Full Judgment Text
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PETITIONER:
KANTAMANI VENKATA NARAYANA & SONS
Vs.
RESPONDENT:
FIRST ADDITIONAL INCOME-TAX OFFICER,RAJAHMUNDRY
DATE OF JUDGMENT:
27/10/1966
BENCH:
SHAH, J.C.
BENCH:
SHAH, J.C.
RAMASWAMI, V.
BHARGAVA, VISHISHTHA
CITATION:
1967 AIR 587 1967 SCR (1) 984
CITATOR INFO :
F 1970 SC1011 (14)
RF 1975 SC 703 (11)
ACT:
Income-tax Act (11 of 1922), s. 34--Escaped
assessment--Notice, whether necessary to state clause-
Grounds of challenge.
HEADNOTE:
During the assessment proceedings of a company, the Income-
tax Officer discovered that there. was a large accretion to
the wealth of the assessee, which had not been disclosed in
the assessment proceedings of the assessee, and the, Officer
issued notices under s. 34 for the reassessment of income
during that period. The assessee filed writ petitions in
the High Court, in reply to which the Income-tax Officer
filed affidavits stating that relying on the information
received by him, he had reason to believe that the assessee
had not disclosed fully and truly all material facts and in
consequence, income chargeable to tax had escaped
assessment. The writ petitions were rejected and the order
was confirmed in appeal by the High Court. In appeals by
the assessee, this Court,
HELD : The appeals must be dismissed.
From the, affidavit of the Income-tax Officer it clearly
appeared that there had been considerable increase in the
investments in the transactions and the wealth of the
assessee. The Income-tax Officer was not seeking to
reassess the income on a mere change of opinion. [989 B]
The Income-tax Officer had prima facie reason to believe
that information material to assessment had been withheld,
and that on account of withholding of that information
income liable to tax had escaped assessment. From the mere
production of the books of account., it could not be
inferred that there had been full disclosure of the material
facts necessary for the purpose of assessment. Sections 23
and 24 of the Act lay that the assessee is under a duty to
disclose fully and truly material facts necessary for the
assessment of the year and that duty is not discharged
merely by the production of the books of accounts or other
evidence. It is the duty of the assessee to bring to the
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notice of the Income-tax Officer particular items in the
books of account or portions of documents which are
relevant. Even if it be assumed that from the books
produced, the Incometax Officer, if he had been circumspect,
could have found out the truth, the Income-tax Officer may
not on that account be precluded from exercising the power
to assess income which had escaped assessment. [989 G990 B]
It is not necessary or imperative that a notice under s. 34
must specify under which of the two clauses-cl. (a) or cl.
(b) of sub-s. (1) of s. 34, the notice is issued. [986 A]
P. R. Mukherjee v. Commissioner of Income-tax, West
Bengal, 30 I.T.R. 535, approved.
Two conditions precedent must co-exist, before a notice
under s. 34 (1)(a) of the Act may be issued : the income-tax
Officer must have reason to believe (1) that income, profits
or gains had been under assessed, and (2) that such under
assessment was due to non-disclosure of material facts by
the assessee. Where the Income-tax Officer has prima
985
facie reasonable grounds for believing that there has been a
non-disclosure of primary material fact, that by itself
gives him jurisdiction to issue notice under s. 34 and the
adequacy or otherwise of the grounds of such belief is not
open to investigation by the Court. [1987 C]
Calcutta Discount Company Ltd. v. Income-tax Officer,
Companies District 1 [1961] 2 S.C.R. 241 and S. Narayanappa
v. The Commissioner of Income-tax, Bangalore [1967] 1 S.C.R.
596 relied on.
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 154, to
165 of 1966.
Appeals by special leave from the judgment and order dated
February 3, 1965 of the Andhra Pradesh High Court in Writ
Appeals Nos. 117 to 128 of 1964.
P. Ram Reddy and A. V. V. Nair, for the appellants (in all
the appeals).
