Act imposes an obligation upon the.
Income-tax Officer to compute the total
income of an individual for the purposes of assessment by including the items
of income set out in cls.(i) to (iv) and (b) but thereby no obligation is
imposed upon the taxpayer to disclose the income liable to be included in. his
assessment under s. 16(3). For failing or omitting to disclose that income
proceedings for reassessment cannot "therefore be commenced under s.
34(1)(a). The ratio of the above decision is inapplicable to the facts of the
If any part of -the. price with which we are
concerned in this case can be considered as deemed profits under s.
10(2)(vii), then the assessee had a duty to
include it in his return. His failure to do so brings his case within the scope
of s. 34(1)(a). Mr. Sen next relied on the decision of this Court in Calcutta
Discount Co. Ltd. v. Income tax Officer, Companies Distt. I Calcutta and
anr.(2). There this Court had observed :
"Once all the primary facts are before
the assessing .authority, he requires no further assistance by way of
disclosure. It is for him to decide what inferences of facts can be reasonably
drawn and what legal inferences have ultimately to be drawn. It is not for
somebody else-far less the assessee-to tell the assessing authority what
inferences whether of facts or law, should be (1) 74 I. T. R. 183.
(2) 41 I. T. R. 191 at 201.
768 drawn. Indeed, when it is remembered that
people often differ as regards what inferences should be drawn from given
facts, it will be meaningless to demand that the assessee must disclose what
inferences-whether Of. facts or law-he would draw from the primary facts."
In that case the question for consideration was whether the assessee had a duty
to inform the Income-tax Officer with what intention the shares concerned in
that case were sold.
We do not think that the, decision in
question is of any assistance to the assessee.
For the reasons mentioned above, we are of
the opinion, 'that the High Court should not have and we in our turn will not
answer the questions referred under s. 66(1) of the Act because in our opinion
those questions cannot be answered without first deciding whether the part of
the sale price received by the assessee amounts to profits under s. 10(2)(vii).
The tribunal must first decide that question and thereafter decide the other
questions of law arising for decision on the basis of its decision whether
there was any profits falling within s. 10(2)(vii).
In the result we allow this appeal and in
place of the answers given by the High Court we enter a decision to decline to
answer those questions. It is for the tribunal to decide the appeal before it
in the light of this decision. In the circumstances of 'the case we make no
order as to costs.