SRINIVASACHARI, J. - These references have come before us on a direction by us to refer a question of law arising in the case under section 66 (2) of the Indian Income-tax Act. The assessee is one Sitaramamma alias Manavathi Bai, resident of Nuzwid, West Godavari. She was assessed by the Income-tax Officer, Vijayawada, for the assessment year 1946-47. She was asked to submit a return and in the return that she submitted she showed a sum of Rs. 70,000 as gift received in cash from Princess Sita Devi, daughter of the Raja of Pithapuram, who was married to the Kumar Raja of Vuyyur and after divorce married to the ex-Gaekwad of Baroda. As the assessee did not file any documents or adduce any evidence in support of the version of the gift, the Income-tax Officer treated the receipts as salary and remuneration and as he found that the assessee had received valuable jewellery also from the said Sita Devi, he added the value of the jewellery also, viz., Rs. 4 lakhs, in computing the taxable income. The total taxable income according to him was Rs. 4,70,000 (Rs. 4 representing the value of the jewellery and Rs. 70,000 cash received from Sita Devi). The assessee went in appeal before the Appellate Assistant Commissioner and contended that the amounts were not salaries paid, and submitted that the various amounts received by her could be regarded only as 'windfall'. The Appellate Assistant Commissioner not because the record before him showed that she had acted as the local agent of the said Sita Devi and it has also appeared that she was styled the private secretary of the said Sita Devi, he came to the conclusion that the amounts received by her were in lieu of services rendered to the said Sita Devi. In the result he affirmed the order of the Income-tax Officer with regard to the sum of Rs. 70,000 treating it as amount received by the assessee for services rendered. With regard to the value of the jewellery the jewels were got valued by a local firm of jewellers, Ummidi Ramiah Setti, and taking the valuation of the said firm the Appellate Assistant Commissioner estimated the value of the jewellery at Rs. 20,000 and thus varied the order of the Income-tax Officer by reducing the assessable income of Rs. 90,000. The assessee, aggrieved by the order of the Appellate Assistant Commissioner, took the matter before the Income-tax Appellate Tribunal and the Tribunal confirmed the order of the Appellate Assistant Commissioner. The Tribunal was of the opinion that the assessee having and had ample opportunity to lead evidence with regard to the nature of the receipt that it was a gift or a voluntary payment made by Sita Devi out of love and affection for her, not having substantiated her contention, treated the property as taxable income.
It may be mentioned that assessment in regard to the years 1946-47, 1947-48, 1948-49 and 1950-51 were completed by having recourse to proceedings under section 34 of the Indian Income-tax Act. In so far as the assessment for the years 1946-47 was concerned, the assessee did not dispute the validity of the initiation of the proceedings under section 34. The objection was taken only to the re-opening of the proceedings under section 34 with regard to the other three years.
It was argued by the learned counsel on behalf of the assessee that the assessee produced her account books containing entries regarding the payments received from Sita Devi and accounts showed that these were gifted to her. These account books have been proved by the clerk of the assessee. In addition to these account books produced on September 12, 1941, the assessee also examined herself on August 26, 1949, and stated on oath that she and Sita Devi having been friends from their childhood were moving very closely and that the Princess made gifts of large amounts to the assessee out of pure love and affection. It was argued that in the order of assessment date November 26, 1949, forth year 1949-50 the assessment was made only in respect of the income derived from the money-lending business and from the property as would be evident from the order of the Income-tax Officer. It would, therefore, be clear that in the assessment made for the assessment year 1948-49 and 1949-50, the Income-tax Officer excluded the amounts received from Sita Devi, treating the amounts as not being taxable. Subsequent to this the wealth statement was called for from the assessee which was filed on September 9, 1953. After the statement was filed the Income-tax Officer called upon the assessee to furnish information on various matters relating to the gifts said to have been received from Princess Sita Devi. It is a detailed letter calling upon the assessee to give particulars about various matters contained therein. This letter of the Income-tax Officer is of October 31, 1953. The assessee sent her reply on November 27, 1953, explaining in detail the circumstances under which these payments were made to her and tracing the relationship of Sita Devi from the time that she was in Pithapuram and later