This order will dispose of Civil Writs Nos. 257-D and 258-D of 1962.
The petitioner, Hari Brothers Private Limited, has preferred a petition under articles 226 and 227 of the Constitution and has prayed for the issuance of a writ of certiorari calling for the records pertaining to the aforesaid proceedings under section 34(1)(b) of the Indian Income-tax Act and to quash the notice under section 34 of that Act.
The facts giving rise to this petition are that the petitioner company is carrying on business as managing agents of Dalmia Cement Limited and Dalmia Cement (Bharat) Limited. The petitioner is also a recognised share dealer and an investor in shares. For the assessment year 1957-58 corresponding to the calender year 1956, the petitioner was assessed to tax on an income of Rs. 4,50,496. This income included a sum of Rs. 43,190 as the profit on the sale of shares of Orissa Cement Limited. These shares, according to the petitioners contention, were not acquired for the purpose of dealing in them but were received from its managed company in respect of managing agency commission. In other words, it was a consideration of a paid-in species. It is stated that these shares were held as investment shares. The assessment was confirmed on appeal by the Appellate Assistant Commissioner, but on second appeal the Income-tax Tribunal held that the difference between the price at which the shares were sold and the cost of the shares 'did not arise in the course of the assessees business activity and, therefore, the profits are not taxable'.
Another item included in the assessment was Rs. 31,355 which had been realised on the sale of the right to subscribe for the shares of Dalmia Cement (Bharat) Limited. The Controller of Capital Issues of the Government of India had given sanction to the managed company to issue further capital. The company issued ordinary shares accordingly. The registered holders of ordinary shares of the value of Rs. 2-8-0 each were given the preferential right to subscribe for the new issue at the rate of three new ordinary shares of Rs. 2-8-0 each for every ordinary share of Rs. 2-8-0 held by a registered holder. The petitioner company held 16,744 ordinary shares of Rs. 2-8-0 in the managed company had was entitled to subscribe for 50,232 ordinary shares of Rs. 2-8-0 each in that new issue. There were also another class of shareholders of Rs. 10 ordinary shares in the managed company and as they were not given a preferential right to subscribe to the new issue they feeling disappointed approached the petitioner company for redress. The petitioner renounced its rights in favour of the shareholders of Rs. 10 ordinary shares and received a nominal payment of annas 8 per right. On this basis the petitioner received Rs. 31,354.50 nP. as consideration for renouncement of the rights.
The contention raised by the petitioner before the Income-tax Officer was that the sum of Rs. 31,455 was a receipt of a casual and non-recurring nature and as such was not taxable. In the alternative the petitioner has maintained that the realisation of Rs. 31,355 could be held not under the heading 'business' but as 'capital gains'. The petitioners contention was rejected by the Income-tax Officer who included this amount in the taxable income as 'business income' and the Appellate Assistant Commissioner on appeal upheld the order of the Income-tax Officer. The petitioner then preferred a second appeal to the Appellate Tribunal which was allowed. The Appellate Tribunal held that the two sums Rs. 43,190 and Rs. 31,355 were not income and, therefore, not taxable.
The Income-tax Officer served on 9th March, 1962, a notice under section 34(1)(b) of the Income-tax Act alleging that he had reason to believe that the assessees income for the assessment year 1957-58 has escaped assessment and has been under-assessed and, therefore, he proposed to assess and reassess the said income. He required the assessee to deliver a return of his income for the year ending 31st March, 1958. The petitioner sent the return under protest and raised a contention that notices under section 34(1)(b) were wrong and without jurisdiction and the two conditions which were essential before the Income-tax Officer could act under section 34(1)(b) were absent, namel :
(1) the Income-tax Officer must have information which comes into his possession subsequent to his making the original order; and
(2) that information must lead one to believe that income chargeable to tax has escaped assessment or has been under-assessed.
