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Ramniwas Kanailal Vs. S.P. Shende, Income-tax Officer, D-1 Ward, Bombay - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberMiscellaneous Application No. 129 of 1962
Judge
Reported in[1965]56ITR659(Bom)
ActsIncome Tax Act, 1922 - Sections 34(1)
AppellantRamniwas Kanailal
RespondentS.P. Shende, Income-tax Officer, D-1 Ward, Bombay
Appellant AdvocateF.S. Nariman, Adv.
Respondent AdvocateG.N. Joshi, Adv.
Excerpt:
direct taxation - material facts - section 34 of income tax act, 1922 - whether there were some reasonable grounds for thinking that there had been any non-disclosure as regards any primary fact which could have material bearing on question of under assessment - it would be sufficient to give jurisdiction to income tax officer (ito) to issue notices under section 34 - not open for court's investigation as to whether such grounds adequate or not for arriving at conclusion of non-disclosure of material facts - belief of ito contemplated by section 34 for initiation of reassessment proceedings must be that of honest and reasonable person based upon reasonable grounds - ito may act on direct or circumstantial evidence but his belief must not be based on suspicion, gossip or rumour - words.....1. this petition has been filed under article 226 of the constitution for the direction that certain notices issued by the respendent, who is an income-tax officer, under section 34(1)(a) of the income-tax act, 1922, for reassessment of the petitioner should set aside and the respondent should be permanently restrained from acting in pursuance of those notices. the impugned notices are in respect of the assessment years 1940-41 to 1945-46 (samvat years 1995 to 2000) and were issued on 19th february, 1962, i.e., nearly 20 years after the period in question. the terms of section 34(1)(a) in so far as they are relevant to the present case, require that the income-tax officer should have reason to believe that, by reason of the omission or failure on the part of an assessee to disclose fully.....
Judgment:

1. This petition has been filed under article 226 of the Constitution for the direction that certain notices issued by the respendent, who is an Income-tax Officer, under section 34(1)(a) of the Income-tax Act, 1922, for reassessment of the petitioner should set aside and the respondent should be permanently restrained from acting in pursuance of those notices. The impugned notices are in respect of the assessment years 1940-41 to 1945-46 (Samvat years 1995 to 2000) and were issued on 19th February, 1962, i.e., nearly 20 years after the period in question. The terms of section 34(1)(a) in so far as they are relevant to the present case, require that the Income-tax Officer should have reason to believe that, by reason of the omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment, income, profits or gains chargeable to income-tax have escaped assessment or have been under-assessee or assessee at too low a rate. It is the case of the petitioner that the respondent, when he issued the impugned notices, had no reason to entertain the belief that the petitioner had omitted or failed to disclose fully and truly all the material facts necessary for his assessment for the said years, or that the petitioner's income in those years had been under-assessee.

2. According to the petitioner, he was at one time carrying on business at Nankana Sahab in west Punjab. His business in the West Punjab was in the process of winding up since about 1936. In 1936 he came to Bombay for some probate proceedings and did business in Bombay from 1937. He had to go to West Punjab form time to time in connection with the winding up of his business there. In 1942, notices were issued on him by the income-tax authorities at Bombay under section 34 of the Income-tax Act, 1922, for the purpose of assessing his income for Samvat years 1994 to 1997 (assessment years 1939-40 to 1942-43). After due enquiry, assessment orders in respect of these years were issued on 19th April, 1943, by one Kazi, who was then the Income-tax Officer.

3. According to the petitioner, he was interrogated at that time by the Income-tax Officer about his antecedents and his business activities in west Punjab, and he was also called upon to file a written statement in answer to certain queries. An office copy of the written statement alleged to have been filed by him is produced at exhibit A to the petition. The contents of exhibition A show that he had then communicated to the Income-tax Officer some details regarding his business in Nankana Sahab in West Punjab. He had pointed out that he had outstandings of more than Rs. 7 lakhs recoverable from certain parties in respect of the West Punjab business, and that, out of those outstandings, credits amounting to about Rs. 7 lakhs were shown in his Bombay account books by making transfer entries in his Nankana account books. According to the petitioner, no balance-sheets were called for, and no balance-sheet were produced by him for the said four years (Samvat years 1994 to 1997), but that he had produced his account books and also submitted statements of account showing the loans, accounting etc., including the outstandings of the Punjab business. It may be mentioned at this stage that many of the documents pertaining to the assessment of the petitioner are admittedly lost from the files of the income-tax department. The written statement and the statements of account referred to above are not to be found in those files at present, and the respondent does not admit that these documents were filed by the petitioner.