in Vuyyur after her marriage with the Kumar Raja of Vuyyur. The next event worth mentioning is that Sitaramamma was examined on December 26, 1954, in support of the explanation given by her. After this sworn statement and after further enquiries, notice was issued to the assessee on March 15, 1955, under section 34 of the Income-tax Act. In the meantime the Income-tax Officer appears to have made independent enquiries and on the basis of the information received, proceedings under section 34 were started on August 8, 1955. The Income-tax Officer wrote a letter to the assessee stating that on an examination of the account books and statements filed before him it was found that the assessee was in receipt of sums aggregating to Rs. 6,86,600 received by means of cheques addressed personally from Sita Devi in the period between November 10, 1945, to October 23, 1952. The Income-tax Officer directed the assessee to produce any correspondence or documentary evidence to support her version that the cash receipts represented gifts from Princess Sita Devi. He also called upon her to furnish full particulars as regards the actual dates of receipt, where they were received and so on. The Income-tax Officer also called the assessee to furnish detailed particulars about the dates on which the jewels were gifted and when they were received. She was also asked to give details with regard to various foreign trips that she said she had made along with Sita Devi. In reply to this letter of the Income-tax Officer calling for particulars, the assessee sent a reply on August 24, 1955, giving particulars with regard to the various matters asked for in the letter. After the receipt of this explanation, the Income-tax Officer passed the assessment order dated March 16, 1956, treating the various receipts from Sita Devi as salary, remuneration and the jewellery as quid pro quo for services rendered. As has been stated already, the Appellate Assistant Commissioner reduced the value of the jewels. In coming to the conclusion that these amounts were received by the assessee in recognition of her services to the Princess, the Income-tax Officer relied upon the circumstantial evidence and the information gathered by him on enquiries made. The Income-tax Officer expressed that in view of the unhelpful attitude taken up by the assessee, he had no other go but to determine the real character of the payments on the basis of the circumstantial evidence and enquiries made. The Income-tax Officer stated that while the assessees denial was clearly based on self-interest, he had no reason to suspect the statement of innumerable persons of status and importance whose statements go to show that she was a servant of the Princess. He concluded that where, therefore, she was discharging the duties as a servant, and her mistress, in recognition of her services as such, made a large payments, they could only come within the meaning of section 7 of the Income-tax Act. The material on record on which this conclusion was arrived at by the Income-tax Officer consists of a bill from the Bombay Garage Limited, dated 31st December, 1948, for a sum of Rs. 47-8-0 in regard to the registration fee paid on Chevrolet Car No. BMY 4931 for Baroda State. The bill is addressed to 'The Private Secretary to H. H. The Maharani of Baroda, P. Manavathi Bai, Jayamahal Palace, Nepeansea Road, Bombay.' The Income-tax Officer seeks to rely upon this document as lending support to the case that the assessee was an employee of Sita Devi. The other document on which reliance is placed is a letter from the Income-tax Officer, II Ward, Bombay, to the Additional Income-tax Officer Vijayawada, wherein the Income-tax Officer says that he called for the books of a firm called Chamanlal Manchand and Co., Jewellers, for Samvats 2003 to 2008 and that there was no account in the account books of the said firm in the name of either K. V. Narasinga Rao or Sitaramamma (the assessee). The Income-tax Officer, Bombay, enclosed with this letter a statement in original recorded by him of Chamanlal Manchand, one of the partners of the firm, and in that statement Chamanlal said that he knew only a woman by name Manavathi Bai who was the maid servant of the junior Maharani of Baroda. He further stated that whenever the Maharani purchased jewellery or cloth for her she used to purchase another set for Manavathi Bai. The Income-tax Officer relied upon the statement made by the partner of the firm that Manavathi Bai was a maid servant. This letter and the statement are relied upon to support the theory of the assessee being a servant. The action taken by the Income-tax Officer under section 34 of the Income-tax Act is impugned as not being in accordance with law. It is also argued that the Department has not been able to establish the relationship of master and servant as between Sita Devi and assessee and under those circumstances the amounts received could not be taxed as remuneration for services rendered, falling within section 7 of the Income-tax Act.
