These three connected writ petitions have been filed by the Hyderabad Allwyn Metal Works Ltd. and all of them can be conveniently disposed of by a single judgment as they raise common questions of fact and law. In these petitions, the petitioner company challenges the legality of the three notices dated March 20, 1959, issued to it by the Income-tax Officer, Special Investigation Circle (the first respondent herein), under section 34 of the Indian Income-tax Act in respect of the three assessment years 1950-51, 1951-52 and 1952-53, and seeks an appropriate writ, order or direction in each case prohibiting the Income-tax Officer from taking any action on the basis of the concerned notices.
The sum and substance of the contention on behalf of the petitioner is that the conditions precedent to the exercise of jurisdiction under section 34 of the Indian Income-tax Act did not exist in the present cases, and consequently, the Income-tax Officer had not jurisdiction to issue the three impugned notices, the conditions precedent being, (1) that the Income-tax Officer must have reason to believe that income, profits or gains chargeable to income-tax have escaped assessment for the relevant years or have been under-assessed, and (2) that he must have also reason to believe that such a result has been brought about by the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that year. It was contended that in the present cases there was no material whatever upon which the Income-tax Officer could have entertained such reasonable belief.
To decide the issues involved in these cases, it is necessary to set out in chronological order the facts leading up to the filing of these writ petitions.
The petitioners assessments for the years, 1950-51, 1951-52 and 1952-53, had been completed on October 24, 1950, March 19, 1952, and March 30, 1957, determining a loss of Rs. 5,03,872, Rs. 4,51,625 and Rs. 7,54,617 respectively. The loss for the assessment year 1950-51 was subsequently revised to Rs. 6,74,964 and for the year 1952-53 to Rs. 7,57,223. In the course of the assessment proceedings for the year 1954-55, the then Income-tax Officer, Special Investigation Circle, Mr. D.S. Sarma, made a detailed investigation of the account books maintained by the petitioner. In the course of the examination of the accounts for the year 1954-55, the Income-tax Officer had occasion to ascertain the gross profit margins of similar concerns engaged in the manufacture of steel furniture and he discovered that the gross profit returned by the petitioner was phenomenally low. It was also noticed that the cash book maintained by the petitioner was defective in that on various dates withdrawals were much in excess of deposits for which there was no convincing explanation. Further, the Income-tax Officer noticed numerous discrepancies between stock balances as per the stock ledger cards and actual balances as per physical verification. On several dates it was found that there were variations and shortages for which there was no satisfactory explanation. These and various other defects came to light as a result of the meticulous scrutiny of the accounts pertaining to the assessment year 1954-55. These discrepancies and inaccuracies naturally gave the Income-tax Officer food for thought since the petitioner had shown huge losses in the previous years as well; and after investigation, he was prima facie satisfied that by resorting to similar devices, the petitioner had got away with under-assessments for the years 1950-51, 1951-52 and 1952-53. It is the case of the department that the Income-tax Officer had in fac called for the cash books of the three accounting years corresponding to the three assessment years 1950-51, 1951-52 and 1952-53 and, on a scrutiny of those books, had found that the accounts had been cooked up. By manipulating cash, raw materials, closing stocks and expenses, the petitioner company had shown huge losses which had been accepted by the assessing authority and allowed to be carried forward. It is the further case of the department that, on the data available to him, the Income-tax Officer had reason to believe that the petitioners income for those three years had escaped assessment by reason of the failure on the part of the petitioner to furnish true particulars of its income and expenditure.
It may be mentioned here that the case of the petitioner is that the Income-tax Officer had not at all looked into the petitioners account books for the accounting years 1948-49, 1949-50 and 1950-51 because they had not been produced before him in the course of the assessment proceedings for the year 1954-55; and that the Income-tax Officer had acted on mere suspicion and conjecture in issuing the notices in question.
