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Poonjabhai Vanmalidas and Sons (H.U.F.) Vs. Commissioner of Income-tax, Gujarat - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference No. 19 of 1965
Judge
Reported in[1974]95ITR251(Guj)
ActsIncome Tax Act, 1922 - Sections 34(1); Income Tax Act, 1961 - Sections 147 and 147(1)
AppellantPoonjabhai Vanmalidas and Sons (H.U.F.)
RespondentCommissioner of Income-tax, Gujarat
Appellant Advocate K.H. Kaji, Adv.
Respondent Advocate J.M. Thakore, Adv.
Cases ReferredCalcutta Discount Co. Ltd. v. Income
Excerpt:
direct taxation - assessment - section 34 (1) (a) of income tax act, 1922 and sections 147 and 147 (1) of income tax act, 1961 - income-tax officer considered omission on part of assessee to furnish correct facts at time of assessment and issued notice under section 34 (1) (a) - pursuant to notice assessee filed return but challenged validity of proceedings under section 34 (1) (a) - whether assessee could validly raise objection to issue of notice under section 34 (1) (a) - income-tax officer had no power to issue notices under section 34 (1) (a) - held, question answered in affirmative. - - of land situated at ghee-kanta, ahmedabad, by an agreement of purchase dated april 5, 1944. the vendor of this plot of land was ambalal sarabhai, a well-known industrialist of ahmedabad. under.....divan, j.1. this full bench was originally constituted to consider whether the decision of a division bench of this high court in kanji ranchhod v. commissioner of income-tax interpreting the decision of the supreme court in calcutta discount co. ltd. v. income-tax officer lays down the correct principles in view of the decisions of the supreme court in s. narayanappa v. commissioner of income-tax, kantamani venkata narayana and sons v. first additional income-tax officer and sowdagar ahmed khan v. income-tax officer. moreover, after the matter was partly heard by us, the decision of the supreme court in commissioner of income-tax v. burlop dealers ltd. was reported and the matter before us has to be considered in the light of this latest decision. we have heard the learned advocates of.....
Judgment:

Divan, J.

1. This Full Bench was originally constituted to consider whether the decision of a Division Bench of this High Court in Kanji Ranchhod v. Commissioner of Income-tax interpreting the decision of the Supreme Court in Calcutta Discount Co. Ltd. v. Income-tax Officer lays down the correct principles in view of the decisions of the Supreme Court in S. Narayanappa v. Commissioner of Income-tax, Kantamani Venkata Narayana and Sons v. First Additional Income-tax Officer and Sowdagar Ahmed Khan v. Income-tax Officer. Moreover, after the matter was partly heard by us, the decision of the Supreme Court in Commissioner of Income-tax v. Burlop Dealers Ltd. was reported and the matter before us has to be considered in the light of this latest decision. We have heard the learned advocates of both the sides regarding this decision.

2. The facts giving rise to this reference may be shortly stated :

3. The assessee is a Hindu undivided family and the relevant year of account is S. Y. 2,000 i.e., November 30, 1943, too October 17, 1944. The assessment year is 1945-46. On January 23, 1947, the assessee was originally assessed in respect of this particular assessment year and the total income of the Hindu undivided family was held to be Rs. 67,605. It appears that in the course of S. Y. 2,000, the karta of this Hindu undivided family had entered into an agreement to purchase 6,708 sq. yds. of land situated at Ghee-Kanta, Ahmedabad, by an agreement of purchase dated April 5, 1944. The vendor of this plot of land was Ambalal Sarabhai, a well-known industrialist of Ahmedabad. On July 1, 1944, the karta of the assessee-family entered into an agreement to sell 5,200 sq. yds. out of this total plot of 6,708 sq. yds. to a firm called Messrs. Nagardas and Co. of Wadhwan. The agreement of sale recited that the purchase price which K. Nagardas and Co. was to pay to the assessee was at the rate of Rs. 185 per sq. yd. A sum of Rs. 3,05,000 was to be paid as earnest money in two installments. The first installment of Rs. 1,05,000 was paid by Messrs. K. Nagardas and Co. on May 14, 1944, for which a separate receipt was passed. On July 1, 1944, at the time of the execution of the agreement for sale a further sum of Rs. 2,00,000 was paid by Messrs. K. Nagardas and Co. to the karta of the assessee-family. Under the terms of this agreement of sale, the sale-deed was to be executed on or before October 1, 1944; and under clause 9, if the the purchaser failed to complete the same on or before October 1, 1944, the vendor was to be entitled to forfeit the earnest money paid to him by the purchaser and the agreement stipulated that time was of the essence of the contract. Out of the aggregate sum of Rs. 3,05,000 received from K. Nagardas and Co. the assessee showed in his books of accounts only a sum of Rs. 78,000 by a credit entry of Aso Vad 13, three days before the closing of the year of account. On November 13, 1944, the pleader for the assessee wrote a letter addressed to Messrs. K. Nagardas and Co. setting out the facts about the agreement of purchase and by this pleader's notice intimation was given to Messrs. K. Nagardas and Co. about the intention of the assessee to forfeit the amount of Rs. 3,05,000 that K. Nagardas and Co. had paid as and by way of earnest money and by this letter Messrs. K. Nagardas and Co. was informed that the vendor, i.e., the assessee-family, had exercised its right of forfeiture and the amount of Rs. 3,05,000 stood forfeited on November 18, 1944. A reply was sent to this letter by Nagardas Khodidas, who was the sole proprietor of the firm of Messrs. K. Nagardas and Co. The reply was to the effect that the purchaser, i.e., Messrs. K. Nagardas and Co. had very high hopes to fulfill the agreement within the stipulated time and they had striven hard for raising the balance required for the purpose. The purchaser had not given up hopes till the time of writing that letter; and he requested the assessee to re-consider his notice and give a further opportunity of 15 days from November 18, 1944; and the letter proceeds :

'and should we fail even then to pay you the balance and complete the sale, you may exercise your right, that is to say, the forfeiture may then stand good.'

4. At the time when the original assessment was completed on January 23, 1947, the original agreement by which the assessee agreed to purchase the property from Ambalal Sarabhai, the agreement to sell a portion of this property to Messrs. K. Nagardas and Co., the receipt for the payment of Rs. 1,05,000 dated June 14, 1944, and the correspondence between the assessee's pleader and the reply, dated November 18, 1944, were all produced before the Income-tax Officer; and after perusing all those documents, he completed the assessment on January 23, 1947.