We would first direct out attention to R. C. No. 11 of 1960 wherein no question relating to proceedings under section 34 arises. It is well known that anything that can properly be described as income is taxable under the Income-tax Act unless expressly exempted. It is not necessary that income in order to be taxable should arise from business activity, investment or an enforceable obligation. The liability to pay the tax is founded upon sections 3 and 4 of the Act, which are the charging sections. The Supreme Court in the case of Commissioner of Income-tax v. Calcutta Agency, observed that the burden of proving the necessary facts in order to entitle the assessee to claim exemption was upon the assessee. It would therefore appear that where admittedly the assessee was in receipt of large sums of money as shown in the accounts submitted by her, that they were outside the pale of taxable income was a matter which had to be established by the assessee himself. The question is as to whether the assessee has discharged the burden that lay upon her. She did not produce any evidence in support of her case that these amounts were gifts made by Sita Devi out of love and affection. When she was asked to lead evidence to substantiate her contention she pleaded utter inability to do anything of the kind and denied the existence of any correspondence which would throw any light upon the question and simply contended herself by making bland statements like 'Her Highness Sita Devi, Gaekwad of Baroda, used to give me these gifts according to the will and pleasure of Her Highness.' With regard to the jewellery the she received from Princess Sita Devi, she makes the same statement to say that these were received as gifts on various occasions in India and she says 'I do not have any correspondence regarding these gifts.' The position was that she did not make any attempt to prove that the receipt of sums of money from the Princess, and the jewellery received from her, were gifts and as such exempt from tax falling under section 4(3)(vii) of the Act. The bare allegation unsupported by any evidence, in our opinion, was not sufficient to discharge the burden which lay upon the assessee. When certain amounts appear in the account books of an assessee as receipts, the taxing authorities ask for an explanation; if the explanation is satisfactory there is an end of the matter and no other question arises but if the explanation be not found to be satisfactory, the taxing authorities are entitled to bring such sums under assessment. This would make it abundantly clear that the burden lay upon the assessee in this case to establish that the amounts received were voluntary payments made by the Princess out of love and affection. In this connection we night refer to a decision of Subba Rao, C. J., (as he then was) and Viswanatha Sastry, J., in Raghavareddi v. Commissioner of Income-tax where in the learned Chief Justice made it clear that the burden was upon the assessee to explain the credit entry though the onus might shift to the Income-tax authorities under certain circumstances. The Supreme Court in the case of Govindarajulu Mudaliar v. Commissioner of Income-tax, while observing that whether a receipt is to be treated as an income or not must depend very largely on the facts and circumstances of the case, stated that where an assessee fails to prove satisfactorily the source and nature of certain amount of cash, the Income-tax Officer is entitled to draw the inference that the receipts are of an assessable nature. In this case we must say that the assessee has failed to prove satisfactorily the nature of the amounts received by her, although the source of the receipt she has been able to explain. A Bench of this court to which one of us (the Chief Justice) was a party referred to the case of Raghavareddi v. Commissioner of Income-tax and opined to the same effect as was done therein. The learned judges expressed accord with the statement of law contained in the above case that the burden shift to the Income-tax Officer under certain circumstance. Vide Mohideen Thamby and Co. v. Commissioner of Income-tax. The matter could not have been made more emphatic than by the observations of the Supreme Court in the case of Commissioner of Income-tax v. Venkataswami Naidu. In the case the assessee owned 70 acres of agricultural land part of which was used as pasture and 65 cows and 10 bulls were reared on it. He sold milk of the value of Rs. 28,000 to a milk supply union on which sales-tax was paid by the union. The assessee contended before the income-tax authorities that the income from the sale of the milk was agricultural income. The assessee did not produce materials in proof of this contention. Under those circumstances their Lordships of the Supreme Court stated that it was the assessee who had to place before the taxing authorities proper materials to enable them to come to the conclusion that the income sought to be assessed was agricultural income and that it was not for the income-tax authorities to prove that it was not agricultural income. In this view they set aside the judgment of the High Court of Madras, holding that the High Court had erroneously placed the burden of proof on the Department. This case is authority for the proposition that the bare allegation of the assessee unsupported by evidence is insufficient to discharge the burden which lay upon the assessee to prove that the income was not taxable. For these reasons, we hold that the assessee failed to discharge the burden that lay upon her.