4. The petitioner was assessee for the next year, i.e., Samvat year 1998 (assessment year 1943-44), by an order of the Income-tax Officer, Kazi, dated 14th May, 1943. During the course of the assessment proceedings for Samvat year 1998, the petitioner had admittedly filed a balance-sheet. His account books were also produced before the Income-tax Officer. According to the petitioner, he had also filed statements of accounts showing the aforesaid outstandings, but those statements of accounts are not found in the records of the department. The balance-sheet for Samvat year 1998 produced by him is also no longer available. As I will presently show, the sole ground on which the respondent has issued the impugned notices dated 19th February, 1962, for reopening the assessment for Samvat years 1995 to 2000 is that the petitioner has failed to state in the balance-sheet of Samvat year 1998, which he had filed and which is now lost, the alleged outstandings of the Punjab business amounting to about Rs. 7 lakhs.

5. For Samvat year 1999 (assessment year 1944-45) the petitioner was assessee by an order date 28th February, 1945, passed by the then Income-tax Officer, Gopinathan. According to the petitioner, he had produced during the assessment proceedings a balance-sheet for Samvat year 1999 and a statement of account, both of which showed the outstanding of the Punjab business. The balance-sheet and the statement of account alleged to have been filed by the petitioner during this proceeding are not found in the records of the department. Even the assessment order and the examination report for that year are missing.

6. For Samvat year 2000 (assessment year 1945-46) the petitioner was assessee by an order dated 22nd May, 1946, issued by the then Income-tax Officer, Pradhan. According to the petitioner, he had then filed a balance-sheet for that year as well as a statement of the accounts, both of which referred to the Punjab outstandings. The statement of account alleged to have been filed by the petitioner is not to be found in the records of the department. The balance-sheet then produced by the petitioner is, however, available and a copy thereof is admitted at exhibit I (collectively). The balance-sheet does not show that the details of the Punjab outstandings to the extent of over Rs. 7 lakhs. I will have occasion to refer to this document at a later stage.

7. It appears that, towards the beginning of 1950, the income-tax authorities started a re-examination of the petitioner's assessment. According to the petitioner, the re-examination was in respect of the assessment for Samvat years 2000 to 2003, whereas according to the respondent the re-examination was in respect of the assessment for Samvat year 2001 only. From the documents produced before me, it is not clear whether the reexamination was in respect of the assessment of Samvat years 2000 to 2003 or only Samvat year 2001. It is, however, clear averments in the petition which are not denied, as well as, from the petitioner's letter dated 1st July, 1951, (copy produced at exhibit B to the petition), that the petitioner's case was thoroughly examined for the preceding years also; that the enquiry extended to more than a year and half; and that the enquiry was eventually dropped.

8. Another enquiry against the petitioner was started by the income-tax authorities in 1954. There is no doubt that this inquiry at any rate related to the alleged outstandings of the Punjab business to the extent of Rs. 7 lakhs or so. In the course of this enquiry, the petitioner wrote a letter (which is not denied) dated 20th October, 1954, to the Income-tax Officer in answer to various points raised by the latter, and a copy of this letter is produced at exhibit C to the petition. Therein the petitioner pointed out that the records of his business in the West Punjab were no longer available as they were kept with certain advocates and could not be salvaged after the partition of the country. It appears that the Income-tax Officer had then expressed the view that there was a substantial increase in the petitioner's capital between Samvat years 1997 and 2000. In that connecting, the petitioner wrote : 'I request you once more to refer to the balance-sheets (along with various statements of accounts annexed thereto) for that period and I submit that they would provide full date and particulars of all that is inquired about.' He claimed that form before Samvat year 1997 he had 'practically the same capital as was there in the year 2000'. He claimed that he had filed copies of accounts showing the receipts form the outstanding of the Punjab business.

