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Gujarat Ginning and Mfg. Co. Ltd. Vs. Commissioner of Income-tax, Gujarat-i - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference No. 172 of 1974
Judge
Reported in[1977]108ITR674(Guj)
ActsIncome Tax Act, 1961 - Sections 147 and 148
AppellantGujarat Ginning and Mfg. Co. Ltd.
RespondentCommissioner of Income-tax, Gujarat-i
Appellant Advocate J.P. Shah, Adv.
Respondent Advocate K.H. Kaji, Adv.
Cases ReferredMalegaon Electricity Co. (P.) Ltd. v. Commissioner of Income
Excerpt:
direct taxation - assessment - sections 147 and 148 of income tax act, 1961 - whether reassessment made by recourse to provisions of section 147 (a) valid and justified in law - primary material facts were disclosed by assessee - assessee not bound to point out possible inferences which can be raised from primary facts - assessee cannot be blamed for failure on part of income tax officer to raise necessary inferences at time of original proceedings - no case be brought under section 147 (a) - conditions precedent for exercise of powers under section 147 (a) not satisfied - held, reassessment made by recourse to provisions of section 147 (a) not valid and justified in law. - - the income-tax officer, therefore, considered that, as a result of such omission or failure on the part of.....b.j. divan, c.j.1. in this case, at the instance of the assessee, the following question has been referred to us for our opinion by tribunal : 'whether, on the facts and in the circumstances of the case, the reassessments made by recourse to provisions of section 147(a) in this case were valid and justified in law ?' 2. the facts leading to this reference are as follows : the assessment years under reference are 1958-59 and 1959-60. the assessee is a private limited company in which the public are not substantially interested. the previous years of account relevant to the assessment years under reference are calendar years 1957 and 1958, respectively. the original assessment was made for the two years by the income-tax officer under section 23(3) of the indian income-tax act of 1922 on.....
Judgment:

B.J. Divan, C.J.

1. In this case, at the instance of the assessee, the following question has been referred to us for our opinion by Tribunal :

'Whether, on the facts and in the circumstances of the case, the reassessments made by recourse to provisions of section 147(a) in this case were valid and justified in law ?'

2. The facts leading to this reference are as follows : The assessment years under reference are 1958-59 and 1959-60. The assessee is a private limited company in which the public are not substantially interested. The previous years of account relevant to the assessment years under reference are calendar years 1957 and 1958, respectively. The original assessment was made for the two years by the Income-tax Officer under section 23(3) of the Indian Income-tax Act of 1922 on total income of Rs. 90,589 for assessment year 1958-59 and Rs. 97,069 for assessment year 1959-60. Subsequently it was found by Income-tax Officer that in the statement of computation of property income filed by the assessee at the time of the original assessment, property taxes of Rs. 27,098 received from the tenants in the previous year relevant to assessment year 1958-59 and Rs. 26,477 in the previous year relevant to assessment year 1959-60 were not taken into account. Although the amount of municipal taxes recovered from tenants was mentioned in the profit and loss account for each of the two years, the assessee had filed a separate statement of income from house property in which the assessee did not either mention or return as income the amount of municipal tax collected from the tenants. The Income-tax Officer, therefore, considered that, as a result of such omission or failure on the part of the assessee to disclose truly and fully all the material facts necessary for assessment, income liable to tax had escaped assessment in the two years and after obtaining the sanction of the Commissioner of Income-tax, he initiated reassessment proceedings for the two years. The assessee contended that there was no omission on its part of disclose the necessary facts but this contention was rejected. The Income-tax Officer completed reassessment by including the sum of Rs. 12,856 representing municipal tax recovered from the tenants in regard to the assessment year 1958-59 and Rs. 19,375 being the municipal tax recovered from the tenants in regard to the assessment year 1959-60. Against the decisions of the Income-tax Officer in respect of the two assessment years the assessee preferred two appeals and the Appellate Assistant Commissioner dismissed both the appeals. Thereafter, the assessee took the matter in further appeal before the Appellate Tribunal. At the stage of the appeal before the Tribunal, there was no dispute regarding the quantum of the addition made as a result of the reassessment for the two years but the assessee sought to challenge the legality of the reassessment proceedings on the ground that it had submitted profit and loss account as also balance-sheet for each of the two years and the amounts of tax recovered from the tenants were already mentioned in the profit and loss account and as the figures were before the Income-tax Officer who made the original assessments, when the Income-tax Officer initiated reassessment proceedings, he was only having a second look at the same figures. It was further contended before the Tribunal that the Commissioner of Income-tax had mechanically sanctioned the reassessment proceedings. The Tribunal held that the assessee had failed to disclose the correct income from property in the property schedule and also in the first page of the return and that it was incumbent on the assessee to disclose fully and truly all material facts necessary for making the assessment. The Tribunal relied on Explanation 2 to section 147 of the Income-tax Act, 1961, and was satisfied that the Income-tax Officer was justified in reopening the assessment under section 147 and as there was no dispute about the quantum of addition made, the Tribunal dismissed the appeals preferred by the assessee. Thereafter, at the instance of the assessee the question set out hereinabove has been referred to us for our opinion.

