1. The petitioner is the karta of an HUF consisting of his wife, his son and his daughter. The HUF was assessed to income-tax for several years and so also under the provisions of the W.T. Act. The HUF of the petitioner owned 1/3rd share in the lands situated at Valnai, near Malad, Greater Bombay. The petitioner and his two brothers has inherited the lands at Valnai from their ancestors and each one of the three brothers held 1/3rd share in respect of the Valnai lands. The Valnai lands are situated in the low lying area adjoining the Malad Creek. The three brothers and their mother entered into an agreement of partnership on April 9, 1963, whereby the parties agreed to carry on business of land contractors and dealers in immovable properties, mining and quarrying undertakings. The partnership was registered in the name and style of M/s. Associated Lands and Development Corporation. As a part of the capital of the partnership, the petitioner and his two brothers brought into the firm their share in the lands at Valnai, while their mother brought certain lands situated at Wedhwan belonging to her. The partnership concern entered into a certain agreement of lease dated April 22, 1963, in favour of M/s. United Investment Corporation, after securing the requisite permission from the Municipal Corporation for bifurcating the land at Valnai and also securing the permission of converting its use to non-agriculture. The firm filed an application in this court seeking permission to enter into a contract of lease as one of the members of the petitioners undivided Hindu family was a minor. The petitioner valued the lands after valuing it by an authorized valued and this court granted permission to enter into a lease. The agreement of lease could not be gone through for certain reasons and a fresh valuation and the requisite permission was secured for entering into an agreement of lease, from this court.
2. The HUF of the petitioner was assessed to income-tax and wealth-tax and the petitioner filed returns for the relevant years, i.e., assessment year 1965-66 to assessment year 1970-71. The wealth-tax return filed by the petitioner for the years 1965-66, inter alia, stated that the assets of the petitioner's HUF included a share in the firm of M/s. Associated Lands and Developments Corporation. The petitioner stated that the principal assets of the said firm consisted of open lands which were originally waste has lands and now being slowly developed. It was further stated that the title to these lands is subject to various acquisition notices and municipal requisitions. The petitioner stated that the lands due to this fact has neither free nor open market. The next statement made by the petitioner should be stated in the exact words and it is as follows :
'Accordingly, the capital balance alone is shown here without making any adjustments therein, which question may be discussed on merits at the time of hearing.'
3. The share in the firm was valued at Rs. 4,22,373 and the net value of the total assets was shown as Rs. 4,28,040. The wealth-tax returns in respect of subsequent years, from assessment year 1965-66 onwards till 1971-72, contains an identical note as motioned in respect of the return for the year 1964-65, and the valuation in respect of the share of the petitioner in the firm of M/s. Associated Lands and Development Corporation was accordingly stated. The wealth-tax returns filed by the petitioner for the assessment years 1965-66 to 1967-68 were accepted by the 6th ITO, A-V Ward, Bombay, by his order dated January 13, 1969. The officer passed the assessment order after the petitioner appeared before him in response to a notice under s. 16(2) of the W.T. Act. The return filed in respect of the assessment year 1968-69 was accepted on February 26, 1969, while the return for the year 1969-70 was accepted on January 28, 1970, and the return for the year 1970-71 was accepted by the officer by his assessment order dated October 14, 1970. The petitioner was served by the Commissioner of Wealth-tax with a notice dated January 10, 1972, issued under the provision of s. 25(2) of the W.T. Act calling upon the petitioner to show cause why the W.T. assessment for the year 1969-70 should not be revised. The petitioner gave an explanation and the Commissioner of Wealth-tax dropped the proceedings by his order dated October 18, 1972. The Commissioner had also issued another notice in respect of the assessment year 1970-71 under s. 25(2) of the W.T. Act, but in respect of this assessment year an order was passed by the Commissioner of Wealth-tax on October 18, 1972, cancelling the assessment order passed in respect of the assessment year 1970-71 and directing that a fresh assessment should be made after taking into consideration the various facts including the fact that the Land Acquisition Officer had awarded Rs. 15 per yard in respect of the acquisition of part of the Valnai lands.