5. At the time of that assessment order, no reference was made in the assessment order itself to this transaction of the amount of Rs. 3,05,000 but a note was made on January 23, 1947, by the Income-tax Officer and the note was kept on the record of the case. The note was regarding Rs. 78,000 out of the aggregate amount of Rs. 3,05,000 received from Nagardas Khodidas, the sole proprietor of Messrs. K. Nagardas and Co., as earnest money. Instead of crediting this full sum of Rs. 3,05,000 in the books of account, only the sum of Rs. 78,000 out of this sum of Rs. 3,05,000 was credited as pointed out above. The explanation of the karta of the assessee-family for this 'strange conduct' (as it was called by the Income-tax Officer) was that the karta wanted to keep this loan hidden from his gumasthas to protect his reputation; and the Income-tax Officer noted that the dispute between the parties, i.e., the assessee and Messrs. K. Nagardas and Co. was still unsettled at the time when he made the note. In the last para of the note, the Income-tax Officer noted :

'Retaining the front portion of this land known as Maganbhai's Vadi for himself, the assessee wanted to dispose of the back portion of the land to somebody and he found in Messrs. K. Nagardas and Co., a handy person. The latter party agreed to purchase this and gave earnest money of Rs. 3,05,000 but subsequently he could not fulfil the contract and there by stood to forfeit the full earnest money of Rs. 3,05,000. The matter has not yet been finally settled but the assessee is yet in possession and ownership of the whole of Maganbhai's Vadi.'

6. It may be pointed out that when the assessment order was passed on January 23, 1947, Wadhwan was not within the jurisdiction of any Income-tax Officer functioning under the Indian Income-tax Act, 1922. In 1953, the Income-tax Officer, having jurisdiction over the assessee's case, made some inquiries from the Income-tax Officer, Surendranagar, who had jurisdiction over Wadhwan Town, about the firm of M/s. K. Nagardas and Co. and also about its sole proprietor, Nagardas Khodidas. By this time, the former Indian States had been financially integrated with the rest of India and the inquiries made by the Income-tax Officer, Ahmedabad, were directed to find out whether Nagardas Khodidas, the sole proprietor of M/s. K. Nagardas and Co., was in a position to pay a sum of Rs. 3,05,000, to the assessee. The Income-tax Officer, Surendranagar, made inquiries and recorded statement of Nagardas Khodidas. In this statement, Nagardas stated that he had only given a loan of Rs. 2,00,000 to the assessee and that this loan was returned by the assessee in the middle of S. Y. 2002. Nagardas also stated in the course of that inquiry before the Income-tax Officer, Surendranagar, that the sum of Rs. 2,00,000, which he advanced was not from the fund of M/s. K. Nagardas and Co. but was advanced from his personal fund. This information was passed on to the Income-tax Officer having jurisdiction over the assessee's case. The information which was thus received from the Income-tax Officer, Surendranagar was materially different from what was furnished by the assessee in 1947 at the time when the original assessment was completed and hence the Income-tax Officer considered that there had been omission or failure on the part of the assessee to furnish correct facts at the time of the original assessment; and he, therefore, issued a notice under section 34(1) (a) of the Act for the assessment year 1945-46; and this notice was served on the assessee on March 30, 1954.

7. Pursuant to this notice, the assessee filed a return on April 2, 1954, but he challenged the validity of the proceedings under section 34(1) (a). In spite of this challenge, the Income-tax Officer proceeded with the assessment and, in the course of the proceedings, a commission was issued to the Income-tax Officer, Surendranagar, to examine Nagardas Khodidas as well as one, M. K. Kamdar, brother-in-law of Nagardas and friend of the assessee. M. K. Kamdar was alleged to have signed as a witness at the foot of the agreement, dated July 1, 1944, entered into between the assessee and K. Nagardas and Co. Nagardas repeated his version of the loan of Rs. 2,00,000, which was subsequently returned. In the course of this statement, Nagardas stated that he did not remember having signed any memorandum of agreement of purchase on July 1, 1944, but he further stated that if he executed such an agreement, it was not for value of consideration. M. K. Kamdar also stated that he did not remember having signed any memorandum or document on July 1, 1944. These statements of Nagardas and Kamdar were recorded in the absence of the assessee. On February 9, 1959, the karta of the assessee-family appeared before the Income-tax Officer at Ahmedabad and stated that he did not remember whether he received the payment of Rs. 2,00,000 or whether Nagardas paid in cash or whether any accounts were kept. He also could not recollect the original of Rs. 78,000 credited in the books of the assessee on Aso Vad 13 of S. Y. 2000. When the Income-tax Officer referred to the statement made by Nagardas on November 23, 1954, to the effect that he had only advanced a loan to the assessee, the karta of the assessee-family reiterated his stand that the amount was taken as earnest money but he did not give any details of the transaction; nor did he seek to establish the correctness of his own version of the transaction. It appears that Nagardas was again examined on February 21, 1955, in the absence of the assessee. After considering the materials gathered by him, the Income-tax Officer taxed the sum of Rs. 3,05,000 as income of the assessee from undisclosed sources. The reassessment was made on March 19, 1955.

8. The order of the Income-tax Officer on reassessment was challenged in appeal before the Appellate Assistant Commissioner and in appeal the order of the Income-tax Officer was set aside on two grounds. In the first place, the Appellate Assistant Commissioner took the view that the formal notice under section 23(2) had not been served upon the assessee; and, secondly, he held that the assessee had not been given proper opportunity to cross-examine Nagardas and Kamdar, on whose evidence the Income-tax Officer had relied in the reassessment proceedings. Against this order of the Appellate Assistant Commissioner, the assessee went in appeal to the Tribunal and raised two contentions. He urged before the Tribunal that the assessee's case fell under section 34(1) (b) and not under section 34(1) (a); and, secondly, he contended that the Appellate Assistant Commissioner was not justified in setting aside the assessment and directing the Income-tax Officer as to how that officer should proceed with the assessment. By its order, dated February 14, 1956, the Tribunal rejected both the contentions. As regards the contention that the case of the assessee fell under section 34(1) (b) and not under section 34(1) (a), the Tribunal dealt with that point in paragraph 3 of its order and the relevant portion is in these terms :

'In so far as the Income-tax Officer was concerned, he believed the statement of Nagardas. He, therefore, had reason to believe that the assessee did not disclose fully and truly all material facts necessary for his assessment. It appears that at the time of the original assessment, the assessee was examined in respect of a sum of Rs. 3,05,000 and he had given an explanation which, at that time, was accepted by the Income-tax Officer. Because the explanation then offered was accepted by the Income-tax Officer does not mean that the assessee had fully and truly disclosed all material facts necessary for his assessment. It is only after all the material is on record that one can say whether the assessee had fully and truly disclosed all material facts. In so far as the Income-tax Officer who reassessed the assessee was concerned, he accepted the statement of Nagardas without getting it tested by cross-examination by the assessee. It is only after all the material is on the record that one can say whether a case fell under section 34(1) (a) or under section 34(1) (b) of the Act. We are, therefore, unable to accept the first contention of Mr. Palkhivala.'

