Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME-TAX, GUJARAT
Vs.
RESPONDENT:
A. RAMAN & COMPANY
DATE OF JUDGMENT:
18/07/1967
BENCH:
SHAH, J.C.
BENCH:
SHAH, J.C.
SIKRI, S.M.
RAMASWAMI, V.
CITATION:
1968 AIR 49 1969 SCR (1) 10
CITATOR INFO :
RF 1972 SC 29 (4)
E 1973 SC2330 (13)
F 1974 SC1358 (10)
RF 1975 SC 703 (11)
AFR 1976 SC 203 (1,4,12,15,16)
F 1977 SC 757 (31)
RF 1977 SC2129 (12)
R 1979 SC1960 (6,14)
RF 1986 SC 649 (16,47)
RF 1986 SC1853 (19,21)
ACT:
Indian Income-tax Act, 1961, s. 147-Conditions for the
exercise of power to re-open assessment.
Constitution of India, 1950, Art. 226-Powers of High Court
to issue writ when Income-tax Officer’s jurisdiction to
issue notice under S. 147 of the Indian Income-tax Act, 1961
is questioned-High Court must not re-appraise evidence.
HEADNOTE:
The assessee firm consisted of two partners who were
managers of their respective Hindu Undivided Families. The
firm sold its goods to the aforesaid families and the
families again sold the goods on their own account. In
income-tax proceedings for the years 1959-60, 1960-61 and
1961-62 the firm and the Hindu Undivided Families were
separately assessed in respect of their incomes.
Subsequently the Income-tax Authorities took view that the
sale of goods by the firm to the families was only a device
to divert the profits of the firm and on this view issued
notices under s. 147 of the Incometax Act, 1961 requiring
the assessee to show cause why the assessments for the years
1959-60, 1960-61 and 1961-62 should not be reopened. The
High Court of Gujarat in a petition for a writ under Art.
226 of the Constitution quashed those notices and restrained
the Income-tax Officer from taking proceedings in pursuance
thereof. With special leave granted by this Court, the
Revenue appealed.
Held:(i) The High Court may issue a high prerogative
writ prohibiting the Income-tax Officer from proceeding with
reassessment when it appears that the Income-tax Officer had
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no jurisdiction to commence proceedings because the
conditions precedent do not exist. [12G-H; 13B-C]
Calcutta Discount Co. Ltd. v. Income-tax Officer, Companies
District 1, Calcutta, & Anr. 41 I.T.R. 191, followed.
It is however not open to the High Court exercising powers
under Art. 226 to set aside or vacate the notice for
reassessment by itself re-appraising the evidence. [15B]
(ii)The condition which invests the Income-tax Officer with
jurisdiction has two branches: (i) that the Income-tax
Officer has reason to believe that income chargeable to tax
has escaped assessment; and (ii) that it is in consequence
of information which he has in his possession and that he
has reason so to believe. The expression ’information’ in
the context of which it occurs must mean instruction or
knowledge derived from an external source concerning facts
or particulars, or as to law relating to a matter bearing on
the assessment. If he has such information the Income-tax
Officer may commence proceedings under s. 147(1)(b). But to
commence such a proceeding it is not necessary that on the
materials which came to the notice of the Income-tax
Officer, the previous order of assessment was vitiated by
some error of fact or law. [13C-G]
(iii)In the present case however the pre-conditions for
the issue of a notice of re-assessment did not exist. The
law does not oblige a trader to make the maximum profit that
he can out of his
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trading transactions. Income which accrues to a trader is
taxable in his hands: income which he could have, but has
not earned is not made taxable as income accrued to him.
Avoidance of tax liability by so arranging commercial
affairs that charge of tax is distributed is not prohibited.
[15D-G]
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 768 of 1966.
Appeal by special leave from the judgment and order dated
December 18, 1964 of the Gujarat High Court in Special Civil
Application No. 332 of 1964.
B.Sen, S. K. A Iyar, R. N. Sachthey and S. P. Nayar, for
the appellant.
S. T. Desai and 0. C. Mathur, for the respondent.
The Judgment of the Court was delivered by
Shah, J.-The assessees--M/s A. Raman & Company-are dealers
in "mill stores" in the course of their business they sell "
mill stores" to other dealers including two concerns trading
in the names of M/s A. M. Shah & Co. and M/s R. Ambalal &
Co., which are owned by the Hindu undivided families,
managers of which are the only partners of the assessees.
For the assessment years 1959-60, 1960-61 and 1961-62 the
assessees were originally assessed by the Income-tax
Officer, Circle-1, Ward-A, Ahmedabad, while the partners of
the assessees and the Hindu undivided families which traded
in the names of M / s A. M. Shah & Co. and M / s R. Ambalal
& Co. were assessed by Income-tax Officers in other Circles.
