Commissioner of Income-Tax, Madras Vs.
T.S.P.L.P. Chidamebaram Chettiar [1971] INSC 25 (21 January 1971)
HEGDE, K.S.
HEGDE, K.S.
SHAH, J.C.
GROVER, A.N.
CITATION: 1971 AIR 2074 1971 SCR (3) 428
ACT:
Income Tax Act, 1922, s. 34(1) (a)
Requirements of-Assessee not disclosing part of money repaid against loan and
interest-If undisclosed amount not taxable and to be presumed adjusted against
principal-System of accounts maintained by assessee-If relevant in relation to
concealed income.
HEADNOTE:
The assessee's father made various loans to P
in 1932. In July, 1932 P executed a mortgage of some of his properties in
favour of the assessee's father for a sum of Rs. 2 . 76 lakhs. After the
mortgagee had instituted a suit in December, 1940 claiming a sum of Rs. 5.50
lakhs inclusive of principal and interest, a compromise decree was passed in
October, 1943 for a sum of Rs. 3.50 lakhs in full satisfaction of the
mortgagee's claim.
When the income-tax assessment proceedings of
the assessee for the assessment year 1944 45 as karta of his Hindu Undivided
Family were pending, the Income Tax Officer, Trichy, received information from
the Income Tax Officer, Erode, that the mortgagor had secretly paid to the
mortgagee a sum of Rs. 1.50 lakhs during the year ended on April 1, 1944, and
that this was not included in the compromise decree. As the assessee denied
receiving this amount and the Assessing Officer had no other material before
him, he made a note in the order sheet that the I.T.O., Erode should be asked
to give further details, and in the meantime the assessment for 1944-45 should
not be held up. On receiving further information, the Assessing Officer came to
believe that a sum of Rs. 1.50 lakhs had escaped assessment and after issuing
the assessee a notice under s. 34(1) (a), he included the additional sum and
taxed him on that basis.
The Appellate Assistant Commissioner set
aside the order and directed the I.T.O. to re-do the assessment after giving
the assessee an opportunity to cross-examine the witnesses on the basis of
whose statements he had reached his conclusion.
After examination of further witnesses and
other evidence, a fresh order of assessment was made on the, assessee under s. 23(3)
read with s. 34 and this was affirmed by, the Appellate Assistant Commissioner
as well as by the Tribunal.
Although the High Court, upon a reference,
found that the assessment under s. 34 was valid and the I.T.O. had rightly
acted in giving effect to the order of the Appellate Assistant Commissioner to
re-do the assessment, it held, purporting to rely on the decision in C.I.T.
Bihar and Orissa v. Kameshwar duringthe relevant accounting year was not
taxable as the assessee maintained his accounts according to the Chetty system
and must be presumed to have appropriated the amount towards the principal
amount due to the mortgagor.
On appeal to this Court by the assessee as
well as by the department,
HELD : The assessee's appeal must be
dismissed and that of the Department allowed;
429 (i)There was no force in the contention
that as the Income Tax Officer had before him the information about payment of
a sum of Rs. 1.50 lakhs at the time he made the initial assessment and did not
choose to act on the information, it was not open to him thereafter to initiate
proceedings under s. 34.
On the facts found, under assessment due to
non-disclosure of material facts was established. At the time he issued notice
under s. 34(1) (a) on the basis of the material before him, the Income-tax
Officer could have 'formed the necessary belief and stated in the notice that
he had formed such belief; the requirements of s. 34(1) (a) were therefore
fully satisfied. [432 F] Calcutta Discount Co. Ltd. v. Income-tax Officer,
Companies District 1, Calcutta and anr. [1961] 41, I.T.R. 191;
referred to.