9. It thus appears from this passage of the Tribunal's order, dated February 14, 1956, that the Tribunal held that the question whether section 34(1) (a) or section 34(1) (b) was applicable was held to be premature at that stage of the proceedings.

10. The Tribunal having rejected both the contentions of the assessee, the matter went back to the Income-tax Officer in pursuance of the directions given by the Appellate Assistant Commissioner. After giving an opportunity to the assessee to cross-examine Nagardas and Kamdar in reassessment proceedings, the Income-tax Officer again included the sum of Rs. 3,05,000 in the assessment. This was done by the reassessment order, dated December 27, 1961. There was an appeal against this order to the Appellate Assistant Commissioner and once again it was contended that the notice under section 34(1) (a) was not validly issued. This contention along with other contentions of the assessee was rejected by the Appellate Assistant Commissioner. The matter was carried in further appeal to the Tribunal and there also the assessee contended that the action under section 34(1) (a) was not validly initiated and that reassessment was not completed within the period of limitation prescribed by law. At the hearing before the Tribunal on this second occasion, a preliminary objection was raised on behalf of the revenue that the assessee was not entitled to raise such a ground since that ground or contention on that basis had been raised before the Tribunal on the earlier occasion and the Tribunal had rejected all the contentions of the assessee including this particular contention. The Tribunal upheld the preliminary objection and came to the conclusion that the assessee was not entitled to question the jurisdiction of the Income-tax Officer to issue the notice under section 34(1) (a) after the remand by the Tribunal. The Tribunal on the second occasion pointed out that in view of the Supreme Court decision on the point, the earlier decision of the Tribunal was not sound but the Tribunal further pointed out that the earlier decision should have been challenged by the assessee before the High Court. The Tribunal also considered the assessee's contention on merits and held that, on the basis of the information received from the Income-tax Officer, Surendranagar, the Income-tax Officer in charge of the assessee's case could entertain an honest belief that the information given by the assessee in 1947 was not correct and the assessee's objection to the issue of the notice under section 34(1) (a) was rejected. The Tribunal also held that the reassessment was completed within the period of limitation. The Tribunal examined the justification for adding the sum of Rs. 3,05,000 as part of the assessee's income for S. Y. 2000 and held that the quantum of undisclosed income in the year of account was Rs. 1,78,000; and, thus, the assessee's appeal was partly allowed.

11. Thereafter, at the instance of the assessee, the following two questions were referred to this court under section 66 (1) of the Act :

'(1) Whether, on the facts and in the circumstances of the case, the assessee could validly raise an objection to the issue of notice under section 34(1) (a)

(2) If the answer to question No. 1 is in the affirmative, whether the facts and the circumstances of the case justified the issue of notice under section 34(1) (a)

12. This reference first came up for hearing before a Division Bench of this High Court but at that time a doubt was felt by the Division Bench as to whether the decision of this High Court in Kanji Ranchhod's case, could still be said to be good law in view of the decisions of the Supreme Court mentioned at the commencement of this judgment and hence the matter was referred to a Full Bench.

13. As regards the first question, it is clear from paragraph 3 of the Tribunal's order, dated February 14, 1956, that the Tribunal did not decide the question of the validity of the notice under section 34(1) (a). It left the matter open by holding that it is only after all the material is on the record that one can say whether a case falls under section 34(1) (a) or section 34(1) (b) of the Act. It is true that at the end of that paragraph the Tribunal stated;

'We, are, therefore, unable to accept the first contention of Mr. Palkhivala.'

And the first contention was that the assessee's case fell under section 34(1) (b) and not section 34(1) (a). Though this contention of Mr. Palkhivala on behalf of the assessee was not accepted by the Tribunal in its order, dated February 14, 1956, the entire tenor of the passage, which we have quoted earlier, clearly shows that the contention of Mr. Palkhivala was neither accepted or rejected because the Tribunal felt that in the absence of all the materials on the record, it was not possible for the Tribunal to say whether the case fell under section 34(1) (a) or section 34(1) (b). The passage which we have cited earlier from this order, dated February 14, 1956, clearly shows that the Tribunal then left the matter open and the contention regarding the validity of the notice under section 34(1) (a) was not concluded against the assessee or decided against the assessee. In view of that particular conclusion of the Tribunal, it is obvious that since the matter regarding the validity of the notice under section 34(1) (a) was left open and was not concluded against the assessee, the assessee could not have come to the High Court on a reference against that particular conclusion of the Tribunal. Under these circumstances, the learned Advocate-General, appearing on behalf of the revenue, very fairly stated that he was not pressing the first question and that the first question should be answered in the affirmative and the court should decide the main question which is the second question in this case. In view of this statement of the learned Advocate-General, we will now proceed to examine the legal point arising from the second question.

14. Section 34(1) (a) of the Act, so far as is material for the purposes of this judgment, provided at the relevant time as follows :

'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 to 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....

he may in cases falling under clause (a) at any time 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 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 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 :....'

15. The rest of the section is not material for the purposes of this judgment. We may point out that it is common ground between the assessee and the revenue that it is only if the case of the assessee fell under section 34(1) (a) that the reassessment proceedings against the assessee could be said to be valid.

16. In Calcutta Discount Co. Ltd. v. Income-tax Officer, the provisions of section 34(1) (a) were considered by the Supreme Court and the majority of the learned judges held that it was the duty of the assessee-company to disclose all the facts which had a bearing on the question; but whether the assessee had the intention to make a business profit as distinguished from the intention to change the form of the investments was really an inference to be drawn by the assessing authority from the material facts taken in conjunction with the surrounding circumstances. The majority held that the law did not require the assessee to state the conclusion that could reasonably be drawn from the primary facts. The question of the assessee's intention was an inferential fact and so the assessee's omission to state its true intention behind the sale of shares could not be considered to be a failure or omission to disclose any material fact within the meaning of section 34. It was further held by the Supreme Court in that case that the Income-tax Officer who issued the notices under section 34 did not have any material before him for believing that there had been any material non-disclosure by reason of which an under-assessment had taken place. The Income-tax Officer had no jurisdiction to issue the notices after the expiry of four years from the end of the assessment year, and the company was, therefore, entitled to an order directing the Income-tax Officer not to take any action on the basis of the notices. For the purposes of this judgment it is not necessary to set out the facts of that particular case; but it may be mentioned at this stage that the Supreme Court drew a distinction between material facts which the assessee was bound to disclose and inferences to be drawn from these material facts which the assessee was under no obligation to disclose; if the assessee puts all the material facts or what have been referred to in the subsequent decisions as 'primary facts', he had disclosed all that he is bound to do and merely because a different inference is to be drawn from those primary or material facts, according to the revenue, it cannot be said that there was omission or failure on the part of the assessee to disclose truly and fully all material facts necessary for his assessment for the year in question.