The cases of assessees, of the partners of the assessees and
of the two Hindu undivided families trading in the names of
A. M. Shah & Co. and R. Ambalal & Co. were later transferred
to the Income-tax Officer, Group Circle-J, Ahmedabad. That
Officer by letter dated March 20, 1964 informed the
assessees that he was convinced from a perusal of the
assessment records of the assessees, their partners and
their individual Hindu undivided families, that the partners
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of the assessees had contrived to divert profits of the
assessees to their respective Hindu undivided families and
had tried to "evade proper taxation", and on that ground he
called upon the assessees to submit their objections, if
any, to the reopening of the assessments for the years 1959-
60, 1960-61 and 1961-62. The assessees in reply contended
that the Income-tax Officer had no jurisdiction to reopen
the assessments since the Hindu undivided families of the
two partners and the assessees had submitted "effect and
complete returns of income" supported by their books of
account, "quantity details" of purchases, sales and
expenses, and had given all material facts and relevant
information necessary for assessment at the time of each
assessment.
The Income-tax Officer issued three separate notices under
s. 147 of the Income-tax Act, 1961, requiring the assessees
to show cause why the assessments for the years 1959-60,
1960-61
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and 1961-62 should not be reopened. The High Court of
Gujarat in a petition for a, writ under Art. 226 of the
Constitution quashed those notices and restrained the
Income-tax Officer from taking proceedings in pursuance
thereof. With special leave granted by this Court, the
Commissioner of Income-tax has appealed to this Court.
In support of the claim of the Income-tax Officer, to reopen
the assessments, reliance was placed in the High Court on
cl. (b) of s. 147 (1), of the Income-tax Act, 1961. The
material part of
s. 147(1)(b) may be read:
"If-
(a)
(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
chargeable to tax has escaped assessment for
any assessment year,
he may, subject to the provisions of sections
148 to 153, assess or reassess such income or
recompute the loss or the depreciation
allowance as the case may be, for the
assessment year concerned.
Explanation 1-For the purposes of this
section, the following shall also be deemed to
be cases where income chargeable to tax has
escaped assessment, namely:-
(a) where income chargeable to tax has been
underassessed; or
*"
Under s. 147(1)(b) reason to believe that income chargeable
to tax has escaped assessment in consequence of information
in the possession of the Income-tax Officer is a condition
precedent to the exercise of his jurisdiction to assess or
reassess the income of the assessee. If that condition does
not exist, steps taken by the Income-tax Officer to assess
or reassess the income will be without jurisdiction.
It was held by this Court in Calcutta Discount Co. Ltd. v.
Income-tax Officer, Companies District I, Calcutta &
Another(1) that the High Court in appropriate cases has
power to issue an order prohibiting the Income-tax Officer
from proceeding to reassess the income when the conditions
precedent do not exist. At p. 207, K. C. Das Gupta, J.,
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delivering the majority judgment of the Court observed:
"It is well-settled however that though the
writ of prohibition or certiorari will not
issue against an executive
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authority, the High Courts have power to issue
in a fit case an order prohibiting an
executive authority from acting without
jurisdiction. Where such action of an exe-
cutive authority acting without jurisdiction
subjects or is likely to subject a person to
lengthy proceedings and unnecessary
harassment, the High Courts, it is well settl-
ed, will issue appropriate orders or
directions to prevent such consequences".
The High Court may, therefore, issue a high prerogative writ
prohibiting the Income-tax Officer from proceeding with re-
assessment when it appears that the Income-tax Officer had
no jurisdiction to commence proceeding.
The condition which invests the Income-tax Officer with
jurisdiction has two branches: (i) that the Income-tax
Officer has reason to believe that income chargeable to tax
has escaped assessment; and (ii) that it is in consequence
of information which he has in his possession and that he
has reason so to believe. Since the learned Judges of the
High Court have concentrated their attention upon the second
branch of the condition and have reached their conclusion in
favour of the assessees on that branch, it would be
appropriate to deal with the correctness of that approach.
The expression "information" in the context in which it
occurs must, in our judgment, mean instruction or knowledge
derived from an external source concerning facts or
particulars, or as to law relating to a matter bearing on
the assessment. If as a result of information in his
possession, the Income-tax Officer has reason to believe
that income chargeable to tax had escaped assessment, the
Income-tax Officer has jurisdiction to assess or reassess
income under s. 147(1)(b) of the Income-tax Act, 1961.
Information in his possession that income chargeable to tax
has escaped assessment furnishes a starting point for
assessing or reassessing income. If he has that
information, the Income-tax Officer may commence proceedings
for assessment or reassessment. To commence the proceeding
for reassessment it is not necessary that on the materials
which came to the notice of the Income-tax Officer, the pre-
vious order of assessment was vitiated by some error of fact
or law.
The High Court exercising jurisdiction under Art. 226 of the
Constitution has power to set aside a, notice issued under
s. 147 of the Income-tax Act, 1961, if the condition
precedent to the exercise of the jurisdiction does not
exist. The Court may, in exercise of its powers, ascertain
whether the Income-tax Officer had in his possession any
information: the Court may also determine whether from that
information the Income-tax Officer may have reason to
believe that income chargeable to tax had escaped
assessment. But the jurisdiction of the Court extends no
further. Whether on the information in his possession he
should commence
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a proceeding, for assessment or reassessment, must be
decided by the Income-tax Officer and not by the High Court.