4. The petitioner received a notice on November 30, 1972, calling upon the petitioner to show case why the assessment orders in respect of the W.T. returns filed by the petitioner for the assessment year 1965-66 to assessment year 1970-71 should not be cancelled. The notice was issued under the provisions of s. 17 of the W.T. Act. The notice, inter alia, stated that the officer has reason to believe that the income of the petitioner had escaped assessment within the meaning of s. 17 of the W.T. Act and that the officer proposed to reassesses the net wealth that has escaped the assessment. The petitioner was called upon to file a fresh return within 35 days of the receipt of the notice. The notices were served upon the petitioner in respect of each assessment year, commencing form assessment year 1965-66 to assessment year 1970-71. It is also necessary to state at this juncture that the petitioner was also served with notices under s.148 of the I.T. Act, 1961, for reopening the assessment made in respect of the assessment year 1967-68 to assessment year 1970-71. The petitioner has filed the present proceedings to challenge the validity and legality of these notices issued under the provisions of s. 148 of the I.T. Act and s. 17 of the W.T. Act.
5. On behalf of the revenue, it was stated that the notices issued under s. 148 of the I.T. Act would not be pursued and in view of the statement section with the notices issued under s. 148 of the I.T. Act. In view of the statement of the revenue, the sole contention which survives for consideration in this petition is whether the notices served upon the petitioner under s. 17 of the W.T. Act are valid and legal.
6. Mr. Dastur, the learned counsel appearing for the petitioner, invited may attention to the provision of s. 17 of the W.T. Act. Section 17(1)(a) of the W.T. Act provides that where the WTO has reason to believe that by reason of the omission or failure on the part of the assessee to file a return under s. 14 or to disclose fully and truly all material facts necessary for the assessment and, as a result of which, the net wealth chargeable to assessment escaped assessment, then it was open to the WTO at any time within eight years to reopen the assessment and proceed to assess or reassess the net wealth. Section 17(1)(b) of the W.T. Act enables the WTO to reopen the assessment within a period of four years in cases where in consequence of any information in his possession, the WTO has reason to believe that though there is no omission or failure, as referred in clause (a), still the net wealth chargeable to tax has escaped assessment for any year, whether by reason of underassessment or assessment at too low a rate or otherwise. The learned counsel submitted that the provisions of this section clearly indicate that cls. (a) and (b) of s. 17(1) are independent of each other and the notices issued by the respondent-WTO did not state whether the action of reopening the assessment was proposed under s.17(1)(a) of under s. 17(1)(b) of the Act. It is undoubtedly true that the notice served upon the petitioner did not disclose whether the WTO proposed to take action under the provisions of s. 17(1)(a) or s. 17(1)(b) of the W.T. Act. On behalf of the revenue, a return was filed to the petition on March 21, 1979, and the return is sworn to by one Subray Laxminarayan Bhat, an ITO. This officer has neither issued the original assessment order, nor has issued the notices under s. 17 of W.T. Act, but he has sworn to the affidavit on the basis of the records in his possession. The learned counsel for the petitioner has several things to say in connection with this affidavit, but one need not go into all the grievances of the learned of the counsel as it is obvious from the contents of the return and especially from paras. 21, 23 and 26 that the WTO had issued the notice by relying upon the provisions of s. 17(1)(a) only. There is no reference in this return to the provisions of s. 17(1)(b) of the Act and the entire action taken by the revenue is dependent upon the satisfaction of the terms and conditions mentioned in s. 17(1)(a) of the W.T. Act.
7. To determine the true scope and ambit of the provisions of s. 17(1)(a), the learned council for the petitioner invited my attention to a passage at p. 897 from the books The Law and Practice of Income Tax by Kanga and Palkhivala. The learned counsel also placed strong reliance upon two decisions of the Supreme Court in the case of ITO v. Lakhmani Mewal Das : 103ITR437(SC) and in the case of ITO v. Madnani Engineering Works Ltd. : 118ITR1(SC) . The decision of the Supreme Court in the case of ITO v. Lakhmani Mewal Das : 103ITR437(SC) is in connection with the provisions of s. 147 of the I.T. Act which are in identical terms with the provision of s. 17 of the W.T. Act. The learned counsel submitted that the principle laid down by the Supreme Court while determining the true scope of s. 147 of the I.T. Act should be applied equally to cases covered by s. 17 of the W.T. Act. The submission is sound and must be accepted. The Supreme Court was observed that two conditions have to be satisfied before the ITO acquired jurisdiction to issue notice under s. 148(1) that the officer must have reason to believe that the income chargeable to tax had escaped assessment, and (2) that such income had escaped assessment by reason of the omission or failure on the part of the assessee to file a return or to disclose fully and truly all material facts necessary for the assessment for that year. Both the conditions must co-exist to confer jurisdiction on the officer. The Supreme Court further observed that the duty which is cast upon the assessee is to make a true and full disclosure of the primary facts at the time of the original assessment. Production before the ITO of the account books or other evidence from which material evidence could with due diligence have been discovered by the ITO will not necessarily amount to disclosure contemplated by law. The duty of the assessee in any case does not extend beyond making a true and full disclosures of primary facts. Once he has done that his duty ends. It is for the officer to draw the correct inference from the primary facts and it is not the responsibility of the assessee to advice the ITO with regard to the inference which he should draw from the primary facts. The Supreme court further observed that if the officer draws an inference which appears subsequently to be enormous, then a mere change of opinion with regards to that inference would not justify initiation of action for reopening the assessment. The further observation of the Supreme Court are crucial and they are as follows (p. 445) :
