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Commissioner of Income-tax Vs. Krishnagopal Maheshwari - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberI.T. Ref. No. 127 of 1969
Judge
Reported in(1979)10CTR(Bom)252
ActsIncome Tax Act, 1961
AppellantCommissioner of Income-tax
RespondentKrishnagopal Maheshwari
Excerpt:
direct taxation - re-assessment - section 34 (1) (b) of income-tax act, 1922 - whether on facts and circumstances of case notice under section 34 (1) (b) was validly issued - consideration of paragraph and reason which persuaded successor income-tax officer to make order of reassessment and for reopening proceedings under section 34 (1) (b) - income-tax officer who made original assessment had misapplied provisions of double taxation avoidance agreement with pakistan - not followed proper procedure indicated in agreement - held, order of assessment totally unsupportable on any consideration - question answered in favour of assessee. - - it accordingly held that the primary condition necessary for initiation of proceedings u/s 34(1)(b) was not satisfied in the present case. strong.....kantawala, c.j.1. krishangopal maheshwari, the assessee, is a karta of the hindu undivided family. as a representative of the family he was a shareholder at the relevant time in sutlej cotton mills limited (hereinafter referred to as the mills) which had its registered office at amritsar. but the factory of the mills was situate at okara in west pakistan. the assessee received certain dividends from the mills and the question arose in connection with the inclusion of the dividends from the mills in the total assessment of the assessee. the controversy in the present case related to the assessment year 1953-54, for which the relevant previous year was maru year 2008-09, ending october 17, 1952. initially the income-tax officer completed the assessment for the year 1953-54 on june 9, 1953.....
Judgment:

Kantawala, C.J.

1. Krishangopal Maheshwari, the assessee, is a Karta of the Hindu undivided family. As a representative of the family he was a shareholder at the relevant time in Sutlej Cotton Mills Limited (hereinafter referred to as the mills) which had its registered office at Amritsar. But the factory of the Mills was situate at Okara in West Pakistan. The assessee received certain dividends from the Mills and the question arose in connection with the inclusion of the dividends from the Mills in the total assessment of the assessee. The controversy in the present case related to the assessment year 1953-54, for which the relevant previous year was Maru Year 2008-09, ending October 17, 1952.

Initially the Income-tax Officer completed the assessment for the year 1953-54 on June 9, 1953 on a total income of Rs. 1,19,918/-. This amount included the sum of Rs. 19,010/- which was taken to be dividends arising in Pakistan. In the order it is stated 'Pakistan income is to be taken for rate proposes only'.

2. The assessment for this year was reopened u/s 34(1)(b) of the Income-tax Act, 1922, on the ground that the assessee's income had been subject of excessive relief. The revised assessment was completed on a total income of Rs. 1,19,918/-. The full dividends including the amount of Rs. 19,010/- received from the Mills were made chargeable to tax in India, and the tax was demanded accordingly. The Income-tax Officer rejected the contention of the assessee that action u/s 34(1)(b) was not in order in the circumstances of the case.

3. The assessee thereafter appealed to the AAC and raised the same objection as was raised before the Income-tax Officer. He overruled the objection by his order dated October 8, 1964, relying upon the order passed by him in the case of Madangopal Maheshwari on the same day.

4. In the second appeal before the Tribunal it was contended on behalf of the assessee that the action u/s 34(1)(b) was not justified as there was no information before the Income-tax Officer making the supplementary assessment, on which he could base his belief that the income of the assessee was subject of excessive relief in the original assessment. Reference was made to the provisions of the Agreement for the Avoidance of Double Taxation with Pakistan (hereinafter referred to as 'the Agreement'). It was contended on behalf of the assessee that the provisions of the said Agreement were known to the Income-tax Officer, who passed the original assessment order. The submission on behalf of the assessee was that the said Income-tax Officer included Pakistan dividends for rate purpose only as per his understanding of the provisions of the said agreement. It was contended that what has really happened was a change in the opinion of the succeeding ITO about the real meaning of the provisions of the Agreement. The Tribunal took the view that there was no information which came into possession of the ITO subsequent to the original assessment, which could reasonably sustain his belief that the income of the assessee was subject of excessive relief. It accordingly held that the assessment relief. It accordingly held that the assessment was liable to be cancelled. It accordingly held that the primary condition necessary for initiation of proceedings u/s 34(1)(b) was not satisfied in the present case. It is from this order of the Tribunal, pursuant to an application made by the Revenue, that the High Court directed that the following question be referred to it for determination :

'Whether on the facts and in the circumstances of the case, the notice u/s 34(1)(b) was validly issued ?'