With regard to R. C. No. 12 of 1960 it would appear that the Income-tax Officer started taking proceedings under section 34 of the Act with regard to the assessments for the years 1947-48, 1948-49, and 1950-51. The Income-tax Officer initiated proceedings under section 34 stating that he had come to know that the assessee was in the employ of Sita Devi as a result of which she had received Large amount in question and as he was of the opinion that the assessee did not disclosed fully and truly all material facts he purported to act under section 34(1)(a) of the Act. A sworn statement of the assessee was recorded by the Income-tax Officer on December 26, 1954, and according to the Income-tax Officer, her statement threw a flood of light on the nature of the receipt of the amounts which were not brought under assessment. On these grounds he though that action under section 34(1)(a) was justified. With regard to the assessment for the year 1948-49 an objection was taken by the assessee that the reassessment could not be regarded as having been validly made since 30 days clear notice had not been given. So far as this objection is concerned, the Tribunal has upheld the objection and set aside the reassessment for the year 1948-49. In so far as the reassessment for the subsequent year is concerned, the Tribunal was of the opinion that the initiation of the proceedings under section 34 had been validly made. The argument of the learned counsel before us is that there was absolutely no justification for action being taken under section 34 in the present case. It was urged that there was no failure to disclose any material facts on the part of the assessee in making the return of her income, because she had made a complete disclosure by submitting the account books and given her statement. It was also urged that there was no material on record on the basis of which it would be said that the Income-tax Officer had reason to believe that there was an assessable income which had escaped assessment. The conditions necessary for the exercise of jurisdiction by the Income-tax Officer for taking action under section 34(1)(a) of the Act are clear. The section reads as under :
'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 excessive loss or depreciation allowance has been computed, or........'
The scope of the application of this section has been clarified by the Privy Council in the case of Commissioner of Income-tax v. Mahaliram Ramjidas. The law as it stood prior to the amendment of the section in 1948 gave the power to the Income-tax Officer to initiate proceedings under section 34 where on the information before him he considered in good faith and he hand good reason to believe that the assessees profits have for some reason escaped assessment. Their Lordships were of the opinion that the Income-tax Officer was not required by the section to convince the assessee or to intimate to him the nature of the alleged escarpment or to give him an opportunity of being heard before the he decides to exercise the powers conferred by the section. By an amendment brought in 1939 the powers of the Income-tax Officer in this regard were curtailed and after the amendment in 1948 the position came to be this. By this amendment the words 'definite information' and 'discovers' were deleted and the words 'has reason to believe' substituted. There can be no doubt that the belief that is contemplated in this section must be that of an honest and reasonable person, based upon reasonable grounds. The Officer must act on direct evidence or, if direct evidence was not available, on circumstantial evidence but his belief can never be based on suspicion, gossip or rumour. The words there are 'has reason to believe' and not 'reason to suspect.' The Supreme Court was considering as to what was meant by 'definite information' occurring in section 34(1)(b) of the Act and in that context their Lordships observed that the information of the Income-tax Officer to entitle him to proceed under section 34 must be definite, that is, something more than mere guess or gossip or rumour. There ought to be before the Income-tax Officer at the time when he decides to take steps under section 34 sufficient material to make an honest belief that there has been escaped assessment. Vide Lakshman Shenoy v. Income-tax Officer, Ernakulam. By the amendment introduced in this section, although it enlarged the powers of the Income-tax Officer, with regard to his being able to take action under section 34, his powers had been limited, and the Income-tax Officer has no unfettered discretion in this matter. There must be material on record which would induce a reasonable man to believe that certain income has escaped assessment by reasonable man to believe that certain income has escaped assessment by reason of the assessee not making a complete disclosure of all material facts. We are of the opinion that in this case it is not clear as to on what material and no what basis the Income-tax Officer came to the conclusion that the relationship of master and servant had been established between the assessee and Princess Sita Devi. We are constrained to hold that the statement of the case is not sufficient to enable the court to determine the question as to whether action under section 34 was justified during the years 1947-48, 1948-49, and 1950-51. It is not therefore possible to answer the question satisfactorily. We, therefore, direct the Tribunal to make a further statement of the case under section 66 (4) of the Act.
