Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME-TAX, MADRAS
Vs.
RESPONDENT:
T.S.P.L.P. CHIDAMEBARAM CHETTIAR (DEAD) THROUGHL. Rs.
DATE OF JUDGMENT21/01/1971
BENCH:
HEGDE, K.S.
BENCH:
HEGDE, K.S.
SHAH, J.C.
GROVER, A.N.
CITATION:
1971 AIR 2074 1971 SCR (3) 428
ACT:
Income Tax Act, 1922, s. 34(1) (a) Requirements of-Assessee
not disclosing part of money repaid against loan and
interest-If undisclosed amount not taxable and to be
presumed adjusted against principal-System of accounts
maintained by assessee-If relevant in relation to concealed
income.
HEADNOTE:
The assessee’s father made various loans to P in 1932. In
July, 1932 P executed a mortgage of some of his properties
in favour of the assessee’s father for a sum of Rs. 2 . 76
lakhs. After the mortgagee had instituted a suit in
December, 1940 claiming a sum of Rs. 5.50 lakhs inclusive of
principal and interest, a compromise decree was passed in
October, 1943 for a sum of Rs. 3.50 lakhs in full
satisfaction of the mortgagee’s claim.
When the income-tax assessment proceedings of the assessee
for the assessment year 1944 45 as karta of his Hindu
Undivided Family were pending, the Income Tax Officer,
Trichy, received information from the Income Tax Officer,
Erode, that the mortgagor had secretly paid to the mortgagee
a sum of Rs. 1.50 lakhs during the year ended on April 1,
1944, and that this was not included in the compromise
decree. As the assessee denied receiving this amount and
the Assessing Officer had no other material before him, he
made a note in the order sheet that the I.T.O., Erode should
be asked to give further details, and in the meantime the
assessment for 1944-45 should not be held up. On receiving
further information, the Assessing Officer came to believe
that a sum of Rs. 1.50 lakhs had escaped assessment and
after issuing the assessee a notice under s. 34(1) (a), he
included the additional sum and taxed him on that basis.
The Appellate Assistant Commissioner set aside the order and
directed the I.T.O. to re-do the assessment after giving the
assessee an opportunity to cross-examine the witnesses on
the basis of whose statements he had reached his conclusion.
After examination of further witnesses and other evidence, a
fresh order of assessment was made on the, assessee under s.
23(3) read with s. 34 and this was affirmed by, the
Appellate Assistant Commissioner as well as by the Tribunal.
Although the High Court, upon a reference, found that the
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assessment under s. 34 was valid and the I.T.O. had rightly
acted in giving effect to the order of the Appellate
Assistant Commissioner to re-do the assessment, it held,
purporting to rely on the decision in C.I.T. Bihar and
Orissa v. Kameshwar duringthe relevant accounting year
was not taxable as the assessee maintainedhis accounts
according to the Chetty system and must be presumed to have
appropriated the amount towards the principal amount due to
the mortgagor.
On appeal to this Court by the assessee as well as by the
department,
HELD : The assessee’s appeal must be dismissed and that of
the Department allowed;
429
(i)There was no force in the contention that as the Income
Tax Officer had before him the information about payment of
a sum of Rs. 1.50 lakhs at the time he made the initial
assessment and did not choose to act on the information, it
was not open to him thereafter to initiate proceedings under
s. 34.
On the facts found, under assessment due to non-disclosure
of material facts was established. At the time he issued
notice under s. 34(1) (a) on the basis of the material
before him, the Income-tax Officer could have ’formed the
necessary belief and stated in the notice that he had formed
such belief; the requirements of s. 34(1) (a) were therefore
fully satisfied. [432 F]
Calcutta Discount Co. Ltd. v. Income-tax Officer, Companies
District 1, Calcutta and anr. [1961] 41, I.T.R. 191;
referred to.
(ii)The only ground on which the assessment order was set
aside by the Appellate Assistant Commissioner was that the
assessee had not been given a proper opportunity to put
forward his case. He did not hold that the notice under s.