Mr. Joshi, on behalf of the Revenue, urged that the Tribunal was in error in taking the view that there was not a shred of information which had come into possession of the Income-tax Officer after the completion of the original assessment, which would reasonably justify his belief that the assessee's income was subject to excessive relief. He submitted that at the time when the original order of assessment was passed, except for a cryptic statement in the order to the effect that Pakistani income is to be taken for rate purposes only, there is no material to show that at this stage the ITO applied his mind to the relevant provisions of the Agreement. He submitted that no provisions of the said Agreement, especially Articles (iv) and (v) read with Item No. 8 of the Schedule are so clear and unequivocal that if the ITO while passing the original order of assessment has applied his mind thereto he could not have passed the cryptic order that he did, but would have subjected not only the income arising in India but also the income arising in Pakistan to tax and kept in abeyance the collection of tax qua the income arising in Pakistan in the manner contemplated by Article (vi) of the Agreement. He submitted that actually the provisions of the said Agreement were omitted from consideration by the ITO while passing the original order of assessment either due to oversight or due to inadvertence or he committed a mistake. He urged that while passing the original order of assessment the income liable to tax has escaped due to oversight or inadvertence or a mistake committed by the ITO and reassessment proceedings can be initiated u/s 34(1 (b) even when the information may be obtained from the record of the original assessment from an investigation of the materials on record or the facts disclosed thereby or from other inquiry or research into facts of law. Strong reliance was placed by him upon the test and principles now laid down by the Supreme Court in the case of Kalyanji Mavji & Company v. CIT, West Bengal, and he submitted that if the test and principles so laid down are applied, then the Tribunal was in error in taking the view that reassessment proceedings were unjustified and were based on a mere change of opinion.

August 4, 1974.

5. Mr. Dastur, on the other hand, on behalf of the assessee, contended that at the time of original assessment the total income that was assessed by the ITO was the same, but he did not make the demand as contemplated by the relevant provisions of the Agreement. He urged that there are conditions to be fulfilled before initiating proceedings or action u/s 34(1)(b) viz. (1) that the notice is issued on the basis of information (2) that such information must be subsequent to the initial assessment, and (3) that the information must be such as would rationally lead the ITO to believe that the income had escaped assessment or was under-assessed or was subject matter of excessive relief. He further urged that assuming that the information is obtained in the present case, it is not of such a nature as would enable the ITO to believe that at the time of the original assessment excessive relief had been granted to the assessee. He emphasised that the belief has to be of an honest and reasonable person and must be formed at the time of issuing a notice of reassessment. His contention is that in the present case excessive relief has not been granted to the assessee while passing the initial order of assessment and notice for reopening the assessment is, therefore, invalid. In such a case, according to his submission, initiation of action u/s 34(1)(b) is to permissible. He urged that mere change of opinion is no information. According to his submission, the ITO at the time of initiating assessment proceedings acted on the very same material that was before the earlier ITO, and, therefore, there was no information. He emphasised that for such information there must be fresh material on record. He urged that if the ITO had not taken up the plea of inadvertence or mistake, he could not get support for the action on that ground. Lastly, he submitted that if the issue is a debatable one, then the Income-tax Officer cannot reopen the assessment u/s 34(1)(b) on the basis of inadvertence.

6. At the outset, we would like to observe that the state of record in this reference is not very happy. It appears that reassessment proceedings were initiated on Krishnagopal Maheshwari, who is the assessee in this reference, as well as against Madangopal Maheshwari, who is the assessee in the subject-matter of Income-tax reference No. 42 of 1970). In the case of Madangopal for the assessment year 1952-53, order u/s 34(1)(b) was passed by G. J. Rodkar, V ITO, C-IV Ward, Bombay. Both for Krishnagopal as well as Madangopal reassessment order was passed by N. D. Advani, V ITO, C-IV Ward, Bombay, on the same day.

7. So far as the appeal before the Appellate Assistant Commissioner was concerned, a substantive order that has been on record in the present case is in respect of Madangopal for the assessment year 1952-63 passed on October 3, 1964, and it is on the basis of the said order that the same Appellate Assistant Commissioner passed on the very same day an order in respect of assessee Krishnagopal for the assessment year 1953-54. It appears that there were two appeals in respect of Madangopal before the Tribunal for the assessment years 1952-53 and 1953-54, while one appeal for the assessment yr. 1953-54 for Krishnagopal. All these appeals were disposed of by a common order of the Tribunal passed on July 12, 1966. It may be stated that the Appellate Assistant Commissioner while passing the order dated October 8, 1964, in respect of Madangopal or the assessment year 1952-53 has inter alia stated in his order that so far as the dividend income from Mills is concerned, the same was declared by its registered office at Delhi and the whole of the dividend income from this company has accrued in India. However, no reference to this part of the order of the Appellate Assistant Commissioner is to be found in the order of the Tribunal and the order is passed by the Tribunal on the footing that so far as assessees Krishnagopal and Madangopal were concerned, part of the dividend income accrued in Pakistan and a part of the dividend income accrued in India. He contention was urged on the footing that if the dividend income is declared by the registered office of the Mills situate at Delhi, is a share holder who received such dividend affected by the provisions of the Agreement, which provides for avoidance of double taxation. As this part of the question has not been gone into by the Tribunal, Counsel for other side proceeded on the assumption that a part of the dividend income so far as the assessee is concerned accrued in India and the rest of the dividend income accrued in Pakistan and the case was even qua a shareholder capable of being governed by the provisions of the said Agreement. As the Counsel had proceeded on this assumption, we do not propose to express any opinion on the question of applicability of the provisions of the Agreement to a case where dividend is declared by a company in India having its registered office in India even though the Mill owned by the company is situate in Pakistan.