17. In Kanji Ranchhod v. Commissioner of Income-tax, a Division Bench of this High Court, consisting of Shelat C.J. and one of us, considered the principles laid down by the Supreme Court in Calcutta Discount Co.'s case, and held that in proceedings for reassessment under section 34 of the Indian Income-tax Act, 1922, though the court cannot investigate into the adequacy or otherwise of the grounds on which the reason to believe on the part of the Income-tax Officer rests, the assessee is entitled to show that there was no material at all on which the Income-tax Officer could found such belief, that is, have reason for such belief. The Division Bench further held that if, therefore, an assessee is in a position to show that he had disclosed at the time of the original assessment all that he was bound to disclose, i.e., all the primary facts relevant to and having a bearing on his assessment there would be no ground for the Income-tax Officer to have reason to believe that there was any omission or failure on the assessee's part to disclose. Similarly, if an assessee can show that, though there was omission or failure to disclose on his part, such failure or omission had not resulted in any non-assessment or under-assessment, etc., there would be no ground for the Income-tax Officer to have reason to believe that there was any non-assessment or under-assessment, etc., consequent upon such omission or failure and the proceedings initiated on the basis of such wrong belief would be invalid. At page 350 of the report, the Division Bench considered the decision of the Supreme Court in Calcutta Discount Co.'s case and observed :

'At page 201, the Supreme Court framed its conclusion on the scope of section 34(1) (a) in the following passage :

'The position, therefore, is that if there were in fact some reasonable grounds for thinking that there had been any non-disclosure as regards any primary fact which could have a material bearing on the question of 'under-assessment' that would be sufficient to give jurisdiction to the Income-tax Officer to issue the notices under section 34. Whether these grounds were adequate or not for arriving at the conclusion that there was a non-disclosure of material facts would not be open for the court's investigation. In other words, all that is necessary to give this special jurisdiction is that the Income-tax Officer had when he assumed jurisdiction some prima facie grounds for thinking that there had been some non-disclosure of material facts.' The Supreme Court also observed that it is the duty of the assessee who wants the court to hold that jurisdiction was lacking, to establish that the Income-tax Officer had no material at all before him for believing that there had been such non-disclosure. Though the court cannot investigate into the adequacy or otherwise of the grounds on which the reason to believe on the part of the Income-tax Officer rests, the assessee is entitled to show that there was no material at all on which the Income-tax Officer could found such belief, that is, have reason for such belief. If, therefore, an assessee is in a position to show that he had disclosed at the time of the original assessment all that he was bound to disclose, i.e., all the primary facts relevant to and having a bearing on his assessment, there would be no ground for the Income-tax Officer to have reason to believe that there was any omission or failure on the assessee's part to disclose. Similarly, if an assessee can show that, though there was omission or failure to disclose on his part, such failure or omission had not resulted in any non-assessment or under-assessment, etc., surely there would be no ground for the Income-tax Officer to have reason to believe that there was any non-assessment or under-assessment, etc., consequent upon such omission or failure. It would, therefore, follow that primary facts necessary for a proper assessment are objective facts, the existence or non-existence of which is not a matter of reasonable belief on the part of an Income-tax Officer. An Income-tax Officer cannot say that he had reason to believe that a certain fact which was relevant for assessment and therefore a primary fact existed and that it was not disclosed by an assessee if such a fact did not factually exist.'

18. Later on, in the course of its judgment, the Division Bench observed.

'The existence of a primary fact is therefore an objective fact which the court can investigate but once that fact is found to exist, if the Income-tax Officer reasonably believes that there was non-disclosure and that such non-disclosure resulted in non-assessment, under-assessment, etc., the court cannot investigate into the adequacy or otherwise of his reasons to come to that belief and the initiation in such cases would be valid. On the other hand, if there was in fact no omission or failure to file a return or no omission or failure to disclose a primary fact necessary for a proper assessment, there would be no ground or material for the taxing officer to have reason to believe that the assessee had failed or omitted to file a return or had failed or omitted to disclose any material fact and the officer in such a case would not satisfy the conditions laid down in Calcutta Discount Co.'s case and the initiation of proceedings by him would be bad.'

19. In Govind Ram v. Income-tax Officer, the question arose before a single judge of the Allahabad High Court in a proceeding under article 226 of the Constitution, as to whether a notice issued under section 147(a) of the Income-tax Act, 1961, similar to section 34(1) (a) of the 1922 Act, was valid or not. The facts in that case were that the petitioner in that case was one of the partners of a firm which carried on business of brick manufacturers in the name and style of Messrs. Krishna Brick Field, Sulem Sarai, Allahabad. The petitioner had an 7 annas share in the profits of the aforesaid firm in the relevant year of account. Two amounts of Rs. 6,380 and Rs. 5,936 were found credited in the books of the firm in the personal account of the petitioner on November 1, 1957. During the assessment proceedings for the assessment year 1959-60, the petitioner contended that the sum of Rs. 5,936 represented sale proceeds of ornaments and produced the receipts for the sales. The Income-tax Officer did not accept this case, and, holding that the sum of Rs. 5,936 represented income from an undisclosed source and as such could not be included in the assessment year 1959-60 but should be assessed only in the assessment year 1958-59, left it out of account in the assessment for the assessment year 1959-60. Later, he issued a notice on May 15, 1964, in respect of the said amount of Rs. 5,936 for the assessment year 1958-59 under section 147(a) of the Income-tax Act, 1961, as income which had escaped assessment; and the learned judge of the Allahabad High Court held that the notice issued after a lapse of four years was without jurisdiction. The learned judge relied upon the decision of the Supreme Court in Calcutta Discount Co.'s Case. An attempt was made on behalf of the revenue to distinguish the Supreme Court decision and it was sought to be urged that the Supreme Court case would have no application to the facts of the case before the Allahabad High Court. It was observed by the learned judge of the Allahabad High Court.

'The primary fact in the case of a cash credit would be the disclosure of the amount supported by the receipts or documents to support the alleged source. The inclusion whether it in fact represents the sale of those ornaments or is income from an undisclosed source would be an inference to be drawn by the Income-tax Officer. It is idle for the department to contend that the assessee himself should in the case of every cash credit admit, contrary to what he alleges, that the income was from an undisclosed source, otherwise he would render himself liable to action under section 147(1) of the Act of 1961.'

20. Thus, the contention of the department was negatived by the learned Judge of the Allahabad High Court. It may be pointed out that in that particular case it was not the argument on behalf of the department that the receipts were believed to be false or fabricated when the notice under section 147(a) was issued by the Income-tax Officer concerned.