34(1)(a) was invalid. There was therefore no assessee under
s. 34(1) (a). [433 D]
(iii)The High Court was in error in thinking that the
decision of the JudicialCommittee in Kameshwar Singh’s case
had laid down the rule that whenever any amount is received
by a creditor which he has not specifically appropriated
either towards the principal or the interest due to him, the
taxing authorities should proceed on the basis of the
presumption that it has ,been appropriated towards the
principal. In the present case it was evident that after
secretly receiving the amount of Rs. 1.50 lakhs, the
creditor did not enter it in his account-books with a view
to evade tax. If he intended to appropriate that amount
towards the principal, there was no. need for him not to
enter that receipt in his accounts. The fact that the
assessee was maintaining the Chetty system of accounts was
immaterial on the facts of the case. The system of
maintaining accounts is wholly irrelevant because the
receipt in question had not been entered in the accounts at
all. [437 Al
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 365 and
671 of 1967.
Appeals from the judgment and order dated January 6, 1966 of
the Madras High Court in Tax Case No. 143 of 1963 (Reference
No. 37 of 1963).
B Sen, B. D. Sharma and R. N. Sachthey, for appellant (in
C.A. No. 365 of 1967) and the respondent (in C A.. No. 671
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of 1967)’.
T.A. Ramachandran and D. N. Gupta, for the respondents
(in C.A. No. 365 of 1967) and the appellants (in C.A No.671
of 1967).
The Judgment of the Court was delivered by
Hegde J.-The first of these two appeals (both by
certificate) viz. that filed by the Commissioner of Income
Tax - and the second, that filed by the legal
representatives of assessee
430
fails. The facts as found by the Tribunal and set out in
the statement of the case, relevant for the purpose of these
appeals are as follows :
The relevant assessment year is 1944-45, corresponding to
the accounting year ended on April 12, 1944. The assessee
is one Chidambaram Chettiar (since deceased). The father of
the assessee Palaniappa Chettiar was a money lender. He had
made various advances to one Nallathambi Sakkarai Manradiar,
who will hereinafter be referred to as the Pattayagar, a
prominent landlord in Coimbatore District, on promissory
notes. The total principal advanced by the father of the
assessee upto July 6, 1932 amounted to Rs. 1,38,535. The
interest on the same came to Rs. 1,34,965. On July 6, 1932,
a further advance of Rs. 2500 was made to the Pattayagar and
for the amounts due from him, the Pattayagar executed a
mortgage of some of his properties in favour of the
assessee’s father for a sum of Rs. 2,76,000. Till 1938,
only a sum of Rs. 13,620 was paid by the mortgagor in part
payment of the debt due from him. On December 14, 1940 the
mortgagee instituted a suit on the foot of the mortgage bond
claiming a sum of Rs. 5,50,573 inclusive of principal and
interest. On September 19, 1943, the claim was compromised
and on October 5, 1943, a compromise decree was passed for a
sum of Rs. 3,50,500 in full satisfaction of the mortgagee’s
claim. The decree amount was made payable on or before
October 1, 1944. The debt under the compromise decree was
subsequently discharged.
For the assessment year 1944-45, the assessee Chidambaram
Chettiar, as karta of his Undivided Hindu Family was
assessed under S. 23(3) of the Income Tax Act, 1922 (to be
hereinafter referred to as the Act), on February 12, 1946,
on a total income of Rs. 78,556 which, on appeal was reduced
to Rs. 53,153. When the assessment proceedings of the
assessee were pending before the Income-tax Officer, Trichy,
that Income-tax Officer received information from the
Income-tax Officer, Erode that the mortgagor had paid
secretly to the mortgagee a sum of Rs. 1,50,000 during the
year ended on April 1, 1944 and that the same was not
included in the compromise decree. When the Income-tax
Officer asked the assessee about the same, he denied having
received any amount secretly. Apart from the information
conveyed by the Income tax Officer, Erode, the Assessing
Officer had no other material before him to show that any
amount had been paid secretly by the mortgagor to the
mortgagee. Hence on May 27, 1945, the Income-tax Officer
made the following note in the order sheet
"It is denied that there was any secret understanding not to
show the payment of Rs. 1,50,000. The
431
receipt of this amount is entirely denied.. The Incometax
Officer, Erode should be asked to give further details and
to ask the Pattayagar to produce evidence of the payment.