8. So far as the question that has been referred to us is only restricted to the validity of notice for initiating proceedings u/s 34(1)(b), we are not concerned in the present reference with the final decision that could be given if it is held that initiation of proceedings u/s 34(1)(b) is proper. The relevant part of s. 34(1)(b) which deals with income escaping assessment is as under :-

34. (1) If -

(a) xxx xxx xxx

(b) 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 is consequence of information in his possession reason to believe that income, profits or gain 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, or that excessive loss or depreciation allowance has been computed, 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-s. (2) of s. 22 and may proceed to assess or re-assess such income, profits or gains or recompute the loss or depreciation allowance, and the provisions of this Act shall, so for as may be, apply accordingly as if the notice were a notice issued under that sub-section.

That rest of the provisions of this section are not material for our present purpose. The only question that we have to consider in the present case is whether, having regard to the provisions of sub-s. (b) above, the initiation of the proceedings by the ITO was justified and proper. Action under sub-s. (b) can be initiated by the Income-tax Officer provided the following conditions are fulfilled :-

(i) that there must be information is his possession;

(ii) in consequence of such information he has reason to believe that income, profits or gains chargeable to income-tax;

(a) have escaped assessment in any year, or

(b) have been under assessed, or

(c) assessed at too low a rate, or

(d) have been made the subject of excessive relief under this Act.

If these conditions are fulfilled, initiation of proceedings u/s 34(1)(b) will be justified on the part of the Income-tax officer.

9. A large number of cases were cited by Mr. Dastur before us with a view to contend that having regard to the facts of the present case initiation of reassessment proceedings was not justified, either having regard to the provisions of s. 34(1)(b) or on the footing that by doing so the subsequent Income-tax Officer was merely having a mere change of opinion. We do not think that it is necessary for the present purpose to refer to each one of the cases to which our attention has been drawn. The principles which govern initiation of reassessment proceedings have been fully crystallised by the decision of the highest Court and only a reference to a few of the pertinent case would suffice for the present purpose.

10. In the case of Kalyanji Mavji & Company v. Commissioner of Income-Tax, West Bengal, the Supreme Court had occasion to lay down the principles which would justify initiation of reassessment proceedings u/s 34(1)(b) while dealing with the use of the word 'information' in s. 34.The Supreme Court pointed out that since the word 'information' has not been defined, it is difficult to lay down any rule of universal application. At the same time, it cannot be disputed that the object of the Act was to see that the tax collecting machinery is made as perfectly effective as possible so that the tax-payer is not allowed to get away with escaped income-tax. The fact that the adjective 'definite' qualified the word 'information', and the word 'discovers' which were introduced by the Income-tax (Amendment) Act, 1939, were deleted by the Amending Act of 1948, would lead to the irresistible inference 'information' is of the widest amplitude and comprehends a variety of factors. Nevertheless, the power u/s 34(1)(b), however wide it may be, is not plenary because the discretion of the Income-tax Officer is controlled by the words 'reason to believe'. It is further pointed out that the information may come from external sources or even from the materials already on record or may be derived from the discovery of new and important matter of fresh facts. The word 'information' will also include true and correct state of the law derived from relevant judicial decisions, whether of the Income-tax authorities or of the other Court of law which decide income-tax matters. In this case, the Supreme Court approved the observation made by it in the earlier case of Maharaj Kumar Kamal Singh v. Commissioner of Income-tax, Bihar & Orissa, that the word 'information' in s. 34(1)(b) includes information as to the true and correct state of the law, and so would cover information as to relevant judicial decisions. It also approved the observation in the Maharaj Kumar's case to the effect that even in a case where a return had been submitted, if the Income-tax Officer had erroneously failed to tax a part of the assessable income, it is a case where the said part of the income has escaped assessment. According to the Supreme Court, any attempt to put a very narrow or artificial limitation on the meaning of the word 'escape' in s. 34 (1)(b) cannot therefore succeed. Thus, it is quite clear, as pointed out by the Supreme Court, that the Court was in favour of not placing a narrow but a liberal interpretation to s. 34(1)(b) of the Act. Further the information in s. 34(1)(b) also includes information as to the true and correct state of the law. In Kalyanji Mavji, the supreme Court also pointed out that the view that has been taken by the Supreme Court in Maharaj Kumar was re-affirmed in the case of Commissioner of Income tax, West Bengal v. Imperial Tabacco Company of India Limited. In that case at page 466,the Supreme Court proceeded to observe :-