21. In Commissioner of Income-tax v. Jeskaran Bhuvalka the decision of the Supreme Court in Calcutta Discount and also the decision of this High Court in Kanji Ranchhod's case were inter alia considered by a Division Bench of the Andhra Pradesh High Court. At page 137 of the report, the Division Bench cited the decision of this High Court in Kanji Ranchhod's case and also the decision of this High Court in Bhanji Lavji v. Commissioner of Income-tax, and it was held by the Division Bench of the Andhra Pradesh High Court that an assessment cannot be reopened under section 34(1) (a) on the basis of mere suspicions. There should be some material on which the Income-tax Officer came to the belief that a portion of the assessee's income had escaped assessment on account of non-disclosure of material facts by the assessee necessary for his assessment. It was also held that it is not for the assessee to suggest the inference that could be drawn from the primary facts, material for his assessment, placed by him before the assessing authority. His only duty is to place before the concerned authority the material facts necessary for a proper assessment. It was further held that merely because the reassessing authority wants to draw a different inference from the one which had been drawn by the original assessing authority, he cannot, for that reason, reopen the assessment under section 34(1) (a). He can do so only if he has reason to believe that material facts necessary for the assessment had not been disclosed fully and truly at the time of the original assessment. On the facts, it was held by the Division Bench that on the first occasion the assessee had placed before the assessing authority the basic facts necessary for his assessment and that the Income-tax Officer had no material on which he could come to the conclusion that a part of the assessee's income had escaped assessment on account of the failure of the assessee to disclose fully and truly all material facts necessary for such assessment.

22. We may point out that in this decision of the Andhra Pradesh High Court the decision of the Supreme Court in Kantamani Venkata Narayan and Sons v. First Additional Income-tax Officer and S. Narayanappa v. Commissioner of Income-tax, were referred to as instances where the Supreme Court interpreted the scope of section 34(1) (a).

23. In Commissioner of Income-tax v. Hemchandra Kar the Supreme Court held on the facts of the case before it that, as the primary facts were within the knowledge of the Income-tax Officer, the escarpment of income took place by reason of the failure of the Income-tax Officer to include the amount in question in the assessment of the assessee when he was in full possession of all the necessary material facts and that in such a situation the requirement of section 34(1) (a) were not satisfied. At page 4 of the report Grover J., delivering the judgment of the Supreme Court, observed :

'What has to be seen is whether the Income-tax Officer could have reason to believe that due to omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment, there had been escarpment of income. The High Court rightly relied on the observations in the majority judgment in Calcutta Discount Co. Ltd. v. Income-tax Officer that in every assessment proceeding the assessing authority will, for the purpose of computing or determining the proper tax, require to know all the facts which help him in coming to the correct conclusion. From the primary facts in his possession whether on disclosed or otherwise, the assessing authority has to draw inference as regards certain other facts and ultimately from the primary facts and the further fact inferred from the duty of disclosing all the primary facts lies on the assessee. The primary facts were admittedly within the knowledge of the Income-tax Officer at the time when he completed the first reassessment under section 34. .... When the Income-tax Officer was in possession of all these facts and he proceeded to make the reassessment of the individual members by including the amounts in question in their individual accounts he could not a few days later merely change his opinion and issue the notices under section 34 to the Hindu undivided family. In this situation it could hardly be said that the requirements of section 34(1) (a) were satisfied.'

24. Thus, this decision of the Supreme Court was on the facts of the case.

25. In Seth Kirorimal Adwani v. Income-tax Officer, a Division Bench of the Assam High Court, relying on the majority decision in Calcutta Discount Co.'s case held that, as the primary facts as appearing from the return had been disclosed to the Income-tax Officer, the petitioner's conduct could not come within the ambit of clause (a) of section 147 of the Act of 1961, and that on the facts the case really lay within the four corners of clause (b) of section 147 and hence the Income-tax Officer had acted without jurisdiction in issuing a notice under section 147(a). This decision also does not help us in deciding the particular matter before us.

26. In Rai Singh Deb Singh Bist v. Union of India, a Division Bench of the Delhi High Court considered the provisions of section 34(1) (a); and there the facts which were relied upon by the revenue authorities as indicating that the entries in the earlier years of account were bogus, came into existence much later after the closing of the relevant years of account; and on the basis of those facts which subsequently came into existence and on the basis of the valuation arrived at by the Income-tax Officer on his own subsequent enquiries, he wanted to proceed under section 34(1) (a); and it was held that since the facts on which the Income-tax Officer wanted to rely had come into existence subsequently, it could not be said that there was non-disclosure on the part of the assessee at the time when he filed the original return of assessment. Mr. Kaji, the learned advocate appearing on behalf of the assessee, relied upon the following passage from the judgment of the Delhi High Court at page 815 of the report :

'This sale deed would have been a material fact if it had been executed at any time prior to the assessment because then its disclosure either in the return or at the time of assessment would have been necessary for the assessment for that year as the credits standing in the names of the Ranas would have to be adjusted. Its non-disclosure at the time of assessment would certainly amount to a disclosure which is neither full nor true, if the assessee does not show an adjustment of the aforesaid credit entries. If such a sale deed is produced in the relevant assessment year, it is open to the Income-tax Officer to hold that it represents a bogus or sham transaction and he may arrive at this conclusion or inference after or even without holding an inquiry such as is contemplated by section 23(3). This conclusion will be an inference and nothing more. On the other hand, he may, after or without such an inquiry, come to a conclusion that the sale deed represents a genuine transaction and make an assessment accordingly. A different inference or conclusion at a later time whether it is arrived at upon the facts disclosed or on fresh facts gathered as a result of a further inquiry will not justify action under section 34(1) (a) if the fresh facts are not primary facts which existed at the time of assessment and which the assessee was under duty to disclose.'

27. In Modi spinning and Weaving Mills Co. Ltd. v. Income-tax Officer, the question of interpretation of section 34(1) (a) again came up before the Supreme Court and Shah J., delivering the judgment of the Supreme Court, has observed at page 371 of the report :

'Section 34 confers jurisdiction upon the Income-tax Officer to issue a notice in respect of the assessment beyond the period of four years, but within a period of eight years, from the end of the relevant year, if two condition exist - (1) that the Income-tax Officer has reason to believe that income, profits or gains chargeable to Income-tax had been under-assessed; and (2) that he has also reason to believe that such 'under-assessment' had occurred by reason of either (i) omission or failure on the part of an assessee to make a return of his income under section 22, or (ii) omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment for that year. These conditions are cumulative and precedent to the exercise of jurisdiction to issue a notice of reassessment : Calcutta Discount Co. Ltd. v. Income-tax Officer.

