Full Judgment Text
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PETITIONER:
S. NARAYANAPPA & ORS.
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX, BANGALORE
DATE OF JUDGMENT:
27/09/1966
BENCH:
RAMASWAMI, V.
BENCH:
RAMASWAMI, V.
SHAH, J.C.
BHARGAVA, VISHISHTHA
CITATION:
1967 AIR 523 1967 SCR (1) 590
CITATOR INFO :
F 1967 SC 587 (5)
F 1970 SC1011 (13)
RF 1972 SC 689 (13)
R 1972 SC2617 (9)
R 1973 SC 370 (11)
RF 1975 SC 703 (11)
D 1976 SC 437 (16)
RF 1976 SC1753 (8)
F 1985 SC 989 (9)
RF 1986 SC1853 (20)
RF 1987 SC1897 (27)
ACT:
Income-tax Act (11 of 1922), s. 34-Scope of.
HEADNOTE:
For the assessment year 1951-52, the appellant did not file
a return of his income under s. 22 of the Income-tax Act,
1922 but the Incometax Officer assessed the income at a
certain figure. When examining the material for the
assessment year 1955-56, it was discovered that the assessee
made large investments and suppressed items of house
property acquired by him. The Income-tax Officer,
therefore, issued a notice under s. 34(1) and after
examining the return assessed the income for the assessment
year 1951-52 at a much higher figure. In the reference to
the High Court, the appellant questioned the jurisdiction of
the Officer to initiate proceedings under s. 34(1), but the
High Court held against him.
In appeal to this Court,
HELD : (i) The Income-tax Officer had reasonable grounds for
thinking that there was non-disclosure of material facts on
the part of the appellant and that there was under-
assessment for the assessment year 1951-52, caused by the
assessee’s failure to submit his return. [593 C]
Two conditions must be satisfied in order to confer
jurisdiction on the Income-tax Officer to issue notice under
s. 34, namely, (i) the Officer must have reason to believe
that the income, profits or gains chargeable to income-tax
had been under-assessed; (ii) he must have reason to believe
that such under-assessment had occurred by reason of the
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omission or failure on the part of No assessee to make a
return or disclose fully all material facts necessary for
assessment. The existence of the belief, and whether the
reasons for -the belief have a rational connection with or
relevant bearing on, the formation of the belief, are open
to examination by the court. But if there are in fact some
reasonable grounds for the Officer to believe that there had
been a non-disclosure as regards any fact, which could have
a material bearing on the question of under-assessment, that
would be sufficient to give him jurisdiction to issue the
notice under s.34, and their sufficiency cannot be
challenged by the assessee. [592 C-H]
(ii) The scheme of s. 34 is that if the conditions of the
main section are satisfied a notice has to be issued to the
assessee. But before issuing the notice the proviso
requires that the officer should -record his reasons and
obtain the sanction of the -Commissioner for initiating
action under the section. But there is no requirement in
the Act that the reasons which induced the Commissioner to
accord sanction should also be communicated to the assessee.
[593 F-G]
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 562 of 1965.
Appeal by special leave from the judgment and order dated
July 24, 1963 of the Mysore High Court in I.T.R.C. No. 3 of
1963.
591
R. Gopalakrishnan, for the appellants.
S. V. Gupte, Solicitor-General, N. D. Karkhanis Sachthey,
for the respondent.
The Judgment of the Court was delivered by
Ramaswami J. The appellant was carrying on business in
jewellery, copper-wire and money lending. The books of
accounts of the appellant were closed on the 30th of June
every year. For the assessment year 1951-52 (for which the
previous year ended on 30th June, 1950) the appellant did
not comply with the notice issued under s. 22(2) or section
22(4) of the Income-tax Act. No return was filed by the
appellant. The assessment was completed by the Income-tax
Officer on such material as was available on the 23rd
February, 1955 and the income was assessed at Rs. 36,068/-.
Subsequently, while making assessment for the assessment
year 1955-56, the appellant was asked to furnish a wealth
statement which was actually filed on the 30th June, 1954.
From the wealth statement it was found that the appellant
had made investments for Rs. 39,000/during the previous year
which ended on the 30th June, 1950, though in respect of
that previous year, the appellant’s income was assessed only
at Rs. 36,068/-. A scrutiny of the wealth statement and the
Bank account and the extensive nature of the business
carried on by the appellant led the Income-tax Officer to
entertain a belief that the income of the year 1951-52 had
been under-assessed. He accordingly issued a notice under
s. 34(1) and after examining the return made, he assessed
the income of the appellant at Rs. 89,002/-by his order
dated the 31st March, 1960. The appellant filed an appeal
against the assessment order to the Appellate Assistant
Commissioner but the appeal was dismissed, the appellant
preferred a further appeal to the Income-tax Appellate
Tribunal, Madras Bench. The appellant did not dispute the
quantum of the assessment but only the jurisdiction of the
Income-tax Officer to initiate proceedings under s. 34(1).