S. V. Gupte, Solicitor-General, R. Ganapathy Iyer and R.
N. Sachthey, for respondent (in all the appeals).
The Judgment of the Court was delivered by
Shah, J. M/s. Kantamani Venkata Narayana & Sons-hereinafter
referred to as ’the assessee’ is a Hindu undivided family,
which was assessed to tax on income derived principally from
money--lending. In the course of proceedings for assessment
of a private limited company styled "Motu Industries Ltd.,"
the Incometax Officer, Rajahmundry discovered that there was
a large accretion to the wealth of the assessee which had
not been disclosed in proceedings for its assessment. On
March 12, 1959, the Income-tax Officer issued a notice
seeking to reopen the assessment for the year 1950-51. The
assessee filed a return under protest. On March 14, 1960
the Income-tax Officer issued notice of re-assessment for
the year 1951-52, and on December 19, 1960, the Income-tax
Officer intimated the reasons that had prompted him to issue
the notices of re-assessment. On March 24, 1962 the Income-
tax Officer issued notices under s. 34 for re-assessment of
income of the assessee for the years 1940-41 to 1949-50.
The assessee then presented petitions in the High Court of
Andhra Pradesh for writs of prohibition directing the
Income-tax Officer to refrain from proceeding in pursuance
of the notices for the assessment years 1940-41 to 1949-50
and 1950-51 and 1951-52. A single Judge of the High Court
rejected the petitions and the order was confirmed in appeal
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by a Division Bench of the High Court. The assessee has
appealed with special leave.
The notice issued by the Income-tax Officer did not
specifically refer to s. 34(1)(a) of the Income-tax Act : it
did not set out the clause under which it was issued. But
on that account the proceeding under s.. 34 is -not
vitiated. It was held by the Calcutta
Sup.C.1.166-18
986
High Court in P. R. Mukherjee v. Commissioner of Income-tax
West Bengal(1), that it is not necessary or imperative that
a notice -under s. 34 must specify under which of the two
clauses-cl. (a)an cl. (b) of sub-s. (1) of s. 34, the notice
is issued. The main notice to be issued in a case under s.
34 is the notice under s. 22(2), and
s. 34 merely authorises the issue of such a notice.
The proceedings for re-assessment cover a period of 12 years
194041 to 1951-52. Section 34 of the Income-tax Act has
under gone some changes during that period, but the basic
scheme of the section has remained substantially the same.
Power to re-assess income under s. 34(1) as amended by Act 7
of 1939 could be exercised if "definite information" had
"come into" the possession of the Income-tax Officer, and in
consequence of such information it was discovered that
income chargeable to tax had escaped assessment By the
Income-tax and Business Profits Tax (Amendment) Act 4 of
1948, s. 34(1) was recast to read as follows -
(1) If-
(a) the Income-tax Officer has reason to
believe that by reason of the omission or
failure on the part of an assessee to make a
return of his income under section 22 for any
year or to disclose fully and truly all
material facts necessary for his assessment
for that year, income, profits or gains
chargeable to income-tax have escaped
assessment for that year, or have been under-
assessed, or assessed at too low
a rate,....... or
(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,
profits or gains chargeable to income-tax have
escaped assessment for any year, or have been
under-assessed, or assessed at too low a rate,
he may in cases falling under clause (a) at
any time and in cases falling under clause (b)
at the time within four years of the end of
that year, serve on the assessee, .... a
notice containing all or any of the
-requirements which may be included in a
notice under sub-section (2) of section 22 and
may proceed to assess or re-assess such
income, profits or gains
(1) 30 I.T.R. 535.
987
An Explanation was also added which states
"Explanation 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
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section."
Since on the matter canvassed in these appeals there is no
material change in the section, we will only refer to the
section as amended by Act 48 of 1948.
This Court in Calcutta Discount Company Ltd. v. Income-tax
officer, Companies District 1 and Another(1) observed that
before the Income-tax Officer may issue a notice under s.
34(1) (a) of the Indian Income-tax Act, two conditions
precedent must co-exist : the Income-tax Officer must have
reason to believe (1) that income, profits or gains had been
under-assessed, and (2) that such under assessment was due
to non-disclosure of material facts by the assessee. The
Court further held that where the Income-tax Officer has
prima facie reasonable grounds for believing that there has
been a non-disclosure of a primary material fact, that by
itself gives him jurisdiction to issue a notice under s. 34
of the Act, and the adequacy or otherwise of the grounds of
such belief is not open to investigation by the Court.
