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K.P. Arthanariswamy Chettiar and ors. Vs. First Income-tax Officer - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberWrit Petition Nos. 2071, 2073 and 2093 of 1968
Judge
Reported in[1972]84ITR51(Mad)
ActsIncome Tax Act, 1961 - Sections 147, 148 and 149; Constitution of India - Article 226
AppellantK.P. Arthanariswamy Chettiar and ors.
RespondentFirst Income-tax Officer
Appellant AdvocateK. Srinivasan, Adv.
Respondent AdvocateV. Balasubrahmanyan and ;J. Jayaraman, Advs.
Cases ReferredMadhya Pradesh Industries Ltd. v. Income
Excerpt:
.....the petitioner was under-assessed and that the assessee failed to disclose fully and truly all the material facts necessary for the assessment of the income relating to the year 1962-63. thereafter, the sanction of the commissioner was obtained and the impugned notice was given. 3. except for a change or variation in the value of the borrowings, the material facts are similar in the other writ petitions as well. under clause (a) of section 147, if 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, or to disclose fully and truly all material facts necessary for his assessment for that year and under sub-clause (b) of the same section, if the income-tax officer has in consequence of information in his.....ramaprasada rao, j.1. these writ petitions raise a common question. it is agreed that if the facts in writ petition no. 2071 of 1968 are noticed, it is sufficient to deal with the contentions raised by the counsel before us in these writ petitions. for the assessment year 1962-63, along with his return of income, the petitioner filed a statement of creditors together with details of interest payment, etc. in the said statement filed by him, he represented that he borrowed a sum of rs. 50,000 from m/s. gordhandas mulchand, bankers, salem, and that he paid interest of rs. 1,155 thereon. a note was appended to the statement, as also to the return, by a chartered accountant, supporting the entry and the borrowing. the income-tax officer, on such material and facts placed before him, completed.....
Judgment:

Ramaprasada Rao, J.

1. These writ petitions raise a common question. It is agreed that if the facts in Writ Petition No. 2071 of 1968 are noticed, it is sufficient to deal with the contentions raised by the counsel before us in these writ petitions. For the assessment year 1962-63, along with his return of income, the petitioner filed a statement of creditors together with details of interest payment, etc. In the said statement filed by him, he represented that he borrowed a sum of Rs. 50,000 from M/s. Gordhandas Mulchand, Bankers, Salem, and that he paid interest of Rs. 1,155 thereon. A note was appended to the statement, as also to the return, by a chartered accountant, supporting the entry and the borrowing. The Income-tax Officer, on such material and facts placed before him, completed the assessment and accepted that the above sum of Rs. 50,000 was a genuine borrowing made by the petitioner in the course of business and that the interest paid thereon was susceptible to allowance under the law. After the completion of the assessment in the manner stated above, it appears that the assessment of M/s. Gordhandas Mulchand came up for scrutiny and orders before the II Income-tax Officer, Circle II, Salem. In the course of the said assessment proceedings, the Income-tax Officer, Circle II, Salem, who was the assessing officer of the creditor, discovered that M/s. Gordhandas Mulchand did not lend this sum of Rs. 50,000 as claimed by the petitioner and made a declaration to that effect. The Income-tax Officer dealing with the petitioner's assessment, having been so informed, called upon M/s. Gordhandas Mulchand and sought information from him whether the credit of Rs. 50,000 disclosed in the books of account of the petitioner was regular. M/s. Gordhandas Mulchand declared that such a credit was not genuine. When the petitioner was confronted, with the said declaration made by one of the partners of M/s. Gordhandas Mulchand, he reiterated that the credits were genuine. Thereafter, one Lakshmanlal, partner of M/s. Gordhandas Mulchand, was examined on oath and he, once again, deposed that the credit of Rs. 50,000 in his firm's favour in the books of the petitioner and certain other credits were not genuine transactions. Once over, the petitioner reiterated that the deposition of the partner of M/s. Gordhandas Mulchand was not true.

2. On the basis of these materials, the Income-tax Officer issued the impugned notice. . But, before doing so, and as required under Section 148 of the Income-tax Act, 1961, he recorded his reasons as to why he proposed to act in the manner he did. As a matter of fact, he referred in his report to the solemn declaration made by M/s. Gordhandas Mulchand, as also the sworn statement made by one of its partners and, thereafter, expressed the view that he had material, and, therefore, reason to believe that the petitioner was under-assessed and that the assessee failed to disclose fully and truly all the material facts necessary for the assessment of the income relating to the year 1962-63. Thereafter, the sanction of the Commissioner was obtained and the impugned notice was given. The petitioner, instead of explaining himself to the Income-tax Officer, has come up to this court for the issue of a writ of prohibition restraining the respondent from pursuing the assessment proceedings as threatened pursuant to the notice challenged in this writ petition.