9. In appears that the enquiry remained in abeyance for some time and was resumed in 1957. On 17th September, 1957, the then Income-tax Officer, Modak, wrote to the petitioner (copy of the letter produced at exhibit H) asking specifically for certain clarifications of the points mentioned in the petitioner's letter dated 20th October 1954, referred to above. The contents of this letter clearly show that the Income-tax Officer was then in possession of the balance-sheets of Samvat years 1998 and 2000, but was unable to trace the balance-sheet of Samvat year 1999. He wrote to the petitioner :

'I find that there is no balance-sheet available on my record for S. Y. 1999. You have submitted balance-sheet for S. Y. 1998 and another copy of balance-sheet for S. Y. 2000 and therefore you might be in a position to submit the balance-sheet for the interventing period, i.e., S. Y. 1999.'

10. In the same letter, the Income-tax Officer has made a further reference to the contents of the balance-sheet for the Samvat year 1998 and this reference also makes it abundantly clear that the balance-sheet of that year was available in the department at that time. The Income-tax Officer wrote :

'.... But you have in the balance-sheet for S. Y. 1998 shown the debit balance which clearly indicates that you were indebted to other parties. Can you produce any evidence to rebut this ?'

11. The petitioner sent a reply to this letter on the same day. i.e., 17th September, 1957, and a copy of that reply has been produced at exhibit D to the petition. Along with this reply he sent a copy of the balance-sheet for the petition. Along with this reply he sent a copy of the balance-sheet is before me at exhibit I (collectively) and it shows the petitioner's outstandings of the Punjab business of over Rs. 7 lakhs. In this letter, exhibit D, the petitioner wrote :

'.... From a perusal thereof (i.e., of the balance-sheet for Samvat your 1999) you will find that there is no material difference between the balance-sheets for S. Y. 1998 and 1999. During those years the capital did not undergo any significant change.'

12. After referring to the loss of the books relating to the Punjab business, he added :

'.... However, if you would kindly refer to the balance-sheet for S. Y. 1998, even there you will find a reference to the Punjab books of account.'

13. In the same letter, the petitioner also made a reference to the written statement which he had filed at the commencement of the assessment proceedings in 1943 (a copy of which is produced at exhibit A to the petition). He wrote :

'When the tax proceedings were first started here, they were started under section 34, Income-tax Act. In connection therewith, the very first thing I was required was to submit a statement explaining my antecedents. If you would kindly refer to that statement, you would find that there too I had to disclose everything relating to my West Punjab affairs in order to explain the receipts of moneys which I had been receiving form there out of the recovery of the outstandings....'

14. It appears that, thereafter, the enquiry somehow dragged on till the issue of the notices dated 19th February, 1962, for the reassessment of the petitioner for Samvat years 1995 to 2000 (assessment year 1940-41 to 1945-46).

15. The respondent filed an affidavit in reply to the petition and also a second affidavit in further reply thereto. It is clear from his affidavits that he has no personal knowledge of the assessment proceedings for the years in respect of which he had issued notices for reassessment under section 34 of the Income-tax Act. He also does not claim that this information is derived from the Income-tax Officers of that time (Kazi, Gopinathan and Pradhan) or from any of the persons who were connected with the subsequent enquiries into the case of the petitioner. His information is exclusively based on 'the relevant assessment records of the petitioner' and it cannot be denied that many of the relevant documents are no longer to be found in these assessment records. It is common ground that many documents which ought to be in the files of the department are no longer there. In respect of Samvat year 1997, the assessment order itself is missing. One page of the examination report of that year was available and a copy thereof has been admitted by me at exhibit J but the second page of that report is missing. For Samvat year 1998, the balance-sheet was admittedly filed, but is missing. The assessment order and part of the examination report of that year are available, and copies thereof are produced at exhibit I to the respondent's affidavit in further reply. This examination report available in part is the only document on which the respondent relies in justification of the impugned notices. This examination report says, inter alia, that a statement of profit and loss account for the year was produced. I asked Mr. G. N. Joshi, who appeared for the respondent, whether that statement of profit and loss account was available and he told me that that statement was also not to be found in the records of the department. Moreover, in respect of Samvat year 1999 neither the assessment order nor the examination report are available with the department. It is on the basis of his perusal of such records - records from which the most relevant documents are missing - that the respondent has come to the conclusion that there is prima facie case for reopening the petitioner's assessment after the lapse of the nearly 20 years.