3. Along with the returns for each of the two assessment years 1958-59 and 1959-60, the assessee had filed statements setting out its calculations regarding income from property. Several items which were required to be added or deducted were properly shown in this statement but the item regarding recoveries of municipal taxes from tenants was not shown in the either of these two statements. An amount of Rs. 27,098 was shown in the balance-sheet and profit and loss account for calendar year 1957. Similarly in the profit and loss account for calendar year 1958, an amount of Rs. 26,477 was shown and with the following note : 'Less recoveries including refund for Rs. 7,101 for earlier year.' the return filed by the assessee-company for each of the two years showed in the part relating to income from house property 'as per statement' and the statement was on the lines that we have indicated above. The main question, therefore, is whether there was sufficient disclosure of primary facts by the assessee-company at the time of original assessment.

4. The position regarding the power of the Income-tax Officer to reopen the assessment proceedings was summarised by a Full Bench of this High Court, after referring to the several decisions of the Supreme Court and other High Court reported till then, in Poonjabhai Vanmalidas and Sons v. Commissioner of Income-tax : [1974]95ITR251(Guj) of the report. The position of law has been summarized as follows :

'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 pretence; 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 oaf the section. On the one hand, according 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 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. After this decision of the Full Bench there have been two subsequent decisions of the Supreme Court dealing with the same point.

In Income-Tax Officer v. Nawab Mir Barkat Ali Khan Bahadur : [1974]97ITR239(SC) the Supreme Court observed, inter alia, that having second thoughts on the same material did not warrant the initiation of proceedings under section 147 and the Supreme Court observed that the law had not changed since the original assessments and it was open to the Income-tax Officer at the time of the original assessments to make the presumption that the three ladies were the legally wedded wives of the assessee. If should have but did not do so, then he could not avail of section 147 to correct that mistake. The conditions precedent to the exercise of the jurisdiction under section 147 were held not exist in that particular case.

In Gemini Leather Stores v. Income-tax Officer : [1975]100ITR1(SC) the facts were that in proceedings for the original assessment of the appellant-firm, the appellant did not disclose certain transactions evidenced by certain drafts. The Income-tax Officer himself discovered the facts relating thereto but by oversight did not bring the amounts represented by the drafts to tax as the income of the appellant. Subsequently, the Income-tax Officer issued a notice under section 147(a) of the Income-tax Act, 1961, with a view to assessee the amounts, the appellant's income from undisclosed sources. On a writ petition filed by the appellant's income from undisclosed sources. On a writ petition filed by the appellant, the High Court held, that the Income-tax Officer did not apply his mind to the question whether the amounts could be treated as part of the total income of the appellant and as the appellant did not disclose the source of those amounts which were not recorded in the account books, all the conditions for invoking the jurisdiction under section 147(a) were present. This view of the Allahabad High Court was reversed by the Supreme Court and it was held that it was plainly a case of oversight and it could not be said that income chargeable to tax had escaped assessment by reason of the omission or failure on the part of the appellant to disclosed fully and truly all material facts. He could not, therefore, take recourse to section 147(a) to remedy the error resulting from his own oversight. At page 4 of the report, Gupta J., delivering the judgment of the Supreme Court, has pointed out :

