Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME TAX, CALCUTTA
Vs.
RESPONDENT:
BURLOP DEALERS LTD.
DATE OF JUDGMENT21/01/1971
BENCH:
SHAH, J.C. (CJ)
BENCH:
SHAH, J.C. (CJ)
HEGDE, K.S.
GROVER, A.N.
CITATION:
1971 AIR 1635 1971 SCR (3) 410
CITATOR INFO :
R 1973 SC 989 (14)
RF 1975 SC1268 (4)
F 1979 SC1450 (4)
ACT:
Income-tax Act, 1922, s. 34(1) (a) -Scope of Assessee
disclosing primary facts necessary for assessment-Duty of
Income-tax Officer to draw necessary inferences.
HEADNOTE:
For the assessment year 1949-50 the assessee submitted a
profit and loss account disclosing a certain amount as
profit in a joint venture and claimed that half of this
profit was paid to R under a partnership agreement. The
Income-tax Officer accepted the return and included only
half of the profit in the joint venture in computing the
assessee’s total income. In the next assessment year the
assessee filed a return accompanied by a profit and loss
account and claimed that it had transferred half the profit
to R as his share. But the Income-tax Officer on
examination of the transactions brought the entire amount of
profit in the joint venture to tax, holding that the
partnership agreement was got up a devise to reduce the
profits received from the joint venture. This order was
confirmed by the Tribunal and the High Court. Meanwhile,
the Income-tax Officer issued a notice under s. 34 of the
Income-tax Act, 1922 to reopen the assessment for the
assessment year 1949-50 and to assess the amount allowed in
that assessment as paid to R. The Income-tax Officer re-
assessed the income under s. 34(1) (a) and added that amount
to the income returned by the assessee in the assessment
year 1949-50. The Appellate Assistant Commissioner
confirmed that order but the Tribunal reversed. The High
Court, on reference, answered in favour of the assessee.
Dismissing the appeal by the Revenue,
HELD : Under s. 34(1) (a,), if the assessee has disclosed
primary facts relevant to the assessment, he is under no
obligation to instruct the Income-tax Officer about the
inference which the Income-tax Officer may raise ’from-these
facts. The terms of the Explanation to S. 34(1) also do not
impose a more onerous obligation. Mere production of the
books of account or other evidence from which material facts
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could with due diligence, have been discovered does not
necessarily amount to disclosure within the meaning of s.
34(1); but where on the evidence and the materials produced
the Income-tax Officer could have reached a conclusion other
than the one which he has reached, a proceeding under s.
34(1) (a) will not lie merely on the ground that the Income-
tax Officer has raised an inference which he may later
regard as erroneous.
The assessee had disclosed his books of account and evidence
from which material facts could be discovered. It was ’for
the Income-tax Officer to raise the necessary inference and
if he did not do so the income which has escaped assessment
cannot be brought to tax under s. 34(1) (a). [413 C]
Calcutta Discount Co. Ltd. v. Income-tax Officer, Companies
District 1, Calcutta & Anr. 41 I.T.R. 191, 200, referred to.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 649 of 1967.
411
Appeal by special leave from the order dated May 4, 1966 of
the Calcutta High Court in Income-tax Reference No. 114 of
1965.
Jagadish Swarup, Solicitor-General, Ram Panjwani, R. N.
Sachthey and B. D. Sharma, for the appellant.
C. K. Daphtary, B. P. Maheshwari and K. R. Khaitan, for
the respondent.
The Judgment of the Court was delivered by
Shah, C.J. Burlop Dealers Ltd.-hereinafter referred to as
’the assessee-is a limited company. For the assessment year
1949-50 the assessee submitted a profit and loss account
disclosing in the relevant year of account Rs. 1,75,875/- as
profit in a joint venture from H. Manory Ltd. and claimed
that Rs. 87,937/- being half the profit earned from H.
Manory Ltd. was paid to Ratiram Tansukhrai under a
partnership agreement. The assessee stated that on June 5,
1948, it ’had entered into an agreement with-H. Manory Ltd.
to do business in plywood chests and in consideration of
financing the business the assessee was to receive 50% of
the profits of the business. The assessee claimed that it
had entered into an agreement on October 7, 1948, with
Ratiram Tansukhrai for financing the transactions of H.
Manory Ltd. in the joint venture, and had agreed to pay to
Ratiram Tansukhrai 50% of the profit earned by it from the
business with H. Manory Ltd.
The Income-tax Officer accepted the return filed by the
assessee and included in computing the total income for the
assessment year 1949-50 Rs. 87,937/- only as the profit
earned on the joint venture with H. Manory Ltd. In the
assessment year 195051 the assessee field a return also
accompanied by a profit and loss account disclosing a total
profit of Rs. 1,62,155/in the relevant account ear received
from H. Manory Ltd., and claimed that it had transferred Rs.
81,077/- to the account of Ratiram Tansukhrai as his share.
The Income-tax Officer on examination of the transactions
brought the entire amount of Rs. 1,62,155/- to tax holding
that the alleged agreement of October 1948 between the
assessee and Ratiram Tansukhrai had merely been "got up as a
device to reduce the profits, received from H. Manory Ltd.".