16. According to the respondent, the sole reason why he thought it proper to reopen the assessment of the aforesaid years was that, according to him, the balance-sheet for Samvat year 1998, which was submitted by the petitioner during the assessment proceedings of that year and which is now lost did not disclose the Punjab outstandings which were to the tune of Rs. 7 lakhs and odd. The respondent's first affidavit in reply to the petition did not explain how he came to this conclusion. An explanation in that behalf was given in the second affidavit filed by him in further reply.

17. In this second affidavit, the respondent refers to the examination report for the assessment for Samvat year 1998. I saw the original of this examination report and I found that the lower portion of the paper on which it is written has been torn off, so that the concluding portion of the report is no longer available. The portion on which the respondent relies is as follows :

'The assessee personally attends and produces the above-mentioned books of a/cs which are closed but not adjusted. From books produced a statement of P. & L. a/c has been prepared. A copy of B/S has been filed. The capital a/c only shows last year's closing balance of Rs. 14,475-13-0. It is not adjusted....'

18. The portion beyond these words is mostly torn off, but it is clear from the original that the words 'profit or loss' occur in the report as the last words of the sentence which started with the words 'It is not adjusted'. From the contents of this partly torn document, the respondent has drawn the following conclusion :

'.... It would appear that the capital account of the petitioner as disclosed by the balance-sheet for the S. Y. 1998 was only Rs. 14,000 while the balance-sheet filed for the S. Y. 2000 shows the capital account to the tune of Rs. 7 lakhs and odd. It is not the case of the petitioner that this capital increased during the S. Y. 1999 and 2000. As far as the assessment record of the petitioner is concerned, there was no material before the income-tax authorities which show that the petitioner had such large amounts during the earlier assessment years. It was for this reason that the it was necessary to reopen the assessment for the earlier years.'

19. The circumstances which confer jurisdiction on the Income-tax Officer to act under section 34(1)(a) of the Income-tax Act, 1922, were considered by the Supreme Court in Calcutta Discount Co. Ltd. v. Income-tax Officer.

20. Their Lordships observed :

'To confer jurisdiction under this section to issue notice.... two conditions have therefore to be satisfied. The first is that the Income-tax Officer must have reason to believe that income, profits or gains chargeable to income-tax have been under assessee. The second is that he must have also reason to believe that the such 'under-assessment' has occurred by reason of either (i) omission or failure on the part of an assessee to make a return of his income under section 22, or (ii) omission, or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment for that year. Both these conditions are conditions precedent to be satisfied before the Income-tax Officer could have jurisdiction to the issue a notice for the assessment or reassessment........'

21. Two questions are, therefore, to be considered in the present case : (1) Whether the respondent had reason to believe that the income, profits or gains of the petitioner chargeable to income-tax have been under-assessee; and (2) whether he had reason to believe that such under-assessment had occurred by reason of the omission or failure on the part of the petitioner to disclose fully or truly all material facts necessary for his assessment for the relevant years. In dealing with the circumstances which would enable a court to decide whether an Income-tax Officer had reason to believe that there was omission or failure on the part of an assessee to disclose the material facts necessary for his assessment, their Lordships stated :

'The position, therefore, is that if there were in fact some reasonable grounds for thinking that there had been any non-disclosure as regards any primary fact, which could have a material bearing on the question of 'under-assessment', that would be sufficient to give jurisdiction to the Income-tax Officer to issue the notices under section 34. Whether these grounds were adequate or not for arriving at the conclusion that there was non-disclosure of material facts would not be open for the court's investigation. In other words, all that is necessary to give this special jurisdiction is that the Income-tax Officer had when he assumed jurisdiction some prima facie grounds for thinking that there had been some non-disclosure of material facts.'

