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S.P. Divekar and A.P. Divekar (Legal Representatives of P.K. Divekar) Vs. Commissioner of Income-tax (Central) - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 71 of 1968
Judge
Reported in(1985)87BOMLR18; (1985)47CTR(Bom)166; [1986]157ITR629(Bom); [1985]20TAXMAN396(Bom)
Acts Income Tax Act 1961 - Sections 147; Income Tax Act, 1922 - Sections 34(1) and 34(1A)
AppellantS.P. Divekar and A.P. Divekar (Legal Representatives of P.K. Divekar)
RespondentCommissioner of Income-tax (Central)
Excerpt:
.....because it appeared to it that both the income-tax officer, kolaba, as well as the income-tax officer (central) had made enquiries before the issue of the notice. on the basis of these enquiries, the income-tax officer came to a finding that shri patankar was not a rich man. ' 21. the supplemental statement has also observed that 'there was material to show that the statement given by manoramabai on march 31, 1954, could be before the income-tax officer (central). the income-tax officer, kolaba, had made a report to the inspecting assistant commissioner having jurisdiction over the income-tax officer (central). this could not have happened unless the income-tax officer (central) was also equally aware of the investigations'.22. the tribunal has, finally, opined in the supplemental..........upon the assessee under section 34(1a) of the indian income-tax act, 1922, by the income-tax officer (central), bombay. it is not on record and its date is not known.4. on february 28, 1957, the income-tax officer made the reassessment order. in it he recorded that subsequent to the original assessment made on march 19, 1952, information was received that there had been escapement of income and action under section 34(1a) of the indian income-tax act, 1922, was taken with the previous sanction of the commissioner of income-tax (central). there was information that securities worth rs. 3,00,000 were purchased by the assessee in the name of one padmanabha ganesh patankar, the assessee's father-in-law, who had died in 1949. patankar was merely an agriculturist paying land revenue of.....
Judgment:

Bharucha, J.

1. This is a reference under section 66(2) of the Indian Income-tax Act, 1922, made at the instance of the assessee. The questions at are posed by the Income-tax Appellate Tribunal read thus :

' (1) Whether the Tribunal erred in law or exercised its discretion un-judiciallyin not deciding the applicant's first submission that the Income-tax Officer was not justified in taking action under section 34(1) of the Indian Income-tax Act, 1922, and in remanding the case without giving a decision on that submission ?

(2) Whether the Tribunal erred in law or acted without any evidence and contrary to the materials on record in treating the sum of Rs. 3,00,000 (Rupees three lakhs) as the concealed income of the applicant ?'

2. We have, in our judgment dated September 19, 1983, reframed the first question to read thus :

' (1) Whether the Income-tax Officer was justified in initiating reassessment proceedings under section 34(1) of the Indian Income-tax Act, 1922 ?'

3. The reference relates to the assessment of one P. K. Divekar, now deceased, for the assessment year 1947-48. The original assessment was made on March 19, 1952. On March 27, 1956, a notice was served upon the assessee under section 34(1A) of the Indian Income-tax Act, 1922, by the Income-tax Officer (Central), Bombay. It is not on record and its date is not known.

4. On February 28, 1957, the Income-tax Officer made the reassessment order. In it he recorded that subsequent to the original assessment made on March 19, 1952, information was received that there had been escapement of income and action under section 34(1A) of the Indian Income-tax Act, 1922, was taken with the previous sanction of the Commissioner of Income-tax (Central). There was information that securities worth Rs. 3,00,000 were purchased by the assessee in the name of one Padmanabha Ganesh Patankar, the assessee's father-in-law, who had died in 1949. Patankar was merely an agriculturist paying land revenue of only about Rs. 200 per annum. The yield of his land was ascertained to be about seven khandis of paddy. He had two daughters, Manoramabai, who was the wife of the assessee, and Yamunabai. He had made a will in which the securities had been bequeathed to Manoramabai. It was clear, in the circumstances, that the investment of Rs. 3,00,000 in the name of the father-in-law was a benami transaction of the assessee and there had been a deliberate attempt to conceal.