The petitioners stand has been that there was no fresh 'information' from which it could be said that the Income-tax Officer had reason to believe that income had escaped assessment. No new facts had come to the notice of the Income-tax Officer nor was there any new information as to the true and correct state of the law. The Income-tax Officer could and ought to have assessed the amounts in question as capital gains even at the outset and he could not have recourse to section 34(1)(b). There was no statement and even if there was one it was fully known to the Income-tax Officer at the time of the assessment proceedings at the initial stage. At the stage of original assessment the petitioner had placed all the materials before the Income-tax Officer and had pointed out to him that the said items of income were not taxable under the head 'profits and gains of busineess'. The Income-tax Officer on the material placed before him had chosen to tax the items in question under the head 'business' and not as 'capital gains'. There was no dispute about the two items and full information of the facts had been placed before the income-tax authorities and the Income-tax Officer drew a legal, though erroneous, inference that the amounts were taxable under the head 'profits and gains of business' and that being so the proceedings under section 34 were without jurisdiction. In a letter dated 25th July, 1959, marked annexure 'A', the petitioner had stated in so many words that alternatively 'the realisation of Rs. 31,355 can be held as capital gains'. Here also maintained that this income was not a 'capital asset' and the right to subscribe for shares does not fall within the definition contained in section 2(4A) of the Income-tax Act.
The respondents is that the decision of the Appellate Tribunal as to the nature of the transaction is 'information' and entitles the Income-tax Officer to re-open the assessment under section 34(1)(b). The Income-tax Officer, after having taxed the income under the head 'business', can proceed under section 34(1)(b) to reassess it under the head 'capital gains'; and this he may do even if there was no omission or failure on the part of the assessee. After the Appellate Tribunal has held that the view taken by the Income-tax Officer is erroneous the letter is at liberty to reopen the assessment under section 34(1)(b), the basis for such a reopening is the authoritative exposition of law by the Tribunal.
It was also contended that the petitioner has an appropriate remedy when he can present his objections before the Income-tax Officer and has remedies open to him by way of appeal and reference. It was said that there was no error of jurisdiction and, therefore, the petitioner is not entitled to any writ.
Two points have been urged by the learned counsel for the petitioner. It was first said that section 34(1)(b) is not attracted as the Income-tax Officer had no 'information' in his possession and no 'reason to believe' that income had 'escaped' assessment. According to the learned counsel 'information' must arise from new facts and there must be escapement and not merely non-assessment. The second contention was that the sale of right of shares could in no case be treated as 'capital asset'. I may deal with the second contention first. In my view it is not sustainable. Section 2(4A) defines 'capital asset' as being property of any kind held by an assessee, whether or not connected with his business, profession or vocation, but does not include any stock-in-trade, etc., personal effects, and land yielding agricultural income. The word 'property' is of wide amplitude.
Section 12B provides tha :
'(1) The tax shall be payable by an assessee under the head Capital gains in respect of any profits or gains arising from the sale, exchange, relinquishment or transfer of a capital asset effected after the 31st day of March, 1956...'
The word 'relinquishment' has been newly inserted. I am inclined to agree with the contention on behalf of the respondents that a right to subscribe for shares is property and it is a 'capital asset'.
On the first point, on which main arguments have been addressed, I have been referred to a number of decisions to which reference may now be made. The decision of the Supreme Court in Chatturam Horilram Ltd. v. Commissioner of Income-tax lays down the proposition tha :
'Where earlier assessment proceedings had in fact been taken but failed to result in a valid assessment owing to some lacuna other than that attributable to the assessing authorities, notwithstanding the chargeability of the Income to tax, it would be a case of chargeable income escaping assessment and not a case of mere non-assessment of income-tax.'
