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Commissioner of Income-tax, Bombay City-i Vs. Malegaon Electricity Co. Private Ltd. and ors. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 19 of 1962
Judge
Reported in[1966]62ITR789(Bom)
ActsIncome Tax Act, 1922 - Sections 10(2) and 34(1)
AppellantCommissioner of Income-tax, Bombay City-i
RespondentMalegaon Electricity Co. Private Ltd. and ors.
Appellant AdvocateG.N. Joshi, Adv.
Respondent AdvocateB.A. Palkhivala, Adv.
Excerpt:
direct taxation - reopening of assessment - sections 10 (2) and 34 (1) of income tax act, 1922 - assessee-company amalgamated - return filed - return did not disclose any profit or loss under section 10 (2) (7) - assessment was reopened under section 34 (1) (a) - notice issued - whether notice issued under section 34 (1) (a) valid as there was no new information which has come to knowledge of department justifying re-opening of assessment - return filed by assessee nowhere indicated that there was any loss or profits - failure on part of department to correlate various materials could not entitle assessee to claim that assessment could not be reopened under section 34 (1) (b) - held, assessment could be reopened under section 34 (1) (b) and notice can be issued under section 34 (1).....tambe, c.j.1. this is a joint reference under sub-section (1) of section 66 of the indian income-tax act, 1922 (hereinafter referred to as the act), arising out of the tribunal's order in three appeals relating to the assessment of the three assessees, the malegaon electricity co. pvt. ltd., the chalisgaon electricity co. pvt. ltd. and the dohad electricity co. pvt. ltd. all the said three companies have sold their concerns to the amalgamated electricity co. facts in all the three cases are similar and, therefore, in the statement of case, facts relating to the assessment of malegaon electricity co. pvt. ltd. have been stated. the questions of law arising out of the appellate order of the tribunal in all the three cases are identical. we would, therefore, state the relevant facts relating.....
Judgment:

Tambe, C.J.

1. This is a joint reference under sub-section (1) of section 66 of the Indian Income-tax Act, 1922 (hereinafter referred to as the Act), arising out of the Tribunal's order in three appeals relating to the assessment of the three assessees, the Malegaon Electricity Co. Pvt. Ltd., the Chalisgaon Electricity Co. Pvt. Ltd. and the Dohad Electricity Co. Pvt. Ltd. All the said three companies have sold their concerns to the Amalgamated Electricity Co. Facts in all the three cases are similar and, therefore, in the statement of case, facts relating to the assessment of Malegaon Electricity Co. Pvt. Ltd. have been stated. The questions of law arising out of the appellate order of the Tribunal in all the three cases are identical. We would, therefore, state the relevant facts relating to the Malegaon Electricity Co. Pvt. Ltd. We are here concerned with the assessment year 1952-53, the relevant accounting period being April 1, 1951, to March 31, 1952. The assessment of the said company was completed by the Income-tax Officer on August 4, 1953. He determined the company's business profits at Rs. 33,096 subject to the assessee's claim for unabsorbed depreciation brought forward to the extent of Rs. 40,000 and odd. Setting off the said unabsorbed depreciation to the extent of Rs. 33,096, the Income-tax Officer determined the total income of the assessee at nil. Now, during the course of the accounting year, the assessee-company had sold its concern to the Amalgamated Electricity Co. Ltd. under the indenture of date 19th September, 1951, for a consideration of Rs. 9,35,246-15-8. The resolution relating to this transaction was passed by the board of directors of the Amalgamated Electricity Co. Ltd. on 16th April, 1951, subject to its approval by the shareholders, and the board of directors of the Malegaon Electricity Co. Ltd. had passed a resolution relating to it on the 19th September, 1951, i.e., the very day on which the indenture was executed. Now, during the course of the assessment proceedings, the assessee-company informed by its letter dated 2nd July, 1953, that it had sold its undertaking to the Amalgamated Electricity Co. Ltd. Along with the letter the assessee-company enclosed an extract from the minutes of the meeting of the board of directors of the Amalgamated Electricity Co. Ltd. of date 16th April, 1951, the resolution passed on 19th September, 1951, by the board of directors of the assessee-company and the indenture dated 19th September, 1951, executed between the assessee-company and the Amalgamated Electricity Co. Ltd., along with a statement showing the break-up of the consideration. The said statement is annexed as exhibit 'F' to the statement of case. It shows that from the original cost of the assets amounting to Rs. 11,97,586-11-10, the liabilities of the assessee-company amounting to Rs. 2,62,339-12-2 were deducted inasmuch as the liabilities had been transferred under the indenture to the Amalgamated Electricity Co. The statement shows the break-up of the original cost of different items of assets as well as different items of liabilities. It is not in dispute that the said consideration of Rs. 9,35,246-15-8 was paid on 4th October, 1951, by the Amalgamated Electricity Co. to the assessee-company and that fact had been noticed by the Income-tax Officer at the time of assessment. In his assessment order, he observes :

'On going through these document and the copies of resolution passed by shareholders of the Amalgamated Electricity Co., it is seen that no adjustment is necessary in the matter. The position of the assessee's total income is determined as under....'

