This a reference under Section 66(2) of the Income-tax Act (XI of 1922) by the Commissioner of Income-tax, Central and United Provinces.
The assessee is a firm known as the Indian National Tannery of Cawnpore. For the assessment year 1936-37 the firm returned an income of Rs. 28,722. The books of account belonging to the firm were examined and they disclosed that since the previous year there had been an increase in the firms capital to the extent of Rs. 1,08,771, which represented money due respectively to eight traders who had supplied bark to the firm. The books showed this sum of Rs. 1,08,771 had been transferred partly to the reserve fund and partly to the personal accounts of the three partners, Mohammad Hamza, Mohammad Nazir and Mohammad Bashir, as follows :-
(1) Reserve Fund
(2) Mohammad Hamza
(3) Mohammad Nazir
(4) Mohammad Bashir
The corresponding debit entries were:
(1) Mazhar Ali Mohammad Unas
(2) Mohammad Saghir
(3) Mohammad Ayub Mohammad Jamil
(4) Nazul Islam
(5) Abdullah & Son
(6) Mohammad Ahmad Abdul Jalil
(7) Wali Mohammad Hafiz Mohammad
(8) Mohammad Ayub
Total ... Rs.
These eight persons are the traders whom we have already mentioned. The Income-tax Officer was satisfied that the sum of Rs. 1,08,771 represented an increase in capital and not profits, and he assessed the firm upon a total income of Rs. 32,341.
In the following assessment year, i.e., 1937-38, the Income-tax Officer found that the sums of money which had been credited in the accounts of the three partners had been withdrawn and that the accounts of the eight traders in bark had been adjusted and closed. Upon these facts he arrived at the conclusion that the sum of Rs. 1,08,771 has escaped income and accordingly, after observing what he considered to be the necessary formalities, he re-assessed the firm under Section 34 for the year 1936-37 upon the total income of Rs. 1,41,112.
The assessee appealed to the Assistant Commissioner, but the appeal was dismissed. An application was them made to the Commissioner of Income-tax for review under Section 33, or in the alternative for reference to this Court under Section 66(2) of the Act, and the Commissioner has referred the following three questions :
'(1) Whether it is necessary in law for an Income-tax Officer, before deciding to issue the notice specified in Section 34, to give the assessee an opportunity of being heard ?
(2) If the answer to the first question be in the affirmative, whether in this case the legal defect was such as to invalidate the whole assessment or whether the defect was not a mere irregularity which was cured by the fact that the petitioner was actually given an opportunity of being before the assessment was made ?
(3) Whether there was any material before the Income-tax Officer on which he could hold that the sum of Rs. 1,08,771 was income, profits or gains of the petitioner-firm, which had escaped assessment in year 1936-37 ?'
As regards the first question, the assessee firm had relied upon the authority of the High Court at Calcutta in the case of Mahaliram Ramji Das : 6ITR265(Cal) ; but the Commissioner of Income-tax was doubtful as regards the correctness of that decision, which at that time was pending in appeal before the Privy Council. The appeal has now been decided and the view taken by the Calcutta High Court has not been approved. The decision of their Lordships is reported in Mahaliram Ramjidas, In re . The reply to this question will be found at page 127 (of A.I.R. 1940 P.C.), second column, and it may be stated thus :
'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. 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.'
Learned counsel for the assessee agrees that this is the correct answer to give to question No. (1) in the light of the decision of the Judicial Committee.
In view of the answer to question No. (1), question No. (2) does not arise and question No. (3) is a question of fact. This is conceded by learned counsel for the assessee.
Learned counsel for the assessee, however, contends that there is another question of law to which an answer should be given by this Court and that is : Whether an Income-tax Officer is competent to make an assessment under Section 34 of the Act in the absence of any fresh material having come before him, since such assessment will amount to a review of the original assessment which had been made under Section 23 In an application dated July 14, 1938 this in effect was one of the questions which the assessee asked the Commissioner of Income-tax to refer to this Court; but we find that in his amended draft dated January 30, 1939 this question was omitted. In any case it is a question which has not been referred to us and we are not competent to decide it in these proceedings. It was open to the assessee to apply to this Court under Section 66(3) of the Act.
Our answer to the three questions referred to us is as indicated above. The assessee will pay his costs of this reference. Counsel for the Department is entitled to a fee of Rs. 200. A copy of this order under the seal of the Court and the signature of the Registrar will be sent to the Commissioner of Income-tax.
Reference answered accordingly.