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Commissioner of Income-tax Vs. Nem Kumar JaIn Ratan Kumar and ors. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference No. 297 of 1976
Judge
Reported in(1980)15CTR(All)330; [1980]125ITR674(All); [1980]3TAXMAN281(All)
ActsIncome Tax Act, 1961 - Sections 147
AppellantCommissioner of Income-tax
RespondentNem Kumar JaIn Ratan Kumar and ors.
Appellant AdvocateR.K. Gulati and ;A. Gupta, Advs.
Respondent AdvocateK.B. Bhatnagar, Adv.
Excerpt:
.....that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the income-tax officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year. he may, subject to the provisions of sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereinafter in sections 148 to 153 referred to as the relevant assessment year).'5. two conditions precedent must be satisfied before the ito can take action under clause (b); (i) he should have reason to believe that income has escaped assessment; both these conditions must be satisfied before an action taken by the..........smt. durga devi, was also a partner in the firm and her share income was to be clubbed with the assessee's income. accordingly, he issued a notice under section 148 for taking action under section 147 on september 23, 1968. this notice was issued to the heirs and legal representatives of the assessee. pursuant to that notice they filed a return on march 19, 1969, showing the same income which had been shown in the return as originally filed. they, however, disputed the validity of the reopening of the assessment on the ground that the assessee and his wife had been separately assessed in the preceding years in respect of their share income from the firm and that the assessee was not legally obliged to include in his income the share income of his wife. the ito did not accept those.....
Judgment:

R.R. Rastogi, J.

1. This is a reference under Section 256(2) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'). It relates to the assessment year 1963-64. Late Sri Makhan Lal Jain was a partner in the firm of M/s. Daulat Ram Makhan Lal (hereinafter referred to as ' thefirm '). The other partners of the firm were his wife, Smt. Durga Devi, and his two sons, Nem Kumar Jain and Ratan Kumar. In his return for the assessment year 1963-64, filed on January 22,1964, late Sri Makhan Lal Jain disclosed his share income from the firm at Rs. 19,501 and income from property at Rs. 1,163. In Part III of the return he mentioned the constitution of the firm and his relationship with Smt. Durga Devi, but he did not include the share income of his wife in his return. On the basis of that return, the ITO completed the assessment on a total income of Rs. 23,163 on February 7, 1964. The income was subsequently revised under Section 154 of the Act. Sri Makhan Lal Jain died on November 15, 1962. According to the ITO during the course of the assessment proceedings of the firm for 1963-64 itself he came to know that the assessee's wife, Smt. Durga Devi, was also a partner in the firm and her share income was to be clubbed with the assessee's income. Accordingly, he issued a notice under Section 148 for taking action under Section 147 on September 23, 1968. This notice was issued to the heirs and legal representatives of the assessee. Pursuant to that notice they filed a return on March 19, 1969, showing the same income which had been shown in the return as originally filed. They, however, disputed the validity of the reopening of the assessment on the ground that the assessee and his wife had been separately assessed in the preceding years in respect of their share income from the firm and that the assessee was not legally obliged to include in his income the share income of his wife. The ITO did not accept those contentions and he included the share income of the assessee's wife under Section 64(iii) of the Act and the total income thus computed came to Rs. 1,85,666.

2. In appeal, the assessee's contentions found favour with the AAC and he cancelled the reassessment order. Aggrieved, the department went up in appeal to the Income-tax Appellate Tribunal but remained unsuccessful. The Tribunal, agreeing with the AAC, held that it being a common ground that the assessment had been reopened under Section 147(b) there should have been some information received by the ITO within the meaning of that provision. In the instant case, there was no material on record to prove that the ITO had received any such information from an external source. They further held that the subsequent realisation by the ITO that he had committed a mistake in not including the income of the assessee's wife in the assessee's hands did not amount to receiving information from some external source and hence Section 147(b) was not applicable. The Tribunal also repelled the department's contention that the assessment could be held valid under Section 147(a) and for its conclusion placed reliance on a decision of this court in Raghubar Dayal Ram Kishan v. CIT : [1967]63ITR572(All) . In the result, the Tribunal dismissed the department's appeal. At the instance of the department and in compliance with the direction of thiscourt, the Tribunal has now referred the following question for the opinion of this court:

' Whether, on the facts and in the circumstances of the case, the assessment was validly made under Section 147(b) of the Income-tax Act?'