'In the case before the assessee did not disclose the transaction evidenced by the drafts which the Income-tax Officer discovered. After this discovery the Income-tax Officer had in his possession all the primary facts, and it was for him to make necessary enquiries and draw proper inference as to whether the amounts invested in the purchase of the drafts could be treated as part of the total income of the assessee during the relevant year. This the Income-tax Officer did not do. It was plainly a case of oversight, and it cannot be said that the income chargeable to tax for the relevant assessment year had escaped assessment by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts. The Income-tax Officer had all the material facts before him when he made the original assessment. He cannot now take recourse to section 147(a) to remedy the error resulting from his own oversight.' We may point out that after the decision of the Full Bench in Poonjabhai Vanmalidas and Sons : [1974]95ITR251(Guj) , in Ahmedabad Cotton Mfg. Co. Ltd. v. Union of India : [1974]95ITR639(Guj) this court had observed that even though there was some omission on the part of the assessee concerned in disclosing fully and truly all material facts necessary for the assessment of the assessee-company for the assessment year under consideration by failing to refer to the amount of initial depreciation that had been granted to it in the past, yet there was also dereliction of duty on the part of the Income-tax Officer in not performing his part of the duty. The Division Bench observed : 'However, the question then arises whether the income chargeable to tax had escaped assessment by reason of the omission or failure on the part of the petitioner to disclose fully and truly such material facts. Just as there was a duty on the part of the petitioner to see to it that the allowance of initial depreciation was disclosed by it, there was also a duty on the part of the Income-tax Officer concerned to see to it that the aggregate of all allowances in respect of depreciation made under section 10(2)(vi) of the Act of 1922 did not exceed the original cost to the petitioner-company. If that duty had been properly discharged by the Income-tax Officer, it is obvious that no excess depreciation would have been allowed in the assessment years 1962-63 to 1965-66. It was because of the combined operation of the the omission or failure on the part of the petitioner-company to disclose these material facts to the Income-tax Officer and dereliction of duty on the part of the Income-tax Officer in failing to see whether the aggregate of all allowances in respect of depreciation under section 10(2)(vi) had exceeded the original cost to the petitioner-company that the situation came about under which the petitioner was in fact allowed excess depreciation in the assessment years under consideration. It was, therefore, not possible to say that it was by reason of the omission or failure on the part of the petitioner to disclose fully and truly all material facts necessary for its assessment for the relevant years that the income chargeable to tax escaped assessment for those years, and the Income-tax Officer could not be said to have reason to so believe for the purpose of section 147(a) of the Act of 1961.'

5. In Commissioner of Income-tax v. Bhanji Lavji : [1971]79ITR582(SC) the Supreme Court has held that when the primary facts necessary for assessment are fully and truly disclosed to the Income-tax Officer at the stage of the original assessment proceedings, he is not entitled, on a change of opinion, to commence proceedings for reassessment under section 34(1)(a).

6. In Commissioner of Income-tax v. Burlop Dealers Ltd. : [1971]79ITR609(SC) , Shah C.J., delivering the judgment of the Supreme Court, observed :

'The assessee had disclosed his books of account and evidence from which material facts could be discovered : it was under no obligation to inform the Income-tax Officer about the possible inferences which may be raised against him. It was for the Income-tax Officer to raise such an inference and if he did not do so the income which has escaped assessment cannot be brought to tax under section 34(1)(a).'

7. These different decisions, in our opinion, summarize completely the position arising under section 34(1)(a) of the Act of 1922, equivalent to section 147(a) of the Act of 1961. Before we proceed further with the case, we must look at what weighed with the Income-tax Officer when he issued the notice under section 148 for reopening the assessment. In the assessment order in reassessment proceedings for assessment year 1958-59 and similarly in the assessment order for the assessment year 1959-60 in reassessment proceedings, the Income-tax Officer observed :

'The original assessment was made under section 23(3) of the old Act on October 23, 1959, determining the total income at Rs. 90,581. The assessee derives income from property. Subsequently, it was ascertained that - 'In the computation of property income filed by the assessee at the time of original assessment, property taxes of Rs. 27,098 recovered from the tenants in this year was not taken into account. The amount of municipal taxes recovered from the tenants was mentioned in the profit and loss account. But the assessee prepared and filed a separate statement for computation of income from house property admitted in the return filed and in that the assessee did not either mention or treat as income the amount of municipal tax collected from its tenants. As the assessee did not disclose fully and truly in the property income statement the recovery of municipal taxes of Rs. 27,098 that amount escaped assessment.''