On the strength of this authority it is contended that the failure of assessment was due to the lapse on the part of the income-tax authorities and, therefore, notice under section 34(1)(b) was without jurisdiction. Ananthalakshmi Ammal v. Commissioner of Income-tax is a decision of the Madras High Court in which the view taken in an earlier judgment of that court in Commissioner of Income-tax v. Janab S. Khaderwalli Sahib was adopted. It was held that a mere change of opinion based on the same facts and figures which were present to the mind of the Income-tax Officer at the time of the original assessment does not amount to discovery. The Income-tax Officer, according to this view, cannot act under section 34 unless the discovery made by him is the result of the information that has come to his knowledge. If the Income-tax Officer has acted on information which was already in his possession and within has knowledge, he cannot act under section 34 even though the taxpayer had escaped assessment. In that case the decision of the Income-tax Officer was reversed as erroneous by the competent appellate authority. The appellate decision could not amount to definite information within the meaning of section 34 so as to enable the Income-tax Officer to exercise the powers conferred on him by section 34 with reference to the same set of facts. The Bench then observe :
'The facts for consideration remained the same. Only his erroneous decision was eliminated. it was nothing more than a change of opinion on the same set of facts, though the change in this case was apparently forced by the decision of the Tribunal. There was no definite information or any discovery in consequence of such information within the meaning of section 34.'
The decision in Maharaj Kumar Kamal Singh v. Commissioner of Income-tax is under section 34(1)(b) after it had been amended in 1948. The word 'information' occurring in section 34(1)(b) was construed to include information as to the true and correct state of the law. The word 'escape' in the same provision was not confined to cases where no return had been submitted by the assessee or where income had not been assessed owing to inadvertence or oversight or other lacuna attributable to the assessing authorities; even in a case where a return had been submitted, if the Income-tax Officer had erroneously failed to tax a part of the assessable income, it was a case where that part of the income had escaped assessment. It was further observed that two conditions must be satisfied before the Income-tax Officer can act under section 34(1)(b : he must have information which come into his possession subsequent to the making of the original assessment order, and that information must lead to his belief that income chargeable to tax has escaped assessment, has been under-assessed or assessed at too law a rate, or has been made the subject of excessive relief. The learned counsel for the petitioner also drew my attention to earlier decision of the High Court of Allahabad in Kedarnath v. Commissioner of Income-tax, New Victoria Mills Co. Ltd. v. Commissioner of Income-tax, Raja Priyanand Prasad Singh v. Commissioner of Income-tax, Lala Pannalal v. Commissioner of Income-tax, the High Court of Patna in Bhimraj Panna Lal v. Commissioner of Income-tax, the High Court of Bombay in Commissioner of Income-tax v. Sir Mahomed Yusuf Ismail and the High Court of Madras in Raghavalu Naidu and Sons v. Commissioner of Income-tax, but in view of the later decision of the Supreme Court in Maharaj Kumar Kamal Singhs case it is not necessary to discuss them. My attention has also been drawn to Calcutta Discount Co. Ltd v. Income-tax Officer, Companies District I, Calcutta, which is a decision of the Supreme Court under section 34(1)(a). Taking support from these authorities the learned counsel wants this court to deduce that the order of the Income-tax Officer is without jurisdiction and does not fall within the ambit of section 34(1)(b).
The learned counsel for the department contends that the decisions cited on behalf of the assessee refer to the provisions of section 34 before it was amended in 1948. There have been important changes in section 34. From 1922 to 1938, section 34 was in the following word :
'34. If for any reason income, profits or gains chargeable to income-tax has escaped 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 that year, serve on the person liable....'
The next amendment came in 1939. The relevant words of the section as amended are reproduced belo :
'34. (1) If (in consequence of definite in formation 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.... the Income-tax Officer may (in any case in which he has reason to believe that the assessee has concealed the particulars... at any time within 8 years, and in any other case at any time within four years of the end of that year), serve on the person....'
The section underwent substantial change in 1948. Section 34(1) was split up in two parts (a) and (b) and the change brought about in 1948 will appear from the portion of section 34(1)(b) reproduced belo :
'34. (1) If - ...
(b) notwithstanding that there has been no omission or failure as mentioned in caluse (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-assessed... he may in... cases falling under clause (b) at any time within four years of the end of that year, serve...'
This section was amended once more in 1953, but the changes introduced are not relevant for purpose of the disposal of this dispute. It will thus be seen that between 1922 to 1938 the law was very liberal and the Income-tax Officer could reopen the matter 'if for any reason income, profits or gains chargeable to income-tax had escaped assessment...' During the second period between 1939 and 1948 the requirements for reopening the matter depended upon definite information which had come into the possession of the Income-tax Officer who then discovers escapement. These are not the words to be construed for purpose of this case. As a result amendment after 1948 steps are to be taken by the Income-tax Officer where he has 'in consequence of information in his possession reason to believe that income... have escaped assessment'.