'In these circumstances it was held by this Court, firstly, that the word information in s. 34(1)(b) included information as to the true and correct state of the law, and so would cover information as to relevant judicial decisions. secondly, that 'escape' in s. 34(1) was not confined to cases where no return had been submitted by the assessee or where income had not been assessed owing to inadvertence or oversight or other lacuna attributable to the assessing authorities. But even in a case where a return had been submitted, if the Income-tax Officer had erroneously failed to tax a part of the assessable income, it was a case where that part of the income had escaped assessment.'

In Kalyanji Mavji's case, the Supreme Court took cognizance of the fact that in the case of Commissioner of Income-tax v. A. Raman & Company the Supreme Court extended the two different categories of cases and observed as follows :-

'The expression 'information' in the context in which it occurs must, in our judgment, mean instruction or knowledge derived from an external source concerning facts or particulars, or as to law relating to a matter bearing on the assessment .....

'Jurisdiction of the Income-tax Officer to reassess income arises if he has, in consequence of information in his possession, reason to believe that income chargeable to tax has escaped assessment. That information must, it is true, have come into the possession of the I.T. Officer after the previous assessment, but even if the information be such that it would have been obtained during the previous assessment from an investigation of the materials on record, or the facts disclosed thereby or from other enquiry or research into facts or law, but was not in fact obtained, the jurisdiction of the Income-tax Officer is not affected.'

After referring to this decision, the Supreme Court in Kalyanji Mavji's case summarised the tests and principles to be applied as under :-

'On a combined review of the decision of this Court the following tests and principles would apply to determine the applicability of section 34(1)(b) to the following categories of cases :

(1) where the information is as to the true and correct state of law derived from relevant judicial decisions;

(2) where in the original assessment the income liable to tax has escaped assessment due to oversight, inadvertence or a mistake committed by the Income-tax Officer. This is obviously based on the principle that the tax payer would not be allowed to take advantage of an oversight or mistake committed by the taxing authority;

(3) Where the information is derived from an external source of any kind. Such external source would include discovery of new and important matters or knowledge of fresh facts which were not present at the time of the original assessment;

(4) Where the information may be obtained even from the record of the original assessment from an investigation of the materials on record, or the facts disclosed thereby or from other enquiry or research into facts or law.

'It these conditions are satisfied then the Income-tax Officer would have complete jurisdiction to reopen the original assessment. It is obvious that where the Income-tax Officer gets no subsequent information, but merely proceeds to reopen the original assessment without any fresh facts or materials or without any enquiry into the materials which form part of the original assessment, s. 34(1) (b) would have no application'.

11. It is on basis of these principles that we have to consider in the present case whether initiation of reassessment proceedings was justified at the time when the initial order of assessment for the year 1953-54 was passed by the ITO qua the assessee. The only thing that has been stated by him in respect of this aspect of the matter is contained in only one sentence viz. 'Pakistan income is to be taken for rate purposes only.' The Officer who initiated the reassessment proceedings was not the same who passed the earlier order. What we have to consider having regard to the provisions of s. 34(1)(b) and the principles laid down in the various decisions of the Supreme Court, referred to above, is whether the initiation of reassessment proceedings is justified or not. Mr. N. D. Advani, the ITO, who passed the order on reassessment, in his order, has observed as under :-

'The assessee had income from dividends, part of which arose in Pakistan (Sutlej Cotton Mills Ltd.). This income was taken for rate purpose only. Later on, it was found that the dividend income arose in Pakistan from the Indian company, whose major portion of income arose in Pakistan. At the time of the original assessment, the assessee was given the benefit of the double taxation avoidance agreement with Pakistan. The rules changed thereafter, hence action under s. 34(1)(b).'

The assessee's main contention is that action u/s. 34(1)(b) cannot be taken as the ITO was in the know of all these things at the time of original assessment. Under the agreement with Pakistan each country is entitled to make assessments according to its own law. The petitioner has not been able to produce any proof of assessment having been made in Pakistan. Therefore, the assessee is not entitled to protection in respect of Pakistan income included in his total income in the taxable territories, unless he produces a certificate in accordance with the provisions of Art. VI(b) of the agreement with Pakistan. This has not been done. I, therefore, hold that the action u/s 34(1)(b) is quite in order in this case.'

12. It was strongly urged by Mr. Dastur that the reason for initiating reassessment proceedings is contained only in the first part of the order and if that was so, then clearly his submission was that initiation of reassessment proceedings was thoroughly unjustified and illegal.