In any event, this should come up for consideration only in
the assessment year 1944-45 as only the excess over Rs.
2,76,000 plus legal expenses can be treated as interest
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income in the hands of the assessee and so, the assessment
for 1944-45 should not be held up pending further
investigation."
After sometime the Assessing Officer made further enquiry
into the information given by the Income-tax Officer, Erode
and thereafter he came to believe that a sum of Rs. 1,50,000
had escaped assessment by reason of the omission of the
assessee to disclose fully and truly all material facts
necessary for his assessment for the assessment year 1944-
45. He accordingly issued a notice under s. 34(1)(a) on
March 9, 1953. In reply to that notice, the assessee filed
a return similar to the one filed by him earlier. He denied
having received Rs. 1,50,000 secretly from the mortgagor.
The Income-tax Officer did not accept the plea of the
assessee. He accordingly included an additional sum of Rs.
1,50,000 to the income of the assessee earlier determined
for the assessment year 1944-45 and taxed him on that basis.
In appeal, the Appellate Assistant Commissioner set aside
the order of the Income-tax Officer and directed the Income-
tax Officer to re-do the assessment after giving the
assessee an opportunity to cross-examine the parties
examined by the Income-tax Officer on the basis of whose
statements he had come to the conclusion that a sum of Rs.
1,50,000 had been secretly paid to the mortgagee by the
mortgagor. Thereafter the Income-tax Officer further in-
quired into the matter; Pattayagar’s books of account were
got produced to prove that an additional sum of Rs. 1,50,000
had been paid to the assessee. Some witnesses were also
examined in the presence of the assessee to prove that fact.
After doing so, a fresh order of assessment was made on the
assessee under s. 23(3) read with s. 34. His order was
affirmed by the Appellate Assistant Commissioner as well as
by the Tribunal. At the instance of the assessee, the
following three questions were submitted to the High Court
under s. 66(1) of the Act.
"(1) Whether assessment under section 34 was valid and
proper. ?
(2) Whether the Income-tax Officer rightly acted in giving
effect to the order of the Appellate Assistant Commissioner
setting aside the assessment to re-do the same according to
law after Living an opportunity to the appellant to place
all his cards before the Department ?
432
(3) Whether Rs. 1,50,000 is taxable as income
of the year of account ?"
The High Court answered the first two questions against the
assessee and the third question against the Department. The
legal representatives of the assessee are challenging the
High Court’s ,,decision on the first two questions and the
Commissioner is challenging the High Court’s decision on the
third question.
We shall first take up the assessee’s appeal. There is
hardly any merit in that appeal. It was urged on behalf of
the representatives of the assessee that as, even when the
original assessment proceedings for the relevant year were
before the Income-tax Officer, he had before him the
information given by the Incometax Officer, Erode, but yet,
he did not choose to act on that information, it was not
open to him thereafter to initiate proceedings under s. 34.
We are unable to accept this contention. On the facts found
by the Tribunal, it is established that the assessee’s
father had clearly suppressed the receipt of Rs. 1,50,000
from the mortgagor. The assesses had a duty to disclose
fully and truly all material facts necessary for his
assessment. Herein we are not dealing with. a case coming
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under s. 34(1)(b). All that we have to see is whether the
requirements of s. 34(1)(a) are satisfied. This Court in
Calcutta Discount Co. Ltd. v. Income-tax Officer, Companies
District I, Calcutta and anr., (1) ruled that to confer
jurisdiction on the Income-tax Officer to take action under
S. 34, ( 1 ) (a), two conditions must be satisfied viz. ( 1
) he has reason to believe that there was under-assessment
and (2) that he must have reason to believe that the under-
assessment has resulted from nondisclosure of material
facts. On the facts found, under assessment is established
and it is also established that the under assessment was due
to non-disclosure of material facts. There can be no doubt
that at the time he issued notice under s. 34(1)(a) on the
basis of the material before him, the Income-tax Officer
could have formed the necessary belief. In the notice
issued he says that he had formed that belief. In our
opinion the requirements of S. 34(1)(a) are fully satisfied.
