Jaganmohan Reddy, J.
1. The following questions have been referred to us by the Income Tax Tribunal at Bombay, in compliance with our directions under Section 66 (2) of the Indian Income Tax Act (hereinafter called the Act).
(1) Whether, on the facts and circumstances of the case, the proceedings under Section 34 of the Act have been validly initiated.
(2) Whether, on the facts and circumstances of the case, there was any material for the Appellate Tribunal to hold that the amount of Rs. 5,000/- for 1944-45, Rs. 11,000/- for 1940-47 and Rs. 10,000/-for 1947-48 represented the secret profits of the assessee from undisclosed sources.
(3) Whether on the facts and circumstances of the case, there was any material for the Appellate Tribunal to hold that the credit of Rs. 3,263/- for 1944-45. Rs. 4,712/- for 1945-46 and Rs. 4,664/-for 1946-47 in the Andhra Bank in the account of Prafulla Chandra Sudha Khaddar Bandar represented the secret profits of the assessee.
The assessee carries on business in rice and other commodities at Vijayawada. For the assessment years 1944-45, 1945-46, 1946-47 and 1947-48, the Income Tax Officer made assessments on 8-5-1946, 16-5-1946, 15-3-1947 and 12-3-1948 respectively. Later, the Income Tax Officer discovered that income under two heads had escaped assessment for all these years one under the head fictitious loans and the other deposits in the Andhra Bank in the account of Prafulla Chandra Sudha Khaddar Bhandar, in which the assessee had a 273rd share. Under the former head for the assessment years 1944-45, 1948-47 and 1947-48 a sum of Rs. 5,000/-, Rs. 11,000/-and Rs. 10,000/- respectively and under the latter head for all the four assessment years, a sum of Rs. 3,2637-, Rs. 4.712/-, Rs. 4,6647- and Rs. 9,600/-, respectively were said to have escaped assessment.
In the circumstances a notice under Section 34 of the Act was issued in respect of these assessment years and the assessee was reassessed on these amounts for the respective years as escaped income derived from undisclosed sources. On appeal, the Appellate Assistant Commissioner while maintaining the assessment under the first head, excluded the additions for the respective four assessment years under the second head. Against this order both the assessee and the department appealed to the Tribunal which dismissed the assessee's appeal under the first head.
The department's appeal was allowed with respect to three, items under the second head pertaining to the assessment years 1944-45, 1945-46 and 1946-47, and was dismissed in respect of Rs. 9,600/- for the assessment year 1947-48, as in its opinion the assessee had satisfactorily explained that the deposit in the Bank could not be treated as income from undisclosed sources. With respect to the objection of the assessee that the proceedings under Section 34 of the Act could not be initiated by the Income Tax Officer as these amounts were neither concealed, nor can it be said that the particulars of the income were in any way suppressed, the Tribunal held that this contention was untenable in the following words, viz.,
'The first objection taken by the assessee before us is that Section 34 proceedings ought not to have been initiated in this case. We agree with the Appellate Assistant Commissioner that Section 34 (1) (a) has been rightly applied. The proceedings were initiated under the amended section (Act of 1948) and no question of discovery by the Income Tax Officer arises. It is enough that income has escaped assessment and there is no doubt that in this case it has.'
