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M.R. Dalal (by His Legal Representative) Vs. Commissioner of Income-tax, Bombay City Ii - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 54 of 1960
Judge
Reported in[1963]49ITR492(Bom)
ActsIncome Tax Act, 1922 - Sections 34(1)
AppellantM.R. Dalal (by His Legal Representative)
RespondentCommissioner of Income-tax, Bombay City Ii
Appellant AdvocateN.A. Palkhivala, Adv.
Respondent AdvocateG.N. Joshi, Adv.
Excerpt:
.....any year or to disclose fully and truly all material facts necessary for his assessment for that year, income, profits or gains chargeable to income-tax have escaped assessment for that year, or have been under-assessed. ..or (b) not with standing that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the income-tax officer has in consequence of information in his possession reason to believe that income, profits or gains chargeable to income-tax have escaped assessment for any year or have been under-assessed. action under clause (a) could be taken in cases where there is either omission on the part of the assessee to make a return of his income, or failure on his part to disclose fully and truly all material facts necessary for his..........any year or to disclose fully and truly all material facts necessary for his assessment for that year, income, profits or gains chargeable to income-tax have escaped assessment for that year, or have been under-assessed.... or (b) not with standing that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the income-tax officer has in consequence of information in his possession reason to believe that income, profits or gains chargeable to income-tax have escaped assessment for any year or have been under-assessed.......... he may in cases falling under clause (a) at any time and in case 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.....
Judgment:

Tambe, J.

1. This is a reference under sub-section (1) of section 66 of the Indian Income-tax Act, 1922, and the first question that falls for consideration is whether the reassessment proceedings started against the assessee on a notice under clause (b) of sub-section (1) of section 34 of the Act have been validly initiated.

2. The following facts give rise to this reference : The assessment year with which we are concerned is the assessment year 1952-53, the relevant previous year being one that ended with 31st March, 1952. The assessee is the late Dr. M. R. Dalal, who died on 2nd October, 1952, and therefore has been represented before the income-tax authorities, the Tribunal as well as before us by his legal representative, his wife, Bai Shirinbai M. R. Dalal. On October 13, 1939, Dr. M. R. Dalal made a trust settling certain shares and securities on trust for the benefit of his son, F. M. Dalal and two daughters securities on trust for the benefit of his son, F. M. Dalal, and two daughters, Miss Gool M. Dalal and Miss Ketty M. Dalal Under the trust, it was directed that the income from the shares and securities settled on trust should be equally divided amongst his aforesaid three children. The trustees appointed under the trust were the settler himself, his wife, Bai Shirinbai, and the Central Bank Executor and Trustee Company Ltd. By virtue of clause 13 of the trust deed the trust was made irrevocable for a period of seven years. The said clause 13 is in the following terms :

'13. It shall be lawful for the Settlor at any time during his life by any deed or deeds with or without power of revocation and new appointment or by will or codicil to revoke either wholly or partially the trusts and powers hereby declared concerning the Trust Funds hereby settled or any part thereof or the moneys or property for the time being representing the same and the same and by the same or any other deed or deeds revocable or irrevocable or by a will or other testamentary document to appoint and declare any new or other trusts or power concerning the Trust Funds or any part thereof to which such revocation shall extend as to him shall seem meet PROVIDED HOWEVER that this power of revocation shall not be exercisable and this deed shall remain irrevocable for a period of seven years from the date hereof and for such further period or periods thereafter as the Settler may by writing declare at the expiration of the said first period of seven years and subsequent further period or periods.'

3. At the time the trust deed was made, Miss Ketty M. Dalal was a minor. In the assessment year 1940-41 the income-tax authorities accepted the trust and excluded the share of income from the trust property of Shri F. M. Dalal and Miss Gool M. Dalal from the total income of Dr. M. R. Dalal. However, one-third share of the income of Miss Ketty M. Dalal was deemed to be income of Dr. Dalal by reason of the provisions of section 16(3) (a) (iv) of the Act. This state of affairs continued till Miss Ketty M. Dalal attained majority on 8th April, 1945. Thereafter, the three children of Dr. Dalal were separately assessed in respect of their share of income in the trust property and Dr. Dalal was separately assessed in respect of his income from other sources and this state of affairs continued till the assessment year 1952-53. For the assessment year 1952-53, returns of income were filed as under :