(ii)The only ground on which the assessment
order was set aside by the Appellate Assistant Commissioner was that the
assessee had not been given a proper opportunity to put forward his case. He
did not hold that the notice under s. 34(1)(a) was invalid. There was therefore
no assessee under s. 34(1) (a). [433 D] (iii)The High Court was in error in
thinking that the decision of the Judicial Committee in Kameshwar Singh's case
had laid down the rule that whenever any amount is received by a creditor which
he has not specifically appropriated either towards the principal or the
interest due to him, the taxing authorities should proceed on the basis of the
presumption that it has,been appropriated towards the principal. In the present
case it was evident that after secretly receiving the amount of Rs. 1.50 lakhs,
the creditor did not enter it in his account-books with a view to evade tax. If
he intended to appropriate that amount towards the principal, there was no.
need for him not to enter that receipt in his accounts. The fact that the
assessee was maintaining the Chetty system of accounts was immaterial on the
facts of the case. The system of maintaining accounts is wholly irrelevant
because the receipt in question had not been entered in the accounts at all.
[437 Al
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 365 and 671 of 1967.
Appeals from the judgment and order dated
January 6, 1966 of the Madras High Court in Tax Case No. 143 of 1963 (Reference
No. 37 of 1963).
B Sen, B. D. Sharma and R. N. Sachthey, for
appellant (in C.A. No. 365 of 1967) and the respondent (in C A.. No. 671 of
1967)'.
T.A. Ramachandran and D. N. Gupta, for the
respondents (in C.A. No. 365 of 1967) and the appellants (in C.A No.671 of
1967).
The Judgment of the Court was delivered by
Hegde J.-The first of these two appeals (both by certificate) viz. that filed
by the Commissioner of Income Tax and the second, that filed by the legal
representatives of assessee 430 fails. The facts as found by the Tribunal and
set out in the statement of the case, relevant for the purpose of these appeals
are as follows :
The relevant assessment year is 1944-45,
corresponding to the accounting year ended on April 12, 1944. The assessee is
one Chidambaram Chettiar (since deceased). The father of the assessee Palaniappa
Chettiar was a money lender. He had made various advances to one Nallathambi
Sakkarai Manradiar, who will hereinafter be referred to as the Pattayagar, a
prominent landlord in Coimbatore District, on promissory notes. The total
principal advanced by the father of the assessee upto July 6, 1932 amounted to
Rs. 1,38,535. The interest on the same came to Rs. 1,34,965. On July 6, 1932, a
further advance of Rs. 2500 was made to the Pattayagar and for the amounts due
from him, the Pattayagar executed a mortgage of some of his properties in
favour of the assessee's father for a sum of Rs. 2,76,000. Till 1938, only a
sum of Rs. 13,620 was paid by the mortgagor in part payment of the debt due
from him. On December 14, 1940 the mortgagee instituted a suit on the foot of
the mortgage bond claiming a sum of Rs. 5,50,573 inclusive of principal and
interest. On September 19, 1943, the claim was compromised and on October 5,
1943, a compromise decree was passed for a sum of Rs. 3,50,500 in full
satisfaction of the mortgagee's claim. The decree amount was made payable on or
before October 1, 1944. The debt under the compromise decree was subsequently
discharged.
For the assessment year 1944-45, the assessee
Chidambaram Chettiar, as karta of his Undivided Hindu Family was assessed under
S. 23(3) of the Income Tax Act, 1922 (to be hereinafter referred to as the
Act), on February 12, 1946, on a total income of Rs. 78,556 which, on appeal
was reduced to Rs. 53,153. When the assessment proceedings of the assessee were
pending before the Income-tax Officer, Trichy, that Income-tax Officer received
information from the Income-tax Officer, Erode that the mortgagor had paid
secretly to the mortgagee a sum of Rs. 1,50,000 during the year ended on April
1, 1944 and that the same was not included in the compromise decree. When the
Income-tax Officer asked the assessee about the same, he denied having received
any amount secretly. Apart from the information conveyed by the Income tax
Officer, Erode, the Assessing Officer had no other material before him to show
that any amount had been paid secretly by the mortgagor to the mortgagee. Hence
on May 27, 1945, the Income-tax Officer made the following note in the order
sheet "It is denied that there was any secret understanding not to show
the payment of Rs. 1,50,000. The 431 receipt of this amount is entirely
denied.. The Income tax Officer, Erode should be asked to give further details
and to ask the Pattayagar to produce evidence of the payment.