13. This is too narrow a view to take for finding out the reasons which persuaded the ITO to initiate the reassessment proceeding. The order has to be read as a whole and a dissection of the order with a view to separate the first portion as containing reasons for initiation of proceedings and the other not so dealing with the matter is not justified on a careful reading of the order. The material part of the order which has been quoted above merely contains the reasons for initiating proceedings and ITO has taken the view that such initiation is justified u/s 34(1)(b). It will be appropriate in this connection to refer to the relevant provisions of the Income-tax Act then prevailing as well as the appropriate clauses of the Agreement.

14. At the relevant time the provisions of s. 49A and 49AA as they then existed were as under :-

49A. Relief in respect of part B, States and Dominion Income-tax,

(i) The Central Government may by notification in the official Gazettee make provision for the granting of relief in respect of income on which has been paid both income-tax (including super-tax) under this Act and Dominion income-tax in one or more countries.

(2) for the purposes of this section 'dominion income-tax' means ........

49AA. Agreement for avoidance of double taxation in India, Pakistan or the United Kingdom. The Central Government may enter into an agreement with Pakistan for the avoidance of double taxation of income, profits and gains under this Act and under the corresponding law in force in Pakistan or the United Kingdom and may, by notification in the official Gazette, make such provision as may be necessary for implementing the agreement. As contemplated in this provision, an agreement for avoidance of double taxation between India and Pakistan was entered into and was published in the Gazetted Notification No. 28, dated December 10, 1947. (Reproduced at page 786 in the book 'Law and Practice of Income-tax', VI edition, by Kanga and Palkhivala, Volume II). As the preamble of this Agreement Shows, it was entered into with a desire to conclude an agreement for the avoidance of double taxation of income chargeable in the two Dominions in accordance with their respective laws. For the present purpose, Articles IV and VI of this agreement are relevant and they are as under :-

'Art.-IV. Each Dominion shall make assessment in the ordinary way under its own law; and, where either Dominion under the operation of its laws charges any income from the sources of categories of transactions specified in Column 1 of the Schedule to this Agreement (here-in-after referred to as the Schedule) in excess of the amount calculated according to the percentage specified in column 2 and 3 thereof, that Dominion shall allow an abatement equal to the lower amount of tax payable on such excess in their Dominions as provided for in Article VI.

xxx xx xxx'VI(a). For the purpose of the abatement to be allowed under Art. IV or V, the tax payable in each Dominion on the excess or the double taxed income, as the case may be, shall be such proportion of the tax payable in each Dominion as the excess or the doubly taxed income bears to the total income of the assessee in each Dominion.

(b). Where at the time of assessment in one Dominion, the tax payable on the total income in the other Dominion is not known, the first Dominion shall make a demand without allowing the abatement, but shall hold in abeyance for a period of one year (or such longer period as may allowed by the ITO in his discretion) the collection of a portion of the demand equal to the estimated abatement. If the assessee produces a certificate of assessment in the other Dominion within the period of one year or any longer period allowed by the ITO, the uncollected portion of the demand will be adjusted against the abatement allowable under this Agreement, if no such certificate is produced, the abatement shall cease to be operative and the outstanding demand shall be collected forthwith.'

As contemplated in Article IV, a Schedule has been annexed to this agreement and Item 8 of this Schedule deals with dividends.As indicated by columns 2 and 3 of this Schedule, each Dominion it entitled to charge tax on the income in proportion to the profits of the company chargeable by each Dominion under this Agreement. In the remarks column, 4, it is stated that 'relief in respect of any excess income-tax deemed to be paid the shareholder shall be allowed by each Dominion in proportion to the profits of the company chargeable by each under this Agreement.' At the time of passing of the original assessment order, the only thing that the ITO did while assessing income from dividends was to state that Pakistan income has to be taken for rate purposes only. Thus, it is very clear from these observations in the order that, apart from taking into account the Pakistan income from dividends for rate purposes, no other tax was to be levied thereon or in other wards income by way of dividends from Pakistan was not subjected to any tax whatsover under the said order. On a plain reading of the provisions of Arts. IV and VI, referred to above, it is quite apparent and obvious that either the ITO, while passing the initial assessment order, completely overlooked the provisions thereof or did not give effect thereto. The provisions contained therein are not susceptible to more than one interpretation. The procedure prescribed therein is quite clear, simple an unequivocal. It is clearly stated in clause (b) of Art. VI that where at the time of assessment in one Dominion the tax payable on the total income in the other Dominion is not known, the first Dominion shall make a demand without allowing the abatement, but shall hold in abeyance for a period of one year (or such longer period as may be allowed by the ITO in his discretion) the collection of a portion of the demand equal to the estimated abatement. If the assessee produces a certificate of assessment in the other Dominion within the period of one year to any longer period allowed by the ITO, the uncollected portion of the demand will be adjusted against the abatement allowable under this Agreement; if no such certificate is produced, the abatement shall cease to be operative and the outstanding demand shall be collected forthwith.