2. It is necessary to state at this stage that, though the assessee-company had sent a copy of the resolution and a copy of the indenture along with a statement showing the details as to how the price was arrived at, the assessee-company had neither disclosed, either in its return or in the correspondence, any loss nor any profit that fell within the purview of section 10(2) (vii).

3. Some time after completing the assessment, the Income-tax Officer realised that profits falling within the ambit of section 10(2) (vii) had not been assessed. He, therefore, sought permission of the Commissioner to start proceedings against the assessee-company under section 34 of the Act. In seeking permission the Income-tax Officer mentioned the following reasons for initiating proceedings under section 34 :

'Profits under section 10(2) (vii) have not been assessed : the company did not disclose this point.'

4. It may also be stated that, in seeking the permission of the commissioner, the Income-tax Officer had sought permission to reopen the assessment under section 34(1) (a). After obtaining sanction from the Commissioner, the Income-tax Officer issued notice under section 34 of the Act on 29th March, 1957, and it was served on the assessee-company on the same day. The assessee-company thereafter filed a return showing the income at nil. The Income-tax Officer found that the profits made by the assessee-company under section 10(2) (vii) as a result of the sale transaction amounted to Rs. 4,88,386. Setting off the unabsorbed depreciation carried forward up to the date of sale, the Income-tax Officer determined the total income of the assessee-company at Rs. 4,48,893 and directed that demand notice be issued to the assessee. The assessee-company raised two contentions before the Income-tax Officer, viz., that the action under section 34(1) (a) is bad in law inasmuch as there was no new information which has come to the knowledge of the Income-tax Officer justifying the reopening of the assessment under section 34(1) (a) and that there was no business done by the assessee-company during the year of account and as such the profits under section 10(2) (vii) cannot be taxed. Both the contentions were repelled by the Income-tax Officer holding that profits falling under section 10(2) (vii) and arising out of the sale transaction did not seem to have been considered by the Income-tax Officer and that was on account of the assessee's omission to disclose these profits in his return. Mere production of accounts or other evidence in regard to the sale of assets and profits under section 10(2) (vii) arising therefrom does not necessarily amount to disclosure on the part of the assessee as laid down in the said section. He, therefore, held that action under section 34(1) (a) was properly taken.

5. The assessee took an appeal and the Appellate Assistant Commissioner confirmed the view of the Income-tax Officer. The same contentions were also reiterated by the assessee before the Appellate Assistant Commissioner.

6. In overruling the aforesaid contentions, the Appellate Assistant Commissioner in his order observed :

'Now section 22(2) casts a statutory duty on an assessee to submit a return showing all his income... The word 'income' here connotes not any income but income as understood in the Act. Therefore, the company was statutorily required to disclose the profit under section 10(2) (vii) in its return and so far as it failed to do so it cannot be said to have disclosed fully and truly all facts material to its assessment. A disclosure must not only be true but it has also to be full. The appellant must be deemed to have been conversant with the provisions of the law and, if it had failed to act according to them, it cannot be said to have made a true and full disclosure of all material facts relevant to its assessment. In this view of the matter, I am satisfied that the proceedings have been validly taken.'

7. The assessee-company took a further appeal to the Tribunal. Both these contentions were again reiterated before the Tribunal. It was contended on behalf of the assessee before the Tribunal that all the material facts or primary facts regarding the sale of assets of the assessee-company, the sale price as well as the break-up thereof were furnished by the assessee-company to the Income-tax Officer. He had applied his mind to the facts of the case and after applying his mind had come to the decision that no profits under section 10(2) (vii) could be taxed in the assessee-company's hands. Reliance was placed in support of this contention on the passage which we have reproduced above. The proceedings under section 34(1) (a) were, therefore, incompetent as there was no fresh material on which any action could be taken. The Income-tax Officer on reopening the assessment only re-examined the material on record and has come to a different conclusion from the conclusion to which the Income-tax Officer who made the original assessment had reached.

8. The assessee-company also contended that all primary facts regarding the sale of the assets of the assessee-company were placed before the Income-tax Officer. The question whether, out of the transaction, profits taxable under section 10(2) (vii) arose or not was a question of merely an inference to be drawn from these primary facts. If the Income-tax Officer had failed to draw the proper inference, that cannot be a good reason for reopening the assessment under section 34(1) (a) of the Act.

9. On behalf of the department, it was on the other hand contended that, though the Income-tax Officer, who made the original assessment, was aware of the transaction of sale of the assets of the assessee-company, the question of computing the profits under section 10(2) (vii) did not seem to have been considered by him. This, according to the department, was due to the assessee's omission to disclose in the return the profits accruing to it under section 10(2) (vii). The mere furnishing of the various documents referred to above did not amount to a full and true disclosure of facts material for the purpose of assessment. It had also been urged on behalf of the department in the alternative that, even assuming that reopening of the assessment was not sustainable under section 34(1) (a), it was sustainable under the provisions of section 34(1) (b). Notice under section 34 was given within the period of limitation and the assessment had also been completed within the period of limitation mentioned in section 34. The Tribunal held that action under section 34(1) (a) was not sustainable. The reason given by the Tribunal is in the following terms :

'There can be no manner of doubt that all primary facts regarding the transaction of sale of the 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 assets was necessary. Whether or not there was any profit under section 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 view of the fact that all the relevant facts were available 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.'