The stand taken up on behalf of the department is that although all the facts, on the basis of which the assessment was made by the Income-tax Officer, were before him, the Income-tax Tribunal brought the matter to the notice of the Income-tax Officer that the particular receipts were taxable not as 'business' but as 'capital gains' under section 12B. This enunciation of law, it is contended, amounts to an 'information' under section 34(1)(b). Main reliance has been placed by Mr. Hardy upon the decision of the Supreme Court in Maharaj Kumar Kamal Singh v. Commissioner of Income-tax, which is a case under section 34(1)(b) as amended in 1948. The Supreme Court was not impressed by the argument that the information contemplated by these provisions was factual and not as to the state of law. The Supreme Court observed.
'... that the word information must have reference to information as to law.'
Gajendragadkar J. observe :
'Where in consequence of information in his possession, the Income-tax Officer has reason to believe that income has been assessed at too low a rate, he is empowered to revise the assessment; and there can be no doubt that the belief of the Income-tax Officer that any given income has been assessed at too low a rate may in many cases due to information about the true legal position in the matter of the relevant rates. If the word information in reference to this class of cases must necessarily include information as to law, it is impossible to accept the argument that, in regard to the other cases falling under the same provision, the same word should have a narrower and a more limited meaning. 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. If that be the true position, the argument that the Income-tax Officer was not justified in treating the Privy Council decision in question as information within section 34(1)(b) cannot be accepted.'
Regarding the term 'escaped assessment', the Supreme Court observe :
'We see no justification for holding that cases of income escaping assessment must always be cases where income has not been assessed owing to inadvertence or oversight or owing to the fact that no return has been submitted. In our opinion, even in a case where a return has been submitted, if the Income-tax Officer erroneously falls to tax a part of assessable income, it is a case where the said part of the income has escaped assessment. The appellants attempt to put a very narrow and artificial limitation on the meaning of the word escape in section 34(1)(b) cannot therefore succeed.'
The decisions cited at the bar on behalf of the assessee in this case and some others, including the decision of the Privy Council in Sir Rajendranath Mukherjee v. Commissioner Income-tax, were reviewed in the above decision of the Supreme Court. The action taken by the Income-tax Officer in this case appears to be conformity with the view in respect of section 34(1)(b) taken by their Lordships of the Supreme Court in Maharaj Kumar Kamal Singhs case. Mr. Hardy also drew my attention to Salem Provident Fund Society Ltd. v. Commissioner of Income-tax. In that case the Income-tax Officer discovered his mistake of his own accord subsequently. On discovering the mistake he proposed to rectify it under section 35, but later on initiated reassessment proceedings under section 34. It was held that the reassessment proceedings which were valid as 'information' for the purpose of section 34 need not be wholly extraneous to the record of the original assessment. A mistake apparent on the face of the order of assessment would itself constitute 'information', whether some one else gave that information to the Income-tax Officer or he informed himself.
The learned counsel for the department also contended that Calcutta Discount Company Limited v. Income-tax Officer, Companies District I, Calcutta and Maharaja Sri Umaid Mills Ltd. v. Income-tax Officer, Central Circle IV, New Delhi, relied upon by the learned counsel for the assessee, were under section 34(1)(a) and the observations in those cases are not a safe guide for construction of section 34(1)(b). Several cases from the Allahabad and other High Courts, cited on behalf of the assessee, refer to interpretation of the provision before an amendment of the section in 1948 and they, in the circumstances, cannot be treated as a dependable guide for construing the amended provisions. The observations of their Lordships of the Supreme Court in Maharaj Kumar Kamal Singh v. Commissioner of Income-tax are nearest to the matter arising in this case and following the ratio in that case the assessees contention cannot prevail. I would, therefore, dismiss both the petitions with costs.