15. Even a casual reading of this Agreement will clearly lead to the only conclusion that the course prescribed in this clause was not followed by the ITO while passing the initial order of assessment. Thus, while passing the initial order of assessment, either due to oversight, inadvertence or mistake, the ITO failed to tax the dividend income pertaining to Pakistan and it was only when reassessment proceedings were initiated by the other ITO that he found in view of the materials on record and the provisions of the terms of the agreement that the dividend income from Pakistan had either escaped assessment or was under-assessed.

16. It was strenuously urged by Mr. Dastur that at the time of initiating the reassessment proceedings there was no information in possession of the ITO, which would persuade him to entertain a reason to believe that the income chargeable to IT has been made have indicated earlier, that the reassessment proceedings were initiated by the ITO because from the investigation of the materials on record he found that either due to oversight or inadvertence or mistake the ITO, while passing the initial order of assessment, had failed to apply the provisions of Art. IV and VI of the agreement in the case of the assessee, even though he knew that part of the dividend income was from Pakistan. As we have pointed out earlier, failure to comply with the procedure prescribed by clause (b) of Art. VI, or failure to levy tax in accordance with the said provisions was discovered by the ITO while initiating reassessment proceedings either from the investigation of materials on record on the terms of the provisions of the Agreement, referred to above, such information came into the possession of the ITO. MR. Advani when he issued a notice for reopening the assessment. It is not as if that the provisions of Art. IV & VI of the Agreement are susceptible of more than one construction, and construed in one way by the ITO while passing the initial order of assessment, and construed in a different way while passing the order in reassessment proceedings. The provisions of these Articles, especially Art. IV and VI, are so clear and unambiguous that anybody who reads them can only understand them in one and only one manner and there is nothing in the provisions thereof which can even persuade in ITO to take into account income from Pakistan by way of dividend merely for purposes of rate and not subject it to tax as provided by clause (b) of Art. VI. In our opinion, having regard to the tests and principles Nos. 2 and 3 laid down by the Supreme Court in the case of Kalyanji Mavji the ITO had complete jurisdiction to reopen the original assessment. There is no possibility of anybody taking a view that this is a case of mere change of opinion. The question of change of opinion can only arise where the provisions of these Articles, viz. Arts. IV and VI, are such that more than one interpretation is possible. That being the position, it is impossible for any body, acting with a sense of responsibility to take a view that the view that had been taken by the ITO while passing the initial order of assessment was a possible view and it was merely by mere change of opinion that reassessment proceedings were initiated.

17. It was urged Mr. Dastur that initiation of proceedings u/s 34(1)(b) of the Act was not permissible because the Income-tax Officer cannot have reason to believe that income chargeable to income-tax has been made the subject of excessive relief under the Act. He urged that as the provisions of s. 49AA, as they stood at the relevant time, so far as the income from Pakistan was concerned, are applicable to the facts of the case, and they deal with the agreement for avoidance of double taxation in India, Pakistan or the United Kingdom. He contrasted the marginal note of s. 49AA and s. 49A relief in respect of Part B States and Dominion Income-tax. He submitted that in a case governed by s. 49AA there is no question of any relief as contemplated by s. 49A. But s. 49AA merely contained provisions only for avoidance of double taxation of income. A provisions for avoidance of double taxation, according to his submission, cannot be regarded as a relief and such a case is not governed by the relevant part of s. 34(1)(b). In our opinion, the contention has to be stated to be rejected.

18. An agreement entered into as contemplated by s. 49AA provided for avoidance of double taxation and an assessee who is not entitled to avoidance of double taxation has been granted the relief erroneously or by inadvertence or mistake of the Income-tax Officer. Thus, undoubtedly such an assessee has been granted relief to which he is not entitled. It is quite clear that the Income-tax Officer while passing the initial order of assessment merely took into account the dividend income from Pakistan only for the purposes of rate, but did not subject any part of that income to tax either provisionally or at all. It may be that he was not aware of the provisions of Articles IV and VI, or either due to oversight, or inadvertence or mistake he did not give effect thereto. If that be so, then since the provisions of Article VI(b) were not complied with by the Income-tax Officer at the stage of initial assessment, excessment, excessive relief was granted to the assessee though he was not entitled to under law, viz. s. 49AA, as it then stood, read with the provisions of the Agreement. Thus, in our opinion, there is no force in the contention of Mr. Dastur that having regard to the provisions of s. 49AA even when the procedure prescribed by Article VI of the agreement has not been complied with, it is not a case of excessive relief under the Act.