3. Except for a change or variation in the value of the borrowings, the material facts are similar in the other writ petitions as well.

4. The contention of the learned counsel for the petitioner is that when the original assessment was completed, he disclosed all material facts before the assessing authority and it was his duty to have made any incidental enquiries consequent upon such disclosure and if he has not undertaken investigation at that time, it is not open to the revenue to act under Section 148 of the Act and reopen a closed assessment on the footing that there was an escapement of assessment on the ground that the material disclosed or placed before the original assessing authority was not true and correct. Reliance was placed upon the language of Section 148 and the various judicial pronouncements of the High Courts and the Supreme Court.

5. Section 147 dealing with income escaping assessment lays down, as it were, the criteria under which the Income-tax Officer could act and treat an assessment which was closed as if it ought to be reopened on the ground that the income has escaped assessment. Under Clause (a) of Section 147, if 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, or to disclose fully and truly all material facts necessary for his assessment for that year and under Sub-clause (b) of the same section, if the Income-tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year, he may proceed as prescribed to bring to tax such escapement. Explanation 2 is the relevant Explanation which has to be noticed for purposes of this case. It provides:

' Production before the Income-tax Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Income-tax Officer will not necessarily amount to disclosure within the meaning of this section.'

6. Section 149 prescribes a time limit for the issuance of notice in cases of escapement. If the case falls under Sub-clause (a) of Section 147, an eight year period of limitation is provided. We are not extracting Sub-clause (ii) of Clause (a) of Section 149 as it is not necessary for the case. A period of four years however is prescribed for action in cases falling under Clause (b) of Section 147. The contention of the learned counsel for the petitioner is that as there was a total disclosure of all primary facts even before the original assessing authority and as such material facts were acted upon then, it is not open to the Income-tax Officer to once over act on the same material and issue a notice under Section 148 only on the strength of certain information secured by him de hors the petitioner, or the evidence oral or documentary produced by him before the original authority. If it appears or if it is apparent that the material facts disclosed by the assessee before the original authority are self-contained and acceptable, then, they should be deemed to be full and true material and the discovery at a later date by the assessing authority to the effect that such material is not true or full, cannot give jurisdiction to the assessing authority to act under Section 148. It is on the strength of this contention, it is urged, that a writ of prohibition ought to issue to the assessing authority interdicting him from proceeding further.

7. Counsel for the revenue, on the other hand, having invited our attention to Explanation 2 to Section 147, says that this is a case where the material facts disclosed by the assessee cannot reasonably be said to be either full or true as those materials were tested in the presence of the petitioner and, prima facie, discovered to be incomplete and untrue. In this state of affairs, the petitioner cannot approach this court and seek a rule even at the threshold to prevent the Income-tax Officer to exercise his jurisdiction under the statute and proceed according to the prescriptions of law.

8. Section 147 deems income as having escaped if the Income-tax Officer has reason to believe that the assessee, while disclosing the necessary or primary facts for purposes of assessment, has failed to disclose them fully and truly. The conjunction ' and ' is rather important and has to be interpreted as a strict prescription of law. The material should not only be full, but also be true. It is not enough if it is only full, for, it may contain untrue material. It is not equally enough if it is true, for, equally, it may not be full. In this behalf, therefore, the two elements prescribed by the statute, namely, the fullness and truthfulness of the materials should invariably be present, which only can disable the Income-tax Officer from acting under Section 147(a). Under Section 147(b) the Income-tax Officer is enabled to act, notwithstanding that there has been no omission or failure as mentioned in Clause (a) on the part of the assessee, In a case where the Income-tax Officer has, in consequence of information in his possession, reason to believe that the income exigible to tax has escaped assessment for any assessment year, even then it would fit in to a case of escaped assessment.

9. The impugned notice is issued by the Income-tax Officer generally under Section 147 of the Income-tax Act. No specific sub-section of this primary section is mentioned by the Income-tax Officer. It is, therefore, urged by the learned counsel for the petitioner that, in the facts and circumstances of this case, the alleged escapement comes squarely within the provision of Section 147(b) and not Section 147(a). Obviously, this contention is raised because the period of limitation prescribed for action by the revenue to make exigible such escaped income is four years as already stated. But the question is whether the facts disclosed are a pointer in this respect and whether action could be pursued under Section 147(b). No doubt, there will be a certain amount of overlapping, while the two sub-clauses are put into operation. But each case has to be decided on its own merits and with reference to the disclosed material. In the instant case, as we may presently advert to, it is not a case where the Income-tax Officer secured bare information and, as a consequence of such information, he subjectively came to the belief that there has been an escapement of tax. On the other hand, the primary facts urged and placed by the assessee at the time of the original assessment were the subject-matter of scrutiny by the revenue, no doubt, while the assessment of the so called creditor was proceeding, and it was in that connection, the Income-tax Officer discovered that the material facts disclosed by the assessee in the first instance were not true. We are, therefore, of the view that, in the circumstances of the case, Section 147(a) is the proper section under which it should be presumed that the Income-tax Officer has acted when he issued the impugned notice.