10. As regards the alternate contention raised on behalf of the department that at any rate the reassessment had been validly made under section 34(1) (b), the Tribunal held that, as the Income-tax Officer, who initiated the present proceeding for reassessment, did so under the belief that the assessee failed to disclose fully and truly all material facts necessary for its assessment, it was not open to the income-tax authorities to take resort to the provisions of section 34(1) (b). In this view of the matter, the Tribunal allowed the appeal. It may be stated that the Tribunal did not consider the contentions raised on behalf of the assessee relating to the merits of the case. To recall, it was the case of the assessee-company that the profits made under section 10(2) (vii) were not taxable inasmuch as no business was done by the assessee-company during the year of account. The merits of this contention have not been considered by the Tribunal. On an application made by the Commissioner of Income-tax, the Tribunal has referred to us the following two questions :

'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 (when) as a matter of fact action for reassessment proceedings had been initiated on the belief that the provisions of section 34(1) (a) were properly applicable to the facts of the case, the department was precluded from sustaining the validity of the reassessment as well (on the ground that it fell) within the scope of section 34(1) (b) ?'

11. Before we proceed to consider the contentions raised on behalf of the parties, it would be convenient to notice the relevant provisions of the Act. Section 22 casts an obligation on every person, whose total income during the previous year falls within the taxable limits, to file a return in the prescribed form of his total income, that is, 'total amount of income, profits and gains referred to in sub-section (1) of section 4 computed in the manner laid down in this Act.' (section 2(15)). Section 10 relates to the computation of profits and gains of business. Sub-section (2) of section 10 enumerates the various allowances, which are allowed as a deduction to an assessee in the manner of computation of his income. Clause (vi) of sub-section (2) relates to the permissible deductions in respect of depreciation of buildings, machinery, plant or furniture, etc., of the assessee used in business in the relevant year. Sub-section (2) (vii) relates to a case where building, machinery or plant is sold during the course of an assessment year.

12. The material part thereof is in the following terms :

'10. (2) Such profits or gains shall be computed after making the following allowances, namely :-....

(vii) in respect of any such building, machinery or plant which has been sold or discarded or demolished or destroyed, the amount by which the written down value thereof exceeds the amount for which the building, machinery or plant, as the case may be, is actually sold or its scrap value :.....

Provided further that where the amount for which any such building, machinery or plant is sold, whether during the continuance of the business or after the cessation thereof, exceeds the written down value, so much of the excess of does not exceed the difference between the original cost and the written down value shall be deemed to be profits of the previous year in which the sale took place.'

'Written down value' has been defined in sub-section (5) of section 10 to mean the actual cost to the assessee in the case of assets acquired in the previous year and the written down value in the subsequent years is actual cost less all depreciation allowed to him under the provisions of the Act. The prescribed forms for making a return are different for different classes of assessees and are sub-divided into various parts. It is not necessary to go into details. We would be only referring to the material part thereof. Form C is a form of return prescribed for companies. Part I of Form C is sub-divided into various sections. Section D thereof requires an assessee to show income, profits or gains which he has not included in Sections A, B and C, but which the assessee claims to be not taxable for any reason such as that the receipt is of a casual nature not arising from any business, profession, or vacation or occupation or that it is exempt under any other provision of the Indian Income-tax Act, or that it is not accounted for in the books of account due to non-adjustment of account or for any other reason. It would thus be seen that under the provisions of section 10(2) (vii) when building, plant and machinery used in business are sold at a price higher than the written down value, the difference would normally result in 'deemed profits' of the previous year in which the sale took place. It is admitted position that there was profit within the meaning of the said provision of section 10(2) (vii). The difference thus, being 'deemed profits' under the Act, forms part of the total income of the assessee. The assessee, in the normal course, was enjoined with a duty to include it in its return of total income under section 22 of the Act. If, for any reason, the claim of the assessee be that it is not taxable on the ground 'that it is exempt under any other provision of the Income-tax Act..... or for any other reason', the assessee-company has to disclose in Section D of the said form. It is an admitted position that the assessee had not done so. The assessee-company had not disclosed the excess of the sale price of plant, building and machinery over the written down value either in the sections relating to the total income or in Section D claiming that it was not taxable under any other provisions of the Act. The assessee, however, has, during the course of the assessment on 2nd July, 1953, sent a letter to the Income-tax Officer stating that the assessee-company was enclosing therewith a copy of the directors' resolution regarding sale of the assessee-company together with copies of other documents, to which we have already made a reference. It may also be stated that it appears that the assessee-company had also sent another letter to the Income-tax Officer on 29th June, 1953. That letter, however, is not on record. It has, however, been stated at the Bar by counsel for the parties that the letter contained the depreciation which was allowed to the assess-company from year to year but did not state the exact position as to the written down value of the buildings, plant and machinery or other assets sold under the indenture of date 19th September, 1951, by the assessee-company to the Amalgamated Company. The said statement has been referred to in the said letter of 29th Juen, 1963, as a statement of unabsorbed depreciation. It is in the light of these provisions of the Act and these facts that we have to consider whether the reopening of the assessment under section 34(1) (a) was valid. It is not in dispute that, in the circumstances, the Income-tax Officer had reason to believe that certain profits and gains chargeable to tax have escaped assessment. The question, however, that has to be considered is whether the escapement of the assessment was by reason of 'omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment for that year.'