R. C. No. 13 of 1960. The assessee is one K. V. Narasinga Rao who was the resident of Nuzvid, who has been assessed on a total in come of Rs. 62,000. During the year 1946-47 he was found to have been in receipt of Rs. 30,000. As he did not file a return admitting this income, action was taken under section 34(1)(a) of the Act. He submitted a return mentioning, however, that the aforesaid sum of Rs. 30,000 was received by him as a gift from Her Highness Sita Devi, Gaekwad of Baroda, on April 10, 1945. No documentary or oral evidence was adduced in support of this allegation by the assessee. He also expressed his inability to lead any evidence and denied his being in a position to produce any correspondence with regard to the alleged gift by Princess Sita Devi. He merely contended himself by saying that these amounts were given to him for his faithfulness to the said Sita Devi for having given up his railway job and attaching himself to the Princess for rendering services to her. The Income-tax Officer, on the sworn statement of the assessee, assessed him to an income of Rs. 58,000 consisting of Rs. 30,000 being the amount received in cash and Rs. 32,000 being the value of the jewellery, after giving credit for the earned income relief. The assessee appealed to the Appellate Assistant Commissioner, who, while confirming the assessment order of the Income-tax Officer in regard to the cash income of Rs. 30,000, taxed the assessee on the actual value of the jewellery, viz., Rs. 6,350, and reduced the taxable assessment to Rs. 25,650. The matter was taken up in appeal before the Appellate Tribunal and the Tribunal concurred with the Income-tax Officer and the Appellate Assistant Commissioner, that these amounts could not be regarded as gifts as alleged by the assessee nor could they be brought under the category of cash receipts bringing them under the exemption of section 4(3)(vii) of the Act. The Income-tax Appellate Tribunal has, at our direction, made a statement of the case for our decision as follows : 'Whether on the facts and in the circumstances of the case what the assessee received in the relevant years is assessable to tax and whether section 34 of the Income-tax Act could be invoked in regard to the years 1947-48, 1948-49 and 1950-51.' The evidence of the assessee makes it clear that he has given up a substantive job in the Railway in order to serve the Princess, who was then Yuvarani for nearly 1 1/2 years. He also admits that he used to accompany the Maharani when she went to Paris and London. It is also clear from his evidence that all along he was attached to the staff of Princess Sita Devi and his only explanation is that these amounts for which he has been taxed were paid to him by the Princess for his faithfulness in the discharge of his duties. There can be no doubt that any amount that is received by the employee for service rendered would clearly fall under section 7 of the Act. Remuneration for services cannot be said to be casual in nature as a gift inter vivos would be. Section 7 read with explanation (2) is indicative that the section also covers gifts or payments made voluntarily where the object of the payments happens to be remuneration for services rendered and every remuneration received by a servant would be covered by section 7. The fact that the payment is out of all proportion to the services rendered would not make the payment any the less a remuneration for services rendered, coming within the ambit of section 7 of the Act.
The action taken under section 34 of the Act, in our opinion, is justified in that the material on record before the Income-tax Officer was sufficient to lead him to believe that the assessee had not disclosed all material facts before him. In the circumstances, we answer both the questions referred to in the affirmative against the assessee. Parties will bear their own costs.
References answered accordingly.