This order was confirmed by the Appellate Assistant
Commissioner and by the Income-tax Appellate Tribunal. The
Tribunal then stated a case under s. 66(1) of the Income-tax
Act to the High Court of Calcutta. The High Court agreed
with the view of the Tribunal and answered the question
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against the assessee.
412
In the meanwhile on May 13, 1955, the Income-tax Officer
issued a notice under s. 34 to the assessee for the
assessment year 1949-50 to re-open the assessment and to
assess the amount of Rs. 87,937/- allowed in the assessment
of income-tax as paid to Ratiram Tansukhrai. The assessee
filed a return which did not include the amount paid to
Ratiram Tansukhrai. The Income-tax Officer re-assessed the
income under s. 34(1) (a) and added Rs. 87,937/- to the
income returned by the assessee in the assessment year 1949-
50. The Appellate Assistant Commissioner held that the
Income-tax Officer was entitled to take action under s.
34(1) (a) of the Income-tax Act 1922 after the ,amendment in
1948, and to re-open the assessment if income had been
under-assessed owing to the failure cf the assessee to
disclose fully and truly all material facts necessary for
the assessment. He confirmed the order observing that the
assessee had misled the Income-tax Officer into believing
that there was a genuine arrangement with Ratiram Tansukhrai
and had stated in the profit and loss account that the
amount paid to Ratiram Tansukhrai was the share of the
latter in the partnership, whereas no much share was payable
to Ratiram Tansukhrai.
In appeal against the order of the Appellate Assistant Com-
missioner the Income-tax Appellate Tribunal held that the
assessee had produced all the relevant accounts and
documents necessary for completing the assessment, and the
assessee was under no obligation to inform the Income-tax
Officer about the true nature of the transactions. The
tribunal on that view reversed the order of the Appellate
Assistant Commissioner and directed that the amount of Rs.
87,937/- be excluded from the total income of the assessee
for the year 1949-50.
An application under s. 66(1) of the Indian Income-tax Act
for stating a case to the High Court was rejected by the
Tribunal. A petition to the High Court of Calcutta under s.
66(2) for ,directing the Tribunal to submit a statement of
the case was also ,rejected. The Commissioner has appealed
to this Court.
Section 34(1) of the Indian Income-tax Act, 1922, as it
stood in the assessment year 1949-50 provided:
"If-----
(a) the Income-tax Officer has reason to elieve that by
reason of the omission or failure on the part of an assessee
to make a return of 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
413
chargeable to income-tax have escaped assessement for that
year, or have been under-assessed.
(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.
he may in cases falling under clause (a) at any time within
eight years and in cases falling under clause (b) at any
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"
The Income-tax Officer had in consequence of information in
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his possession that the agreement with Ratiram Tansukhrai
was a sham transaction reason to believe, that income
chargeable to tax had escaped assessment. Such a case would
appropriately fall under s. 34(1)(b). But the period
prescribed for serving a notice under s. 34(1) (b) had
elapsed. Under s. 34 (1 )(a) the Income-tax Officer had
authority to serve a notice when he had reason to believe
that by reason of omission or failure on the part of the
assessee to disclose fully and truly all material facts
necessary for his assessment for the year, income chargeable
to tax had escaped assessment. As observed by this Court in
Calcutta Discount Co. Ltd. v. Income-tax Officer, Companies
District 1, Calcutta and another(1).
"The words used are "omission or failure to disclose fully
and truly all material facts necessary for his assessment
for that year". It postulates a duty on every assessee to
disclose fully and truly all material facts necessary for
his assessment. What facts ’are material and necessary for
assessment will differ from case to case. In every
assessment proceeding, the assessing authority will, for the
purpose of computing or determining the proper tax due from
an assessee, require to know all the facts which help him in
coming to the correct conclusion. From the primary facts
(1) 41 1,T.R. 191, 200.
414
in his possession whether on disclosure by the assessee, or
discovered by him on the basis of the facts disclose, or
otherwise, the assessing authority has to draw inferences as
regards certain other facts; and ultimately, from the
primary facts and the further facts inferred from them, the
authority has to draw the proper legal inferences, and
ascertain on a correct interpretation of the taxing
enactment, the proper tax leviable".
We are of the view that under S. 34(1) (a) if the assessee
has disclosed primary facts relevant to the assessment, he
is under no ,obligation to instruct the Income-tax Officer
about the inference which the Income-tax Officer may raise
from those facts. The terms of the Explanation to s. 34(1)
also do not impose a more onerous obligation. Mere
production of the books of account or other evidence from
which material facts could with due diligence have been
discovered does not necessarily amount to disclosure within
the meaning of S. 34(1), but where on the evidence and the
materials produced the Income-tax Officer could ’have
reached a conclusion other than one which he has reached, a
proceeding under s. 34(1) (a) will not lie merely on the
ground that the Income-tax Officer has raised an inference
which he may later regard as erroneous.
The assessee had disclosed his books of account and evidence
from which material facts could be discovered : it was under
no obligation to inform the Income-tax Officer about the
possible inferences which may be raised against him. It was
for the Income-tax Officer to raise such an inference and
if he did not do so the income which has escaped assessment
cannot be brought to lay under section 34(1) (a).
The appeal fails and is dismissed with costs.
K.B.N. Appeal
dismissed.
415