2. The first question involves the interpretation of Section 34 and its application to the facts and circumstances of this case. The relevant provisions of Section 34, as amended in 1948 are as follows: 34 (1) if-
(a) the Income Tax Officer has reason to believe that by reason of the omission or failure on the part of an assessee to make a return of his income under Section 22 for any year or to disclose fully and truly all material facts necessary for his assessment for that year, income, profits or gains chargeable to income-tax have escaped assessment for that year, or have been under assessed, or assessed at too low a rate, or have been made the subject of excessive relief under the Act, or excess loss or depreciation allowance has been computed, or
(b) notwithstanding that there has been no omission or failure as mentioned in Clause (a) on the part of the assessee, the Income-lax Officer has in consequence of information in his possession reason to believe that income, profits or gains chargeable to income-tax have escaped assessment for any year, or have been under assessed, 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 (a) at any time within eight years and in cases falling under Clause (b) at any time within four years of the end of that year, serve on the assessee, or, if the assessee is a company, on the principal officer thereof, a notice containing all or any or the requirements which may be included in a notice under Sub-section (2) of Section 22 and may proceed to assess for reassess such income, profits or gains or recompute the loss or depreciation allowance; and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section:
It will be observed that before the amendment in 1956, the Incometax Officer had power to reopen assessments if they fall under Sub-section (1) (a) within eight years and within four years if they fall under Sub-section (1) (b). The period of eight years rescribed for cases falling under Sub-section (1)(a) has now been deleted by section 18 of the Finance Act of 1956 which gives the Income-tax Officer power to reopen the assessments falling under that clause at any time without prescribing any time limit. It is not denied that if Sub-section (1) (a) applies, there is no bar of limitation, but if Sub-section (1)(b) applies, the reassessment for 1944-45, 1945-40 and 1946-47 would be barred.
For the purposes or Clause (a), the Income-tax Officer must have reason to believe, (i) that the assessee has omitted or failed to make a return of his income under Section 22 for any year, or (ii) failed to disclose fully and truly all material facts necessary for his assessment for that year, the income, profits or gains chargeable to income-tax, and that by reason of any of the two above, income has escaped assessment or has been assessed at too low a rate or has been the subject of excessive relief under the Act or excessive loss or depreciation allowances have been made.
If there has been no omission or failure as mentioned under Clause (a) on the part of the assessee, for the purposes of Clause (b) if the Income-tax Officer, in consequence of information in his possession, has reason to believe that income, profits or gains chargeable to income-tax have escaped assessment etc. he gets jurisdiction to issue a notice and reassess the escaped income. Before 1939 the Income-tax Officer had very wide powers in that where, for any reason, the income, profits or gains chargeable to income-tax had escaped assessment etc. he could exercise powers thereunder for reassessment of such Income.
But in 1939, the Legislature restricted that power by limiting the jurisdiction of the Income-tax Officer to cases, where in consequence of definite information which has come into his possession, he discovers that income, profits or gains have escaped assessment in any year etc. The Legislature retraced its steps and removed this limitation in 1948. Clause (a), by the amendment, only requires that the Income-tax Officer must have reasons to believe that on account of the failure of the assessee to make a return, or to disclose full and material particulars, income has wholly or partly escaped assessment.
This is a subjective test showing that the belief must be that of an honest and reasonable person based upon reasonable grounds which, however, would exclude his acting on mere suspicion, gossip or rumour. Clause (b) which takes the place of the old Sub-section (1), requires the Income-tax Officer to have in his possession information and in consequence of such information he must have reason to believe that income has escaped assessment. The words 'definite' 'come into' and 'discovers' have been omitted in Clause (b) of the present Sub-section (1), with the result that the decisions under the old section no longer apply in so far as they were based upon these expressions in the old section.
3. In so far as Clause (a) is concerned, it is not the case that the assessee has not furnished any return, but that he has not fully and truly disclosed all material facts necessary for his assessment for the respective years in question, Learned advocate for the assessee contends that the items relating to the loan were entered in his books which were produced before the Income-lax Officer and that after examining them if he has accepted them, it cannot be said that the assessee has not disclosed all material facts fully or truly. In so far as the deposits in the Andhra Bank in the account of Prafulla Chandra Sudha Khaddar Bhandar is concerned, he says that they do not pertain to the assessee, but to a registered firm under that name and if there is any nondisclosure of material facts, it is by that firm and that firm alone can be reassessed. In fact reassessment proceedings under Section 34 were taken against that firm and dropped.
4. Learned Advocate for the department, on the other hand, contends that the mere production of the account books and the entry of the loans in those books do not mean that the assessee has disclosed the material facts fully and truly and in so far as the deposits in the account of Prafulla Chandra Sudha Khaddar Bhandar are concerned, the assessee being a partner in that firm, has utilised that account for the purposes of suppressing income from undisclosed sources. The fact that these deposits do not find an entry in the firm's accounts justifies the Income-tax Officer in holding that these amounts were not disclosed.