4. On September 9, 1953, Shri F. M. Dalal filed a turn of his income which included his 1/3rd share of income from the trust property. On November 17, 1953, Bai Shirinbai M. Dalal, in her capacity as the legal representative of her deceased husband Dr. Dalal filed a return in respect representative of her deceased husband, Dr. Dalal, filed a return in respect of Dr. Dalal's income which did not include any income from the trust property. On the same day, i.e., on November 17, 1953, Miss Gool M. Dalal and also Miss Ketty M. Dalal filed separate returns in respect of their income which included their respective 1/3rd share of income from the trust. On January 20, 1954, assessment orders were made against Miss Gool M. Dalal and Miss Ketty M. Dalal, in which were included their respective 1/3rd share in the trust property. On January 27, 1954, an order of assessment was made on the applicant in respect of Dr. Dalal's income which did not include any income from the trust.

5. Now it so happened that for the same assessment year, i.e., assessment year 1952-53, the Central Bank Executor and Trustee Company Ltd., who was one of the executors of the trust filed a return of the total income of the trust with the 3rd Income-tax Officer, A-IV, Ward Bombay. During the course of this assessment the Income-tax Officer noticed that the period of seven years during which the trust was made irrevocable had expired, that the trust had become a revocable trust, and, therefore, the entire income from the trust property was assessable in the hands of Dr. Dalal. He accordingly informed the Income-tax Officer who had made the assessment in respect of Dr. Dalal's income. By this time, as already stated the assessment in respect of Dr. Dalal's income was completed on January 27, 1954. The Income-tax Officer, therefore, on receiving the aforesaid communication from the Income-tax Officer, A-IV Ward, Bombay, issued a notice under section 34(1) (b) and unseated reassessment proceedings. Before the Income-tax Officer the applicant who had appeared in response to the notice under section 34(1) (b), inter alia, raised two contentions. The first contention was that the assessment could not be reopened under section 34(1) (b) inasmuch as the Income-tax Officer had not come into possession of any fresh information which was not in his possession at the time the original assessment was closed and completed on January 27, 1954. The other contention which was raised by the applicant was that after the expire of the period of seven years, Dr. Dalal had made the trust irrevocable, and, therefore, the income of the trust properly was not assessable in his hands. Both these contentions were not accepted by the Income-tax Officer and the entire income of the trust property was included in the income of Dr. Dalal and assessed in the hands of his legal representative. The applicant took an appeal before the Appellate Assistant Commissioner, reiterating both these contentions, but the Appellate Assistant commissioner also did not accept the same. It was also contended before the Appellate Assistant Commissioner that 2/3rd share of the income of the trust property had already been assessed in the hands of Miss Gool M. Dalal and Miss Ketty M. Dalal, and therefore it could not again be assessed in the hands of the applicant. This contention of the applicant also was not accepted by the Appellate Assistant Commissioner. He, however, gave a direction to the Income-tax Officer concerned to modify the assessment of Miss Gool M. Dalal and Miss Ketty M. Dalal. Further appeal taken by the applicant to the Tribunal also failed. On an application made under section 66(1), the Tribunal has stated the case raising the following two questions :

'(1) Whether, on the facts and in the circumstances of the case section 34(1) (b) could be invoked

(2) Whether the subsequent reassessment including the income of the beneficiaries, is valid in law ?'

6. In respect of the first question, Mr. Palkhivala appearing for the assessee contended that the power given to the Income-tax Officer to reopen a completed assessment under section 34(1) (b) could only be exercised if it is established that in consequence of the information in his possession he had reason to believe that income, profits and gains chargeable to income-tax have escaped assessment for any year or have been under-assessed or assessed at too low a rate or have been made the subject of excessive relief under this Act. The Income-tax Officer has purported to reopen the assessment on the basic that the communication received by him from the Income-tax Officer, A-IV Ward, Bombay, to the effect that the trust had then become revocable was a fresh information but that position is not borne out on the record. On the other hand, that information was always available to the Income-tax Officer, and the aforesaid communication made by the Income-tax Officer, A-IV Ward, Bombay, did not give any fresh information. The reopening of the assessment is therefore bad in law. He placed reliance on the three decisions in Purshottamdas Thakurdas v. Commissioner of Income-tax, D. R. Dhanwate v. Commissioner of Income-tax and Raja Priyanand Prasad Singh v. Commissioner of Income-tax.