In any event, this should come up for consideration
only in the assessment year 1944-45 as only the excess over Rs. 2,76,000 plus
legal expenses can be treated as interest income in the hands of the assessee
and so, the assessment for 1944-45 should not be held up pending further
investigation." After sometime the Assessing Officer made further enquiry
into the information given by the Income-tax Officer, Erode and thereafter he
came to believe that a sum of Rs. 1,50,000 had escaped assessment by reason of
the omission of the assessee to disclose fully and truly all material facts
necessary for his assessment for the assessment year 1944
45. He accordingly issued a notice under s.
34(1)(a) on March 9, 1953. In reply to that notice, the assessee filed a return
similar to the one filed by him earlier. He denied having received Rs. 1,50,000
secretly from the mortgagor.
The Income-tax Officer did not accept the
plea of the assessee. He accordingly included an additional sum of Rs.
1,50,000 to the income of the assessee
earlier determined for the assessment year 1944-45 and taxed him on that basis.
In appeal, the Appellate Assistant
Commissioner set aside the order of the Income-tax Officer and directed the
Incometax Officer to re-do the assessment after giving the assessee an
opportunity to cross-examine the parties examined by the Income-tax Officer on
the basis of whose statements he had come to the conclusion that a sum of Rs.
1,50,000 had been secretly paid to the
mortgagee by the mortgagor. Thereafter the Income-tax Officer further inquired
into the matter; Pattayagar's books of account were got produced to prove that
an additional sum of Rs. 1,50,000 had been paid to the assessee. Some witnesses
were also examined in the presence of the assessee to prove that fact.
After doing so, a fresh order of assessment
was made on the assessee under s. 23(3) read with s. 34. His order was affirmed
by the Appellate Assistant Commissioner as well as by the Tribunal. At the
instance of the assessee, the following three questions were submitted to the
High Court under s. 66(1) of the Act.
"(1) Whether assessment under section 34
was valid and proper. ? (2) Whether the Income-tax Officer rightly acted in
giving effect to the order of the Appellate Assistant Commissioner setting
aside the assessment to re-do the same according to law after Living an
opportunity to the appellant to place all his cards before the Department ? 432
(3) Whether Rs. 1,50,000 is taxable as income of the year of account ?"
The High Court answered the first two questions against the assessee and the
third question against the Department. The legal representatives of the
assessee are challenging the High Court's ,,decision on the first two questions
and the Commissioner is challenging the High Court's decision on the third
question.
We shall first take up the assessee's appeal.
There is hardly any merit in that appeal. It was urged on behalf of the
representatives of the assessee that as, even when the original assessment
proceedings for the relevant year were before the Income-tax Officer, he had
before him the information given by the Income tax Officer, Erode, but yet, he
did not choose to act on that information, it was not open to him thereafter to
initiate proceedings under s. 34.
We are unable to accept this contention. On
the facts found by the Tribunal, it is established that the assessee's father
had clearly suppressed the receipt of Rs. 1,50,000 from the mortgagor. The
assesses had a duty to disclose fully and truly all material facts necessary
for his assessment. Herein we are not dealing with. a case coming under s.
34(1)(b). All that we have to see is whether the requirements of s. 34(1)(a)
are satisfied. This Court in Calcutta Discount Co. Ltd. v. Income-tax Officer,
Companies District I, Calcutta and anr., (1) ruled that to confer jurisdiction
on the Income-tax Officer to take action under S. 34, ( 1 ) (a), two conditions
must be satisfied viz. ( 1 ) he has reason to believe that there was
under-assessment and (2) that he must have reason to believe that the underassessment
has resulted from nondisclosure of material facts. On the facts found, under
assessment is established and it is also established that the under assessment
was due to non-disclosure of material facts. There can be no doubt that at the
time he issued notice under s. 34(1)(a) on the basis of the material before
him, the Income-tax Officer could have formed the necessary belief. In the
notice issued he says that he had formed that belief. In our opinion the
requirements of S. 34(1)(a) are fully satisfied.