22. It is also well settled that the 'belief' of the Income-tax Officer contemplated by section 34 for initiation of reassessment proceedings must be that of an honest and reasonable person based upon reasonable grounds. The Officer may act on direct or circumstantial evidence; but his belief must not be based on the mere suspicion, gossip or rumour. the words used in the section are 'reason to believe' and not 'reason to suspect' (vide Bhimraj Panna Lal v. Commissioner of Income-tax and Parimisetti Seetharamamma v. Commissioner of Income-tax.

23. Turning to the first question, namely, whether the respondent had reason to believe that the income, profits or gains of the petitioner chargeable to income-tax had been under-assessee during the relevant period, it will be recalled that, according to the petitioner, the amount of Rs. 7 lakhs or so which was recoverable to him from various parties consisted of the outstandings of his business in West Punjab, which had come to an end by about the time when he came to Bombay, i.e., by 1936. The impugned notice under section 34(1)(a) of the Income-tax Act, 1922, are in respect of the assessment years 1940-41 to 1945-46. If, as claimed by the petitioner, the assets of Rs. 7 lakhs or so were the outstandings of a business which had come to an end by 1936, the alleged discovery by the respondent that the petitioner had those assets cannot provide any reason which can justify the belief that the petitioner was under-assessee for the above years. The respondent has nowhere claimed that he has any reason to believe that the amount of Rs. 7 lakhs did not consist of the outstandings of a closed business, but was an acquisition made during the years for which he proposes to reopen the petitioner's assessment. In fact, in the two affidavits filed by the respondent, no explanation whatever has been given to explain how the respondent came to believe that the petitioner was under-assessee in respect of the said period. This lacuna was sought to be supplied in the course of the arguments before me by Mr. G. N. Joshi who appeared for the respondent. He explained that, according to the missing balance-sheet of Samvat year 1998, the capital of the petitioner was only Rs. 14,000 or so; that according to the balance-sheet of Samvat year 2000, his capital was more than Rs. 7 lakhs; and that these facts provide a reason to believe that the capital of Rs. 7 lakhs was acquired during the period between Samvat years 1998 and 2000. I will assume that it was no this ground that the respondent came to believe that the income, profits or gains of the petitioner during the aforesaid years were under-assessee. It must then follow that the question whether the respondent had 'reason to believe' that the petitioner was under-assessee must depend upon whether he had reason to believe that, in the assessment proceedings prior to those in respect of Samvat year 2000, and particularly in the balance-sheet of Samvat year 1998, the petitioner did not show that he had Punjab outstandings to the tune of Rs. 7 lakhs, but showed, on the contrary, that his total capital was about Rs. 14,000 only.

24. On the second question, the respondent must have reason to believe that the under-assessment had occurred by reason of the petitioner's omission or failure to disclose fully and truly all material facts necessary for his assessment for the aforesaid years. On this question also, there is corresponding vagueness in the case made out by the respondent. The averments in the two affidavits filed by the respondent in reply to the petition make it appear that, according to the respondent, the fact not disclosed by the petitioner at the time of this assessment for the years prior to Samvat year 2000 was that he had these assets consisting of the Punjab outstandings to the extent of about Rs. 7 lakhs. As indicated above a case that the petitioner had these assets, but did not disclose them, is inconsistent with the respondent having any reason to believe that the petitioner was under-assessee from the said years. In his arguments, Mr. G. N. Joshi stated that, according to the income-tax department, the omission or failure of the petitioner to make a full and true disclosure, which led to his under-assessment consisted of the omission or failure on his part to disclose that the amount of Rs. 7 lakhs or so was the income derived by him during the relevant period and did not really consist of the outstandings of his Punjab business, as made out by him. I am unable to find this case in the two affidavits filed by respondent. However, even in the form in which Mr. G. N. Joshi has put the respondent's case, it amounts to this, that the respondent had reason to believe that the petitioner had shown in the balance-sheet of Samvat year 1998 that his capital consisted of Rs. 14,000 only; that, therefore, the respondent had reason to believe that the amount of Rs. 7 lakhs, which was later shown to consist of outstanding of the Punjab business, was really derived by was of income during the relevant period; and that the respondent, therefore, had reason to believe that the under-assessment of the petitioner was caused by his non-disclosure of this income.