8. It is thus obvious that even at the stage of the original assessment the profit and loss account was before the Income-tax Officer and in that profit and loss account the amount of Rs. 27,098 so far as the assessment year 1958-59 was concerned and the amount of Rs. 26,477 so far as the assessment year 1959-60 was concerned were shown as amounts of municipal taxes recovered from the tenants of the assessee-company. The only grievance which the Income-tax Officer has made is that these amounts of Rs. 27,098 and Rs. 26,477 were not shown in the statements filed along with the returns for computation of income from house property. Thus, at the time of the original assessment proceedings the primary facts necessary for ascertaining what the income from house property was had been disclosed to the Income-tax Officer. The narrow question that we have to consider in this case is whether this disclosure was sufficient in the eye of the law.

9. Mr.Kaji, appearing for the revenue, does not dispute that there was disclosure but he contends that this disclosure was only partial and not full. According to him it was obligatory on the assessee to point out specifically in the statement of computation of income from property these two amounts of Rs. 27,098 and Rs. 26,477 in each of the two assessment years under reference so that the pointed attention of the Income-tax Officer could have been drawn to this aspect of the case.

10. Mr.Kaji in this connection has relied upon the decision of the Supreme Court in Commissioner of Income-tax v. T.S.PL.P. Chidambaram Chettiar : [1971]80ITR467(SC) . The facts before the Supreme Court in that case were that the assessee's father, a money-lender, had advanced various sums of money to P on promissory notes. On July 6, 1932, the principal stood at Rs. 1,38,535 and interest thereon came to Rs. 1,34,965. Taking a further loan of Rs. 2,500 P executed a mortgage of some of his properties for a sum of Rs. 2,76,000. Of this only a small amount was repaid. In December, 1940, a suit was instituted against P for recovery of a sum of Rs. 5,50,573 inclusive of interest. In September, 1943, the claim was compromised and on October 5, 1943, a compromise decree was passed for the sum of Rs. 5,50,500 in full satisfaction of the mortgagee's claim. The amount of the decree was payable by October 1, 1944, and the debt due under the decree was subsequently discharged. For the assessment year 1944-45, the assessee was assessed to tax as karta of his Hindu undivided family by the Income-tax Officer, Trichy. Pending the assessment proceedings, that officer received information from the Income-tax Officer, Erode, that P had paid secretly to the mortgagee during the relevant accounting period a sum of Rs. 1,50,000 which was not included in the compromise decree. The assessee, however, denied having received that amount. Referring to the assessee's denial the assessing officer recorded in the order sheet on May 27, 1945 : 'The Income-tax Officer, Erode, should be asked to give further details and to ask P. to produce evidence of payment. In any event, this should come up for consideration only in the assessment year 1945-46, as only the excess over Rs. 2,76,000 plus legal expenses can be treated as interest income in the hands of the assessee and so the assessment for 1944-45 should not be held up pending further investigation.' The assessing officer completed the assessment on February 12, 1946, without including that amount. Thereafter, the officer made further inquiry and on March 9, 1953, issued a notice under section 34(1)(a) of the Indian Income-tax Act, 1922, for reassessment and included the sum of Rs. 1,50,000 in the income of the assessee for the assessment year 1944-45. The Appellate Assistant Commissioner, on appeal, set aside the order and directed the officer to re-do the assessment after giving the assessee an opportunity to cross-examine the parties examined by the officer. The Income-tax Officer, without issuing a fresh notice of reassessment, enquired further into the matter. P's books of accounts were produced to prove the payment to the assessee, some witness were examined in the presence of the assessee, and a fresh order of assessment was made. This order was affirmed by the Tribunal. On a reference, the High Court held that the reassessment was valid, and that the officer had acted rightly in giving effect to the order of the Appellate Assistant Commissioner, but that the sum of Rs. 1,50,000 was not taxable income of the relevant year of account, because the amount secretly received must be deemed to have been kept in suspense and as the debtor had not given any direction about the appropriation of that amount, it was open to the creditor to appropriate it towards the principal. Both the parties appealed to the Supreme Court. At page 471, the Supreme Court dealt with the assessee's appeal and observed : [1971]80ITR467(SC) :