To proceed with the course of events, on February 5, 1959, the Income-tax Officer, as required by the proviso to section 34 of the Act, made a report to the Commissioner setting out the reasons for his belief that there had been escapement of assessment for the three years and requesting the Commissioner to accord his sanction for the issue of notices under section 34(1)(a) of the Act. The Commissioner, being apparently satisfied that they were fit cases for reopening the assessments, gave the requisite sanction on February 17, 1959. Thereafter, on March 20, 1959, the Income-tax Officer issued the three impugned notices under section 34(1)(a) of the Act in respect of the three assessment years 1950-51, 1951-52 and 1952-53 calling upon the petitioner to submit fresh returns not later than April 28, 1959, of its total income assessable for the three accounting years relating to the said three assessment years. These notices were served on the petitioner on March 21, 1959.
On April 24, 1959, the petitioner wrote to the Income-tax Officer requesting him to grant it time for filing the returns till the first week of June, 1959. The Income-tax Officer complied with this request. Again on May 29, 1959, the petitioner sent another letter requesting for extension of time till the 20th next month to submit the returns on the ground that its legal adviser, Mr. M.J. Swamy, was out of station and its employee, Mr. Gopalrao, was also on leave. The Income-tax Officer acceded to the petitioners request. Once again on June 15, 1959, the petitioner asked for time till the 15th July for filing the returns. Time was granted accordingly. By another letter dated July 22, 1959, a further extension of time was asked for till the 10th of August on the ground that the returns were not ready. This request also was granted by the Income-tax Officer. Ultimately, on July 29, 1959, the petitioner filed its returns for the three years with a covering letter requesting the Income-tax Officer to supply the petitioner with a copy of the grounds on which action under section 34(1)(a) of the Income-tax Act had been taken and complaining that the notices issued to it did not give the necessary particulars.
Subsequently, notices under sections 23(2) and 22(4) of the Act were issued to the petitioner on December 31, 1959, fixing the date of hearing as January 16, 1960. Thereafter, the matter was adjourned from time to time and on August 4, 1960, Mr. V. Ramamurthy, Income-tax Officer, Special Investigation Circle, who had succeeded Mr. D.S. Sarma, again issued notices under sections 22(4) and 23(2) of the Act fixing the enquiry for August 17, 1960. On that day, one Y.V. Anjaneyulu of Messrs. S.G. Dastagir and Co. appeared before the Income-tax Officer with a letter from the petitioner company stating that the chief accounts officer and the concerned accountant of the company were on sick-leave and were, therefore, unable to attend the office, and requesting the Income-tax Officer to adjourn the matter. The latter acceded to the request and posted the enquiry to August 24, 1960. On that date the Income-tax Officer had also fixed a programme of visit to the petitioners factory as per the direction of the Appellate Assistant Commissioner in the course of the appellate proceedings for the year 1954-55, wherein the company was contending that its factory should be classed as a second class factory for purposes of depreciation, whereas the assessing officer had taken it as a first class factory. The enquiry itself was to be taken up in the afternoon on that date after the Income-tax Officers visit to the factory. The Income-tax Officer finished his visit to the factory by 2 p.m. At 2 p.m. the companys representative requested the Income-tax Officer to take up the enquiry on another day and further promised to telephone to him at 4 p.m. with regard to the exact date to which the cases may be adjourned for enquiry. At that stage, the chief accounts officer of the petitioners company informed the Income-tax Officer that they had already filed writ petitions in the High Court in respect of the assessment proceedings and obtained orders of ad interim injunction. At about 4 p.m. the same day, i.e., August 24, 1960, the chief accounts officer of the company went to the Income-tax Officers office and filed a letter enclosing copies of the orders of temporary injunction passed by the High Court on August 23, 1960. It may be mentioned here that the writ petitions had been filed on August 22, 1960, and had come up for orders before this court on August 23, 1960. Rules nisi had been issued on that day orders of interim injunction passed. Yet the Income-tax Officer had been kept in the dark about all this.