The fact that there was some vague
information before the Income-tax Officer that the assessee's father had
secretly received a sum of Rs. 1,50,000 from the mortgagor was by itself not
sufficient to bring to tax that amount particularly in view of the fact that
the assessee had stoutly denied that fact and the court records did not support
that information. It is true that the Income-tax Officer could have made
further enquiry into the matter but the fact that he did not make any further
enquiry does not take the case out of S. 34(1)(a) particularly when the
assessee had failed to place truly and fully all the material 'facts before
him.
The remark of the Income-tax Officer that
"in (1) [1961] 41 I.T.R. 191 433 any event this (the receipt of Rs.
1,50,000) should come up for consideration only in the assessment year 1944-45
as only the excess over Rs. 2,76,000 plus legal expenses can be treated as
interest income in the hands of the assessee and so, the assessment for 1944-45
should not be held up pending further investigation" in the order sheet
does not amount to a decision taken by him. It may be noted that those remarks
were not made in the order assessing the income of the assessee. It must also
be remembered that the Income-tax Officer, at the time he made those remarks
was not satisfied about the correctness of the information given by the
Income-tax Officer, Erode. Hence those remarks must be treated as casual
observations and not a decision taken on the basis of facts found.
We see no substance in the contention that
the Income-tax Officer did not give effect to the order of the Appellate
Assistant Commissioner when the latter asked him to reassess the income of the
assessee. The only ground on which the assessment order was set aside by the
Appellate Assistant Commissioner was that the assessee had not been given a
proper opportunity to put forward his case. The Appellate Assistant
Commissioner did not hold that the notice issued by the Income-tax Officer
under s. 34(1)(a) was an invalid notice. Therefore there was no need for the
Incometax Officer, Trichy to issue a fresh notice to the assessee under s.
34(1)(a) as contended on behalf of the assessee's representatives. All that the
Income-tax Officer had to do was to afford proper opportunity to the assessee
to show that in fact he had not received the aforementioned sum of Rs.
1,50,000. That opportunity had been given.
In view of our above conclusion Civil Appeal
No. 671 of 1967 fails and the same is dismiss ed.
Now coming to the appeal filed by the
Commissioner of Income-tax, the High Court came to the conclusion that the sum
of Rs. 1,50,000 received by the assessee during the relevant account year must
be presumed to have been appropriated by the assessee towards the principal
amount due to the mortgagor and hence the same cannot be considered as an
income of the assessee during that year. The assessee was maintaining his
accounts in accordance with what is known as Chetty system of accounts. The
material on record shows that according to the Chetty system of accounts, the
creditor appropriates a receipt first towards the cost of litigation, then
towards the principal amount due and the balance towards the arrears of
interest. The High Court was of the view that the sum of Rs. 1,50,000 secretly
received by the creditor must be deemed to have been kept in suspense. As the
debator had not given any direction about the appropriation of that amount it
was open to the creditor to appropriate the same 434 towards the principal
amount and further he must be presumed to have appropriated that amount towards
the principal amount before s. 34 proceedings were started against him firstly
because of the system of accounts maintained by him and secondly because everyone
must be deemed to have acted in a manner least disadvantageous to him. In
support of this conclusion reliance was placed by the High Court on the
decision of the Judicial Committee in The Commissioner of Income-Tax, Bihar and
Orissa v. Kameshwar Singh(1). In that case, nature of several receipts by the
assessee came up for consideration. For our present purpose we need only refer
to two of them. One Damodar Das Burman owed to the assessee in the Fasli year
1332 Rs. 3,09,281. During the currency of the debt the debtor had made regular
payments to the assessee over a number of years, the total of which payments
was not stated. Those payments were entered in the deposit register maintained
by the assessee but no allocation thereof were made as between principal and
interest, and no part of those payments were carried to the interest register
maintained by the assessee. Consequently no part of these payments was
subjected to tax until the Fasli year 1331, in which year for the first time
the Income-tax Officer came to know about the deposit register maintained by
the assesse,e.