28. In that case, the judgment of the Allahabad High Court was set aside by the Supreme Court and the case was remanded for determination of the issue as to whether by reason of the omission or failure of the part of the company to disclose fully and truly all material facts necessary for assessment of the company for the three years in question, any income, profits or gains chargeable to Income-tax had escaped assessment. Again this decision of the Supreme Court in Modi Spinning and Weaving Mills Co.'s case, does not throw any further light on the principles governing issuance of notice under section 34(1) (a).

29. As against these different decisions of this High Court, Allahabad High Court, Andhra Pradesh High Court, Delhi High Court and Assam and Nagaland High Court, we have three decisions of the Supreme Court all interpreting section 34(1) (a) and laying down the requirements to be met before a notice under section 34(1) (a) can be issued.

30. In S. Narayanappa v. Commissioner of Income-tax, Ramaswami J., delivering the judgment of the Supreme Court, observed at page 221 of the report :

'It is true that two conditions must be satisfied in order to confer jurisdiction on the Income-tax Officer to issue the notice under section 34(1) in respect of assessments beyond the period of four years, but within a period of eight years, from the end of the relevant year. The first condition is that the Income-tax Officer must have reason to believe that the income, profits or gains chargeable to Income-tax had been under-assessed. The second condition is that he must have reason to believe that such 'under-assessment' had occurred by reason of either (i) omission or failure on the part of an assessee to make a return of his income under section 22, or (ii) omission or failure on the part of the assessee to disclose fully and truly all the material facts necessary for his assessment for that year. Both these conditions are conditions precedent to be satisfied before the Income-tax Officer acquires jurisdiction to issue a notice under the section. But the legal position is that if there are in fact some reasonable grounds for the Income-tax Officer to believe that there had been any non-disclosure as regards any fact, which could have a material bearing on the question of under-assessment, that would be sufficient to give jurisdiction to the Income-tax Officer to issue the notice under section 34. Whether these grounds are adequate or not is not a matter for the court to investigate. In other words, the sufficiency of the grounds which induced the Income-tax Officer to act is not a justiciable issue. It is of course open for the assessee to contend that the Income-tax Officer did not hold the belief that there had been such non-disclosure. In other words, the existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. Again the expression 'reason to believe' in section 34 of the Income-tax Act does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The belief must be held in good faith; it cannot be merely a pretense. To put it differently, it is open to the court to examine the question whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section. To this limited extent, the action of the Income-tax Officer in starting proceedings under section 34 of the Act is open to challenge in a court of law.'

31. In this passage, Ramaswami J. has pointed out that the correct legal position is that if there are some reasonable grounds for the Income-tax Officer to believe that there had been non-disclosure of material facts, that would be sufficient to give him jurisdiction to issue the notice under section 34. The action of the Income-tax Officer in starting proceeding under section 34 is open to challenge in a court of law only to a limited extend, viz. : (1) whether the Income-tax Officer held the belief that there had been such non-disclosure; and (2) the belief must be held in good faith; it cannot be merely a pretense; and it is open to the court to examine the question whether the reasons for the belief have a rational connection or a relevant bearing upon the formation of the belief and are not extraneous or irrelevant for the purpose of the section. Therefore, if there are in fact reasonable grounds for the Income-tax Officer to believe that there was any non-disclosure of material facts, it is open to him to issue a notice and the issuance of the notice is open to challenge in a court of law to the limited extent indicated above, viz : (1) that such belief was not at all held; or (2) that the belief was not held in good faith and was merely a pretense.

32. In Kantamani Venkata Narayana and Sons v. First Additional Income-tax Officer, a portion of the above passage from the judgment of Ramaswami J. in S. Narayanappa's case, was cited and Shah J., delivering the judgment of the Supreme Court, observed at page 641 of the report :

'This court in Calcutta Discount Co. Ltd. v. Income-tax Officer, observed that before the Income-tax Officer may issue a notice under section 34(1) (a) of the Indian Income-tax Act, two conditions precedent must co-exist : the Income-tax Officer must have reason to believe : (1) that income profits or gains had been under-assessed; and (2) that such under-assessment was due to non-disclosure of material facts by the assessee. The court further held that where the Income-tax Officer has, prima facie, reasonable grounds for believing that there has been a non-disclosure of a primary material fact, that by itself gives him jurisdiction to issue a notice under section 34 of the Act, and the adequacy or otherwise of the grounds of such belief is not open to investigation by the court.'

33. At page 640 of the report, Shah J., after referring to the judgment of the Calcutta High Court in P. R. Mukherjee v. Commissioner of Income-tax, agreed with the Calcutta High Court that it is not necessary or imperative that a notice under section 34 must specify under which of the two clauses, clause (a) or clause (b) sub-section (1) of section 34, the notice is issued. The main notice to be issued in a case under section 34 is the notice under section 22(2) and section 34 merely authorises the issue of such a notice. Thus, it is clear from this decision of the Supreme Court that the action of the Income-tax Officer in starting the proceedings is open to challenge in a court of law only to a limited extent, viz., the existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief and the assessee can contend that the Income-tax Officer did not in fact hold the belief that there had been such non-disclosure. Secondly, the belief must be held in good faith. It cannot be merely a pretense. Barring this limited challenge to the action of the Income-tax Officer for initiating action under section 34 (1), if there are reasonable grounds for the Income-tax Officer to believe that there had been non-disclosure of any facts, which could have a material bearing on the assessment of the assessee, that would be sufficient to give him jurisdiction to issue a notice under section 34 of the Act.

34. In Sowdagar Ahmad Khan v. Income-tax Officer, the Supreme Court dealt with the question of issuance of the notice under section 34 (1) (a). There, after the original assessment of the assessee for the assessment year 1943-44 was completed, the Income-tax Officer found that the assessee had a current account in the name of his father-in-law till the latter's death, that the assessee had failed to disclose the advance of a sum of Rs. 70,000 and that in the relevant returns the assessee had not shown income from property in the names of his sons, wife and daughter though many of the properties were purchased by him in their names. In the light of the material newly gathered the Income-tax Officer also felt that certain cash credits in the assessee's account books to the extent of Rs. 5 lakhs were not genuine. On September 5, 1959, the Income-tax Officer issued notices under section 34(1) (a) of the Indian Income-tax Act, 1922, to reopen the assessments for the years 1943-44 to 1949-50. The assessee filed writ petitions in the High Court challenging the legality of the notices but the petitions were dismissed. The matter was carried in appeal to the Supreme Court, where it was held that on the facts there was some material before the Income-tax Officer on which he formed the prima facie belief that the assessee had omitted to disclose fully and truly all the material facts and that in consequence of such non-disclosure income had escaped assessment and, therefore, the Income-tax Officer had jurisdiction to issue the notices under section 34(1) (a). It was contended before the Supreme Court on behalf of the assessee that it was not permissible in law for the Income-tax Officer to issue the notice under section 34(1) (a) because all the accounts were produced in the original assessment proceedings and the accounts had been accepted in the original assessment. Thus it was contended that there was no material before the Income-tax Officer, on which he could form the belief that the assessee had omitted to disclose fully and truly all material facts and in consequence of such non-disclosure income had escaped assessment or that there was under-assessment or that there was assessment at to low a rate. The argument was stressed that the conditions requisite for the issue of notice under section 34(1) (a) were not satisfied and the Income-tax Officer had no jurisdiction to issue such notices for any of the assessment years. The Supreme Court rejected this line of argument and, after examining the facts, observed.