5. The assessee appealed and contended before the Appellate Assistant Commissioner that the proceedings under section 34(1A) of the Indian Income-tax Act, 1922, were not validly initiated and that the securities in question were not his. The Appellate Assistant Commissioner concluded that the securities were bought in the name of Manoramabai and the money for the purchase was found from the assessee's secret income. As regards the contention about the initiation of proceedings under section 34(1A), he said only this :

'As regard the second contention, it may be noted that at the time of original assessment, nothing was disclosed before the ITO regarding the impugned securities. Since I have held that the securities belonged to the appellant himself, the ITO, in my opinion, in the aforesaid circumstances, was justified in taking action under section 34. This contention is, therefore, rejected.'

6. The assessee went in second appeal to the Income-tax Appellate Tribunal. He contended that the Income-tax Officer had erred in starting action under section 34(1A) of the Indian Income-tax Act, 1922, and that his notice in that behalf was bad in law and without proper authority. He also contended that he had disclosed fully and truly all material facts and that the sum of Rs. 3,00,000 was not his income for the relevant year.

7. The Tribunal called for a remand report by its order dated June 15, 1960. While the order set out both the assessee's contentions, the remand report was required only in regard to the merits of the addition. The Income-tax Officer sent the remand report on October 22, 1960.

8. The Tribunal then fixed the hearing of the appeal. The order of the Tribunal does not deal with the contention regarding the validity of the action under section 34(1A) of the Indian Income-tax Act, 1922. The statement of case prepared by the Tribunal, however, states that 'the assessee's counsel did not, in his arguments, refer to the contention about section 34, but solely dealt with the merits of the addition of Rs. 3 lakhs in the assessment.'

9. The Tribunal held :

'We have examined above in detail the relevant facts on which much can be said on both sides. On balance, however, we are induced to hold that the consideration of Rs. 3 lakhs odd for the purchase of the Government loan was paid by the assessee in the name of Patankar. The facts before us can be individually explained away by the assessee. When, however, we take a collective view, we are inclined to reject the story of the assessee. We, therefore, uphold the order of the Appellate Assistant Commissioner on the point and dismiss the appeal.'

10. When this reference reached us on September 19, 1983, after hearing some arguments, we set out the facts, we reframed the first question in the manner stated above and we directed the Tribunal to give a decision upon the first question as reframed : We stated :

'At one stage, we had considered whether we could apply our mind to this question without having the benefit of the Tribunal's views thereon. But, on further consideration, we think it advisable to follow the normal procedure and have the Tribunal's decision on this plea. On receipt of the decision on this plea, the High Court will go into the said question as well as question No. 2 which already stands referred to us.

We may clarify that in order to give its decision, the Tribunal must allow the concerned parties to bring to its notice all such material as was available to the Income-tax Officer at the time the action under section 34(1) (a) was taken by the Income-tax Officer. We may mention that in the annexure which is the copy of the reassessment order dated February 28, 1957, it has been mentioned by the Income-tax Officer that he had received information that there had been escapement of income whereupon he took action under section 34(1) (a) with the previous sanction of the Commissioner of Income-tax (Central). The Tribunal would certainly be entitled to and must, in our opinion, go into that material and on the basis of that material give its opinion on this question as reframed. The Tribunal may also bring this material on record for consideration of the High Court and we direct it to submit its opinion together with this further material as expeditiously as possible and preferably with in three months of the order of the High Court reaching it.'

11. Pursuant to our directions, the Tribunal heard the matter and prepared a supplemental statement of case.

12. In the supplemental statement, the Tribunal has noted that the departmental representative had been unable to produce the records relating to the matter because they could not be traced. The Tribunal felt obliged to 'consider the materials placed before the Tribunal at the time of hearing of the appeal and attempt to carry out the directions of the High Court'.

13. The Tribunal has dealt with in the supplemental statement with 'what happened before the Income-tax Officer (Central) issued a notice under section 34(4) of the 1922 Act'. On or about August 7, 1946, Patankar, the assessee's father-in-law, deposited a sum of Rs. 3,01,000 in his name with the New Citizen Bank of India. On September 25, 1946, he purchased in his own name Government securities for Rs. 3,01,476-9-0. He later on endorsed the securities in favour of the assessee for collection of interest. He had made a will on June 28, 1946, under which he bequeathed all his movable and immovable properties to the wife of the assessee. He died on July 25, 1949.

