Income Tax Officer & Ors Vs. M/S.
Madnani Engineering Works Ltd., Calcutta [1979] INSC 1 (4 January 1979)
BHAGWATI, P.N.
BHAGWATI, P.N.
KOSHAL, A.D.
CITATION: 1979 AIR 1450 1979 SCR (2) 905 1979
SCC (2) 455
CITATOR INFO :
R 1987 SC1897 (30)
ACT:
Income Tax Act, 1961-S. 147(a) Scope
of-Income Tax Officer at first refused to give reasons for believing that
income escaped assessment-In the second affidavit did not set out any material
for the basis of his belief-Validity of.
HEADNOTE:
In respect of the assessment year 1959-60 the
assessee was allowed deduction of interest paid to creditors from whom it
claimed to have borrowed moneys on hundis. In January, 1968 the Income Tax
Officer issued a notice to the assessee under s. 147(a) of the Income-tax Act,
1961 on the ground that the transactions of loans represented by the hundis
were bogus and no interest was paid by it to any of the creditors shown in the
hundis, that it was wrongly allowed as a deduction and therefore a part of the
assessee's income had escaped assessment by reason of its failure to disclose
fully and truly all material facts necessary for the assessment.
In the assessee's writ petition before the
High Court the Income Tax Officer at first declined to disclose the facts which
had weighed with him in reaching the belief that income had escaped assessment
on the ground that if they were disclosed it would cause great prejudice to the
interests of revenue and would frustrate the object of reopening the
assessment. Later however, realising that this stand was untenable he gave his
reasons for issuing the notice.
A Single Judge of the High Court dismissed
the assessee's writ petition. On appeal a Division Bench held that there was no
failure on the part of the assessee to disclose fully and truly all material
facts and that in any event the Income Tax Officer had no reason to believe
that any part of the income had escaped assessment by reason of such failure on
the assessee's part. Dismissing the appeal, HELD:
There was no failure on the part of the
asscssee to disclose fully and truly all material facts necessary for its
assessment and the condition for the applicability of s. 147(a) was not
satisfied. The notice in the circumstances was void. [1910 A] (1) In CIT v.
Burlop Dealers Ltd., 79 ITR 609 this Court held that there was no obligation on
the part of the assessee to disclose that the documents produced by it were
bogus and that the entries made in its books of account were false. The
assessee discharged its obligation by disclosing its books of accounts and
evidence from which material facts could be discovered and it is for the Income
Tax Officer to decide whether the documents were genuine or false. [909 F] 906
In the instant case the assessee could not be said to have failed to make true
and full disclosure of the material facts by not confessing before the Income
Tax Officer that the hundis and the entries in the books of account produced
before him were bogus. [909 G] CIT v. Burlop Dealers Ltd. 79 ITR 609; applied.
(2) All that the Income Tax Officer stated in
his affidavit was that he discovered that the transactions of loan against
security of hundis were not genuine and that the credits against the names of
certain persons who were alleged to have advanced the loans were bogus. He
merely stated his belief but did not set out any material on the basis of which
he had arrived at such belief. [910 C] (3) The existence of reason to believe
on the part of the Income Tax Officer is a justiceable issue and it is for the
court to be satisfied whether in fact the Income Tax Officer had any material
on the basis of which he could reasonably entertain such belief. [907 D]
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 829 of 1975.
From the Judgment and Order dated 11-4-74 of
the Calcutta High Court in Appeal from original Order dated 221/70.
S. C. Manchanda, and Miss A. Subhashini for
the Appellant V. S. Desai, Sanjay Bhattacharya and Rathin Dass for the
Respondent.
The Judgment of the Court was delivered by
BHAGWATI, J.-This appeal by certificate is directed against an order passed by
a Division Bench of the High Court of Calcutta allowing an appeal against a
decision of a Single Judge dismissing the writ petition of the respondent.