3. As has been stated earlier it is not disputed in the instant case that the constitution of the firm was mentioned by the assessee in his original return. He had also mentioned his relationship with Smt. Durga Devi. The submission of the learned counsel for the department was that even where the facts are before the ITO, but he does not apply his mind to the same, Section 147(b) would be attracted. According to the learned counsel, for the applicability of Section 147(b), it is not necessary that some fresh facts should have come to the knowledge of the ITO. On the facts as originally disclosed, which could and should have been considered by the ITO but it was not so done and when the very same facts are subsequently discovered, that would amount to an information within the meaning of Section 147(b). It was an information received by the ITO from the file of the firm and during the reassessment proceedings of the firm for this very year. It was submitted that no finding has been recorded to the effect that the case of the department that such an information was received by the ITO from the file of the firm during the assessment for this very year, was wrong. On the other hand, according to Dr. K.B. Bhatnagar, counsel for the assessee, two conditions are required to be satisfied for the application of Section 147(b) and they are that there should be some information received by the ITO subsequent to the original assessment and, secondly, that should not be as a result of a fresh enquiry or research in respect of questions of fact or law. That was not the position here because all the primary facts were disclosed by the assessee in Ms original return and if there was any mistake or omission committed by the ITO that would not help the department unless it is shown that any further information was received by the I.T. Dept. subsequently. The non-application of mind on the part of the ITO would not justify the reopening of the assessment.

4. In order to appreciate the contentions urged before us by counsel for the parties it would be necessary to refer to the relevant provisions of the Act. Section 147, in so far as it is relevant for our purpose reads, as under ;

' 147. If--......

(b) notwithstanding that there has been no omission or failure as mentioned in Clause (a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year.

he may, subject to the provisions of sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereinafter in sections 148 to 153 referred to as the relevant assessment year).'

5. Two conditions precedent must be satisfied before the ITO can take action under Clause (b); (i) he should have reason to believe that income has escaped assessment; (ii) it should be in consequence of the information received after the original assessment that he should have such reason to believe. Both these conditions must be satisfied before an action taken by the ITO under this provision can be justified.

6. The leading case on the subject is that of Maharaj Kumar Kamal Singh v. CIT : [1959]35ITR1(SC) . While interpreting the meaning of the word ' information ' their Lordships held (p. 7);

'We would accordingly hold that the word 'information' in Section 34(1)(b) includes information as to the true and correct state of the law and so would cover information as to relevant judicial decisions. '

7. Then they adverted to the other condition as to when can income be said to have escaped assessment and held thus (p. 8) :

' In our opinion, even in a case where a return has been submitted, if the Income-tax Officer erroneously fails to tax a part of assessable income, it is a case where the said part of the income has escaped assessment. The appellant's attempt to put a very narrow and artificial limitation on the meaning of the word 'escape' in Section 34(1)(b) cannot therefore succeed.'

8. Thereafter, in CIT v. A. Raman and Co. : [1968]67ITR11(SC) , it was ruled that the expression ' information ' in the context in which it occurs must mean instruction or knowledge derived from an external source concerning facts or particulars, or as to law relating to a matter bearing on the assessment. In that case, the High Court had held that the information in consequence of which proceedings for reassessment were intended to be started, could have been gathered by the ITO in charge of the assessment in the previous years from the disclosures made by the two HUFs. In the opinion of the Supreme Court that view was wholly irrelevant, and it was held (p. 16):

' Jurisdiction of the Income-tax Officer to reassess income arises if he has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment. That information must, it is true, have come into the possession of the Income-tax Officer after the previous assessment, but even if the information be such that it could have been obtained during the previous assessment from an investigation of the materials on the record, or the facts disclosed thereby or from otherenquiry or research into facts or law, but was not in fact obtained, the jurisdiction of the Income-tax Officer is not affected.'

9. The same view was taken by the Supreme Court in R.B. Bansilal Abirchand Firm v. CIT : [1968]70ITR74(SC) . However, in Kalyanji Mavji & Co. v. CIT : [1976]102ITR287(SC) , a Division Bench of the Supreme Court gave a somewhat extended scope to this provision that even if in the original assessment the income liable to tax had escaped assessment due to oversight, inadvertence or a mistake committed by the ITO, it was found to be sufficient to attract the applicability of Section 34(1)(b)/147(b). Some of the High Courts as well had considered lack of vigilance, inadvertence or negligence or the perfunctory performance of his duties without due care and caution by the ITO while making the original assessment as sufficient to constitute information within the meaning of this provision. Such view was taken by the Madras High Court in Family of V.A.M. Sankaralinga Nadar v. CIT : [1963]48ITR314(Mad) and CIT v. Rathinasabapathy Mudaliar : [1964]51ITR204(Mad) , by the Kerala High Court in United Mercantile Co. Ltd. v. CIT : [1967]64ITR218(Ker) and Muthukrishna Reddiar v. CIT : [1973]90ITR503(Ker) , and by the Punjab High Court in Kulbushan and Brij Bhushan v. CED and CIT v. Yash Pal Mehra and Co. . Our attention was also invited by the learned counsel for the revenue to the following decisions in this behalf Smt. Sarla Devi v. CED : [1976]103ITR652(All) , CIT v. D.S. Bottlewala : [1978]115ITR441(Bom) , CIT v. Kerala State Industrial Development Corporation Ltd. : [1979]116ITR158(Ker) , CIT v. National Sound Studio (P.) Ltd. : [1979]117ITR422(Cal) and R.K. Malhotra, ITO v. Kasturbhai Lalbhai : 1975CriLJ1545 . We do not think that it would be necessary for us to refer to the ratio laid down in any of these cases because of the latest decision of the Supreme Court to which we would advert shortly after. We may note that in R. K. Malhotra : 1975CriLJ1545 the opinion of the audit dept. was held as constituting information for reopening assessment under Section 147(b) on the view that the audit dept. was the proper machinery to scrutinise the assessments of ITOs and point out the errors, if any, in law.

