Full Judgment Text
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PETITIONER:
MALEGAON ELECTRICITY CO. (P) LTD.
Vs.
RESPONDENT:
THE COMMISSIONER OF INCOME-TAX, BOMBAY
DATE OF JUDGMENT:
11/08/1970
BENCH:
HEGDE, K.S.
BENCH:
HEGDE, K.S.
SHAH, J.C.
GROVER, A.N.
CITATION:
1970 AIR 1982
CITATOR INFO :
R 1986 SC1857 (7)
F 1987 SC1768 (3,5)
ACT:
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.
HEADNOTE:
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 Income-
tax 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 re-
assessment. 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
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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
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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 Income-
tax, 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]
JUDGMENT:
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
1962.
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
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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:
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(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 Belgaum
Company;
(C) Agreement dated 19-9-1951 between the said
two companies;
Later on in response to a letter from the Income-tax Offi-
cer, 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
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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
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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
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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 this appeal.
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
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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
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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 relevant facts.
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 assessment.
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 present case.
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
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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.
G.C.
Appeal allowed.
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