In that year, the deposit register showed a
receipt of Rs. 38,091 and on this the officer claimed and was paid tax on the
footing that it was attributable to interest and not to principal. The result
is that against the total interest on the debt, viz. Rs. 3,09,281, no sums had
been attributed by the assessee to interest out of the payments made to him by
the debtor. But the Income-tax Officer had himself treated the sum of Rs.
38,091 received in the year Fasli 1331 as interest and taxed it accordingly.
That left Rs. 2,71,190 as the balance of the total interest on the debt, during
its currency towards which balance the assessee made no attributions of
interest out of the payments received by him from the debtor during its
currency. No tax accordingly had been paid in respect of any of these receipts
other than on Rs. 38,091. Therefore the question before the Court was how in
those circumstances should be received of Rs. 2,78,000 in the Fasli year 1332
be treated. Dealing with that question the Judicial Committee observed :
"Now, where interest is outstanding on a
principal sum due and the creditor receives an open payment from the debtor
without any appropriation of the payment as between capital and interest, by
either debtor or creditor, the presumption is that the payment is attributable
in the first instance towards the outstanding interest........ This presumption
is no doubt operative primarily in questions between debtor and creditor, but
(1) [1933] 2 I.T.R. 94.
435 in their Lordship's view, the Income-=
Officer, finding that the assessee received a payment from his debtor of Rs.2,78,000
in the year Fasli 1332 and that the assessee had not up till then credited
himself as having received, any interest receipts to the Revenue Authorities
was entitled in the circumstances to treat this sum of Rs. 2,78,000 as
applicable to the outstanding interest to the extent of Rs. 2,71,190 and
accordingly to treat the payment to that extent as income of the assessee in
the year of payment." From the facts noted above, it is clear that what
presumption should be drawn in regard to appropriation of an open payment
depends on the circumstances of a case. Now we shall proceed to deal with the
second receipt namely that from Kumar Ganesh Singh. In the Fasli year 1332
Kumar Ganesh Singh owed the assessee 32 lacs as principal and Rs.6,09,571 as
interest, or a total of Rs. 38,09,571 in all, in respect of an unsecured loan.
In that year the assessee and his debtor entered into an arrangement whereby,
as the Commissioner stated "the assessee took over from the debtor in
satisfaction of this amount the following items of property movable. or
immovable:
1. The Kajora Colliery valued atRs.7,37,339/
2. Shares in different companies valued
atRs.94,125/
3. Bills received by the above brokers (i.e.
Ganesh Singh's firm)Rs.48,809,
4. DecreeRs.1,42,594/
5. Transfer of loan to the Agra United
Co.Rs.10,00,000/6. Pronotes and hand-notes (of third parties) S.
7. Hand-notes from Kumar Ganesh
SinghRs.17,34,596Rs. 38,09,569/ The question for decision was whether as a
result of the above settlement, it could be said that in the account year the
assessee had received a sum of Rs. 6,09,571-due to him as interest. The
Judicial Committee came to the conclusion that the first six items mentioned
above amounting to Rs. 20,74,973 may perhaps reasonably enough be regarded as
the equivalent of cash, but the seventh item of Rs. 17,34,596 consisting of the
debtor's own promissory notes, was clearly not the equivalent of cash. A debtor
who gives his creditor a promissory note for the sum he owes can in no sense be
said to pay his creditor; he merely gives him a document or voucher of debt
possessing certain legal attributes. The next question was whether the receipt
of Rs. 20,74,973 can be said to include a receipt of interest of Rs. 6,09,571 ?