'There is hardly any merit in that appeal. It was urged on behalf of the representative of the assessee that as, even when the original assessment proceedings for the relevant year were before the Income-tax Officer, he had before him the information given by the Income-tax Officer, Erode, but yet, he did not choose to act on that information, it was not open to him thereafter to initiate proceedings under section 34. We are unable to accept this contention. On the facts found by the Tribunal, it is established that the assessee's father had clearly suppressed the receipt of Rs. 1,50,000 from the mortgagor. The assessee had a duty to disclose fully and truly all material facts necessary for his assessment. Herein we are not dealing with a case coming under section 34(1)(b). All that we have to see is whether the requirements of section 34(1)(a) are satisfied.'

11. It is thus clear that in this particular case of Chidambaram Chettiar : [1971]80ITR467(SC) the Supreme Court was dealing with a case of clear suppression of material facts or withholding or primary facts from the Income-tax Officer in the course of the original assessment proceedings. It was not a case like the present one where some facts were in fact disclosed but the inferences which could be drawn from those facts were not pointed out to the Income-tax Officer.

12. Mr. Kaji also relied on the decision of a Division Bench of this High Court in Jai Hind Printing Press v. Commissioner of Income-tax : [1972]86ITR309(Guj) . In that case the assessee, a registered firm carrying on the business of printing and publishing newspapers, sold a rotary machine on October, 28, 1956. Capital gains realised after March 31, 1956, had been made assessable by introduction of section 12B in the Indian Income-tax Act, 1922. The assessee did not make any entry in section A of part I of the returns under the head 'Capital gains' for the accounting year 1955-56, ending November 2, 1956. In Part VII requiring particulars of capital gains the entry made by the assessee was 'nil'. The accounts of the assessee disclosed that the machine had been sold but the actual date of sale was not stated. On these facts the Division Bench of this High Court held that during the relevant accounting year, capital gains arising during part of the year, i.e., after 31st March 1956, would be assessable. Hence, the date of sale was a primary fact, material and necessary for determining whether the capital gains were assessable or not. As the assessee had not included the capital gains in its returns and had failed to furnish the actual date of sale of machinery, the proceedings for reassessment were valid. Here again, like the case in Chidambaram Chettiar's case : [1971]80ITR467(SC) , the Division Bench was dealing with a case where there was a clear suppression of material fact or clear withholding of primary facts from the Income-tax Officer at the time of the original assessment, namely, non-disclosure of the date of the sale of rotary machine because the date when the sale took place was material in view of the fact that capital gains arising after March 31, 1956, were assessable. At page 316 Bhagwati C.J., delivering the judgment of the Division Bench, observed - See : [1972]86ITR309(Guj) :

'Since the actual date of sale of the rotary machine was not mentioned and the column against the heading 'Capital gains' in section A of Part I of the return was kept blank and capital gain in Part VII of the return was shown as 'nil', it is reasonable to assume that the Income-tax Officer must have taken the view that the sale of the rotary machine was effected prior to 31st March, 1956, and the profit or gain resulting from the sale of the rotary machine was, therefore, not liable to tax in the hands of the assessee as capital gain.'

13. It is thus clear that the Division Bench decided the case in Jai Hind Printing Press v. Commissioner of Income-tax : [1972]86ITR309(Guj) because a material fact which was also a primary fact, namely, the date of the actual sale of the rotary machine, was not disclosed and, on the contrary, it was shown in the return that there was no capital gain by mentioning in the column against 'Capital gains' 'nil'. Thus, this decision in Jai Hind Printing Press's case : [1972]86ITR309(Guj) can also be distinguished on the facts of the case being of the class of categories where there was clear suppression of material facts as distinguished from some disclosure of facts as in the case before us.