14. The Tribunal has stated in the supplemental statement that 'it would appear that the Income-tax Officer came to know some time in July, 1953, regarding the purchase of securities Joy Shri Patankar. This was only an inference drawn by us.. In July, 1953, the Income-tax Officer obtained a statement of Wealth from the assessee.'

15. The Tribunal does not state whether the Income-tax Officer who so came to know or who obtained the statement of wealth from the assessee was the Income-tax Officer (Central), who issued the notice under section 34(1A) of the Indian Income-tax Act, 1922, or the Income-tax Officer, Kolaba District, who dealt with Patankar's assessments.

16. In March, 1954, the supplemental statement has stated that the Income-tax Officer examined Manoramabai, wife of the assessee. The supplemental statement has noted that at the time of the finalisation of its draft, it was suggested on behalf of the assessee that the Income-tax Officer so mentioned was the Income-tax Officer, Kolaba, and this should be made clear The Tribunal was unable to make the clarification because it appeared to it that both the Income-tax Officer, Kolaba, as well as the Income-tax Officer (Central) had made enquiries before the issue of the notice. On March 31, 1954, the solicitor (Mr. M. V. Jayakar) concerned with the drafting of Patankar's will had been examined by the Income-tax Officer (Central). On the same date, Manoramabai had given a statement 'it could possibly be before the Income-tax Officer (Central) also. Thus both the Income-tax Officers had made some enquiries'.

17. The supplemental statement has summarised Mr. Jayakar's statement thus :

'He stated that he was a witness to the will drawn up by the late Patankar. To a question whether the solicitor had personal knowledge of the movable and immovable properties mentioned in the will, he stated that instruction were given to him for disposal of the movable property which was received in the will. He was asked by the Income-tax Officer whether he was convinced that the late Patankar was the absolute owner of all the properties bequeathed. He stated that he thought so since the late Patankar had instructed him for disposal of the property. He further stated that he came to know about Patankar only through the assessee, who was his client. There was nothing to disbelieve Patankar when he gave instructions to prepare the will. He further stated that Shri Patankar had represented that he was an inamdar.'

18. The supplemental statement has noted that some enquiries regarding the purchase of Government securities seemed to have been entrusted to an Inspector, who had on September 15, 1955, made his report to the Income-tax Officer, Kolaba. On March 19, 1956, the Income-tax Officer, Kolaba, made a report to the Inspecting Assistant Commissioner (Central) on the subject, 'P. K. Divekar - 1947-48 assessment - proceedings under section 34(1) (a) - starting of'. In the report, he acquainted the Inspecting Assistant Commissioner (Central) with the enquiries made by the Inspector and the statements of Manoramabai and Yamunabai made to him. To the report, the Income-tax Officer, Kolaba, annexed copies o the Inspector's report and Manoramabai's statement to him.

19. The supplemental statement has noted that the next event was the issue of the notice under section 34(1A) of the Indian Income-tax Act, 1922. The notice was served on the assessee on March 27, 1956.

20. The supplemental statement has concluded :

'The above represents the materials which we could gather on the basis of which the assessment had been reopened. The question which we have to decide is whether on these materials, the Income-tax Officer (Central) was justified in initiating the reassessment proceedings. In our opinion, the Income-tax Officer was fully justified. The materials placed would show that there was information that Shri Patankar had invested nearly Rs. 3 lakhs in the purchase of Government securities. Enquiries had been made regarding the economic status of Patankar. These enquiries were by the examination of the two daughters of Shri Patankar, the examination of the solicitor who drew the will and the Inspector's report on local enquiries regarding the economic status. On the basis of these enquiries, the Income-tax Officer came to a finding that Shri Patankar was not a rich man. Therefore, he could not have purchased these Government securities. These inferences drawn by him are contained in the report made by him to his superior. Given the facts and circumstances, he informed that the only person who could have purchased these Government securities would be the assessee. For drawing this inference, there was sufficient material. During his lifetime itself, the late Patankar had assigned the collection of interest to the assessee. Before making the purchase of the securities, he had made a will under which the assessee's wife would be the beneficiary. The report of the Inspector and the statement of Smt. Manoramabai had shown him that barring the Government securities, there were no other assets bequeathed by the late Patankar. Under these circumstances. it is quite possible that the Income-tax Officer could be said to have reason to believe that income of the assessee had escaped assessment.'