The Incometax Officer alone is entrusted with the power to
administer the Act: if he has information from which it may
be said, prima facie, that lie had reason to believe that
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income chargeable to tax had escaped assessment, it is not
open to the High Court, exercising powers under Art. 226 of
the Constitution, to set aside or vacate the notice for
reassessment on a re-appraisal of the evidence.
The High Court in this case was apparently of the view that
the information in consequence of which proceedings for
reassessment were intended to be started, could have been
gathered by the Income-tax Officer in charge of the
assessment in the previous years from the disclosures made
by the two Hindu undivided families. But that, in our
judgment, is wholly irrelevant. Justification of the
Income-tax Officer to reassess income arises if he has in
consequence of information in his possession reason to
believe that income chargeable to tax has escaped
assessment. That information, must, it is true, have come
into the possession of the Income-tax Officer after the
previous assessment, but even if the information be such
that it could have been obtained during the previous
assessment from an investigation of the materials on the
record, or the facts disclosed thereby or from other enquiry
or research into facts or law, but was not in fact obtained,
the jurisdiction of the Income-tax Officer is not affected.
The High Court was also of the view that the inference
raised by the Income-tax Officer that the Hindu undivided
families of the assessees had made profit by sale of
articles purchased from the assessees larger than the profit
which the assessees had made, was not justified, since there
was no evidence on the record about the price at which
similar goods were sold by the assessees to other merchants
and about the profit which those other merchants made by
sale of those goods. But in a petition under Art. 226 of
the Constitution the taxpayer may challenge the validity of
a notice under s. 147 of the Income-tax Act, 1961, on the
ground that either branch of the condition precedent does
not exist, but an investigation whether the inferences
raised by the Income-tax Officer from the information are
"correct or proper" cannot be made. Counsel for the
Commissioner is, therefore, right in contending that the
High Court entered upon an investigation of matters which
were not within their competence.
But the appeal of the Commissioner must still fail. The
case of the Commissioner on the materials placed before the
High Court, suffers from a serious infirmity on the first
branch of the jurisdictional condition. The averments made
in the affidavit filed by the Income-tax Officer in that
behalf do not establish the existence of that branch of the
condition. In reply to the averment by the
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assessees that the Income-tax Officer had no reason to
believe that income had escaped assessment, the Income-tax
Officer stated:
"In the course of the discussions I had at the
several meetings hereinabove referred, I also
learnt that in the earlier years also the
petitioners (the assessees) had effected such
sales to the said Hindu undivided families,
and that over and above the margin of profits
earned by the petitioners (the assessees) from
the Hindu undivided families, the Hindu
undivided families had earned substantial
profits on the resale of such goods. 1,
therefore, came to the conclusion that the
creation of the Hindu undivided family
business was merely a subterfuge or a
contrivance by the partners of the petitioner
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firm (the assessees) to divert the huge
profits made by the petitioners (the asses-
sees) on imported articles".
The plea raised by the Income-tax Officer is that income
which could have been earned by the assessees was not
earned, and a part of that income was earned by the Hindu
undivided families. That according to the Income-tax
Officer was brought about by "a subterfuge or contrivance".
Counsel for the Commissioner contended that if by resorting
to a "device or contrivance", income which would normally
have been earned by the assessee is divided between the
assessee and another person, the Incometax Officer would be
entitled to bring the entire income to tax as if it had been
earned by him. But the law does not oblige a trader to make
the maximum profit that he can out of his trading
transactions. Income which accrues to a trader is taxable
in his hands: income which he could have, but has not
earned, is not made taxable as income accrued to him. By
adopting a device, if it is made to appear that income which
belonged to the assessee had been earned by some other
person, that income may be brought to tax in the hands of
the assessee, and if the income has escaped tax in a
previous assessment a case for commencing a proceeding for
reassessment under s. 147(1)(b) may be made out. Avoidance
of tax liability by so arranging commercial affairs that
charge of tax is distributed is not prohibited. A taxpayer
may resort to a device to divert the income before it
accrues or arises to him. Effectiveness of the device
depends not upon considerations of morality, but on the
operation of the Income-tax Act. Legislative injunction in
taxing statutes may not. except on peril of penalty, be
violated, but it may lawfully be circumvented.
If the goods were nominally transferred to the Hindu
undivided families the latter acting merely as benamdars for
the assessees, and the profits were earning in truth by the
assessees, income earned by sale of the goods by the Hindu
undivided families may be held chargeable to tax as income
which has escaped assessment to tax in
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the hands of the assessees. In the present case,, no such
case was attempted to be made out in the affidavit filed by
the Income-tax Officer. We hold, therefore, that on the
materials on the record, the Income-tax Officer. had no
reason to believe that income chargeable to tax had escaped
assessment for the three years in question.
The order passed by the High Court is therefore confirmed.
There will, however, be no order as to costs in this Court
and the High Court.
G.C.
Appeal dismissed.
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