The fact that there was some vague information before the
Income-tax Officer that the assessee’s father had secretly
received a sum of Rs. 1,50,000 from the mortgagor was by
itself not sufficient to bring to tax that amount parti-
cularly in view of the fact that the assessee had stoutly
denied that fact and the court records did not support that
information. It is true that the Income-tax Officer could
have made further enquiry into the matter but the fact that
he did not make any further enquiry does not take the case
out of S. 34(1)(a) particularly when the assessee had failed
to place truly and fully all the material ’facts before him.
The remark of the Income-tax Officer that "in
(1) [1961] 41 I.T.R. 191
433
any event this (the receipt of Rs. 1,50,000) should come up
for consideration only in the assessment year 1944-45 as
only the excess over Rs. 2,76,000 plus legal expenses can be
treated as interest income in the hands of the assessee and
so, the assessment for 1944-45 should not be held up pending
further investigation" in the order sheet does not amount to
a decision taken by him. It may be noted that those remarks
were not made in the order assessing the income of the
assessee. It must also be remembered that the Income-tax
Officer, at the time he made those remarks was not satisfied
about the correctness of the information given by the
Income-tax Officer, Erode. Hence those remarks must be
treated as casual observations and not a decision taken on
the basis of facts found.
We see no substance in the contention that the Income-tax
Officer did not give effect to the order of the Appellate
Assistant Commissioner when the latter asked him to reassess
the income of the assessee. The only ground on which the
assessment order was set aside by the Appellate Assistant
Commissioner was that the assessee had not been given a
proper opportunity to put forward his case. The Appellate
Assistant Commissioner did not hold that the notice issued
by the Income-tax Officer under s. 34(1)(a) was an invalid
notice. Therefore there was no need for the Incometax
Officer, Trichy to issue a fresh notice to the assessee
under s. 34(1)(a) as contended on behalf of the assessee’s
representatives. All that the Income-tax Officer had to do
was to afford proper opportunity to the assessee to show
that in fact he had not received the aforementioned sum of
Rs. 1,50,000. That opportunity had been given.
In view of our above conclusion Civil Appeal No. 671 of 1967
fails and the same is dismiss ed.
Now coming to the appeal filed by the Commissioner of
Income-tax, the High Court came to the conclusion that the
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sum of Rs. 1,50,000 received by the assessee during the
relevant account year must be presumed to have been
appropriated by the assessee towards the principal amount
due to the mortgagor and hence the same cannot be considered
as an income of the assessee during that year. The assessee
was maintaining his accounts in accordance with what is
known as Chetty system of accounts. The material on record
shows that according to the Chetty system of accounts, the
creditor appropriates a receipt first towards the cost of
litigation, then towards the principal amount due and the
balance towards the arrears of interest. The High Court was
of the view that the sum of Rs. 1,50,000 secretly received
by the creditor must be deemed to have been kept in
suspense. As the debator had not given any direction about
the appropriation of that amount it was open to the creditor
to appropriate the same
434
towards the principal amount and further he must be presumed
to have appropriated that amount towards the principal
amount before s. 34 proceedings were started against him
firstly because of the system of accounts maintained by him
and secondly because every one must be deemed to have acted
in a manner least disadvantageous to him. In support of
this conclusion reliance was placed by the High Court on the
decision of the Judicial Committee in The Commissioner of
Income-Tax, Bihar and Orissa v. Kameshwar Singh(1). In that
case, nature of several receipts by the assessee came up for
consideration. For our present purpose we need only refer
to two of them. One Damodar Das Burman owed to the assessee
in the Fasli year 1332 Rs. 3,09,281. During the currency of
the debt the debtor had made regular payments to the
assessee over a number of years, the total of which payments
was not stated. Those payments were entered in the deposit
register maintained by the assessee but no allocation
thereof were made as between principal and interest, and no
part of those payments were carried to the interest register
maintained by the assessee. Consequently no part of these
payments was subjected to tax until the Fasli year 1331, in
which year for the first time the Income-tax Officer came to
know about the deposit register maintained by the assesse,e.