13. It is the argument of Mr. Joshi that all primary or material facts have not been disclosed by the assessee either in its return or in the aforesaid documents which assessee had filed before the Income-tax Officer. He contends that the most material fact that the sale price relating to plant, machinery and building exceeded the written down value had nowhere been clearly stated. It has not been so stated either in the return or in any of the documents or statements submitted by the assessee-company during the course of its assessment. The statement, on the face of it, does not show what the written down value was, and that, according to Mr. Joshi, amounts to a failure to disclose fully and truly the material facts necessary for its assessment.

14. Mr. Palkhivala, on the other hand, contends that it is not open to the revenue to argue or contend that any fact material for the purpose of assessment had not been disclosed. According to Mr. Palkhivala, throughout the case of the department had been that the failure or omission on the part of the assessee-company to disclose in the return or at any rate in its Section D the profits under section 10(2) (vii) constituted failure to disclose fully and truly all the material facts within the meaning of section 34(1) (a). According to Mr. Palkhivala, it was an admitted position that all facts material for the assessment of the year had been placed by the assessee-company before the Income-tax Officer. It had also been his argument that in fact the assessee had claimed an exemption in respect of its profits on the ground that no business was conducted by assessee during the year of account and, therefore, the profits accruing were not taxable. This contention of the assessee, according to Mr. Palkhivala, had been upheld by the Income-tax Officer. It is, therefore, not open to the department to say that any material fact, that is, the written down value of its assets, was not disclosed by the assessee-company during the course of assessment. In support of the first branch of his argument, that it was an admitted position that all relevant facts were put by the assessee before the Income-tax Officer, Mr. Palkhivala placed strong reliance on the following sentence in the concluding part of paragraph 4 of the Tribunal's order :

'It would thus be seen that while it is common ground that the factum of sale of the assets of the assessee-company, the amount for which the assets were sold, the break-up thereof and all the relevant facts were put by the assessee before the Income-tax Officer during the course of the original assessment proceedings, the sole ground on which action under section 34(1) (a) is sought to be sustained is that the assessee did not compute the profits accruing to it under section 10(2) (vii) and did not show them in the return of income.'

15. Emphasis is put by Mr. Palkhivala on the clause 'all the relevant facts'. Reading the sentence in the context of what had preceded it, we find it difficult that it was an admission made before the Tribunal on behalf of the department that all facts relevant to the assessment were disclosed by the assessee to the Income-tax Officer. On the other hand, it appears to us that the expression 'all relevant facts' refers to the transaction of sale, the price for which the assets were sold and the break-up thereof. Paragraph 2 of the reassessment order of the Income-tax Officer itself shows that the reason given by the Income-tax Officer for holding that there was failure on the part of the assessee to disclose fully and truly all material facts was that the assessee failed to show the profits under section 10(2) (vii) in its return and that the mere production of some documents, account books or other evidence relating to the sale of assets was not sufficient to disclose the profits made. In other words, the finding of the Income-tax Officer was that the facts supplied by the assessee-company did not constitute disclosure of all the relevant material for the purpose of the assessment. The statement of the case also does not indicate that it was an admitted position before the Tribunal that all facts material for the purpose of assessment had been disclosed by the assessee during the course of its assessment and the only question was whether failure to disclose profits in the return amounted to failure to disclose truly and fully all facts material for the purpose of its assessment.

16. We are also not impressed by the argument of Mr. Palkhivala that the assessee-company had, as a matter of fact, claimed in the original assessment before the Income-tax Officer that the profits accruing to it under section 10(2) (vii) were not taxable because no business was conducted by the assessee-company during the previous year. The sentence, on which Mr. Palkhivala has placed reliance in support of his argument, is the following concluding sentence in the order of the Income-tax Officer during the original assessment, and that sentences is :

'On going through these documents and the copies of resolution passed by shareholder of the Amalgamated Electricity Co., it is seen that no adjustment is necessary in the matter.'