It will be seen from the foregoing narration of facts that the writ petitions were filed in the High Court on August 22, 1960, that is to say, one year and five months after the impugned notices had been issued to the petitioner, and more than one year after the petitioner had filed its fresh returns for the three years in question in pursuance of those notices. Furthermore, the petitioner had induced the Income-tax Officer to grant extensions of time for filing the returns and to adjourn the enquiry from time to time on one ground or another. The inordinate delay in filing these writ petitions, coupled with the conduct of the petitioner, by itself disentitles it to invoke the extraordinary jurisdiction of this court under article 226 of the Constitution. On this ground alone, the writ petitions deserve to be dismissed. I may add that, had I known all the above facts, I would have dismissed these writ petitions in limine.
Even on the merits, there is little force in contentions raised on behalf of the petitioner. The first contention was that the notices in question were, according to the learned counsel, 'blank notices' and did not give any indication of the action proposed to be taken by the Income-tax Officer. The notices issued in these cases were in printed form and it is true that none of the clauses contained therein was scored out. But the printed form does mention that it is a notice under section 34 of the Indian Income-tax Act. Section 34 does not prescribe any standard form of notice; all that the section requires is that a notice containing all or any of the requirements which may be included in a notice under section 22(2) shall be served on the assessee. The notices in question contain all the contingencies contemplated by sub-section (1) of section 34. It is well settled that it is not necessary that a notice under this section, calling for a return, should specify the item or items of income which have escaped assessment or indicate whether it is issued under clause (a) or clause (b) of sub-section (1). In the present cases, the petitioner was fully aware of the true import of the notices and the petitioner did file the returns as required by the notices. In these circumstances it is idle for the petitioner to complain that it has been misled by the form of the notices.
The main contention on behalf of the petitioner was that, issuing the notices under section 34, the Income-tax Officer could not have had reason to believe that there had been omission or failure by the petitioner to disclose fully and truly all material facts necessary for its assessment for the three years in question. It was argued that the Income-tax Officer had not issued any summons for the production of the account books relating to the relevant accounting years, nor had the books been produced before him. It is asserted in the affidavit filed in support of these writ petitions by the chief accounts officer of the petitioners company and in the 'rejoinder-affidavit' filed by the assistant secretary of the company that the account books relating to the assessment years of 1950-51, 1951-52 and 1952-53 were never produced or scrutinised by the Income-tax Officer in the course of the assessment proceedings for the year 1954-55. But having regard to the categorical statement contained in the counter-affidavit sworn to by the Income-tax Officer, Mr. V. Ramamurthy, and in view of the intrinsic evidence furnished by the contemporaneous report sent on February 5, 1959, by Mr. D.S. Sarma, the then Income-tax Officer, to the Commissioner, seeking the latters sanction for initiating proceedings under section 34, I am not prepared to attach any importance to the ipse dixit of the chief accounts officer and the assistant secretary of the company. In this connection, it is material to note that in the affidavit sworn to by the chief accounts officer, this significant statement occurs;
'In the course of the assessment proceedings of the petitioners company for the assessment year 1954-55 in 1959, the then Income-tax Officer wanted the petitioners to produce the factory cash books for the accounting years 1948-49 to 1950-51. The petitioners informed the said Officer that they could produce the same if sufficient time was granted as there was change of management therein and change of office premises from time to time and it would therefore take some time to trace the books. The said officer without waiting for the production of the books and without inspection thereof issued three notices on March 20, 1959, under section 34 of the Income-tax Act for the purpose of re-opening the petitioners assessments for the assessment years 1950-51, 1951-52 and 1952-53 respectively.'