14. In Commissioner of Income-tax v. Malegaon Electricity Co. (p.) Ltd. : [1966]62ITR789(Bom) , the facts before the Bombay High Court were that during the course of the accounting year, the assessee-company had sold its concern to another company under an indenture dated September 19, 1951, for a consideration of Rs. 9,35,246-15-8. The assessee-company did not disclose in its return the excess of the sale price of plant, building and machinery over the written down value either in the sections relating to the total income or in section D claiming that it was not taxable under any other provision of the Act. During the course of the assessment, on 2nd July, 1953, the assessee sent a letter to the Income-tax Officer stating that the assessee was enclosing therewith copy of the directors' resolution and other documents relating to the sale and the break-up of the sale price. An assessment was made without reference to the excess sale price. Some time after completing the assessment, the Income-tax Officer realised that profits falling within the ambit of section 10(2)(vii) of the Indian Income-tax Act, 1922, had not been assessed and he started proceedings against the assessee-company under section 34 of the Act. He found that the profits made by the assessee-company under section 10(2) (vii) as a result of the said transaction amounted to Rs. 4,88,386 and setting off the unabsorbed depreciation carried forward up to the date of sale, he determined the total income of the assessee-company at Rs. 4,48,893. The assessee-company contended that all primary facts regarding the sale of the assets of the assessee-company were placed before the Income-tax Officer; that the question whether, out of the transaction, profits taxable under section 10(2)(vii) arose or not was a question of merely an inference to be drawn from these primary facts; and, if the Income-tax Officer had failed to draw the proper inference, that cannot be good reason for reopening the assessment under section 34(1)(a) of the Act. The Division Bench of the Bombay High Court held that it was not possible to hold that the production of these various documents amounted to a full and true disclosure within the meaning of the section, as the assessee-company knew that large amount of profits had accrued to it which would normally fall under section 10(2)(vii) and yet it did not, as required by law, disclose this fact anywhere in its return and claim exemption in respect thereof in a straight forward manner. Tambe C.J., delivering the judgment of the Division Bench, observed at page 804 of the report - See : [1966]62ITR789(Bom) :

'The question that arises then is whether there had been a failure on the part of the assessee to disclose truly and fully facts material for the purpose of assessment within the meaning of section 34(1)(a). We have already pointed out that, under the various provisions of the Act, the assessee was bound to to state these profits in its return, at any rate in section D thereof, when his case was that it was not liable to tax. It is obvious that the statutory duties cast on the assessee with a view to draw pointed attention of the Income-tax Officer at the time of the assessment to such transactions, which normally are exclusively within the knowledge of the assessee, have not been discharged by the assessee in the instant case. It is not in dispute that these profits were not anywhere shown in the return. It is not contended by the revenue that it is not open to the assessee to disclose that the assessee-company had made profits otherwise than by disclosing them in its return, and, in our opinion, rightly. The section nowhere says that the disclosure of all material facts must necessarily be in the return.'

15. At page 807 of the report he further observed - See : [1966]62ITR789(Bom) :

'In the instant case the material fact that the sale price secured by the assessee was in excess of the written down value has not been disclosed anywhere in a sufficiently clear manner. The only argument is that it could have been ascertained from the material on record and, therefore, it was a full disclosure.'

16. Mr. Kaji for the assessee has relied upon the fact that the Division Bench of the Bombay High Court in Malegaon Electricity Company's case : [1966]62ITR789(Bom) held that the case fell in section 34(1)(a) of the Act of 1922 equivalent to section 147(a) of the Act of 1961, because what was required to be disclosed was not disclosed in a sufficiently clear manner and that though there was some disclosure, it was not a full and true disclosure of all the facts necessary for the assessment in that particular case.

17. Against the decision of the Bombay High Court in Malegaon Electricity Company's case : [1966]62ITR789(Bom) there was an appeal to the Supreme Court and the Supreme Court decision is to be found in Malegaon Electricity Co. (P.) Ltd. v. Commissioner of Income-tax : [1970]78ITR466(SC) . The Supreme Court held that the Tribunal erred in declining to decide the question whether any portion of sale price came within the scope of section 10(2)(vii). That question should have been examined at the very outset for the purpose of considering whether the assessee had placed before the Income-tax Officer truly and fully all material facts necessary for the purpose of its assessment. If any part of the sale proceeds could be deemed to be profits under section 10(2)(vii) then the appellant had a duty to include it in its return and its failure to do so would amount to failure on its part to disclose fully and truly the material facts necessary for its assessment and would bring its case within the scope of section 34(1)(a). The Supreme Court observed that the High Court should not have answered the question referred, because those questions could not be answered without first deciding whether any part of the sale price received by the appellant amounted to profits under section 10(2)(vii). At page 472 of the report, Hegde J., delivering the judgment of the Supreme Court, observed - See : [1970]78ITR466(SC) :

'If the assessee had disclosed to the Income-tax Officer the surplus price realised by it over and above the written down value of the assets sold or in the alternative if it had informed the Income-tax Officer the price realised as well as the written down value of the assets sold, then it could have been said that the assessee had done its duty and it was for the Income-tax Officer to draw any inference of the facts placed before him. But the failure of the assessee to disclose to the Income-tax Officer the fact that the price realised by it by sale of its assets was more than the written down value of those assets or at least the written down value of those assets amounts, in our opinion, to a failure on its part to disclose fully and truly the material facts necessary for its assessment.'