17. According to Mr. Palkhivala, the finding that no adjustment is necessary in the matter is finding allowing the assessee's claim that the profits arising under section 10(2) (vii) were not taxable. Having regard to the contents of the entire order, it is difficult to accept the argument on the basis of the cryptic sentence : 'no adjustment is necessary in the matter.' We have read the Income-tax Officer's order and re-read it. We have read the copies of the various documents which the assessee-company had filed before the Income-tax Officer as well as of their letter of 2nd July, 1953. There is not a whisper in any one of them as to the assessee's claim that the profits arising under section 10(2) (vii) were not taxable in view of the fact that no business was run by the assessee-company in the year of account. If one has to conjecture what this sentence 'no adjustment is necessary in the matter' means, there could be conjectures other then the one which the argument suggests, and it is this difficulty which the Tribunal must have found and that is why the Tribunal in its order has observed :

'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 assets was necessary.'

18. The finding is not a defiant one, nor do we find anything in the order of the Income-tax Officer to indicate the basis on which this finding has been given. Except the said cryptic sentence in the Income-tax Officer's order, what constituted the basis on which the Tribunal arrived at its aforesaid finding, it is difficult to find out. The profits that would normally fall under section 10(2) (vii) amounted to a large figure of Rs. 4,83,386. It the assessee was claiming an exemption in respect of this large amount of profits, it would be natural to expect that the assessee would be putting forward its claim in that respect in writing somewhere or other, either in the return or in the correspondence or communications made by the assessee to the Income-tax Officer. In contradistinction, we find that in its letter dated 2nd July, 1953, the assessee-company was giving reasons why it was not claiming depreciation on the assets relating to the assessment year. Thus, in our opinion, it is not possible to construe from the Tribunal's order that it was an admitted position before the Tribunal that all facts material for the purpose of assessment had been disclosed by the assessee and the only ground on which the department was contending that the case fell under section 34(1) (a) was the omission on the part of the assessee to mention these profits in the return either in Sections A, B, C or in Section D. As already stated, we are also unable to read either in the order of the Income-tax Officer or in the order of the Tribunal any definite or clear finding that the Income-tax Officer had considered the alleged contention of the assessee that the said profits were not liable to tax and had accepted the said contention.

19. The question that arises then is whether there had been a failure on the part of the assessee to disclose truly and fully facts material for the purpose of assessment within the meaning of section 34(1) (a). We have already pointed out that, under the various provisions of the Act, the assessee was bound to state these profits in its return, at any rate in Section D thereof, when his case was that it was not liable to tax. It is obvious that the statutory duties case on the assessee with a view to draw pointed attention of the Income-tax Officer at the time of the assessment to such transactions, which normally are exclusively within the knowledge of the assessee, have not been discharged by the assessee in the instant case. It is not in dispute that these profits were not anywhere shown in the return. It is not contended by the revenue that it is not open to the assessee to disclose that the assessee-company had made profits otherwise than by disclosing them in its return, and, in our opinion, rightly. The section nowhere says that the disclosure of all material facts must necessarily be in the return.

20. The question then to be considered is whether the disclosure alleged to have been made by forwarding to the Income-tax Officer the various documents, viz., copy of the resolution of the board of directors of the Amalgamated Company, resolution of the board of directors of the assessee-company, the indenture of sale, the statement of the purchase-price and its break-up and a statement of unabsorbed depreciation, would constitute a true and full disclosure of all material facts. It is the arguments of Mr. Joshi that mere filing of these statements did not constitute a full and true disclosure, while according to Mr. Palkhivala that would amount to full and true disclosure. Mr. Palkhivala argued that, from to said material supplied by the assessee, the written down value could easily have been found : all that the Income-tax Officer had to do was to taken the value of the assets representing plant, building and machinery from the statement of the cost price supplied by the assessee and deduct therefrom the depreciation allowed in respect of these items and he could easily have found what the written down value was. It, therefore, cannot be said that the assessee-company had not disclosed the primary facts. Having regard to the circumstances of the case, it is not possible for us to accept this contention of Mr. Palkhivala. We have already stated that nowhere, neither in the return nor in any of the statements or its covering letters, the assessee-company had clearly stated that the profits, which would normally fall under section 10(2) (vii) have been made by the assessee and that the assessee was claiming an exemption from tax in respect of those profits for the aforesaid reasons. In other words, the fact that the assessee-company had obtained a price for plant, machinery and buildings in excess of its written down value was not disclosed in a clear manner to the Income-tax Officer. There can hardly be any doubt that the primary fact or the material fact for the assessment of the assessee was that the price obtained for plant, machinery and building on their sale was in excess of their written down value. What the section requires is not merely a disclosure but a full and true disclosure. 'Full' would normally mean a complete disclosure and a 'true' disclosure would mean honest and upright disclosure. Thus, when the Income-tax Officer finds that, at the time of the assessment, the assessee had not honestly and uprightly made a complete disclosure of all material facts, it is open to the Income-tax Officer to reopen the assessment under section 34(1) (a). It may be true that if the Income-tax Officer had sat down and carefully worked out the various figures given by the assessee, it might have been possible for him to ascertain whether profits under section 10(2) (vii) had accrued to the assessee or not. But it cannot necessarily be said that the disclosure made by the assessee was full and true. We may in this context refer to the Explanation to section 34 of the Act and the Explanation is :

'Production before the Income-tax Officer of account books or other evidence from which 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.'