'The grounds or reason which lead to the formation of the belief contemplated by section 147(a) of the Act must have a material bearing on the question of escapement of income of the assessee from assessment because of his failure or omission to disclose fully and truly all material facts. Once there exist reasonable grounds for the Income-tax Officer to from the above belief that would be sufficient to clothe him with jurisdiction to issue notice. Whether the grounds are adequate or not is not a matter for the court to investigate. The sufficiency of the grounds which induce the Income-tax Officer to act is, therefore, not a justiciable issue. It is, of course, open to the assessee to contend that the Income-tax Officer did not hold the belief that there has been such non-disclosure. The existence of the belief can be challenged by the assessee but not the sufficiency of the reason for the belief. The expression 'reason to believe' does not mean a purely subjective satisfaction on the part of the income-tax Officer. The reason must be held in good faith. It cannot be merely a pretence. It is open to the court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose of the section. To this limited extent, the action of the Income-tax Officer in starting proceedings in respect of income escaping assessment is open to challenge in a court of law.'
8. This decision of the Supreme Court makes two things clear. First, it is the duty of the assessee to make a true and full disclosure of primary facts and, secondly, the power to reopen the assessment is not dependent merely on the fact of failure or omission to disclose fully and truly all material facts, but, before the officer issues the notice reopening the assessment, he must come to the conclusion that the fact of non-disclosure had led to the escapement of tax on the assessee. It is necessary that there should be a nexus between the fact of non-discourse and escapement of the assessment and unless that fact is established, it is not open to the officer to issue a notice directing the reopening of the assessment.
9. The Second decision relied upon by the learned counsel is also in respect of the reopening of the assessments under the provisions of s. 147(a) of the I.T. Act. The facts involved in the case before the Supreme Court were that the assessee was assessed by allowing deductible expenditure in respect of interest paid by the assessee to creditors. Subsequently it was noticed by the ITO that the transactions of loan represented by the hundis were bogus and no interest was paid by the respondent to any of the creditors shown in the hundis and the interest was wrongly allowed as a deduction and hence a part of the income of the respondent had escaped assessment by reason of the failure of the respondent to disclose fully and truly all material facts necessary for the assessment. On the facts, the Supreme Court came to the conclusion that in fact the assessee had made a false statement and had secured advantage at the time of the original assessment, but the Supreme Court placing reliance upon its earlier decision in the case of CIT v. Burlop Dealers Ltd. : 79ITR609(SC) held that a mere false statement would not confer jurisdiction upon the ITO to reopen the assessment. The Supreme Court found that the assessee had disclosed fully and truly all material facts necessary for the assessment and it was for the ITO to decide whether the documents produced by the assessee were genuine or fall. The Supreme Court approving its earlier decision held that the ITO had no jurisdiction to issue notice for reopening the assessments. In view of these two decisions of the Supreme, Court, the learned counsel submitted that, in the present case, the WTO had no jurisdiction to reopen the assessment for the years 1965-66 to 1970-71, as the assessee had not failed to disclose truly and faithfully all material facts necessary for the assessment. In view of the dictum laid down by the Supreme Court, the questions which really falls for determination in this petition is whether the petitioner had made a full and true disclosures of all material facts necessary for the assessment in the relevant assessment years.
10. The learned counsel placed reliance upon the returns filed by the petitioner in the respective years and especially on the annexure to the return which states that the assessable income of the petitioner was a share in the firm of M/s. Associated Lands and Development Corporation. The learned counsel contended that the petitioner wanted the WTO to assess the petitioner by relying upon the provisions of s. 7(2)(a) of the W.T. Act. Section 7 of the W.T. Act provides for determination of the value of the assets and 7(1) provides that subject to any rules made in this behalf, the value of any assets other than cash, shall be estimated to be the price which in the opinion of the WTO it would fetch, if sold in the open market on the date of the valuation. The assessee has stated in the return that the lands held by the partnership concern cannot be sold in the open market on the date of the valuation in view of the land acquisition notices and the municipal requisition. The assessee, thereupon, requested the WTO to assess the value of the lands by reference to the provisions of s. 7(2)(a) of the W.T. Act. The said sub-section provided the where the assessed is carrying on a business for which accounts are maintained by him regularly, the WTO may determine the net value of the assets of the business having regard to the balance-sheet of such business on the date of valuation and making such adjustments therein as may be prescribed.