'In the context of these facts we are of opinion that there was some material before the Income-tax Officer on which he formed the prima facie belief that the assessee had omitted to disclose fully and truly all material facts and that in consequence of such non-disclosure income had escaped assessment. It follows that the Income-tax Officer had jurisdiction to issue notices under section 34(1) (a) of the Act....'

35. We may point out that in this case the decision in Kantamani Venkata Narayana & Sons' case was relied upon by the Supreme Court.

36. In Commissioner of Income-tax v. Burlop Dealers Ltd., the facts before the Supreme Court were as follows :

37. The assessed was a limited company. The assessee stated at the time of filing of its return for the assessment year 1949-50 that on June 5, 1948, it had entered into an agreement with H. Manory Ltd. to do business in plywood chests and in consideration of financing the business, the assessee was to receive 50% of the profits of the business. The assessee also claimed that it had entered into an agreement on October 7, 1948, with Ratiram Tansukhrai for financing the transactions of H. Manory Ltd. in the joint venture, and had agreed to pay to Ratiram Tansukhrai 50% of the profit earned by it from the business with H. Manory Ltd. Stating these facts, for the assessment year 1949-50, the assessee submitted the profit and loss account disclosing in the relevant year of account Rs. 1,75,875 as profit in a joint venture from H. Manory Ltd. It also claimed that an amount of Rs. 87,937, being half of the amount of this profit from H. Manory Ltd., has been paid by the assessee to Ratiram Tansukhrai under the agreement of October 7, 1948. The Income-tax Officer accepted the return filed by the assessee and included in computing the total income for the assessment year 1949-50, Rs. 87,937 only, as the profit earned in the joint venture of H. Manory Ltd.

38. In the assessment year 1950-51 the assessee filed a return also accompanied by a profit and loss account disclosing a total profit of Rs. 1,62,155 in the relevant accounting years as the profit received from H. Manory Ltd. and claimed that out of this amount of profit it had transferred Rs. 81,077 to the account of Ratiram Tansukhrai as his share. The Income-tax Officer on examination of the transaction brought to tax the entire amount of Rs. 1,62,155 holding that the alleged agreement of October 7, 1948, between the assessee and Ratiram Tansukhrai had merely been 'got up as a device to reduce the profits received from H. Manory Ltd.' This order was confirmed by the Appellate Assistant Commissioner, thereafter by the Income-tax Appellate Tribunal and by the High Court on a reference under section 66(1) of the Income-tax Act.

39. In the meanwhile, on May 13, 1955, the Income-tax Officer issued a notice under section 34 to the assessee for the assessment year 1949-50 proposing to reopen the assessment and to assess the amount of Rs. 87,937 in the original assessment as the amount paid to Ratiram Tansukhrai. The assessee file a fresh return which did not include the amount paid to Ratiram Tansukhrai. The Income-tax Officer reassessed the income under section 34(1) (a) and added Rs. 87,937 to the income returned by the assessee in the assessment year 1949-50. The Appellate Assistant Commissioner upheld the action of the Income-tax Officer under section 34(1) (a) and confirmed the order observing that the assessee had misled the Income-tax Officer into believing that there was a genuine arrangement with Ratiram Tansukhrai and had stated in the profit and loss account that the amount paid to Ratiram Tansukhrai was the share of the latter in the partnership, whereas no such share was payable to Ratiram Tansukhrai. The Income-tax Appellate Tribunal in further appeal held that the assessee had produced all the relevant accounts and documents necessary for completing the assessment and the assessee was under no obligation to inform the Income-tax Officer about the true nature of the transactions. On this view the Tribunal reversed the order of the Appellate Assistant Commissioner and directed that the amount of Rs. 87,937 be excluded from the total income of the assessee for the year 1949-50. The Tribunal declined to state the case to the High Court under section 66(1). A petition to the High Court under section 66(2) for directing the Tribunal to state the case was rejected by the High Court and thereafter an appeal was preferred by special leave to the Supreme Court. These were the facts before the Supreme Court and while interpreting section 34(1) (a), in the light of the decision of the Supreme Court in Calcutta Discount Co. Ltd. v. Income-tax Officer, Shah J., delivering the judgment of the court, observed at page 612 of the repor :

'We are of the view that under section 34(1) (a) if the assessee had disclosed primary facts relevant to the assessment, he is under no obligation to instruct the Income-tax Officer about the inference which the Income-tax Officer may raise from those facts. The terms of the Explanation to section 34(1) also do not impose a more onerous obligation. Mere production of the books of account or other evidence from which material facts could with due diligence have been discovered does not necessarily amount to disclosure within the meaning of section 34(1); but where on the evidence and the materials produced the Income-tax Officer could have reached a conclusion other than the one which he has reached, a proceeding under section 34(1) (a) will not lie merely on the ground that the Income-tax Officer has raised an inference which he may later regard as erroneous.'

40. In view of this interpretation regarding the scope of the provisions of section 34(1) (a), the Supreme Court held on the facts of the case before it that the assessee had disclosed its books of account and evidence from which material facts could be discovered. The assessee was under no obligation to inform the Income-tax Officer about the possible inference which might be raised against it. It was for the Income-tax Officer to raise such an inference and if he did not do so, the income which had escaped assessment cannot be brought to tax under section 34(1) (a).