21. Section 34(1) (a) read together with the Explanation makes it abundantly clear that the intention of the legislature is that the assessee should himself disclose truly and fully all facts material for the purpose of his assessment and not leave them to be discovered by the Income-tax Officer by working diligently on the material and evidence produced before him by the assessee. Whether in a given case an assessee has so disclosed the material facts or has merely left them to be so discovered by the Income-tax Officer depends on the facts of that case. It is in the light of these provisions that we have to consider whether, in the circumstances of the present case, the production of the various documents by the assessee would amount to a full and true disclosure.

22. Having regard to the circumstances of the case, it is not possible for us to up hold the contention of Mr. Palkhivala that the production of these various documents amounted to a full and true disclosure within the meaning of this section. It is abundantly clear that the assessee-company knew that large amounts of profit had accrued to it which would normally fall under section 10(2) (vii) and yet it did not, as required by law, disclose this fact in Part D of its return claiming exemption in respect thereof in a straightforward manner. During the assessment proceedings the aforesaid documents were produced at different times. By reading these documents it does not become apparent that the sale transaction had resulted in the assessee getting a price for its building, machinery and plant in excess of its written down value. No statement of the written down value of the assets sold was filed. Had this statement been filed, it could possibly have been argued that on reading this statement it became apparent from the record that the price fetched for the building, machinery and plant was in excess of its written down value. Mr. Palkhivala, however, argued that it was possible for the Income-tax Officer to ascertain this fact from the documents produced. In the statement the assessee had given the cost price of the building, machinery and plant. The assessee had also given a statement of the depreciation allowed. Deducting the amount of depreciation allowed from the cost price, the Income-tax Officer could easily have found what the written down value was. Had he done so, he could have easily found that the sale price was in excess of the written down value. The argument is without merit. The section requires the assessee to disclose facts and not leave them to be discovered by the Income-tax Officer. Mr. Palkhivala strongly relied no one of our decisions in support of his contention that, if relevant facts could be ascertained from the material on record, then there is no failure to disclose all material facts within the meaning of section 34(1) (a) of the Act. The decision, on which reliance is placed by Mr. Palkhivala, is D. R. Dhanwate v. Commissioner of Income-tax. In our opinion, this decision would have not application to the facts of the present case. In Dhanwate's case, proceedings under section 34 were initiated on the ground that the income of the wife and minor son had escaped assessment from tax in the hands of the assessee on account of his failure to disclose the fact that they were his partners in his individual assessment. This stand of the department was overruled by this court on the ground that the assessment of the registered partnership firm and the assessment of the individual partners were not two distinct and separate watertight compartments, but they were complementary to one another. That the wife and the minor son were partners of the assessee was fully disclosed in the assessment of the firm and, therefore, there was no failure on the part of the assessee to full and truly disclose facts material for the purpose of his assessment. In other words, the question that was to be was whether disclosures during the course of the assessment of the registered firm are also disclosures for the purpose of assessment of the individual partners. In the instance case the material fact that the sale price secured by the assessee was in excess of the written down value has not been disclosed anywhere in a sufficiently clear manner. The only argument is that it could have been ascertained from the material on record and, therefore, it was a full disclosure. For that proposition this case is no authority. In our opinion, therefore, initiation of proceedings for reassessment could be justified under the provisions of section 34(1) (a).

23. We would now proceed to consider the case on an assumption that there had been no omission on the part of the assessee to disclose fully and truly all material facts necessary for its assessment within the meaning of section 34(1) (a) and this brings us to the next question. Now, the next question, as framed, indicates that the rival contentions were that, according to the department, even if the reassessment proceedings had been initiated under section 34(1) (a), reassessment could be made under section 34(1) (b) even though the case did not fall within the scope of section 34(1) (a), and the contention on behalf of the assessee was that, once the proceedings are initiated under section 34(1) (a), the reassessment could not be done under section 34(1) (b), even if the case fell within section 34(1) (b). Mr. Palkhivala frankly conceded that such is not the case of the assessee and it was not the contention of the assessee raised before the Tribunal. The contention of the assessee, on the other hand, was that, on the facts and in the circumstances of the case, reassessment cannot be sustained under section 34(1) (b) because there was no additional fact which had come into the possession of the Income-tax Office in consequence of which he could have reason to believe that profits and gains chargeable to income-tax have escaped assessment. It is, therefore, necessary to reframe the second question and we reframe it as follows :

'Whether, on the facts and in the circumstances of the case, the reassessment made by the Income-tax Officer could be sustained under section 34(1) (b) of the Ac ?'

24. Material part of section 34(1) (b) is in the following terms :

'If 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,... he may 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 reassess such income, profits or gains.... and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section.'

25. The circumstances, which empower the Income-tax Officer to take action under section 34(1) (b), are 'in consequence of information coming into possession he has reason to believe that income, profits or gains chargeable to income-tax has either escaped assessment or has been under-assessed.'