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The Tribunal by its order dated the 31st January, 1962 over-
ruled the objection and dismissed the appeal. At the
instance of the appellant, the Tribunal referred the
following question of law for the opinion of the High Court:
"Whether the Income-tax Officer had
jurisdiction to initiate proceedings for the
assessment year 1951-52 under the provisions
of s. 34(1) (a) of the Indian Income-tax Act
of 1922".
The High Court answered the question against the appellant
holding that the Income-tax Officer had jurisdiction to
initiate proceedings against the appellant under s. 34(1)
(a) of the Act for the assessment year 1951-52. This appeal
is brought by special leave against the judgment of the High
Court dated the 24th July, 1963.
592
On behalf of the appellant Mr. Gopalakrishnan contended in
the first place that the reasons which induced the Income-
tax Officer to initiate the proceedings under s. 34 were
justiciable. It was submitted that those reasons should
have been communicated by the Income-tax Officer to the
assessee before the assessment was made. In this
connection, the further argument of the appellant was that
those reasons "must be sufficient for a prudent man to ,come
to the conclusion that the income had escaped assessment".
In our opinion, there is no substance in any one of these
arguments. It is true that two conditions must be satisfied
in order to confer jurisdiction on the Income-tax Officer to
issue the notice under s. 34 in respect of assessments
beyond the period of four years, but within a period of
eight years, from the end of the relevant year. The first
condition is that the Income-tax Officer must have reason to
believe that the income, profits or gains chargeable to
income-tax had been under-assessed. The second condition is
that he must have reason to believe that such "under-
assessment" had occurred by reason of either (i) omission or
failure on the part of an assessee to make a return of his
income under s. 22, or (ii) omission or failure on the part
of the assessee to disclose fully and truly all the material
facts necessary for his assessment for that year. Both
these conditions are conditions precedent to be satisfied
before the Income-tax Officer acquires jurisdiction to issue
a notice under the section. But 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 Income-tax Officer did not hold the belief
that there had been such nondisclosure. 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 "reason 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 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
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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
593
of law. [See Calcutta Discount Co. Ltd., v. Income-tax
Officer Companies District 1, Calcutta and Anr.(1)]
In the present case the High Court has pointed out that the
Income-tax Officer when examining the relevant material in
the proceeding for the assessment year 1955-56 found that
the appellant had made investments to the extent of Rs.
39,000/- in the account 1 year under question when the
income assessed was only Rs, 36,068/-. On further
examination it was discovered that items of house property
acquired long before the relevant accounting year had been
suppressed. The High Court, therefore, held that the
Income-tax Officer had reasonable grounds for thinking that
there was non-disclosure on the part of the appellant and
that there was under-assessment for the assessment year
1951-52.
It was _also contended for the appellant that the Income-tax
Officer should have communicated to him the reasons which
led him to initiate the proceedings under s. 34 of the Act.
It was stated that a request to this effect was made by the
appellant to the Income-tax Officer, but the Income-tax
Officer declined to disclose the reasons. In our opinion,
the argument of the appellant on this point is misconceived.
The proceedings for assessment or reassessment under s.
34(1) (a) of the Income-tax Act start with the issue of a
notice and it is only after the service of the notice that
the assessee, whose income is sought to be assessed or re-
assessed, becomes a party to those proceedings. The earlier
stage of the proceeding for recording the reasons of the
Income-tax Officer and for obtaining the sanction of the
Commissioner are administrative in character and are not
quasi-judicial. The scheme of s. 34 of the Act is that, if
the conditions of the main section are satisfied a notice
has to be issued to the assessee containing all or any of
the requirements which may be included in a notice under s
sub-section (2) of section 22. But before issuing the
notice, the proviso requires that the officer should record
his reasons for initiating action under section 34 and
obtain the- sanction of the Commissioner who must be
satisfied that the action under s. 34 was justified. There
is no requirement in any of the provisions of the Act or any
section laying down as a condition for the initiation of the
proceedings that the reasons which induced the Commissioner
to accord sanction to proceed under section 34 must also be
communicated to the assessee.
In The Presidency Talkies Ltd. v. First Additional Income-
tax Officer, City Circle II, Madras,(2) the Madras High
Court has expressed a similar view and we consider that that
view is correct. We accordingly reject the argument of the
appellant on this aspect of
the case.
(1) 41 I.T.R. 191.
(2) 25 I. T. R. 447.
594
Lastly, it was submitted by the appellant that the
proceedings under s. 34 were invalid because the Income-tax
Officer did not entertain the belief that the under-
assessment was made by reason of the omission or failure on
the part of the assessee to make a return under s. 22 or to
disclose fully and truly all material facts necessary for
the first assessment. There is no substance in the
argument. The Tribunal has found that there was direct
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connection or nexus between the assessee’s omission or
failure to make a return and the under-assessment made by
the Income-tax Officer for the year 1951-52. The High Court
has affirmed this finding and concluded that the proceedings
under s. 34(1)(a) of the Act were not defective in law.
For these reasons we dismiss this appeal with costs.
V.P.S. Appeal dismissed
595