11. Mr. Dastur contended that in the return filed by the assessee, it was stated that the question of making adjustments as contemplated by the provisions of s. 7(2)(a) of the Act could be discussed on merits at the time of the hearing and it was obvious that the assessee desired that the WTO should determine the value of lands as contemplated under s. 7(2)(a). The learned counsel submitted that the assessee had made full and true disclosure of his assets which included immovable property at Valnai and the assessee was relying upon the balance-sheets in its possession. Mr. Dastur submitted that it was not necessary for the assessee to produce evidence in the shape of balance-sheet or any other material at the time of the filing of the return and it was open to the WTO to determine it before passing order of assessment. It is undoubtedly true that the WTO has got absolute powers to call upon the assessee to substantiate the contents of the return by reference to evidence in his possession and the WTO has also got the power to reject the evidence produced by the assessee. In the present case, the WTO held an enquiry under the provision of s. 16(3) of the W.T. Act and after making the enquiry found that the valuation mentioned by the assessee in its return was accurate and accepted the same. The learned counsel for the petitioner is right in his contention that nothing further is required to be done by the assessee and no material was suppressed from the WTO in the return filed by the petitioner. The contention of the learned counsel is just and deserves to be accepted.
12. On behalf of the revenue reliance was placed upon two or three facts to support the order issued by the WTO under s. 17(1)(a) of the W.T. Act. As mentioned earlier, the revenue relies solely upon the provisions of s. 17(1)(a) of the Act and it is the case of the revenue that the assessee has not disclosed the true and material fats in its return and that fact has resulted in the escapement of the assessment for the relevant assessment years. Turning to the return filed on behalf of the revenue, I find that 4 grounds are made out in support of the notices issued by the WTO under s. 17 of the W.T. Act. In the first instance, it is stated that in the return submitted by the 4 assessees, i.e., the petitioner, his two brothers and their mother, no immovable property was shown. The statement is obviously inaccurate. On behalf of the revenue, the original returns filed by the petitioner, his two brothers and mother were produced in the court and those return clearly indicate that the annexures to each of the return contain this statement that the petitioner holds a share in the firm of M/s. Associated Lands and Development Corporation and the principal assets of the firm are lands. In view of this fact, is it difficult to appreciate how the officer made this statement in the return after perusing the records in his possession. Mr. Kotval, the learned counsel appearing for the respondents, tried to defend the action of the officer by contending that what was suggested by the statement was that no reference was made to the immovable property in the column which is intended for stating and describing the immovable property. The suggestion of the learned counsel is undoubtedly brave, but it is impossible to conceive how the WTO proceeded to make the statement by relying upon such technicality. It is obvious that the statement made by the WTO in the return is wholly unwarranted and if the notices are issued under s. 17 of the Act placing reliance upon such material, then such notices deserve to be quashed.
13. The second contention raised on behalf of the revenue is that the balance-sheet of the firm of M/s. Associated Lands and Development Corporation of which the petitioner is one of the partners was not produced along with the return and that amounts to suppression of relevant material. It is difficult to accede to this submission. The duty cast upon the assessee is to make a true and full disclosure of all the material facts and once the primary fact of ownership of lands is disclosed then it is futile to contend that the failure to produce evidence in the shape of the balance-sheet along with the return amounts to a suppression of relevant material enabling the WTO to reopen the assessment. It, must be noticed that the assessee desired that its assets should be valued as per the provision of s. 7(2)(a) of the W.T. Act and the provision of the section itself shows that the WTO has to assess the value of the lands by reference to the balance-sheets of the firm. The assessee, by requesting the WTO to asses under the provisions of s. 7(2)(a) of the W.T. Act, has made it clear that the firm holds the balance-sheet. It was open to the officer to call for the balance-sheet from the assessee at the time of the initial assessment order. There is no mandatory provision under the Act which requires the assessee to produce his evidence along with the return and the contention of Mr. Kotval that failure to produce the balance-sheet amounts to non disclosure of the true and material facts is without any substance and must be repelled. In this connection Mr. Kotval also place reliance upon the provisions of r. 3(2) of the W.T. Rules which require that where the assessee is carrying on a business, a copy of the balance-sheet shall also be furnished along with the return of the net wealth. It requires to be stated that the failure to produce the balance-sheet along with the return of the net wealth is not so fatal as to hold that the assessee had failed to disclose the material and true facts in his return. It cannot be overlooked that the filing of the balance-sheet would only enable the WTO to find out the truth of the statements made in the return and it is not a primary facts to find out the assets of the assessee. Mr. Dastur, the learned counsel appearing for the petitioner, in this connection, pointed out that the provisions of sub-r. (2) of r. 3 is attracted provided the assessee was carrying on a business and, in the present case, it cannot be said that the partner was carrying on a business and, in the present case it cannot be said that the partner pH was carrying on a business on the date when the return was filed. In any event, I am not inclined to hold the the failure to produce the balance-sheet amounts to non-disclosure of primary facts in the possession of the assessee.