26. Mr. Joshi contends that even if, on a re-examination of the material on record, the Income-tax Officer comes to the conclusion that income chargeable to tax has escaped assessment, it would amount to information within the meaning of section 34(1) (b). In support of his contention, he has placed reliance on a decision in Commissioner of Income-tax v. Rathinasabapathy Mudaliar.

27. Mr. Palkhivala, on the other hand, contends that the information contemplated by section 34(1) (b) is some new information, which is not there on the record. In other words, the contention of Mr. Palkhivala is that the information must be such as is de hors the record. In support of his contention he has placed reliance on a decision of this court in Dr. M. R. Dalal v. Commissioner of Income-tax. The question that falls for our consideration is what is the import of 'information in his (Income-tax Officer's) possession'. Facts in Commissioner of Income-tax v. Rathinasabapathy were : There was a partition between a Hindu father and his sons, one of whom was a minor and the business carried on by the father was continued by a firm consisting of the father and his major sons, to the benefits of which the minor son was also admitted. The partition was recognised by an order under section 25A and the firm was also registered for the purpose of income-tax. In his return, the father did not include the income of the minor son from the minor's share in the firm and an assessment was made on the father's income without including in it the minor's income. The minor included this income in his own return and was assessed on this income. Subsequently, the Income-tax Officer discovered that he had committed an error and made a reassessment under section 34 including the minor's income in the father's income. The question that arose was whether the realisation of the mistake on the part of the Income-tax Officer after completing the original assessment that he had omitted to include the minor's share income in the father's total income was 'information' with in the meaning of section 34(1) (b). It was held that the realisation of the mistake was 'information' obtained by the Income-tax Officer after completing the original assessment within the meaning of section 34(1) (b) and it was, therefore, competent to the Income-tax Officer to initiate reassessment proceedings under section 34(1) (b). At page 209 of the report, it was observed :

'Even inadvertence and error in the making of the assessment would bring the case within the operation of section 34(1) (b) and where the error is subsequently discovered, that amounts to information that a part of the income has escaped assessment. To emphasise the position, it is not the information, in the sense that the assessee is a partner in a firm and his minor son had been admitted to the benefits of the partnership, that is relevant for the purpose of section 34(1) (b), but the information that a certain part of the income which should have been assessed under the relevant provisions of the law, in the hands of the father, had failed to be so assessed. Obviously, even within the meaning of the decision such information regarding the escapement of tax is information subsequent to the original assessment.'

28. This decision undoubtedly supports Mr. Joshi's contention. The ratio of the decision appears to be that even if on reconsideration of the material on record the Income-tax Officer realises, subsequent to the original assessment, that he had committed an error, which has resulted in the escapement of tax or under-assessment, that amount to an information within the meaning of the section. With respect, we feel some hesitation in going to the extent to which this decision would take us. It would virtually amount that section 34(1) (b) confers a power on the Income-tax Officer enabling him to correct his own mistakes by reviewing his own decision on the same set of facts, which are clearly patent on the record. We find it difficult to equate 'in consequence of information in his possession' with 'in consequence of discovery of an error on re-examination of the record'. The Supreme Court decision referred to in this decision does not, in our opinion, go to that extent. Facts in Maharaj Kamal Singh v. Commissioner of Income-tax were : Following a decision of the High Court, the Income-tax Officer had omitted to bring to assessment a certain sum representing interest on arrears of rent due to the assessee in respect of agricultural land on the ground that the amount was agricultural income. Subsequently, the Privy council on an appeal from that decision of the High Court, held that interest on arrears of rent payable in respect of agricultural land was not agricultural income. After the said decision of the Privy Council, the Income-tax Officer reopened the assessment under section 34(1) (b). The question was whether, in the circumstances, the correct position in law, as stated by the Privy Council, was an information within the meaning of section 34(1) (b). Their Lordships held that, to bring into play section 34(1) (b), there must be two conditions present : the Income-tax Officer must have some information which has come into his possession subsequent to the making of the assessment order, which he seeks to reopen under section 34(1) (b) and the information must be such as would lead to his belief that income chargeable to tax has escaped assessment. The contention that was raised on behalf of the assessee before their Lordship was that the word 'information' should receive a narrower construction limiting it to facts or factual position as distinguished from information as to the true state of the law, while, on behalf of the revenue it was contended that the strict literal meaning should be given to the word 'information', which would include and mean knowledge even about a state of law or a decision on a point of law. Their Lordships held that the decision of the Privy Council stating the correct position of the law was 'information' within the meaning of section 34(1) (b). The ratio of this decision, as appears to us, in short, is that the word 'information' includes knowledge as to the correct state of the law or knowledge as to the correct factual position, but none the less the condition that the said information came into the possession of the Income-tax Officer subsequent to the making of the assessment must be fulfilled. The question that has then to be considered is whether, after the conclusion of the original assessment proceedings, the Income-tax Officer came into possession of any knowledge as to the correct position of law or as to the correct factual position. We have already stated that the factual position as to whether the transaction of sale has resulted in the assessee obtaining a price for building, machinery and plant in excess of the written down value or not had not been clearly stated on the record. On the record, therefor, the information that the sale price of these items was in excess of the written down value cannot be said to be patently available to the Income-tax Officer. The order of the Income-tax Officer does not show that any contention was raised before him that, though the transaction had resulted in obtaining excess price, it was not profit within the meaning of section 10(2) (vii), as much as the assessee did not carry on any business in the year of account. Thus, the position obtaining is that, on the material on record, it cannot be said that the Income-tax Officer had knowledge that the price fetched in respect of the said items of assets had exceeded the written down value. The said knowledge has been subsequently obtained by the Income-tax Officer on correlating various facts and ascertaining the resultant position after the completion of the original assessment. Thus the knowledge as to the correct position of factual matters has been obtained by the Income-tax Officer subsequent to the completion of the original assessment and that would, in our opinion, amount to information within the meaning of section 34(1) (b). A distinction has to be made between facts, which are clearly or patently on the record and facts, which could be gathered or could have been gathered with due diligence by elaborately correlating the various facts on the record. As regards the former, it can, without hesitation, be said that the information as to the facts, which are patently or clearly on the record was within the possession of the Income-tax Officer at the time of the original assessment. The same cannot be said of the latter because the correct factual position emerges only after the Income-tax Officer has correlated the various facts and ascertained what the resulting position is. Knowledge secured in the latter case, subsequent to the assessment, in our opinion, is 'information' within the meaning of section 34(1) (b). The decision, on which reliance has been placed by Mr. Palkhivala, does not run in any manner counter to the view which we have taken.