In that year, the deposit register showed a receipt of Rs.
38,091 and on this the officer claimed and was paid tax on
the footing that it was attributable to interest and not to
principal. The result is that against the total interest on
the debt, viz. Rs. 3,09,281, no sums had been attributed by
the assessee to interest out of the payments made to him by
the debtor. But the Income-tax Officer had himself treated
the sum of Rs. 38,091 received in the year Fasli 1331 as
interest and taxed it accordingly. That left Rs. 2,71,190
as the balance of the total interest on the debt, during its
currency towards which balance the assessee made no
attributions of interest out of the payments received by him
from the debtor during its currency. No tax accordingly had
been paid in respect of any of these receipts other than on
Rs. 38,091. Therefore the question before the Court was how
in those circumstances should be received of Rs. 2,78,000 in
the Fasli year 1332 be treated. Dealing with that question
the Judicial Committee observed :
"Now, where interest is outstanding on a principal sum due
and the creditor receives an open payment from the debtor
without any appropriation of the payment as between capital
and interest, by either debtor or creditor, the presumption
is that the payment is attributable in the first instance
towards the outstanding interest........ This presumption is
no doubt operative primarily in questions between debtor and
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creditor, but
(1) [1933] 2 I.T.R. 94.
435
in their Lordship’s view, the Income-= Officer, finding that
the assessee received a payment from his debtor of Rs.
2,78,000 in the year Fasli 1332 and that the assessee had
not up till then credited himself as having received, any
interest receipts to the Revenue Authorities was entitled in
the circumstances to treat this sum of Rs. 2,78,000 as
applicable to the outstanding interest to the extent of Rs.
2,71,190 and accordingly to treat the payment to that extent
as income of the assessee in the year of payment."
From the facts noted above, it is clear that what
presumption should be drawn in regard to appropriation of an
open payment depends on the circumstances of a case. Now we
shall proceed to deal with the second receipt namely that
from Kumar Ganesh Singh. In the Fasli year 1332 Kumar
Ganesh Singh owed the assessee 32 lacs as principal and Rs.
6,09,571 as interest, or a total of Rs. 38,09,571 in all, in
respect of an unsecured loan. In that year the assessee and
his debtor entered into an arrangement whereby, as the
Commissioner stated "the assessee took over from the debtor
in satisfaction of this amount the following items of
property movable. or immovable:-
1. The Kajora Colliery valued atRs.7,37,339/-
2. Shares in different companies valued atRs.94,125/-
3. Bills received by the above brokers (i.e. Ganesh
Singh’s
firm)Rs.48,809,-
4. DecreeRs.1,42,594/-
5. Transfer of loan to the Agra United Co.Rs.10,00,000/-
6. Pronotes and hand-notes (of third parties)S.
7. Hand-notes from Kumar Ganesh SinghRs.17,34,596-
Rs. 38,09,569/
The question for decision was whether as a result of the
above settlement, it could be said that in the account year
the assessee had received a sum of Rs. 6,09,571-due to him
as interest. The Judicial Committee came to the conclusion
that the first six items mentioned above amounting to Rs.
20,74,973 may perhaps reasonably enough be regarded as the
equivalent of cash, but the seventh item of Rs. 17,34,596
consisting of the debtor’s own promissory notes, was clearly
not the equivalent of cash. A debtor who gives his creditor
a promissory note for the sum he owes can in no sense be
said to pay his creditor; he merely gives him a document or
voucher of debt possessing certain legal attributes. The
next question was whether the receipt of Rs. 20,74,973 can
be said to include a receipt of interest of Rs. 6,09,571 ?