25. It will thus be seen that both the questions which determine the jurisdiction of the respondent to issue the impugned notices depend upon whether the respondent had any reason to believe that, in the balance-sheet of Samvat year 1998, the petitioner had stated that his total income was about Rs. 14,000 only, and that he did not show in the proceedings prior to the assessment in respect of Samvat year 2000 that he had assets to the tune of about Rs. 7 lakhs consisting of outstandings from his West Punjab business.

26. As stated above, the belief of the respondent that the balance-sheet of Samvat year 1998 made no mention of the Punjab outstandings is solely based on one sentence which appears in the examination report for the assessment for Samvat year 1998 produced at exhibit 1 (collectively) attached to the second affidavit of the respondent. I am satisfied that the contents of that examination report are wholly incapable of supporting that belief. In my view, the respondent must have misinterpreted the contents of that report if those contents led him to believe that the balance-sheet for the Samvat year 1998 must have stated that the total capital of the petitioner (i.e., excess of assets over liabilities) was only about Rs. 14,000, and that the balance-sheet made no reference to the Punjab outstandings. Such parts of the examination report as are available show that the persons who made the report referred both to the books of account as well as to the balance-sheet for Samvat year 1998. Therefore he stated : 'The capital account only shows last years's closing balance of Rs. 14,475-13-0. It is not adjusted..... profit or loss'. Obviously, the capital account which is mentioned here is the capital account or khata in the petitioner's books of account for the Samvat year 1998. There could be no occasion for any capital account as such to find a place in the balance-sheet; nor would the balance-sheet show that the figure occurring there as 'capital' consisted of the closing balance of the previous year. Moreover, it is clear from the immediately next sentence that the capital account was not adjusted by the profit or loss, and this reference is necessarily to the capital account in the petitioner's books of account and not to the excess of the assets over liabilities which might be regarded as the petitioner's capital. That this is the correct interpretation of these sentences in the examination report is corporated by the contents of the examination report of the previous year (in respect of Samvat year 1997) a copy of the which is produced at exhibit J. Even in respect of this examination report, only one page thereof is available and the next page is missing from the records of the department. In the assessment proceedings in respect of Samvat year 1997 as well as in the assessment proceedings for the previous years, the petitioner had not produced any balance-sheets. He had, however, produced his books of account. The examination report for Samvat year 1997 (exhibit J) says :

'The books are maintained more or less on cash system. No capital account is kept where the loss of the previous years as well as this year is adjusted. The books as produced show the following result on examination : ....' (The rest of the report is not available).

27. Obviously, the reference to the capital account in this report is to the capital account or khata in the petitioner's books of account. The report also refers to the adjustment of the profit or loss which is expect to be made in the capital account and which was not made since the capital account itself was not maintained. If this examination report is read along with the examination report of the next year (in exhibit I collectively), it is clear that the petitioner started maintaining a capital account in his account books for the first time from the beginning of Samvat year 1998, and that appears to be the reason why the capital account started with the closing balance of the previous year, which was Rs. 14,475-13-0. It is thus clear that the sentences in the examination report for Samvat year 1998 (exhibit I), on which the respondent relies, do not relate to the balance-sheet of that year, but relate to the account books of that year. No inference regarding the contents of the balance-sheet can, therefore, be reasonably drawn from those sentences.

28. In support of his case, Mr. G. N. Joshi placed reliance on the balance-sheet for Samvat year 2000 produced at exhibit 1 (collectively). That balance-sheet enumerates the assets on the right hand side and the total of the assets is Rs. 8,18,166-15-0. The liabilities on the left hand side come to Rs. 86,254-12-9. In order to balance the two sides, an item of Rs. 7,31,912-2-3 has been added on the side of the liabilities, and this item has been described as 'Old Books B/F'. Mr. Joshi pointed out that this amount of Rs. 7,31,912-2-3 being the excess of the assets over liabilities, should be regarded as the capital of the petitioner. It is, however, clear that nobody in the normal course would describe this amount of 'capital' as an amount in the 'capital account', nor would be say that this capital account was or was not adjusted for the profit or loss of that year.

29. I must, therefore, conclude that the belief of the respondent that the petitioner was under-assessee and that the petitioner omitted or failed to make a full and true disclosure is solely based upon the misinterpretation of some sentences which had no relation to the balance-sheet of Samvat year 1998 at all and which are contained in a document which is partly torn and is not available in complete form.