29. Facts in Dr. M. R. Dalal v. Commissioner of Income-tax were : The assessee had settled certain shares and securities on trust directing the trustees to equally divide the income thereof amongst his son and his two daughters. The trust was irrevocable for a period of 7 years but could be revoked thereafter at any time. The trust deed was made in the year 1939. At the time of the settlement, one of the daughters was a minor and her 1/3 share was being clubbed together with the income of the assessee till the year 1945, when she attained majority. Thereafter, the three children of the assessee were separately assessed in respect of their share income from the trust property. In the assessment year 1952-53, one of the trustees filed a return of the total income of the trust. That Income-tax Officer then noticed that the period 7 years during which the trust was irrevocable had expired. He accordingly informed the Income-tax Officer who was dealing with the assessment of the assessee, about the expiry of the trust. The Income-tax Officer then initiated proceedings under section 34(1) (b) on the ground that he had come into possession of information and that in consequence thereof he had reason to believe that income chargeable to tax had escaped assessment. In the circumstances of the case, it was held that information that the trust had become revocable was also available to the Income-tax Officer who assessed the assessee and the communication from the Income-tax Officer, who dealing with the assessment case of the trust, did not give any fresh information to the Income-tax Officer who was dealing with the assessment of the assessee. The rival arguments were : According to the revenue, the record for the assessment of that year did not show that the trust had become revocable, while, according to the assessee, the records of the previous year clearly indicated that the trust had become revocable. The material on record thus clearly indicated that the trust had become revocable and, therefore, there was no fresh information which the Income-tax Officer had obtained subsequent to the original assessment. It has been observed at page 501 of the report :

'Mr. Joshi, however, contends that the said information communicated to the Income-tax Officer dealing with the assessment of Dr. Dalal was received in the year 1940-41. Many years had elapsed. It would, therefore, not be reasonable to expect the Income-tax Officer, who dealt with the assessment of Dr. Dalal for the assessment year 1952-53, to carry in his mind all the information contained in the old record or to read the old record. We have no hesitation in accepting Mr. Joshi's argument that it would not be reasonable to expect the Income-tax Officer to carry in his head all that is contained in the old records. But it is difficult to accept his contention that it would not be reasonable to expect the Income-tax Officer referring to the old records which are relevant for the assessment with which he is dealing. Apart from it, it would not be unreasonable to expect that a note is taken of the relevant information which is useful for subsequent assessments of the assessee, and a note thereof is kept on record.'

30. It would thus be seen that, having regard to the circumstances of the case, it has been held that the information that the trust had become revocable, which was material and relevant for the assessment, must have been on record or was available on the record and, therefore, no fresh information within the meaning of section 34(1) (b) was obtained by the Income-tax Officer subsequent to the original assessment. Such, however, is not the position in the case we are dealing with. In the present case, information was gatherable from the material on record if the Income-tax Officer had diligently worked on it. From the facts stated by us above, it is abundantly clear that nowhere in clear terms it has appeared on the record that the sale transaction has resulted in the assessee obtaining a price for the building, plant and machinery in excess of its written down value. It might be that that fact could been ascertained by correlating the various documents on record, working on them, making arithmetical calculations and thus ascertaining the resultant position. The mere failure on the part of the Income-tax Officer to correlate these various materials could not entitle the assessee to claim that assessment could not be reopened under section 34(1) (b). It is for these reasons that, in our opinion, the answer will have to be given on both the questions in favour of the department.

31. In the result, we answer the first question in the affirmative, and answer the second question, as reframed, also in the affirmative. The assessee shall pay the costs of the Commissioner.


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