In a recent judgement of this Court in S. Narayanappa &
Others v. The Commissioner of Income-tax, Bangalore,(2)
Ramaswami J., speaking for the Court observed:
" . . . the legal position is that if there
are in fact some reasonable grounds for the
Income-tax Officer to believe that there had
been any non-disclosure as regards any fact,
which could have a material bearing on the
question of under-assessment that would be
sufficient to give jurisdiction to the Income-
tax Officer to issue the notice under s. 34.
Whether these grounds are adequate or not is
not a matter for the Court to investigate. In
other words, the sufficiency of the grounds
which induced the Income-tax Officer to act is
not a justiciable issue. It is of course open
for the assessee to contend that the Incometax
Officer did not hold the belief that there had
been such non-disclosure. In other words, the
existence of the belief can be challenged by
the assessee but not the sufficiency of the
reasons for the belief. Again the expression
$treason to believe" in section 34 of the
Income-tax Act does not mean a purely
subjective satisfaction on the part of the
Income-tax Officer. The belief must be held
in good
(1) [1961] 2 S.C.R. 241.
(2) [1967] 1 S.C. R. 596.
988
faith:it cannot be merely a pretence. To put
it differently it is open to the Court to
examine the question whether the reasons for
the belief have a rational connection or a
relevant bearing to the formation of the
belief and are not extraneous or irrelevant to
the purpose of the section. To this limited
extent, the action of the Income-tax Officer
in starting proceedings under s. 34 of the Act
is open to challenge in a court of law."
It is clear from the affidavits filed in the Court of First
Up stance that the Income-tax Officer had received
information relying upon which he had reason to believe that
the assessee had not disclosed fully and truly all material
facts necessary for the assessment and in consequence of
non-disclosure-of that information, income chargeable to tax
had escaped assessment. In his affidavit, Income-tax
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Officer stated :
"A scrutiny of the money-lending
’statements’ filed by the assessee for the
years ended 31-3-50 and 31-3-51 revealed that
there were large investments made by the
assessee in his money-lending business in
those two years. The assessee did
not file
balance sheets for the said two years, or for
the earlier assessment years and consequently
it was not clear from the statements filed by
him, how he could make heavy investments in
money-lending business in those two years."
The Income-tax Officer also stated that in the year of
account 1949-50 the total investments in money-lending
business had increased by Rs. 1,33,000/- and in the
following year by Rs. 49,000/and the plea of the assessee
that growth in the investments of the assessee in those
years was mainly due to "the cash balance" he by the manager
out of his share received on partition between his and his
brothers, and cash gifts from his father-in-law which were
till then kept uninvested even in the money-lending
business, was not supported by any evidence, that the
assessee had suppressed the account books for the periods
prior to April 1, 1949, and that the assessee had not
produced the deed of partition relied upon. According to
the Income-tax Officer, the net wealth of the family ,on
April 1, 1937, inclusive of investments in the money-lending
business was less than Rs. 50,000/- and the investments made
by the assessee in money-lending business were approximately
of the ,order of Rs. 21,000/-, that the assessments made on
the family from 1937-38 till 1948-49 showed that the
assessee’s aggregate income for those years was Rs. 30,000/-
, that taking into account the manager’s professional income
and the agricultural income of the assessee, the aggregate
could not exceed Rs. one lakh, and that possession of large
wealth on April 1, 1949 which was not explained justified
him in inferring that there "was escapement
989
assessment of huge income or in any event it had resulted
in under-assessment on account of the failure of the
assessee in not disclosing the material facts fully and
truly for the assessment years 1940-41 to 1949-50."
The averments made by the Income-tax Officer in his
affidavit which have been accepted by the Court of First
Instance, prima facie, establish that the Income-tax Officer
had reason to believe that by reason of the omission or
failure on the part of the assessee to disclose fully and
truly all material facts necessary for his assessment,
income chargeable to income-tax has escaped assessment.
