This is a reference under section 66(1) of the Indian Income-tax Act, 1922.
2. The facts on which the reference is founded are as follows : the assessee is an individual. His assessment for the year 1946-47, the year of account being the financial year ending March 31, 1946, was made by the Income-tax Officer Shri Bandevar on December 6, 1946. The assessee had a two anna share in Messrs. Shiv Raj Fine Art Litho Works, Nagpur. This is a registered firm. The partners of the firm were the assessee, his wife and four major sons. The two minor sons of the assessee were admitted to the benefits of the partnership. Thus there were in all eight person, each having a two anna share, amongst whom the profits of the firm were to be divided. In the return submitted by the assessee for the year 1946-47 he showed only his share of income but omitted to include the profits which fell to the share of his wife and minor sons. Such income has to be included for computing the total income of any individual for the purpose of assessment by virtue of the provisions of section 16(3)(a)(i) and (ii) of the Indian Income-tax Act. Shri Bandevar, however, overlooked the provisions of section 16(3)(a)(i) and (ii) of the Act when he assessed the assessees income for the year 1946-47. He assessed the assessee, his wife and his minor sons separately. He did the same thing in the year 1947-48. In the year 1948-49 Shri Bandevar was succeeded by Shri Gahlot, who also assessed these person in the same way. The Tribunal both while dismissing the assessees appeal and while making a reference has accepted the position that Shri Bandevar as well as Shri Gahlot had overlooked the provisions of section 16(3)(a)(i) and (ii) of the Act.
3. While Shri Gahlot was making the assessment for the year 1949-50, he realised that an error had been committed in respect of the past assessment of the assessee inasmuch as in the income of the assessee the profits which fell to the share of his wife and minor sons were not included as required by section 16(3)(a)(i) of Act. Thereupon he made a report to the Commissioner for sanction as required by section 34, as amended by the Amending Act of 1948. The Commissioner gave the sanction, whereupon the Income-tax Officer, issued a notice to the assessee under section 34 of the Act and after hearing the assessee included in his income the income of his wife and minor sons. The appeal taken by the assessee against that order was dismissed by the Appellate Assistant Commissioner. A further appeal taken by him before the Tribunal was also dismissed. The assessee then made an application to the Tribunal for stating the case to this Court. The Tribunal allowed the application and has framed the following question of law for decision by this Court : (i) Whether the notice issued by the Income-tax Officer to the assessee under the amended section 34 of the Income-tax Act was validly issued (ii) If the answer to question No. 1 is in the negative, whether the notice issued under the amended section 34 of could be considered to have been issued under section 34 before its amendment by the Income-tax and Business Profits Tax Amendment Act, 1948 (iii) If the answer to question No. 2 is in the affirmative, whether the notice under section 34, as it stood before its amendment, was validly issued 4. The second and the third question do not arise for decision now because as has been conceded by the learned Advocate-General who appeared for the assessee section 34 has been made expressly retrospective by the Amending Act of 1952 and the only question which we have to answer therefore is the first one.
4. Section 34 of the Act has been amended from time to time. The relevant portion of the original section stood thus : "If for any reason income, profits or gains chargeable to income-tax has escaped as assessment in any year or has been assessed at too low a rate, the Income-tax Officer may, at any time within one year of the end of the year, serve on the person liable to pay t ax on such income, profits or gains, or, in the case of a company, on the principal officer thereof a notice containing all or any of the requirements which may be included in a notice under sub-section (2) of section 22 and may proceed to assess or re-assess such income, profits or gains, and the provision of this Act shall, so far as may be, apply accordingly as if the notice were issued under that sub-section." The relevant portion of section 34 after the Amending Act of 1939 stood thus : "34. (1) If in consequence of definite information which has come into his possession the Income-tax Officer discovers that income, profits or gains chargeable to income-tax have escaped assessment in any year, or have been under-assessed, or have been assessed at too low a rate, or have been the subject of excessive relief under this Act the Income-tax Officer may, in any case in which he has reason to believe that the assess has concealed the particulars of his income of deliberately furnished inaccurate particulars thereof, at any time within four years of the end of that year, serve on the person liable to pay tax on such income, profits or gains, or in the case of a company, on the principal officer thereof, a notice containing all or any of the requirements which may be included in a notice under sub-section (2) of section 22, and may proceed to assess or re-assess such income, profits or gains, 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..." (a) the Income-tax Officer has reason to believe that by reason of the omission or failure or 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 (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, profits or gains chargeable to income-tax have escaped assessment for any year, or have been under-assesssed 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 principle officer thereof, a notice containing all or any of the requirements which may be included in a notice under sub-section (2) of section 22 and may proceed to assess or 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 : (i) the Income-tax Officer shall not issue a notice under this subsection, unless he has recorded his reasons for doing so and the Commissioner is satisfied on such reasons recorded that it is a fit case for the issue of such notice." 