It is thus clear that the Income-tax Officer did call for the account books for the relevant three years, and I find it hard to believe that the officer, without waiting for the production of the books, proceeded to issue notices under section 34 of the Act. That the Income-tax Officer had reason to believe that the petitioner had omitted or failed to disclose fully and truly all material particulars in the returns submitted by it for those three years, is amply borne out by the reasons recorded. by the Officer in accordance with the statutory requirement. As pointed out already, those reasons were embodied in the report submitted by the Income-tax Officer to the Commissioner on February 5, 1959, seeking the Commissioners sanction. The report mentions that the cases fell under section 34(1)(a) of the Income-tax Act and the reasons recorded therein are as follows :
'While scrutinising the books of accounts for 1954-55 to 1956-57, it was found that the books of accounts maintained by the company were defective and that on several dates the cash outgoings as recorded in the cash book exceeded the cash incomings. The cash books for the accounting years for the assessment years 1950-51 to 1953-54 were summoned and similar defects were found. Further, it was also seen on verification that there were shortages of raw materials such as M. S. Sheets. The valuation of closing stock of manufactured and semi-manufactured articles was found to have been deliberately under-valued. Inflation of expenses such as wages of temporary labour was also noticed. The gross profit disclosed by the company was also lower than that disclosed by similar concerns. Thus, by manipulating cash, raw materials, closing stock and expenses, the company got away with huge losses which were determined and allowed to be carried forward. In view of the defects pointed out above, the book results have to be the rejected and gross profit has to be estimated which would result in the wiping out of losses. Since there is prima facie evidence to show that the assessee furnished inaccurate particulars and thereby got the benefit of huge losses, which were bogus, it is requested that I may be permitted to re-open the assessment for the assessment years 1950- 51, 1951-52 and 1952-53 under section 34(1)(a) of the Act.'
It is also worthy of note that the Commissioner, on a consideration of this report, was satisfied that these were fit cases for the issue of notices under section 34.
In view of the above circumstances, I have no hesitation in holding that the Income-tax Officer did have some relevant material before him upon which he could entertain a reasonable belief as regards the nondisclosure of material facts to the detriment of the revenue, as envisaged by section 34 of the Income-tax Act. The question of the sufficiency or otherwise of the material upon which the belief was founded is outside the purview of this court in these proceedings.
In a recent case, Calcutta Discount Co. Ltd. v. Income-tax Officer, Calcutta, the Supreme Court had to consider the scope and effect of section 34 of the Indian Income-tax Act. Explaining the precise scope of the disclosure, which the section demands of an assessee, Das Gupta J., speaking for the majority, observed as follows :
'The words used are omission or failure to disclose fully and truly all material facts necessary for his assessment for that year. It postulates a duty on every assessee to disclose fully and truly all material facts necessary for his assessment. What facts are material and necessary for assessment will differ from case to case. In every assessment proceeding, the assessing authority will, for the purpose of computing or determining the proper tax due from an assessee, require to know all the facts which help him in coming to the correct conclusion. From the primary facts in his possession, whether on disclosure by the assessee, or discovered by him on the basis of the facts disclosed, or otherwise, the assessing authority has to draw inferences as regards certain other facts; and ultimately, from the primary facts and the further facts inferred from them, the authority has to draw the proper legal inferences, and ascertain on a correct interpretation of the taxing enactment, the proper tax leviable......
There can be no doubt that the duty of disclosing all the primary facts relevant to the decision of the question before the assessing authority lies on the assessee. To meet the possible contention that when some account books or other evidence has been produced, there is no duty on the assessee to disclose further facts, which on due diligence, the Income-tax Officer might have discovered, the legislature has put in the Explanation... In view of the Explanation, it will not be open to the assessee to say, for example - I have produced the account books and the documents : You, the assessing officer, examine them, and find out the facts necessary for your purpose : My duty is done with disclosing these account books and the documents. His omission to bring to the assessing authoritys attention those particular items in the account books, or the particular portions of the documents, which are relevant, will amount to omission to disclose fully and truly all material facts necessary for his assessment. Nor will he be able to contend successfully that by disclosing certain evidence, he should be deemed to have disclosed other evidence, which might have been discovered by the assessing authority if he had pursued investigation on the basis of what has been disclosed. The Explanation to the section gives a quietus to all such contentions; and the position remains that so far as primary facts are concerned, it is the assessees duty to disclose all of them - including particular entries in account books, particular portions of documents, and documents and other evidence, which could have been discovered by the assessing authority, from the documents and other evidence disclosed.