7. Mr. Joshi, on the other hand, contends that the Income-tax Officer who had reopened the assessment for the first time knew that the trust had become revocable only when he received a communication from the Income-tax Officer, A-IV Ward, Bombay. The information was not available on the record. That trust deed was not on the record of the case of Dr. Dalal. That trust deed was filed on the record of the case by Miss Gool M. Dalal, and it was filed in the course of assessment for the assessment year 1941-42. Different Income-tax Officer had dealt with the assessment case of Dr. Dalal and his children. The mere fact that the same Income-tax Officer dealt with the assessments of Miss Gool M. Dalal and Miss Ketty M. Dalal and the applicant for the assessment year 1952-53 would not lead to the inference that the Income-tax Officer was aware that the trust had become revocable. The fact that even after the year 1946, i.e., after the expire of the period of seven years, the children were assessed separately in respect of their share of income from the trust properly and Dr. Dalal was assessed separately in respect of his income, bears testimony to the fact that the Income-tax Officer had no information that the trust had become revocable. In our opinion, the contentions raised by Mr. Palkhivala are well-founded, and the first question therefore will have to be answered in favour of the assessee. Consequently, it would not be necessary to record our answer to the second question.

8. The material part of clauses (a) and (b) of section 34(1) is in the following terms :

'34. (1) If -

(a) the Income-tax Officer has reason to believe that by reason of the omission or failure on the part of an assessee to make a return of his income under section 22 for any year or to disclose fully and truly all material facts necessary for his assessment for that year, income, profits or gains chargeable to income-tax have escaped assessment for that year, or have been under-assessed.... or

(b) not with standing that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income, profits or gains chargeable to income-tax have escaped assessment for any year or have been under-assessed..........

he may in cases falling under clause (a) at any time and in case 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 or recompute the loss or depreciation allowance; 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.'

9. Now the circumstances which empower an Income-tax Officer to take action under clauses (a) and (b) are different. Action under clause (a) could be taken in cases where there is either omission on the part of the assessee to make a return of his income, or failure on his part to disclose fully and truly all material facts necessary for his assessment even though he had filed a return of his income, and that that had resulted in either escapement of assessment or under-assessment. Clause (b), on the other hand empowers the Income-tax Officer to take action in cases where the assessee had complied with the provisions of clause (a), but as a consequence of information coming into his possession he had reason to believe that income profits or gains chargeable to tax have either escaped assessment or under-assessed. Keeping in view these requirements of clauses (a) and (b), it would be relevant to true to the finding of the Tribunal in respect of the contention of the assessee that the income-tax authorities were in error in taking action under section 34(1) (b). The material part of the order which is a very short one is in the following terms :

'The facts have been stated in detail in the order below and therefore need not be reproduced.

We agree with the department that the proceedings under section 34 had been rightly initiated by the income-tax authorities. The Income-tax Officer had reason to believe that by reason of the omission or failure on the part of the assessee the income had escaped assessment in the hands of the appellant and has been assessed at too low a rate.'

10. Now the finding clearly is that the circumstances which would justify reopening of an assessment under clause (a) of section 34(1) have been established. But that is not the case of the income-tax authorities at all. On the other hand, the notice has not been issued under clause (a), but it has been issued under clause (b) on the ground that in consequence of information in his possession received from the Income-tax Officer, A-IV Ward, Bombay, that the trust had become revocable the Income-tax Officer had reason to believe that the income from the trust property chargeable to income-tax in the hands of Dr. Dalal had escaped assessment in his hands. That, however, is not the finding of the Tribunal. On the finding of the Tribunal the action taken by the income-tax authorities under section 34(1) (b) cannot be justified. Mr. Joshi, however, contends that the finding recorded by the Tribunal should be read as confirming the finding of the income-tax authorities that the information received by the Income-tax Officer was fresh information which was not available to him before. In support of his contention, Mr. Joshi has placed reliance on the following sentence in the order :

'We agree with the department that the proceedings under section 34 had been rightly initiated by the income-tax authorities.'