6. With reference to this section as it stood before 1939, the Calcutta High Court has taken different views on the question as to what were the conditions precedent to the application of section 34. But the matter eventually went before the Privy Council who held in Commissioner of Income-tax, Bengal v. Mahaliram Ramjidas, that it was enough if the Income-tax Officer believed bona fide on the information before him that there was ground for thinking that the income had escaped assessment or been under-assessed. It will be seen that the Amending Act of 1939 introduced two important changes in section 34. In the first place, it required that the Income-tax Officer must come into possession of a "definite information" and secondly that by reason of that he should "discover" that the income has escaped assessment for any year. The Amending Act of 1948 has split up sub-section (1) of section 34 into two clause. Clause (a) deals with the omission or failure on the part of an assessee to make a return of his income or to disclose fully and truly all material facts necessary for his assessment and clause (b) relates to a belief entertained by the Income-tax Officer that the income. in consequence of information in his possession, has escaped assessment. The word "discovers" which found place in section 34 after its amendment by the Act of 1939, has been replaced now by the words "reason to believe".
7. After the amendment of section 34 by the Amending Act of 1939, the Bombay High Court held in Commissioner of Income-tax, Bombay v. Sir Mohammad Yusuf, that before the section can be applied, the Income-tax Officer has to discover that income has escaped assessment, and that discovery must be based on definite information having come into his possession. As regards the pre-existing law the learned Judge observed : "Section 34 under the Act before the amendment of 1939 provided that if for nay reason income, profits or gains chargeable to income-tax had escaped assessment in any year, or had been assessed at too low a rate, the Income-tax Officer might make a fresh assessment. Under that section all that had to be shown was that income has escaped assessment, or had been assessed at too low a rate, and the cases show that position might arise by a mere error on the part of the Income-tax Officer. He might change his opinion , and thereupon make a fresh assessment, having to do no more than assert that owing to his mistake income had escaped assessment." "Presumably it was desired to curtail the powers of the Income-tax authorities in that respect. Income-tax is a serious item in the expenditure of most people, and an assessee is entitled to know what his liability is, and it certainly seems unreasonable that , if his liability has been fixed at a certain figure, and he has based his future budget on that figure, he should subsequently be told that, owing to some mistake of the Income-tax Officer, he ought to have been charged at a heavier figure, with the result that he may cause considerable embarrassment." 8. In the instance case it would appear from the order of the Income-tax Officer that proceedings were started by him against the assessee not under clause (a) but under clause (b) of sub-section (1) of section 34. This position was also accepted by the Appellate Assistant Commissioner while dismissing the appeal and by the Tribunal while dismissing the appeal to them. In the order of reference, the Tribunal have made mention of section 34 generally and have not referred to any particular sub-section thereof. It is, however, clear that though there was no specific mention in the Tribunals order of reference to clause (b) of sub-section (1) of section 34, it is that clause which the Tribunal had in mind when they made the reference.
This would be clear from the fact that before formulating the questions they referred to two contentions which were raised before them in appeal, of which the second one is as follows : "Under the amended section 34, even it that section applied, an notice could have been issued, inasmuch as Mr. Gahlot was only revising the opinion which Mr. Bandewar had formed while making the assessment on the assessee for the year 1946-47." This grounds could obviously not apply to a case falling under clause (a). We would, therefore, regard the question, though framed in wide terms, as being limited to clause (b) of sub-section (1) of section 34, and answer it accordingly.
9. It is clear from the appellate order of the Tribunal that in their opinion what the Income-tax Officer did was to revise an opinion because "he realised that an error had been committed in respect of the past assessment of the assessee, inasmuch as in the income of the assessee were not included the shares of his wife and his minor sons, as provided in section 16(3)(a)(i) and (ii) of the Act." Thus, according to the Tribunal the error in the past consisted in the fact that the provisions of section 16(3)(a)(i) and (ii) were overlooked by the Income-tax Officer concerned. According to the Tribunal it was on this basis that Shri Gahlot, the Income-tax Officer, made a report to the Commissioner for his sanction as required by the first proviso to sub-section (1) of section 34. The notice issued to the assessee was thus on the basis of this ground, that is the Income-tax Officer concerned had in the past overlooked the provisions of section 16(3)(a)(i) and (ii) and that the occasion arose for acting under section 34.