41. It is thus clear that, according to the interpretation put by the Supreme Court on the requirements of section 34(1) (a), whenever action of the Income-tax Officer in issuing the notice under section 34(1) (a) is challenged before a court of law, the court has to ask itself the question whether in fact there are reasonable grounds for the Income-tax Officer to believe that there had been non-disclosure as regards any fact which could have a material bearing on the question of assessment. If such reasonable grounds exist, that by itself is sufficient to give him jurisdiction to issue the notice. Of course, this action of issuing the notice under section 34(1) (a) can be challenged on either of two grounds and that challenge is only, to a limited extent, viz., (1) that the Income-tax Officer did not in fact hold the belief that there had been such non-disclosure; (2) that the belief must be held in good faith; it could not be merely a pretense; and it is not open to the court to examine the question whether the reasons for the belief have a rational connection to the formation of such belief and are not extraneous or irrelevant to the purpose of the section. On the one hand, according to the Supreme Court, once the two conditions are satisfied, a notice can be issued under section 34(1) (a) and subject to the limited extent of the challenge to the action of the Income-tax Officer, if there are reasonable grounds for him to believe that there had been any non-disclosure as regards any fact which could have a material bearing on the question of under-assessment, the issuance of the notice under section 34(1) (a) would be valid. It is not for the court to consider whether these grounds are adequate or not. The sufficiency of the grounds which induced the Income-tax Officer to act is not a justiciable issue. Moreover, the assessee is not bound to put forward before the Income-tax Officer at the time of the original assessment a version contrary to what he contends for or contrary to what he has written in his books of account. In certain circumstances the question whether a particular transaction is genuine or not is an inference to be drawn from primary facts. If the assessee has disclosed primary facts relevant to the assessment, he is under no obligation to instruct the Income-tax Officer about the inference which the Income-tax Officer may raise from those facts. Further, where on the evidence and material produced at the time of the original assessment the Income-tax Officer could have reached a conclusion other than the one which he has reached, the proceeding under section 34(1) (a) will not lie merely on the ground that the Income-tax Officer had earlier raised an inference which he may later regard as erroneous.

42. In view of these authoritative pronouncements by the Supreme Court on the scope of the powers and jurisdiction of the Income-tax Officer to issue a notice under section 34(1) (a), it is clear that the decision of this High Court in Kanji Ranchhod's case, in so far as it lays down that the primary facts necessary for proper assessment are objective facts, the existence or non-existence of which is not a matter of reasonable belief on the part of the Income-tax Officer, is an extension of the principle laid down in Calcutta Discount Co.'s case, but in view of the decisions of the Supreme Court in S. Narayanappa's case and Kantamani Venkata Narayana and Sons' case, this qualification or restriction on the power of the Income-tax Officer to issue a notice under section 34(1) (a) is not justified. It, therefore, followed that the test, laid down by the Division Bench of this High Court in Kanji Ranchhod's case, based on the footing that the primary fact must objectively exist is not justified in view of the decisions in S. Narayanappa's case and Kantamani Venkata Narayana and Sons' case. In view of the aforesaid decisions of the Supreme Court explaining the scope of the tests laid down in Calcutta Discount Co.'s case, it is clear that the interpretation put by the Division Bench of this High Court in Kanji Ranchhod's case goes further than the interpretation put upon the same tests by the subsequent Supreme Court decisions.

43. We will now proceed to see whether in the light of the tests laid down by the Supreme Court in the decisions referred to above, the notice issued in the instant case was valid or not. The narration of facts which we have set out at the commencement of this judgment clearly shows that the Income-tax Officer himself when he made the original assessment was not fully satisfied with the explanation given by the assessee regarding this receipt of Rs. 3,05,000. The note, dated January 23, 1947, which was kept on the record of the case clearly indicates that the Income-tax Officer making the original assessment treated the whole transaction with a certain degree of suspicion. He noted the fact that only the back portion of the land which the assessee had purchased from Ambalal Sarabhai was agreed to be sold to M/s. K. Nagardas and Co. and he has used the word 'a handy person' while referring to M/s. K. Nagardas and Co. All the facts from which the necessary inference can be drawn were before the Income-tax Officer who made the original assessment. It was not for the assessee to point out what possible inference can be drawn by the Income-tax Officer making the original assessment at the time when the assessment was made in 1947. As the Supreme Court has pointed out, the only obligation on the assessee was to place all the primary facts before the Income-tax Officer who made the original assessment and once he placed those primary facts his obligation came to an end. It was open to the Income-tax Officer to draw an inference adverse to the assessee when he passed the order on January 23, 1947, regarding the entire transaction in favour of M/s. K. Nagardas and Co., yet instead of drawing an adverse inference against the assessee, the Income-tax Officer rested himself content with observing that the matter between the assessee and M/s. K. Nagardas and Co. had not been finally settled and the assessee was in possession and ownership of the whole property known as Maganbhai's Vadi. The assessee was under no obligation to put forward before the Income-tax Officer at the time of the original assessment a version contrary to the version that he was contending for, viz., that he had agreed to sell this property to M/s. K. Nagardas and Co. In our opinion, at the time of the original assessment, all the primary facts having been placed before the Income-tax Officer, it was open to the Income-tax Officer then not to accept the version of the assessee and to bring to tax the amount of Rs. 3,05,000. In the circumstances, the question whether this particular transaction between the assessee and M/s. K. Nagardas and Co. was genuine or not was and inference of fact to be drawn from the primary facts placed before the Income-tax Officer at the time when he passed the order in 1947. The assessee was under no obligation to instruct the Income-tax Officer about the other inferences which it was possible to draw by the Income-tax Officer, viz., that the transaction between him and M/s. K. Nagardas and Co. could possibly be held to be a bogus transaction. The Income-tax Officer could have reached the conclusion in 1947 other than the one which he appears to have reached, viz., that there was a genuine transaction of sale and an agreement of sale between M/s. K. Nagardas and Co. and the assessee. Merely because the Income-tax Officer in 1947 raised an inference, which he subsequently regards as erroneous, the proceedings under section 34(1) (a) cannot lie. The fact that it was because of the proceedings started by the Income-tax Officer at Surendranagar that the matter came to the knowledge of the Income-tax department, does not enable the Income-tax Officer to invoke the provisions of section 34(1) (a). So far as the provisions of section 34(1) (a) are concerned, it is the conduct of the assessee that has to be looked at and not whether the Income-tax Officer subsequently came to know some facts. It is only under section 34(1) (b) that it would be open to the Income-tax Officer to bring in aid the information received from the Income-tax Officer having jurisdiction at Surendranagar for reopening the assessment proceedings which had been completed in January, 1947. It is common ground between the learned counsel before us that there is no scope for re-opening the proceedings under section 34(1) (b) and the assessee will be liable only if the provisions of section 34(1) (a) can be invoked by the revenue. In view of the decision of the Supreme Court in Burlop Dealers Ltd.'s case, it is obvious that, in the instant case, even if the Income-tax Officer changed his opinion about the genuineness of the transaction between the assessee and K. Nagardas and Co., it was not open to him to resort to the provisions of section 34(1) (a).

44. Under these circumstances, it must be held that the Income-tax Officer had no power or jurisdiction to issue the notices under section 34(1)(a) and the facts and circumstances of the case did not justify the issue of a notice under section 34(1)(a).

45. In the light of the above discussion, we answer the questions referred to us as follows :

Q. (1) : Not pressed on behalf of the revenue. Therefore, answered in the affirmative.

Q. (2) : In the negative.

46. The Commissioner of Income-tax will pay the costs of this reference to the assessee.


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