As we have stated earlier, a large number of cases have been cited by Mr. Dastur before us, but, in our opinion, it is unnecessary to refer to the same, since what is being done by us is merely to apply the principles which have been clearly laid down by the Supreme Court in Kalyanji Mavji's case above referred to. However, it will be appropriate to refer to one of the decisions of the Bombay High Court, to which our attention was invited viz. Purshotamdas Thakurdas v. Commissioner of Income-tax, Bombay. This was a case where the question that was referred to the High Court for determination was as under :

'Whether on the facts and circumstances of the case the relief allowed in the assessment u/s 23(3) on that portion of dividend income from Narandas Rajaram & Co. (Private) Ltd. which is attributable to the income of the company arising in Pakistan, can be withdrawn while making re-assessment under s. 34(1)(b)'?

The question involved related to the validity of the order passed on re-assessment u/s 34(1)(b), and by the wording of the question. initiation of the proceedings for re-assessment were not sought to be challenged. This question was answered by the Division Bench in the negative. It was sought to be urged by Mr. Dastur that the facts in this case were more or less similar to those before us and since this is a decision of the Division Bench of this Court, it being of a binding nature, we should follow the same. We have carefully gone through the judgment, and Counsel for the Revenue as well as Counsel for the assessee have read it more than once before us. We asked Mr. Dastur to point out that portion of the judgment which lays down the ratio of the decision or the reasoning which supported the conclusion which as reached, and Mr. Dastur, was unable to point out any part of the judgment which could be regarded as laying down the ratio of the decision. Ordinarily, a decision of a Division Bench of this Court will be binding on us provided our attention is drawn to the ratio or the reason on the basis on which a particular conclusion is arrived at. In the present case, neither the Counsel for either side was in a position to point out the reason for the ratio nor we are in position to find out the same and placed in such a situation, it is difficult for us to regard this decision as laying down any principle which would prevent us from going into the question which we have to consider. In the case before us, since the Tribunal has held against the justification of the initiation proceedings, has not gone into the merits of the case. As we are unable to find out the ratio of the decision in Purshotamdas Thakurdas's case, we do not think that this decision can preclude us from considering the question in the manner in which we have done.

19. I agree, but with some hesitation. The hesitation is not occasioned by any doubt as to the error committed in the original order of assessment, but is entirely due to the manner in which the re-assessment has been made which is necessarily reflected in the order passed on 10th July 1958, Annexure 'B', to the Statement of Case. It is because of this that I would like to add a few words to what the learned Chief Justice has observed in the judgment delivered by him on behalf of the Bench.

20. This is a reference at the instance of the Commissioner and the question referred to us pertains to the validity of the notice initiating proceedings u/s 34(1)(b) of the Indian Income-tax Act, 1922. However, very curiously the notice issued by the Income-tax Officer to the assessee for the proposed Re-opening under this section is not to be found annexed to the Statement of Case. As already observed, the original order of assessment passed by the 2nd Income-tax Officer, C-IV Ward, which is the order dated 9th June, 1953 in the case of the assessee, is very perfunctory; the portion with which we are concerned has been characterised by the Chief Justice as 'cryptic', I would characterise or describe it as scrappy and understandable, and written in such a manner which makes it difficult to say with confidence that any mind had been applied at all to the question.

21. In this reference we are really concerned with the content of and the manner of the order of re-assessment passed by the Income-tax Officer H. D. Advani, 6th ITO C-IV Ward on 10th July 1958, which is Annexure 'B' to the Statement of Case. The Foundation of action of re-assessment u/s 34(1)(b) is the information in possession of the Income-tax Officer, as consequence of which he has reason to believe that some income of the assessee had escaped assessment. In recent judgments of the Supreme Court the phrase 'information in possession of the officer' has been given a wide connotation. But by such judgments the Income-tax Officer concerned is not relied from indicating in precise and unequivocal language what such information was, which prompted the course of action resulting in the issue of notice u/s 34(1)(b), when his proposed action is challenged by the assessee. It is normally found that the order in such re-assessment proceedings is a consolidated order which deals with the objections of the assessee to the proposed action of re-assessment, as also with the merits of the question involved in the re-assessment. The two portions of the order dealing with separate arguments, must be kept distinct and separate, and it is unfortunate that orders even in re-assessment u/s 34(1)(b) and u/s 147(b) are being made in a scrappy and slipshod manner, and in appropriate cases the entire action of re-assessment may become liable to be quashed unless the orders are specific, clear and do not betray the lack of comprehension and confusion reflected in the order before us. It is to be remembered that the assessee has a right of appeal from the order of re-assessment. That right of appeal exists over both the limbs of the order the first dealing with initiation of proceedings and propriety of action u/s 34(1)(b) and the second with the merits of the decision given in re-assessment. If the order is confused, rolled up, unhappily worded or couched in such language as would be difficult to understand, then one wonders how the assessee can exercise his right of appeal Are the infirmities of such order to be filled up before the Appellate Assistant Commissioner, or before the Tribunal, or still later in the reference before the High Court, Such defects cannot be allowed to be cured or glossed over at a subsequent stage, and the information in possession of the Income-tax Officer which motivated the initiation of re-assessment proceedings must ordinarily be clearly specified or indicated in the order itself.