The learned advocate further contends that ii there has been a suppression of material facts under any of the two heads specified above, the Income-tax Officer would be justified in initiating proceedings under Section 34(1) (a), after which he can reassess the entire escaped income under either of the heads. If this contention of his is not accepted, then even under Clause (b) of Sub-section (1) of section 34, the Income-tax Officer can initiate proceedings because of the information in his possession that the items of loan and deposits had escaped assessment, which [information is not necessarily confined to information received from external sources, but from the records also.
This contention is demurred to by the learned advocate for the assessee who says that the Income-tax Officer cannot take any action under this section merely because he happens to change his opinion or to hold an opinion different from that of his predecessor, on the same set of facts. To do so would be to allow him deliberately to make piecemeal assessments. In support of this contention, he relies on the finding of the Appellate Assistant Commissioner expressed in the following words:
'This is clearly a case where the Income-tax Officer who made the original assessments set, part of the appellant's income, free from assessment on account of an error of judgment on his part. He proceeded on the assumption that the ostensible was the real, and that the pronotes executed by the appellant and sums covered by these promotes were genuine and investments of capital. That explains the demand that he raised under Section 18 for tax in respect of interest claimed to have been paid to the alleged nonresident loan creditors.'
It may here at once be stated that the Appellate Assistant Commissioner while so holding was of the view that another Income-tax Officer or for that matter even the same Income-tax Officer cannot be estopped from setting in motion proceedings to set right the error.
5. With respect to the first question, viz., whether the case falls under Section 34(1)(a) or (b), it may be stated that the mere fact that certain entries are made in the account books produced before the Income-tax Authorities does not show that the assesses has made a true and full disclosure of all material facts. The explanation to Sub-section (1) clearly negatives any such assumption, because it lays down that production before the Income-tax Officer of account books for other evidence from which material facts could with due diligence have been discovered by him will not necessarily amount to disclosure within the meaning of that section.
In this case, however, not only were the entries of the loans found in the account books, but also the Income-tax officer raised a demand for tax to respect of the interest claimed to have been paid to the alleged non-resident loan creditors. It is, therefore, argued that these borrowings were brought to the notice of the Income-tax Officer who accepted the assessee's claim, and as such it is not a case of non-disclosure of material facts fully or truly. In our view, where income escapes assessment due to the Income-tax Officer's inadvertence or negligence or failure to examine properly the account books produced by the assessee, the Income-tax Officer would not he lettered in invoking the above provisions.
The provisions of Section 18 are only designed to facilitate easy collection of revenues by providing for deduction at source, but that does not justify the conclusion that an order made under Section 18, that all material facts were considered either at the time of collection under Section 18 pr at the time of assessment in order to hold that the Income-tax Officer had after directing his mind to the relevant facts accepted the borrowings as correct.
That apart, in so far as the deposits in the bank account of the Khaddar Bhandar are concerned, the Income-tax Officer found that these amounts were deposited in the bank account of the firm without either bringing them into the books of the firm or showing them in the books of the assessee. The contention of the assessee that these amounts have nothing to do with him, and that no liability can be foisted on him for any omission by the firm to show them in their accounts, is controverted by the Income-tax officer who held that these amounts did not belong to the firm and that in fact it was admitted on behalf of the firm that these monies did not belong to it and represented accommodation cheques credited on behalf of some of the assessee's friends.
The Income-tax Officer did not accept this explanation of the firm and considered that the deposits which aggregated to Rs. 4,712/- represented the assessee's undisclosed income which escaped assessment tor the assessment year 1945-46. Similarly for the year 1944-45 a sum of Rs. 3,263/- and Rs. 4,664/- for the year 1946-47 were said to be the income of the assessee that escaped assessment. If the Income-tax Officer has reason to believe that due to the failure of the assessee to disclose these facts, income has escaped assessment, he can start proceedings under the provisions of Section 34 (1)(a). In our view, the facts and circumstances of the case show that the proceedings under Section 34 have been validly initiated.