The Judicial Committee answered that question thus :
436 "He (Counsel for the Crown) relied
on the already invoked in the case of Damodar Das Burman above, that a creditor
is presumed to apply payments received from his debtor towards the extinction
of interest claims before capital claims.
But the situation which their Lordships are
now considering differs materially from that which existed in the case of
Damodar Das Burman. In that case, apart from other specialities there was no
settlement, but merely an open payment to account. Here there was an
arrangement effecting the whole indebetedness whereby certain assets were
accepted in part satisfaction and promissory notes were taken for the balance.
The basis of the presumption, namely, that it is to the creditor's advantage to
attribute payments to interest in the first place, leaving the interest-bearing
capital outstanding, is gone. Moreover, if the question were one between Kumar
Ganesh Singh and the assessee, i.e., between debtor and the creditor, the
assessee might up to the last moment appropriate 'the Rs. 20,74,973 to capital
account...... Their Lordships have also not omitted to bear in mind the
provisions of ss. 60 and 61 of the Indian Contract Act, though these were not
relied on in argument as applicable to the case. In the result their Lordships
are of opinion that having regard to the nature of the transaction, the
assessee is entitled to say that he has accepted the first six items in discharge
pro tanto of his debtor's capital liability and that the capital debt now
stands discharged to that extent. No part of the sum of Rs. 20,74,9 73
accordingly was received by the assessee as taxable income in the year of
computation." Here again we notice that the conclusion drawn by the
Judicial ,Committee depended on the facts and circumstances before them. Though
the factum of settlement of the debt was relied upon as one of the
circumstances, for finding out the meaning of appropriation, it was by no means
a conclusive circumstance. Evidently their Lordships bore in mind the
possibility of the assessee not being able to realise the debts under the
hand-notes. Under those circumstances it was advantageous to the assessee to
appropriate the money value of the properties received towards, the capital,
otherwise there was a possibility of his having to pay income-tax ;on a receipt
which ultimately may not prove to be an income. It is under those circumstances
their Lordships observed :
"that in a question with the revenue the
tax-payer is entitled to appropriate payments as between capital and interest
in the manner least disadvantageous to himself." 437 In our opinion the
High Court was in error in thinking that the decision of the Judicial Committee
in Kameshwar Singh's case(1) has laid down a firm rule that whenever an
assessee receives a payment and does not appropriate the same either towards
the principal or interest, he must be deemed to have appropriated the same
towards the principal. The decision in question, in our opinion, does not lay
down the rule that whenever any amount is received by a creditor which he has
not specifically appropriated either towards the principal or theinterest due
to him, the taxing authorities should proceed on the basis of the presumption
that it has been appropriated towards the principal. On the facts of that case
it was clear that 'it was advantageous to the creditor to appropriate the
receipt towards the principal. But turning to the facts of the present case the
total amount due to the assessee was over 6 lakhs. Out of that the principal
amount was less than 3 lakhs. The compromise decree was for Rs. 3,50,500. The
creditor secretly received Rs. 1,50,000/-. He does not enter the same in his
account books. Evidently he did not enter the same in his account books with a
view to evade tax. If he intended to appropriate that amount towards the
principal, there was no need for him not to enter that receipt in his accounts.
Obviously he appropriated the amount towards
the interest due to him and that is why he did not enter that receipt in the
accounts so as to facilitate evading payment of tax on that amount. The fact
that the assessee was maintaining Chetty system of accounts is immaterial on
the facts of the case. The system of maintaining accounts is wholly irrelevant
because the receipt in question had not been entered in the account at all.
Hence, in our opinion, the High Court erred in answering the third question
against the Department.
We accordingly allow Civil Appeal No. 365 of
1967 and answer the third question referred to the High Court in favour of the
Revenue namely that the receipt of Rs. 1,50,000/is taxable as income of the
year of account. The assessee shall pay the costs of these appeals-hearing fee
one set.
Civil Appeal 365 of 1967 allowed.
Civil Appeal 671 of 1967 dismissed R.K.P.S.
(1) [1933] 2 I.T.R.94.
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