21. The supplemental statement has also observed that 'there was material to show that the statement given by Manoramabai on March 31, 1954, could be before the Income-tax Officer (Central). The Income-tax Officer, Kolaba, had made a report to the Inspecting Assistant Commissioner having jurisdiction over the Income-tax Officer (Central). This could not have happened unless the Income-tax Officer (Central) was also equally aware of the investigations'.

22. The Tribunal has, finally, opined in the supplemental statement thus :

'On the facts of the case before us, if the Income-tax Officer's belief that the investment in the purchase of securities is a reasonable belief at this stage, then he could reasonably believe that income had escaped assessment on account of the failure to disclose fully and truly all material facts of his income.'

23. The existence of the Income-tax Officer's belief under section 34(1A) of the Indian Income-tax Act, 1922, that income has escaped assessment is justiciable. In ITO v. Madnani Engineering Works Ltd. : [1979]118ITR1(SC) the Supreme Court said (p. 6) : 'The Income-tax Officer merely stated his belief but did t set out any material on the basis of which he had arrived at such belief so that the court could decide for itself whether there was any material on the basis of which the Income-tax Officer could reasonably entertain such belief. We are, therefore, not at all satisfied on the affidavit that the Income-tax Officer had reason to believe that a part of the income of the respondent had escaped assessment by reason of its failure to make a true and full disclosure of the material facts. The notice under section 147(a) of the Income-tax Act for reopening the assessment must, in the circumstances, be held to be void.' In Chhugamal Rajpal v. S. P. Chaliha : [1971]79ITR603(SC) , the Supreme Court noted that when the provision required the Income-tax Officer to give reasons for issuing a notice, it required him to show that he had prima facie grounds before him for doing so, and that this was an important safeguard.

24. The assessee took before the Appellate Assistant Commissioner the plea that the proceedings under section 34(1A) of the Indian Income-tax Act, 1922, had not been validly initiated. He reiterated the plea at least in his memo of appeal to the Tribunal. Neither before the Appellate Assistant Commissioner nor before the Tribunal did the Income-tax Officer (Central) produce the memorandum recording his reasons for reopening the assessment and seeking the Commissioner's sanction to do so. This memorandum is obligatory under the first proviso to section 34(1A). It is the primary evidence of the reasons which led the Income-tax Officer (Central) to form the belief that the assessee's income had escaped assessment and it must necessarily indicate the material upon which he had come to form such belief. Even after we sent the matter back to the Tribunal, the Revenue did not produce this memorandum. Nowhere upon the record is there even so much as a statement of the Income-tax Officer (Central) indicating the reasons for and the materials upon which he formed the belief that the assessee's income had escaped assessment.

25. In the absence of the memorandum, and even of such a statement, we do riot know for what reasons and upon what material the Income-tax Officer (Central) formed such belief. Hence, we are unable to decide whether he could reasonably have entertained it. We are, therefore, not satisfied that the Income-tax Officer (Central) had reason to believe that the assessee's income had escaped assessment and that the proceedings under section 34(1A) of the Indian Income-tax Act, 1922, were validly initiated.

26. We are unable to accept the Tribunal's reasoning and conclusion set out in the supplemental statement. The first question which the Tribunal ought to have addressed itself to after we sent the matter back to it was : what was the material upon which the Income-tax Officer (Central) came to form the belief that the assessee's income had escaped assessment Only after having ascertained what that material was, could the Tribunal have gone on to consider whether, upon that material, the Income-tax Officer (Central) could reasonably have entertained such belief. The Tribunal noted that the Revenue had been unable to produce the records. It ought to have stated then only that it could not be held that the Income-tax Officer (Central) was justified in initiating the proceedings under section 34(1A) of the Indian Income-tax Act, 1922. The Tribunal, in fact, speculated on what were the materials before the Income-tax Officer (Central) when he issued the notice under section 34(1A) and, thereon, opined that he was justified in initiating the proceedings. The Tribunal would appear to have failed to appreciate that what was germane for deciding whether the Income-tax Officer (Central) was justified in initiating the proceedings was not what material was before him when he issued the notice under section 34(1A) but on what material he, in fact, based his opinion that the assessee's income had escaped assessment.