10. It must be borne in mind that clause (b) requires that the belief entertained by the Income-tax Officer that income has escaped assessment must be based upon a definite information, and that the information must be of a fact and not of law. In other words, overlooking a provision of law is not the same thing as obtaining a definite information. The Income-tax Officer who administers law must be deemed to be conversant with the provisions of the law, and if he omitted to apply the provisions, neither he nor his successor can take resort to clause (b) of sub-section (1) of section 34. It may, however, be otherwise where the law has been amended or a decision has been overruled and the Income-tax Officer being unaware of this fact under-assesses an assessee. In the present case there is nothing of the kind.
11. In support of the proposition that possession of definite information is a condition precedent for reopening an assessment under section 34(1)(b), reliance is placed, apart from the Bombay case, on the following cases : Income-tax Appellate Tribunal, Bombay v. B. P.Byramji & Co., Raghavalu Naidu & Sons v. Commissioner of Income-tax, Bihar & Orissa, Misc. C. C. No. 195 of 1950, dated March 31, 1952 and Misc. C. C. No. 106 of 1953, dated April 17, 1954.
In the first-mentioned case,, it was held that a mistake a law is not a ground for reopening an assessment under section 34 of the Income-tax Act as amended by the Income-tax (Amendment) Act of 1939 and that under this provision the Income-tax Officer has no power to reopen an assessment unless he acts in consequence of definite information which has come into possession. In the two Madras cases stress has been laid on the words "definite information" and it is stated that where there is no definite information in possession of the Income-tax Officer, he cannot issue a notice under section 34. The same view has been taken in the Patna case. In all these cases notice issued was under section 34(1) as amended by the Act of 1939, but the principle laid down in those cases would equally apply to cases which after the Amending Act of 1948 would fall under clause (b) of sub-section 34 of the Act.
12. We were also referred to the decision in Raja Benoy Kumar v.Commissioner of Income-tax, West Bengal. In that case the words "definite information" were interpreted to include information as to the true state of the law obtaining from outside the case and it was observed : "Under the terms of the section, the information should be such as is capable of lending to a discovery that income has escaped assessment or has been under-assessed or has been assessed at too low a rate or has been the subject or excessive relief. Although it may be possible to construe the section by limiting the information to purely factual information in the first, second and fourth cases, the third case clearly suggests that the error may be an error in the application of the appropriate rate and so an error law and therefore the information may applied for the reason that the amount of the assessable income was determined at a lower figure, because that contingency is covered by the second case. If information as to the correct law is proper information in the third case, it must be so in all the four cases." This decision supports to some extent the contention of the assessee, but dies not support the stand taken on behalf of the defendant.
13. On behalf of the Department it was contended by Adhikari that the assessee had failed to comply with the requirements of law by not furnishing all the facts in his return inasmuch as he omitted to show the income of his wife and minor sons. In our opinion, we cannot go into this question as it was not raised at any stage of this case.
14. Shri Adhikari also wanted that we should hold that this case fell under clause (a) of sub-section (1) of section 34. As we have already pointed out earlier we must proceed on the basis that he proceedings were initiated by reference to clause (b) of sub-section (1) of section 34 and therefore it is not open to the Department now to say that he proceedings should be considered as being under clause (a).
15. It was then contended that the assessment for the previous about the facts could be acquired by Shri Gahlot after perusing the were made. For these reasons, it was paid, that the knowledge so gained by Shri Gahlot could be regarded as information. In our opinion, whoever may have made assessment in the past, the Income-tax Officer who acts under section 34 must be deemed to have always had before him the fact an the knowledge which the officers making the assessments themselves had at the time of making the assessment.
16. Lastly it was contended does not arise on the points which are referred to this Court. In our opinion, the argument is clearly referable to the first question put before us.
17. Our answer to the first question posed therefore is that the notice was not validly issued by the Income-tax Officer under the amended section 34 of the Income-tax Act.
18. Cost of this application shall be paid by the respondent. Counsels fee Rs. 200.