18. Now, in Malegaon Electricity Company's case : [1970]78ITR466(SC) it must be noted that the price realised at the sale in excess of the written down value was not shown in section D of Part I of the return and the assessee had not shown in its return for the relevant assessment year submitted to the Income-tax Officer the written down value of the assets sold and because of the non-disclosure of the written down value of the assets, it was held that if the case otherwise came under section 10(2)(vii) there was non-disclosure of the written down value of the assets, it was held that if the case otherwise came under section 10(2)(vii) there was non-disclosure on the part of assessee-company.

19. We are unable to accept Mr. Kaji's contention that this case of the Supreme Court and the observations of the Bombay High Court apply to the present case. In the instant case the assessee has not suppressed material facts as was the case in Jai Hind Printing Press's case : [1972]86ITR309(Guj) . He has not failed to disclose in the documents submitted to the Income-tax Officer the amounts of the recoveries of municipal taxes from the tenants. Actually, in the profit and loss account one finds that in each of those two assessment years, the total amount of rates and taxes were first shown and the recoveries were shown as deductions from those amounts of rates and taxes, Therefore, to any persons reading the profit and loss account it would be obvious that these recoveries, namely Rs. 27,098 in one case and Rs. 26,477 in the other case, were recoveries of taxes for which the assessee-company before us was not claiming any deductions. Thus, the primary fact that these recoveries were made was before the Income-tax Officer at the time of the original assessment proceedings. As the Supreme Court has pointed out in Commissioner of Income-tax v. Burlop Dealers Ltd. : [1971]79ITR609(SC) , it was for the Income-tax Officer raise the possible inferences. The assessee-company was under no obligation to inform the Income-tax Officer about the possible inferences which could be raised against him. If the Income-tax Officer did not raise the appropriate inference on the primary facts disclosed before him the income which has escaped assessment cannot be brought to tax under section 147(a) of the Act of 1961. The duty which has been cast upon the assessee is to disclose all the primary facts necessary to enable the Income-tax Officer to arrive at the proper figure of the total income and to assessee the tax accordingly. Beyond disclosure of the primary facts, no other duty is cast on the assessee. Here is not a case of books of account or other evidence produced by the assessee at the time of the original assessment proceedings. The profit and loss account of the assessee-company was submitted and it did disclose the recoveries in each of these two years. In the reassessment proceedings it has been pointed out that at the time of the original assessment proceedings those profit and loss accounts of the two years were before the Income-tax Officer and those profit and loss accounts did mention these two amounts of Rs. 27,098 and Rs. 26,477 as recoveries of municipal taxes. If the Income-tax Officer did not draw the necessary inferences from these primary facts, the assessee, cannot be blamed and it cannot be said that the tax had escaped assessment because of the omission or failure on the part of the assessee to disclose fully and truly all material facts. The material facts which were the primary facts were disclosed and the assessee was not bound to point to the possible inferences which should be raised from these primary facts. Because of the failure on the part of the Income-tax Officer to raise the necessary inferences at the time of the original assessment proceedings, the assessee cannot be blamed nor can the case be brought under section 147(a) of the Income-tax Act, 1961, because of such failure of the Income-tax Officer at the time of the original assessment proceedings.

Under the circumstances we hold that the conditions precedent for the exercise of the powers under section 147(a) were not satisfied in the instant case and hence the Tribunal was not correct in law when it held that the provisions of section 147(a) were satisfied and that the assessment under section 147(a) was valid in law and justified.

20. The same position prevails in each of the two assessment years before us and we, therefore, answer the question referred to us in the negative, that is, the reassessment proceedings were not valid and were not justified in law. The question is answered in favour of the assessee and against the revenue. The Commissioner will pay the costs of the reference to the assessee.


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