The facts giving rise to the appeal may be
briefly stated as follows:
The respondent was assessed to income-tax for
the assessment year 1959-60 and certain interest paid by the respondent to
creditors from whom it claimed to have borrowed monies on hundis, was allowed
as deductible expenditure. The assessment of the respondent was completed on
23rd August, 1960. On or about 25th January, 1968, however, a Notice was issued
by the Income Tax Officer under Section 148 of the Income Tax Act, 1961 to
re-open the assessment of the respondent for the assessment year 1959-
60. The Notice was obviously under Section
147(a) since a period of four years had already elapsed from the close of the
assessment year 1959-60 and no Notice could be issued under Section 147(b). The
Income Tax Officer claimed that the transactions of loan represented by the
hundis were bogus and no interest was paid by the respondent to any of the 907
creditors shown in the hundis and it was wrongly allowed as a deduction and
hence a part of the income of the respondent had escaped assessment by reason
of the failure of the respondent to disclose fully and truly all material facts
necessary for its assessment. The respondent challenged the validity of the
Notice issued by the Income Tax Officer by filing a writ petition in the
Calcutta High Court. The respondent contended that there was no failure on its
part to disclose fully and truly all material facts necessary for its
assessment and that in any event the Income Tax Officer had no reason to
believe that any part of the income of the respondent had escaped assessment by
reason of such failure on the part of the respondent. The Income Tax Officer in
the affidavit in reply filed by him on 5th December, 1968 declined to disclose
the facts which had weighed with him in reaching the belief that the income of
the respondent had escaped assessment by reason of its failure to disclose
fully and truly all material facts, on the ground that if such facts were
disclosed to the respondent, it would cause great prejudice to the interests of
the Revenue and would frustrate the object of re-opening the assessment. This
was obviously an untenable stand because the existence of reason to believe on
the part of the Income Tax Officer was a justiceable issue and it was for the
court to be satisfied whether in fact the Income Tax Officer had reason to
believe that income had escaped assessment by reason of failure of the
respondent to make a full and true disclosure. The Income Tax Officer realising
this position filed a further affidavit on 27th January, 1970 stating as
follows:
"In January 1968 I was the Income Tax
Officer 'I' Ward, Hundi Circle, Calcutta. On or about the 25th January 1968 I
issued a notice under Section 148 of the Income Tax Act, 1961 on the
petitioner. My reasons for issuing such notice were these. In the course of
assessment of the petitioner for assessment year 1963-64 it was discovered that
various items shown as loans against the security of hundis in the petitioner's
books of account for the previous year relevant to assessment year 1959-60 were
in fact fictitious. Credits against the names of certain persons as having
advanced loans viz. Amarlal Moolchand, Girdharidas, Reghoomal, Murlidhar,
Kanhaiyalal and Deudaram Basdeo in the petitioner's books were found not to be
genuine. It appeared during assessment proceedings for 1963-64 that none of
such loans were genuine. In the premises, it appeared to me that the petitioner
had failed to disclose fully and truly all material facts necessary for its
assessment, and a portion of the petitioner's income had escaped assessment by
reason of such failure".
908 The writ petition was heard by a Single
Judge of the High Court and he took the view that the affidavit of the Income
Tax Officer dated 27th January, 1970 clearly showed that he had reason to believe
that income of the respondent had escaped assessment by reason of its failure
to disclose fully and truly all material facts and he accordingly dismissed the
writ petition. The respondent preferred an appeal and a Division Bench of the
High Court disagreeing with the view taken by the Single Judge held that there
was no failure on the part of the respondent to disclose fully and truly all
material facts and in any event there was no material on the basis of which it
could be said that the Income Tax Officer had reason to believe that any part
of the income had escaped assessment by reason of such failure on the part of
the respondent. The Division Bench accordingly allowed the writ petition and
quashed and set aside the Notice for re-opening the assessment. The Income Tax
Officer thereupon preferred the present appeal to this Court after obtaining a
certificate from the High Court.
The present case is clearly covered by the
decision of this Court in Commissioner of Income Tax, Calcutta v. Burlop
Dealers Ltd. There the assessee in the course of its original assessment to
income-tax for the assessment year 1949-50 had produced a partnership agreement
with one Ratiram Tansukhrai and claimed that the profits earned by it from H.
Manory Ltd. had been divided between itself and Ratiram Tansukhrai under the
partnership agreement and its one-half share of the profit, namely, Rs.