30. On the other hand, there was ample material available to the respondent which would have led him to conclude that the balance-sheet of Samvat year 1998 did refer to the Punjab outstandings, and it is clear that the respondent did not take this material into consideration. Firstly, it was clear from the assessment reports in the possession of the respondent that the balance-sheet for Samvat year 2000 was produced during the assessment proceedings for that year. It also appears from the contents of the letter of the Income-tax Officer Modak, dated 17th September, 1957, (exhibit H), that the balance-sheet of the Samvat year 1999 was also produced during the assessment proceedings of that year, though it was not available to Modak at the time of writing the letter. If the balance-sheet of Samvat year 1998 had shown that the total capital (in the sense of the excess of assets over liabilities) consisted only of Rs. 14,000 and odd, then in the assessment of Samvat year 1999 or Samvat year 2000 a question would naturally have been raised by the then Income-tax Officer about the sudden increase in the capital of the petitioner from Rs. 14,000 to over Rs. 7 lakhs. The assessment order of Samvat year 1999 is not available, but that of Samvat year 2000 is available; and Mr. G. N. Joshi told me that no such question was raised and considered according to that assessment order. This indicates that there was no sudden increase in the capital as disclosed by the petitioner in Samvat year 1998 and in Samvat year 2000. Again, the contents of the petitioner's letter dated 20th October, 1954 (exhibit C to the petition), show that, in support of his contention that his capital was practically the same between the Samvat years 1997 to 2000, he had requested the Income-tax Officer 'to refer to the balance-sheets (along with various statements of accounts annexed thereto) for that period'. If there was such a variance between the balance-sheet of Samvat year 1998 on the one hand and Samvat years 1999 and 2000 on the other, the petitioner would hardly have requested the Income-tax Officer to refer to these balance-sheets in corroboration of the petitioner's contention that his capital had remained the same during these years (Samvat years 1997 to 2000). A much more conclusive piece of evidence, moreover, was in the possession of the respondent and it consisted of the letters dated 17th September, 1957, between the Income-tax Officer, Modak, and the petitioner produced at exhibit H and at exhibit D to the petition. Exhibit H clearly shows that the Income-tax Officer was then in possession of the balance-sheet of 1998 and in fact he has referred to certain contents of that balance-sheet and asked for an explanation thereof from the petitioner. In his reply of the same date (exhibit D to the petition), the petitioner has requested the Income-tax Officer to peruse the balance-sheet for Samvat year 1998 and to ascertain that the petitioner had referred in that balance-sheet to the Punjab books of account and that the balance-sheet did show that there was no material difference in the capital of the petitioner between the Samvat years 1998 and 1999. It is hardly conceivable that, if the balance-sheet of 1998 had mentioned that the total capital of the petitioner was only about Rs. 14,000, the petitioner should request the Income-tax Officer to compare that balance-sheet with the one of 1999 (in which the capital of the petitioner is over Rs. 7 lakhs) and to ascertain for himself that the petitioner's capital had remained unchanged during these two years. In my view, this piece of circumstantial evidence proves beyond doubt that the balance-sheet of 1998 did refer to the Punjab outstandings and that the outstandings were to the tune of about Rs. 7 lakhs.

31. Moreover, in deciding whether the petitioner had represented to the Income-tax Officer in the year 1998 that his total capital consisted of Rs. 14,000 only, the respondent ought to have taken into consideration the fact that the representations made by the petitioner were not confined to the balance-sheet for the year 1998 filed by him. It is clear from the petitioner's letter of 17th September, 1957 (exhibit D to the petition), that, when the tax proceedings were initially started against the petitioner in Bombay, he had submitted a written statement to the Income-tax Officer explaining his antecedents. In the aforesaid letter of 17th September, 1957, the petitioner has requested the then Income-tax Officer to refer to this written statement and ascertain therefrom that he had disclosed 'everything relating to my West Punjab affairs in order to explain the receipts of monies which I have been receiving from there out of the recoveries of outstandings.' Moreover, in his letter dated 20th October, 1954 (exhibit C to the petition), the petitioner had stated that he had filed statements of accounts in the course of assessment proceedings showing the recovery of outstandings from West Punjab. It is not claimed that there is anything on the record of the respondent which shows that these statements of the petitioner were controverted at any time. If, in fact, the petitioner had not filled the said written statement and the statements of accounts, he would not have asked the Income-tax Officer to refer to these documents and, in any case, the Income-tax Officer would have repudiated his statements that these documents were filed by him.