14. The next ground stated in the return for reopening the assessment is that each one of the partners had not declared the value of the ownership flats at Shankar Darshan, Vile Parle, Bombay. Mr. Dastur, in this connection, pointed out that the statement is made by the WTO in the return without taking any care to find out whether each of the partner held flats in Shankar Darshan, Vile Parle, or not. Mr. Dastur contended that except one of the partners, none of the other partners, held any flat in Shankar Darshan and only one of the partners-Harishkumar S. Inamdar-held a single flat in this building. The learned counsel for the petitioner invited my attention to the return filed by this partner which specifically states that the assessee is the owner of a flat in Shankar Darshan for the relevant assessment years. As the solemn statement was made on oath in the return by the WTO, I called upon Mr. Kotval to point out any material in his possession which would indicate that each of the partners holds flats in Shankar Darshan but Mr. Kotval very fairly stated, after taking instruction from the department, that there is no such material in their custody. It is obvious that the statement made in the return is obviously inaccurate and misleading. It would have been much better it the WTO has taken more precaution before making such a statement. It is obvious that if the notices under s. 17 of the Act are issued by placing reliance upon such material which is found to be untrue, then such notices suffer from infirmity which can never be cured.
15. Lastly, Mr. Kotval contended by placing reliance upon the averments made in the return by the WTO that the officer has received information on September 27, 1972, which lead to an inference that the four partners had estimated the value of the land at a very low rate. It is stated in the return that after this report was received, full investigation was made and it was found that the petitioner had not disclosed fully and truly all material facts necessary for the assessment. It is difficult to imagine how a WTO assumes jurisdiction merely because at a subsequent date he finds that the earlier assessment order made by him was inaccurate, because the valuation of the property was not proper. The mere fact that the valuation stated by the assessee in its return was inaccurate is not sufficient to assume jurisdiction and issue notice under s. 17 of the W.T. Act for reopening the assessment. In my judgment the grounds given by the WTO in the return for issuing the notices under s. 17 of the W.T. Act are totally incorrect and unwarranted and the notices were issued by assuming jurisdiction when there was none. Obviously, the notices issued by the WTO deserve to be quashed.
16. In the petition which was filed on January 24, 1973, the petitioner has sought the relief of quashing and setting aside the notices dated November 13, 1972, issued by the ITO under s. 148 of the I.T. Act and the notice issued by the WTO under s. 17 of the W.T. Act. As stated hereinabove, the department has categorically stated that they are not proceeding with the notices issued under the I.T. Act and, consequently, no relief is given to the petitioner in that connection. The petitioner is obviously entitled to the relief of issuing the notice under the W.T. Act and, accordingly, the rule is made absolute in terms of prayer(a) of the petition.
17. At this stage, Mr. Dastur, the learned counsel appearing for the petitioner, points out that during the pendency of the petition, the WTO has reassessed the petitioner and the orders reassessing the petitioner have also been passed. The petitioner has been served with the fresh assessment order on March 13, 1979, and the petitioner is required to pay the tax accordingly. Mr. Dastur, submits that, in view of my judgment, the fresh assessment order passed by the 1st respondent are required to be quashed and the petitioner is requesting permission to amend the petition and to seek this additional relief. Accordingly, a draft amendment is handed over to me. Mr. Kotval, for the revenue has no serious objection to the grant of the amendment. Accordingly, I grant the amendment and direct that the petition should be amended within a period of one week from today.
18. The petitioner is also entitled to the additional relief. The orders passed by the 1st respondent making fresh assessments in respect of the assessment years 1965-66 to 1970-71, are hereby quashed and set aside. In the circumstances of the case, there will be no order as to costs.