6. The further questions to be considered are, whether there is any material for the Tribunal to hold that the amounts shown as borrowings and deposits in the Andhra Bank represent the secret profits of the assessee. In so far as the borrowings are concerned, the Income-tax Officer found that these sums were borrowed from persons in the Nalgonda District then forming part of the Nizam's State. Though the assessee produced the discharged pronotes, it was found that most of the lenders were email agriculturists or petty businessmen whose income does not warrant the lending of those sums.
In the assessment year 1944-45, the borrowings were from a person who had a khaddar shop fetching an annual income of Rs. 2,500/- and Rs. 2,000/-from 30 acres of land. In the circumstances it was hardly likely that this person with an income of Rs. 4,500/- would lend Rs. 5,000/- to a big businessman in Bezwada or that a businessman of the status of the assessee would be in need to borrow monies from such persons who went all the way to Bezwada to lend him money. The creditor could not be examined, but his son was examined and it was found that no account books were maintained for the khaddar shop.
The attestors of the pronote and the clerks were also examined and the Income-tax Officer came to the conclusion that this amount was a fictitious borrowing by the assessee. Similarly in the case of the assessment year 1946-47, two sums of Rs. 6,000/-and Rs. 5,000/- were alleged to have been borrowed, the former from one Jagini Mahanarasimham, and the latter from Nelanti Lakshminarasimham on the same date. Both are residents of Chandur of Nalgonda District. While the discharged pronotes were no doubt produced by the assessee, the evidence our behalf of the creditors summoned by the Income-tax Officer did not establish that the loans were genuine ones.
The creditor's undivided son deposed that the family has trade in kirana and handloom and mill doth. The annual income from these three sources fetched about Rs. 3,000/-. The explanation given by this person that due to Razakar troubles, they began to sell away gold and keep their monies elsewhere in deposits and that the loan to the assesses was said to have been given by his father from out of the sale proceeds of gold and the savings by then made from their businesses, was disbelieved, probably because there were no disturbances of any nature in 1945 when India was still in a State of war. The further fact that he did not maintain accounts was also disbelieved.
The preson who attested the promote, Potti Seshagiri Rao, was also found to be a clerk of Prafulla Chandra Sudha Khaddar Bhandar of which the assessee is a partner, while the other person who attested it was his friend. It was also found that this was the only loan which the creditor is supposed to have given. Similarly the creditor who lent the other sum of Rs. 5,000/- was also examined. He deposed that he gave the loan to the assessee out of the savings from handloom cloth business which he was carrying on for the last ten years, and that be had himself taken this money to Bezwada to give to the assessee.
He says that because three or four persons of his village give loans to the assessee, whom he knew through his clerk, he also gave the money. This creditor is also a small businessman dealing in hand-loom cloth. He denied having maintained accounts. The persons who attesled the pronotes at the time of the borrowal and repayment, viz., Kurmala Anjaneyulu, Venkayala Gopalarao and Surempalli Madana Gopalarao, are all clerks in retail cloth shop of the firm.
In these circumstances, no reliance was placed on them. The other amount of Rs. 10,000/- for the year 1947-48 was similarly disbelieved after recording evidence of the creditor, one Nelanti Tripurai. He is also a native of Chandur and his undivided son and the attestors were examined. These attestors were clerks and it was found that the business of the creditor was not such as would justify lending such a substantial sum of money. The attestors as in the previous instances were none other than the clerks of the partnership firm of Prafulla Chandra Sudha Khaddar Bhandar and some others were the assessees friends.
7. In so far as the deposits in the Andhra Bank were concerned, the assessee's explanation was that they consisted of small amounts representing accommodation cheques; but the assessee was not able to establish this fact. In these circumstances the Income-tax authorities were justified in holding that these items formed part of the income of the assessee from undisclosed sources. In our view there was ample material for the Income-tax authorities to come to that conclusion.
8. In the result, our answers to all the three questions are in the affirmative. Let the reference be answered accordingly with costs to the department. Advocate's fee Rs. 250/-.