32. Mention must be made at this stage of an argument advanced by Mr. G. N. Joshi. He argued that, if the respondent was in possession of any piece of evidence which could lead him to believe that the petitioner was under-assessee and that the petitioner had not made a full and true disclosure of material facts, the court must conclude that the respondent was entitled to issue notices under section 34(1)(a) of the Income-tax Act, 1922, and the court in that case would not be justified in considering whether there were other facts in the possession of the respondent which, taken with the piece of evidence relied upon by the respondent, showed that his belief was wholly unreasonable. In support of this argument, Mr. Joshi placed reliance on a part of the observation of the Supreme Court in Calcutta Discount Co. Ltd. v. Income-tax Officer, which I have already quoted. Their Lordships observed that, if there were in fact some reasonable grounds for thinking that there had been any non-disclosure as regards any primary fact, which could have a material bearing on the question of under-assessment that would be sufficient to give jurisdiction to the Income-tax Officer to issue the notices under section 34, and went on to say : 'Whether these grounds were adequate or not for arriving at the conclusion that there was a non-disclosure of material facts would not be open for the court's investigation.' In my view, these observations of the Supreme Court do not imply that, if the Income-tax Officer is in possession of a number of facts which, in their cumulative effect, show that the Income-tax Officer could not possibly come to a reasonable conclusion either that the assessee was under-assessee or that the assessee had not made a full and true disclosure of material facts, the Income-tax Officer is still entitled to rely on any one of such facts in isolation and by neglecting the other facts claim that his belief in the under-assessment or the non-disclosure, as the case may be, is reasonable. As I understand the observations of the Supreme Court, the test is whether the facts in the possession of the Income-tax Officer can lead to a reasonable belief that the assessee was either under-assessee or had omitted or failed to make a full and true disclosure; and if the court finds that such a belief can be reasonably entertained from the facts in the possession of the Income-tax Officer, the court will not further consider, whether, in its own view, such a belief was justified. In the present case, even the single fact which Mr. Joshi wants to be considered in isolation from other facts, namely, the contents of the examination report of Samvat year 1998 (part of exhibit I), cannot lead reasonably to the conclusion that the petitioner was under-assessee during the relevant period or that the petitioner had omitted or failed to make a full and true disclosure of material facts. If the said examination report is considered along with the other facts which were also in the possession of the respondent and which I have referred to above, it must follow that the Income-tax Officer had no material whatever for the belief which he claims to have entertained. I must, therefore, hold that the respondent had no jurisdiction to issue the impugned notices and the notices must be quashed and set aside.

33. On behalf of the petitioner, Mr. Nariman wanted to argue that the petitioner's case is covered by section 34(1A) of the Income-tax Act, 1922, and that, therefore, no proceedings can be initiated against the petitioner under section 34(1)(a). It appears that Mr. Nariman's contention finds support in the decisions of some High Courts; but a Division Bench of this court has taken the contrary view in Laxminarayan R. Rathi v. Income-tax Officer, Poona. Nariman conceded that, in view of this decision, it is not open to him to contend before me that the respondent was incompetent to issue notices under section 34(1)(a) for the reason that the petitioner's case was covered by section 34(1A) of the Income-tax Act, 1922.

34. As the case of the petitioner has now been transferred to a different Income-tax Officer, Mr. Nariman applied at this stage for the amendment of the petition so as to add as second respondent the Income-tax Officer to whom the petitioner's case has been transferred. Some consequential amendments are also prayed for. Mr. G. N. Joshi has no objection to the amendments being granted. Amendments allowed.

35. In the result, the petition is allowed and the rule is made absolute in terms of prayers (a) and (b). The respondent to pay the petitioner's costs quantified at Rs. 500.


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