Does the duty, however, extend beyond the full and truthful disclosure of all primary facts In our opinion, the answer to this question must be in the negative. Once all the primery facts are before the assessing authority, he requires no further assistance by way of disclosure. It is for him to decide what inferences of facts can be reasonably drawn and what legal inferences have ultimately to be drawn.....................
We have, therefore, come to the conclusion that while the duty of the assessee is to disclose fully and truly all primary relevant facts, it does not extend beyond this.
The position, therefore, is that if there were in fact some reasonable grounds for thinking that there had been any non-disclosure as regards any primary fact, which could have a material bearing on the question of under-assessment, that would be sufficient to give jurisdiction to the Income-tax Officer to issue the notices under section 34. Whether these grounds were adequate or not for arriving at the conclusion that there was a non-disclosure of material facts would not be open for the courts investigation. In other words, all that is necessary to give this special jurisdiction is that the Income-tax Officer had when he assumed jurisdiction some prima facie grounds for thinking that there had been some non-disclosure of material facts.
Clearly it is the duty of the assessee, who wants the court to hold that jurisdiction was lacking, to establish that the Income-tax Officer had no material at all before him for believing that there had been such non-disclosure.'
Applying the above tests to the present cases, it must be held that the petitioner has not succeeded in establishing that there was no material at all before the Income-tax Officer for believing that there had been non-disclosure of primary facts and it follows as a necessary corollary that the Income-tax Officer was acting within his jurisdiction in issuing the impugned notices.
In this connection, a judgment of the Judicial Committee of the Privy Council in Commissioner of Income-tax v. Mahaliram Ramjidas may also be usefully referred to. Their Lordships, in construing section 34 of the Indian Income-tax Act, said this at page 448 :
'The section, although it is part of a taxing Act, imposes no charge on the subject, and deals merely with the machinery of assessment. In interpreting provisions of this kind the rule is that that construction should be preferred which makes the machinery workable, utters valet porous qualm perat. In the present instance two considerations are in their Lordships opinion decisive. First, no powers are imposed by the section on the Income-tax Officer to convene the assessee, or to issue notices calling on him to produce documents, though these powers are essential if the Income-tax Officer is to conduct a quasi-judicial enquiry before deciding that profits have escaped assessment or have been assessed at too low a rate.'
Their Lordships, after referring to the observations of Lush J. in Rex v. Kansington Income Tax Commissioners, proceeded to observe at page 449 as follows :
'Their Lordships are of opinion, in accordance with that reasoning, that it cannot be a condition precedent to the operation of section 34 that the Income-tax Officer should hold a quasi-judicial enquiry, because the powers necessary for such an enquiry are not conferred upon him. But there is a second consideration which is no less conclusive. The operative part of section 34 empowers the Income-tax Officer to proceed de novo under sub-section (2) of section 22, and that in turn leads, if there should still be a question of the accuracy of the return, to an enquiry under section 23(2) and (3) and in that enquiry the assessee has statutory right to appear and to produce evidence. Therefore a construction of section 34 which requires a quasi-judicial enquiry to be held before the powers under the section can be operated would result in mere duplication of procedure and in two enquiries of the same kind, into the same matter, conducted by the same official, and without any advantage to the parties. A construction so unreasonable and unpractical ought not to be preferred when another construction is open. Accordingly their Lordships are of opinion that the Income-tax Officer is not required by the section to convene the assessee, or to intimate to him the nature of the alleged escapement, or to give him an opportunity of being heard, before he decides to operate the powers conferred by the section......... Their Lordships think that the proper answer to be given is that to enable the Income-tax Officer to initiate proceedings under section 34 it is enough that the Income-tax Officer on the information which he has before him and in good faith considers that he has good ground for believing that the assessees profits have for some reason escaped assessment or have been assessed at too low a rate.'