11. In view of the clear finding recorded by the Tribunal that in its view the Income-tax Officer had reason to believe that by reason of omission or failure on the part of the assessee income had escaped assessment in the hands of the appellant or had been assessed at too low a rate, it is difficult to accept Mr. Joshi's contention. We would however examine the case on the assumption that the Tribunal has affirmed the finding of the income-tax authorities that the information received by the Income-tax Officer was fresh information.

12. Now, it is the case of the applicant that all the relevant facts, materials and documents were available on the record of the case of Dr. Dalal to the Income-tax Officer who made assessment in respect of Dr. Dalal's income on 27th January, 1954. The material and the relevant documents on the record show that the trust had become revocable after the expire of seven years, i.e., after 23rd October, 1946, and therefore no fresh information had come into the possession of the Income-tax Officer by the communication received from the Income-tax Officer, A-IV Ward, Bombay. The copies of documents which are on record are included in the statement of the case as annexure 'E'. Now 'E-1' letter dated 7th December, 1940, is written by the Income-tax Officer who dealt with the case of Miss Goolbai M. Dalal for the assessment year 1940-41, to the Income-tax Officer who was dealing with the assessment case of Dr. Dalal of that year. The relevant part thereof is in the following terms :

'In the course of deciding the refund claim of Miss Goolbai M. R. Dalal, it has been proved that a deed of settlement dated 23rd October, 1939, had been made by Dr. M. R. Dalal which is irrevocable for 7 years in respect of securities and shares to the extent of Rs. 3 lakh for the benefit of his daughters and sons and consequently refund due on 1/3rd share has been granted to his son, Mr. F. M. Dalal in Case No. 22839 and to Miss Goolbai in Case No. 22969 out of the total income specified below as they are majors....

1/3 rd share as specified comes to the benefit of Miss Ketty M. R. Dalal who is minor and as such this should please be considered for assessment and refund purposes in the case of Dr. M. R. Dalal while deciding his case for the assessment year 1940-41 under section 16(3).'

13. It is not in dispute that, consequently, the share of income of the minor Ketty, was included in the income of Dr. Dalal till Ketty M. Dalal attained majority. This letter clearly shows that after examination of the trust deed it has been found that the trust was irrevocable only for seven years. The date of the trust deed is also given, i.e., October 23, 1939. The letter which is of 7th December, 1940, clearly shows that the trust became revocable after the expire of the period of seven years. Paragraph 7 of the statement of the case clearly shows that this document is on record. To the same effect is another letter of 1st August, 1941, which is also on record. In the order of the Tribunal no reference at all has been made to these documents. Mr. Palkhivala contended before us that the copies of these original documents have been filed by the applicant along with the memo of appeal before the Appellate Assistant Commissioner as well as the Tribunal. In the statement of the case, the Tribunal has observed 'but they do not appear to have been relied upon or considered at any stage.' We fail to understand how copies of the document which are filed by the applicant in support of her case along with the memo of appeal both before the Appellate Assistant Commissioner as well as the Tribunal are the documents on which no reliance has been placed. The documents clearly establish that the information that the trust has become revocable since 1946 was available on the record, and, therefore, it cannot be said that any fresh information was received by the Income-tax Officer as a result of the communication received by him from the Income-tax Officer, A-IV Ward, Bombay. 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 in 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 would not be unreasonable to expect that a not is taken of the relevant information which is useful for subsequent assessments of the assessee and a note thereof is kept on record. Further the Income-tax Officer who has reopened the assessment under section 34(1) (b) is not the same officer who had made the assessment for the assessment year 1952-53 on January 27, 1954. The material question is whether that officer i.e., who made the assessment on January 27, 1954, knew that the trust had become revocable or not and on that aspect of the case, there is no finding by either the income-tax authorities or the Tribunal that that Income-tax Officer had no knowledge that the trust had become revocable. The mere fact that the Income-tax Officer who reopened the assessment had no knowledge can hardly be of any relevance to sustain reopening of the assessment under section 34(1) (b).

14. Considering the case from all aspects in our opinion the answer to the first question will have to be in the negative. We answer it accordingly. In view of our answer to the first question, it is not necessary to deal with the second question. The Commissioner shall pay the costs of the applicant.

15. Question answered accordingly.


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