The Judicial Committee answered that question thus :
436
"He (Counsel for the Crown) relied on the already invoked in
the case of Damodar Das Burman above, that a creditor is
presumed to apply payments received from his debtor towards
the extinction of interest claims before capital claims.
But the situation which their Lordships are now considering
differs materially from that which existed in the case of
Damodar Das Burman. In that case, apart from other
specialities there was no settlement, but merely an open
payment to account. Here there was an arrangement effecting
the whole indebetedness whereby certain assets were accepted
in part satisfaction and promissory notes were taken for the
balance. The basis of the presumption, namely, that it is
to the creditor’s advantage to attribute payments to
interest in the first place, leaving the interest-bearing
capital outstanding, is gone. Moreover, if the question
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were one between Kumar Ganesh Singh and the assessee, i.e.,-
between debtor and the creditor, the assessee might up to
the last moment appropriate ’the Rs. 20,74,973 to capital
account...... Their Lordships have also not omitted to bear
in mind the provisions of ss. 60 and 61 of the Indian
Contract Act, though these were not relied on in argument as
applicable to the case. In the result their Lordships are
of opinion that having regard to the nature of the
transaction, the assessee is entitled to say that he has
accepted the first six items in discharge pro tanto of his
debtor’s capital liability and that the capital debt now
stands discharged to that extent. No part of the sum of Rs. 20,74,9
73 accordingly was received by the assessee as
taxable income in the year of computation."
Here again we notice that the conclusion drawn by the
Judicial ,Committee depended on the facts and circumstances
before them. Though the factum of settlement of the debt
was relied upon as one of the circumstances, for finding out
the meaning of appropriation, it was by no means a
conclusive circumstance. Evidently their Lordships bore in
mind the possibility of the assessee not being able to
realise the debts under the hand-notes. Under those
circumstances it was advantageous to the assessee to
appropriate the money value of the properties received
towards, the capital, otherwise there was a possibility of
his having to pay income-tax ;on a receipt which ultimately
may not prove to be an income. It is under those
circumstances their Lordships observed :
"that in a question with the revenue the tax-payer is
entitled to appropriate payments as between capital and
interest in the manner least disadvantageous to himself."
437
In our opinion the High Court was in error in thinking that
the decision of the Judicial Committee in Kameshwar Singh’s
case(1) has laid down a firm rule that whenever an assessee
receives a payment and does not appropriate the same either
towards the principal or interest, he must be deemed to have
appropriated the same towards the principal. The decision
in question, in our opinion, does not lay down the rule that
whenever any amount is received by a creditor which he has
not specifically appropriated either towards the principal
or the- interest due to him, the taxing authorities should
proceed on the basis of the presumption that it has been
appropriated towards the principal. On the facts of that
case it was clear that ’it was advantageous to the creditor
to appropriate the receipt towards the principal. But
turning to the facts of the present case the total amount
due to the assessee was over 6 lakhs. Out of that the
principal amount was less than 3 lakhs. The compromise
decree was for Rs. 3,50,500. The creditor secretly received
Rs. 1,50,000/-. He does not enter the same in his account
books. Evidently he did not enter the same in his account-
books with a view to evade tax. If he intended to
appropriate that amount towards the principal, there was no
need for him not to enter that receipt in his accounts.
Obviously he appropriated the amount towards the interest
due to him and that is why he did not enter that receipt in
the accounts so as to facilitate evading payment of tax on
that amount. The fact that the assessee was maintaining
Chetty system of accounts is immaterial on the facts of the
case. The system of maintaining accounts is wholly irrele-
vant because the receipt in question had not been entered in
the account at all. Hence, in our opinion, the High Court
erred in answering the third question against the
Department.
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We accordingly allow Civil Appeal No. 365 of 1967 and answer
the third question referred to the High Court in favour of
the Revenue namely that the receipt of Rs. 1,50,000/- is
taxable as income of the year of account. The assessee
shall pay the costs of these appeals-hearing fee one set.
Civil Appeal 365 of 1967 allowed.
Civil Appeal 671 of 1967 dismissed-
R.K.P.S.
(1) [1933] 2 I.T.R.94.
438