It was urged on behalf of the assessee that year after year
account books and statements of account were produced by the
assessee before the Income-tax Officer, and the Income-tax
Officer had computed to taxable income on the materials
furnished, no case for exercising the power of the Income-
tax Officer under s. 34 was made out, since power to re-
assess may not be exercised merely because on the same
evidence the Income-tax Officer or his successor entertains
a different opinion. In our view there is no force in this
contention. From the affidavit of the Income-tax Officer it
clearly appears that there had been considerable increase
since 1938 in the investments in the money-lending
transactions of the assessee and in the wealth of the
assessee. The Income-tax Officer was not seeking to re-
assess the income on a mere change of opinion. The increase
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in the wealth discovered was wholly disproportionate to the
known sources of income of the assessee. That was prima
facie evidence on which he had reason to believe that the
assessee had omitted to disclose fully and truly all
material facts and that in consequence of such non-
disclosure income had escaped assessment. The Income-tax
Officer has said that no attempt was made by the assessee to
furnish some reasonable proof of the source of the addi-
tional wealth : the partition deed was not produced; the
books of account prior to 1948-49 were withheld on the plea
that all the books were lost; no evidence was tendered to
show that the fatherin-law of the manager was possessed of
sufficient means to give and did give any large cash amounts
to him; and there was also no explanation why a large amount
exceeding a lakh of rupees was not invested in the money-
lending or other business.
The Income-tax Officer had therefore prima facie reason to
believe that information material to the assessment had been
withheld, and that on account of withholding of that
information income liable to tax had escaped assessment.
From the mere production of the books of account it cannot
be inferred that there had been full disclosure of the
material facts necessary for the purpose of assessment. The
terms of the Explanation are too plain to permit an argument
being reasonably advanced, that the duty of the assessee to
disclose fully and truly all material facts is discharged
when he produces the books of account or other evidence
which has a material
990
bearing on the assessment. It is clearly implicit in the
terms of ss. 23 and 34 of the Income-tax Act that the
assessee is under a duty to disclose fully and truly
material facts necessary for the assessment of the year, and
that the duty is not discharged merely by the production of
the books of accounts or other evidence. It is the duty of
the assessee to bring to the notice of the Income-tax
Officer particular items in the books of account or portions
of documents which are relevant. Even if it be assumed that
from the books produced the Income-tax Officer, if he had
been circumspect, could have found out the truth, the
Income-tax Officer may not on that account be precluded from
exercising the power to assess income which had escaped
assessment.
It was urged that since the High Court in appeal did not de-
cide whether any primary facts on which the determination of
the issue of reasonable belief in non-disclosure of material
facts necessary for the assessment of the previous year and
escapement of tax in consequence thereof depended, were not
disclosed, the judgment of the High Court should be set
aside. The learned Trial Judge has dealt with in detail the
affidavits of both the assessee and the In come-tax Officer
and has come to the conclusion that there was prima facie
evidence of non-disclosure fully and truly of all material
facts necessary for the assessment and on the materials
placed before the Income-tax Officer he had reason to
believe that as a consequence of that non-disclosure income
had escaped assessment. The High Court in appeal after
referring to the judgment in Calcutta Discount Company’s
case() observed
"......without the enquiry being held by the
concerned Income-tax Officer it is not
possible, on the material on record, to decide
whether or not the assessee omitted to or
failed to disclose fully and truly all
material facts necessary for his assessment
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for the respective year."
The High Court has pointed out that no final decision about
failure to disclose fully and truly all material facts
bearing on the assessment of income and consequent
escapement of income from assessment and tax could be
recorded in the proceedings before them It certainly was not
within the province of the High Court to finally determine
that question. The High Court was only concerned to decide
whether the conditions which invested the Income-tax Officer
with power to re-open the assessment did exist, and there is
nothing in the judgment of the High Court which indicates
that they dissagreed with the view of the Trial Court that
the conditions did exist
These appeals therefore fail and are dismissed with costs.
There will be one hearing fee.
Appeals dismissed.
Y.P.
(1) [1961] 2 S.C.R. 241.
991