87,937/- was the only amount assessable to tax in respect of this source. The
Income Tax Officer accepted the partnership agreement and assessed the assessee
only on the profit of Rs. 87,937/-. It appears that while making assessment for
the assessment year 1950-51 the Income Tax Officer found that the partnership
agreement between the assessee and Ratiram Tansukhrai was a got up device to reduce
the profit received from H. Manory Ltd. and the assessee was, therefore, liable
to tax on the entire amount of profit coming from H. Manory Ltd. This view
taken by the Income Tax Officer was confirmed on appeal by the Appellate
Assistant Commissioner and the Income Tax Tribunal. The High Court also on a
reference agreed with the view of the Tribunal. The Income Tax Officer
thereupon issued a Notice under Section 34(1) (a) of the Income Tax Act to
re-open the assessment of the assessee for the assessment year 1949-50 in order
to bring to tax the further amount of Rs. 87,937/- being the half share of the
profit from H. Manory Ltd. alleged to have been paid to Ratiram Tansukhrai
under the partnership agreement. The assessee con- 909 tended that it had produced
all the relevant accounts and documents necessary for completing the assessment
and it was under no obligation to inform the Income Tax Officer about the true
nature of the transaction and there was accordingly no failure on its part to
disclose fully and truly all material facts necessary for its assessment. This
contention was negatived by the Income Tax Officer and the income of the
assessee was re-assessed by adding Rs. 87,937/- to the income returned by the
assessee. The Appellate Assistant Commisioner confirmed the order of the Income
Tax Officer on appeal, but on further appeal, the Tribunal accepted the
contention of the assessee and held that there was no failure on the part of
the assessee to make a full and true disclosure of the material facts and hence
the Income Tax Officer was not justified in seeking to re-open the assessment
under Section 34(1) (a) of the Income Tax Act.
The Revenue applied to the Tribunal for a
reference but the application was rejected and the High Court also dismissed
the application of the Revenue for calling for a reference from the Tribunal.
The Revenue thereupon preferred an appeal to this Court by special leave. The
appeal was rejected by this Court on the ground that the assessee had disclosed
all its books of account and evidence from which material facts could be
discovered and it was under no obligation to inform the Income Tax Officer
about the possible inferences which might be raised against him and hence there
was no failure on its part to disclose the preliminary facts relevant to the
assessment which would invite the applicability of Section 34(1) (a). It will
thus be seen that according to this judgment, there was no obligation on the
assessee to disclose that the partnership agreement produced by it was bogus
and that the entries made by it in its books of accounts were false. The
assessee discharged the obligation which lay upon it by disclosing its books of
account and evidence from which material facts could be discovered and it was
for the Income Tax Officer to decide whether the documents produced by the
assessee were genuine or false.
Here also the respondent produced all the
hundis on the strength of which it had obtained loans from creditors as also
entries in the books of account showing payment of interest and it was for the
Income Tax Officer to investigate and determine whether these documents were
genuine or not. The respondent could not be said to have failed to make a true
and full disclosure of the material facts by not confessing before the Income
Tax Officer that the hundis and the entries in the books of account produced by
it were bogus. We do not see any distinction at all between Burlop Dealers case
(supra) and the present one and the language of Section 147(a) being identical
with that of Section 34(1)(a), the ratio of the decision in Burlop Dealers case
(supra) must govern the decision of the present case. We 910 must, therefore,
hold that there was no failure on the part of the respondent to disclose fully
and truly all material facts necessary for its assessment and the condition for
the applicability of Section 147(a) was not satisfied.
We may also point out that though it was
contended in the Writ Petition that the Income Tax Officer could have no reason
to believe that any part of the income of the respondent had escaped assessment
by reason of its failure to make a full and true disclosure of material facts,
the Income Tax Officer did not disclose in his affidavit any material on the
basis of which it could be said that he had come to the requisite belief. All
that the Income Tax Officer stated in his affidavit was that he discovered that
the transactions of loan against security of hundis were not genuine and that
the credits against the names of certain persons who were alleged to have
advanced loans were bogus.
The Income Tax Officer merely stated his
belief but did not set out any material on the basis of which he had arrived at
such belief so that the Court could decide for itself whether there was any
material on the basis of which the Income Tax Officer could reasonably
entertain such belief.
We are, therefore, not at all satisfied on
the affidavit that the Income Tax Officer had reason to believe that a part of
the income of the respondent had escaped assessment by reason of its failure to
make a true and full disclosure of the material facts. The Notice under Section
147(a) of the Income Tax Act for re-opening the assessment must in the
circumstances be held to be void.
We accordingly dismiss the appeal with costs.
P.B.R. Appeal dismissed.
Back