27. We are constrained to point out that even in its inquiry as to what material was before the Income-tax Officer (Central) when he issued the notice under section 34(1A) of the Indian Income-tax Act, 1922, the Tribunal has fallen into some error.

28. The Tribunal could only have said without any conjecture that the Income-tax Officer (Central) had before him when he issued the notice under section 34(1A) of the Indian Income-tax Act, 1922, the statement made by Mr. Jayakar before him. There is nothing in that statement, the summary of which by the Tribunal has been reproduced above, which could possibly have led the Income-tax Officer (Central) to form the belief that the assessee's income had escaped assessment.

29. The Tribunal appears to have confused the knowledge of the Income-tax Officer, Kolaba, with the knowledge of the Income-tax Officer (Central). The enquiries into Patankar's economic status, through the examination of Manoramabai and local enquiries by an Inspector, were made by the Income-tax Officer, Kolaba. He drew the inferences that Patankar was not a rich man and could not have purchased the securities and communicated them in his report, not to his superior but to the Inspecting Assistant Commissioner (Central). There is nothing on record which indicates that the report made by the Income-tax Officer, Kolaba, to the Inspecting Assistant Commissioner (Central) or the annexures thereto were before the Income-tax Officer (Central) when he issued the notice under section 34(1A) of the India Income-tax Act, 1922. There was no warrant for the Tribunal's supposition that 'under these circumstances, it is quite possible that the Income-tax Officer could be said to have reason to believe that income of the assessee had escaped assessment'.

30. The Tribunal appears to have proceeded on the basis that Manoramabai had made only one statement, but it was reluctant to state that it had been made before, the Income-tax Officer, Kolaba. The Tribunal stated that 'it could possibly be before the Income-tax Officer (Central) also'.

31. Perusal of the annexures to the original statement of case shows that Manoramabai made two statements prior to the issue of the notice under section 3(1A) of the Indian Income-tax Act, 1922, but that neither was made before the Income-tax Officer (Central). On March 31, 1954, she made a statement to the 8th Income-tax Officer, C-II Ward (page 36). This is clear from paragraph 4 of the Appellate Assistant Commissioner's order dated December 8, 1958. The statement before the Income-tax Officer, Kolaba, was made on November 7, 1955 (page 109). The only statement made by Manoramabai before the Income-tax Officer (Central) was made on August 19, 1960 (page 79), after issue of the notice under section 34(1A). Nothing on the record establishes that either of Manoramabai's statements, the one dated March 31, 1954, and the other dated November 7, 1955, was before the Income-tax Officer (Central) when he issued the notice under section 34(1A).

32. The Tribunal relied upon the circumstance that Patankar had during his lifetime assigned the collection of interest upon the securities to the assessee and concluded therefrom that the inference that the securities belonged to the assessee was justified. The information that Patankar had during his lifetime assigned the collection of interest upon the securities to the assessee was elicited only after the remand made by the Tribunal.

33. It was not before the Income-tax Officer (Central) when he issued the notice under section 34(1A) of the Indian Income-tax Act, 1922.

34. For the reasons aforementioned, we answer the first question, as reframed, in the negative and in favour of the assessee. In view of this answer, it becomes unnecessary to deal with and answer the second question.

35. The Revenue shall pay to the assessee the costs of the reference.

36. We are informed that the Tribunal has (in R.A. No. 1442 (Bom) /1984) made a reference, at the instance of the assessee, arising out of its conclusions set forth in the supplementary statement. The question so referred reads :

'Whether, on the facts and in the circumstances of the case, the Tribunal has properly carried out the High Court's order dated September 19, 1983 ?'

37. The answer to this question is sufficiently indicated in the discussion above. Mr. Dastur, learned counsel for the assessee, has stated to us that this reference will not be pressed.


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