22. Now, let us consider the order reassessment from this point of view. Para 1 of the order commences by reference to the original order that was passed on 9th June, 1953. It then says that 'later on (presumably after the original assessment) it was found that the dividend income arose in Pakistan from the Indian Company whose major portion of the income arose in Pakistan'. With respect to the ITO Advani, I have not been able to understand what is sought to be conveyed by this sentence. The Original ITO, who made the order dated 9th June. 1953 was dealing (presumably) with the dividend income of the assessee. He had, therefore, before him the certificate of the company (counterfoil of the dividend warrant) which must have shown that it was Indian Company, whose dividend income was received by the assessee, and that according to the certificate the specific income had arisen to the Indian Company from its Pakistan unit. The finding 'latter on' which is referred to in this case, therefore, does not appear to me to make any sense. Further, it is not made clear who has made this subsequent finding. The order then proceeds in that very paragraph to indicate that 'at the time of the original assessment the assessee was given the benefit of double taxation avoidance agreement with Pakistan.' On what basis, or on what material is this stated If the original order of assessment is perused to ascertain its correctness; we find no reference to such agreement therein, at the highest there is only a simple statement of considering Pakistan income for rate purposes only. A question then arises, whether Mr. Advani made inquiries with original officer before arriving at such conclusion and making the statement in his order In this statement based on information or just We do not have any hint in the order as to why this particular statement is made. This, however, is not all. What is astounding in the last sentence occurring in para 1 of this order, which reads : 'The rules changed thereafter, hence action under s. 34(1)(b)'. From the preceding sentence it can be understood that the assessee was given the benefit of the taxation avoidance agreement with Pakistan. There is no reference in the order as to what the rules originally were, not what change was effected, when such change was effected and in what manner, or why, and because of such change action u/s 34(1)(b) became necessary. On these aspects of the order of Mr. Advani. Counsel for the Revenue generated much heat but shed little light.

23. That brings us to a consideration of paragraph 2 of ITO Advani's order. This paragraph, it may be conceded, is some improvement on paragraph 1, but even then, it is cryptic. In order to make this concession i. e. that it amounts to an improvement, we have stretched the language of the said paragraph and also understood it as indicative, to some extent, of the reason or motive which persuaded the successor Income-tax Officer (Advani) to make the order of reassessment and for reopening the proceedings u/s 34(1)(b). It is from this paragraph that we have the hint or suggestion that Income-tax Officer, who made the original assessment, had misapplied the provisions of the Double Taxation Avoidance Agreement with Pakistan, or, at any rate, had not followed the proper procedure indicated in Article VI(b) of the said Agreement. To a large extent it would be true that trying to give a proper meaning to this order amounts to re-writing the order. Perhaps, only by so doing we are able to hold that there was an initial mistake in the order of the Income-tax Officer, i. e. the II Income-tax Officer, C. IV Ward, that this mistake was discovered by his successor and it is a result of this discovered by his successor and it is a result of this discovery of the mistake that the successor, i. e. Advani, initiated believe that the income of the assessee had escaped assessment. My personal feeling is that perhaps in adopting this approach we have been over-generous to the Revenue and somewhat unfair or even harsh with the assessee. This is the basis for the hesitation. which I indicated at the commencement of my order.

24. Before parting with the reference, it may be commented upon that even before the Appellate Assistant Commissioner the appeal of the assessee has not received proper attention. It is found that the appeal of the assessee before us had been decided by Appellate Assistant Commissioner following the decision given in the appellate order for an other assessee, Madangopal Maheshwari, for the two years 1952-53 and 1953-54 (See Annexure 'C'). The appellate order in Madangopal Maheshwari's cases for 1953-54 (also part of Annexure 'C') is couched in similar manner and based on the order in his case for 1952-53. However, for this year, i.e. assessment year 1952-53. when the original order of assessment made in the case of that assessee is perused, and the order of reassessment made on 18th May, 1957 by C. J. Redkar V. ITO is considered, it is found that these two orders and in particular in the order to re-assessment totally different language has been employed then in the two orders with which we are concerned. The principles applicable and the conclusion that may follow in Madangopal Maheshwari's case for the assessment year 1952-53 may not necessarily apply to his case for 1953-54 and will not certainly apply to the assessee's case for the assessment year 1953-54.

25. As stated earlier, we find the original order of assessment totally unsupportable on any consideration whatsoever. This, in my opinion, must colour the approach to be adopted by the Court, and accordingly I concur in the view expressed by the Chief Justice that the Revenue must succeed in the reference.

PER COURT - Accordingly our answer to the question referred to us is in the affirmative in favour of the assessee. There will be no order as to costs.


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