10. In our opinion, this legal aspect stands concluded by the latest decision of the Supreme Court in Indian and Eastern Newspaper Society v. CIT (Tax Reference Cases Nos. 1 to 4 of 1973, dated 31st August, 1979) (since reported in : [1979]119ITR996(SC) ). His Lordship, Pathak J., speaking for the court, has laid down (p. 1001) :

' In so far as the word ' information ' means instruction or knowledge concerning facts or particulars, there is little difficulty. By its inherent nature, a fact has concrete existence. It influences the determination of an issue by the mere circumstance of its relevance. It requires no furtherauthority to make it significant. Its quintessential value lies in its definitive vitality.'

11. However, in regard to the meaning of the word ' information ' as instruction or knowledge as to law, it has been observed that the position is more complex. The controversy between the parties centres round the point whether the instruction or knowledge as to law is circumscribed by any limitation.

12. It has been observed (p. 1001);

' When we speak of ' law ', we ordinarily speak of norms or guiding principles having legal effect and legal consequences. To possess legal significance for that purpose, it must be enacted or declared by competent authority. The legal sanction vivifying it imparts to it its force and validity and binding nature. Law may be statutory law, or what is popularly described as, judge-made law. In the former case, it proceeds from enactment having its source in competent legislative authority. Judge-made law emenates from a declaration or exposition of the content of a legal principle or the interpretation of a statute, and may in particular cases extend to a definition of the status of a party or the legal relationship between parties, the declaration being rendered by a competent judicial or quasi-judicial authority empowered to decide questions of law between contending parties. The declaration or exposition is ordinarily set forth in the judgment of a court or the order of a tribunal. Such declaration or exposition in itself bears the character of law. In every case, therefore, to be law it must be a creation by a formal source, either legislative or judicial authority. A statement by a person or body not competent to create or define the law cannot be regarded as law.'

13. The conclusion, thus, has been arrived (p. 1002) :

'In that view, therefore, when s. 147(b) of the I.T. Act is read as referring to ' information ' as to law, what is contemplated is information as to the law created by a formal source. It is law, we must remember, which, because it issues from a competent legislature or a competent judicial or quasi-judicial authority, influences the course of the assessment and decides any one or more of those matters which determine the assessee's tax liability.'

14. This decision has overruled the earlier decisions of the court in Kalyanji Mavji & Co. v. CIT : [1976]102ITR287(SC) as also in R.K. Malhotra, ITO v. Kasturbhai Lalbhai : 1975CriLJ1545 . By implication it can be said that those decisions of the different High Courts which have followed the decision of the Supreme Court in Kalyanji Mavji : [1976]102ITR287(SC) stand overruled.

15. After the aforesaid decision of the Supreme Court, the controversy which arises in the instant case stands fully resolved. There is no disputethat in the original return the assessee had shown the constitution of the firm as also his relationship with one of the partners, viz., Smt. Durga Devi, his wife. The assessee had, of course, not included the share income of his wife in the return and certainly he was under no obligation to do so. The inclusion of the wife's income in the income of the assessee was to be done by the ITO under the provisions of Section 64(iii), That he did not do. According to the counsel for the revenue, it is a case where the ITO did not apply his mind to this legal aspect though the information was available on his record and thus it was a case of mistake or omission to consider a certain legal provision. In other words, it is not disputed that the present case is not one of information concerning the facts or particulars, but is one of information regarding instruction or knowledge as to law. That being so, unless the information as to law is received from a formal source, it cannot constitute an information within the meaning of Section 147(b) so as to justify the ITO to reopen the assessment. The ITO framing the original assessment did not apply his mind to the legal aspect applicable to the facts which had been disclosed by the assessee and that being so, the successor ITO could not reopen the assessment on the pretext that he informed himself of the correct legal position from the assessment of the firm, which cannot be regarded as a formal source. It would' only amount to a fresh look on the facts already on record and hence the proceedings were invalid. We are, thus, in agreement with the view taken by the Tribunal.

16. Our answer, therefore, to the question referred is in the negative, in favour of the assessee and against the department. The respondents are entitled to their costs which are assessed at Rs. 200 and counsel fee in like figure.


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