10. As regards the case law, which has developed considerable importance on this aspect of the branch of income-tax law, the locus classicus is the decision in Calcutta Discount Company Ltd. v. Income-tax Officer, : [1961]41ITR191(SC) . The ratio in the said case is best stated by extracting excerpts therefrom. The Supreme Court said:

' It postulates a duty on every assessee to disclose fully and truly all material facts necessary for his assessment. What facts are material and necessary for assessment will differ from case to case. In every assessment proceeding, the assessing authority will, for the purpose of computing or determining the proper tax due from an assessee, require to know all the facts which help him in coming to the correct conclusion .... There can be no doubt that the duty of disclosing all the primary facts relevant to the decision of the question before the assessing authority lies on the assessee .... In view of the Explanation, it will not be open to the assessee to say, for example--' I have produced the account books and the documents : You, the assessing officer, examine them, and find out the facts necessary for your purpose : My duty is done with disclosing these account books and the documents . . . .'

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. ' (Underlining is ours.)

11. With this background as to the proposition well-said and well-settled by the Supreme Court, we shall now examine the decisions quoted by the learned counsel for the petitioner in support of his contention that the Income-tax Officer, in the instant case, had no jurisdiction to issue the impugned notice, for all the materials or primary facts were before the original authority when the assessment for the year in question was completed. It is not in dispute that the petitioner was given a fair opportunity to present himself when his so-called creditor was examined for the purpose of proving that the credit appearing in the books of the petitioner as if it was a genuine borrowing did not disclose the real state of affairs. Excepting for the reiteration of his earlier stand that he did borrow from such creditor, no other material was produced by the assessee in spite of his having had the benefit of P. reasonable opportunity to disprove it and to bring home to the Income-tax Officer who issued the impugned notice that he was acting without material, capriciously and arbitrarily. On the other hand, we are of the view that, in the instant case, the information which the Income-tax Officer secured from his co-ordinate official, who was assessing the creditor, should be deemed to be sufficient for him to act and come to a reasonable conclusion that the disclosure made by the assessee in the first instance was not true and, if not, full.

12. Reliance, however, was placed by the learned counsel on Chhugamal Rajpal v. S. P. Chaliha : [1971]79ITR603(SC) . That was a case where the Income-tax Officer while reporting his proposed action to the Commissioner for sanction did not mention the material he had before him and his reason for coming to the conclusion that that was a fit case for issuing a notice under Section 148. The Commissioner mechanically granted his approval for the proposal to act under Section 148. It was in those circumstances the Supreme Court said:

' From the report submitted by the Income-tax Officer to the Commissioner, it is clear that he could not have had reasons to believe that by reason of the assessee's omission to disclose fully and truly all material facts necessary for his assessment for the accounting year in question, income chargeable to tax has escaped assessment for that year; nor could it be said that he, as a consequence of information in his possession, had reasons to believe that the income chargeable to tax has escaped assessment for that year.'

13. This is not the case in the instant case. In his report submitted to the Commissioner, the Income-tax Officer stated thus:

'The assessment was completed under Section 143(3) by an order dated September 15, 1962, on a total income of Rs. 84,356. At the time of original assessment, the assessee claimed as having received loan of Rs. 50,000 from M/s. Gordhandas Mulchand, Bankers, Salem. The assessee has also claimed interest payment of Rs. 1,155 to the said banker. According to the information available on record, I have reason to believe that the transaction the assessee had with M/s. Gordhandas Mulchand is bogus. I have also reason to believe that the interest claimed, viz , Rs. 1,155, and allowed in the assessment is not allowable in view of the fact that the transaction with the above-said banker was not genuine. I have also reason to believe that there was underassessment of total income to the extent of Rs. 51,155, due to failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment of 1962-63. As there is under-assessment of total income to the extent of Rs. 51,155 action is called for under Section 147(a) to reopen the assessment. Tax effect in the hands of the firm roughly works out to Rs. 4,806. I request that kind sanction may be accorded to reopen the assessment of 1962-63. '

14. He has given cogent and clear reasons as to the basis for his action and what prompted him to take action. There was, therefore, enough material for him to act. The subjective satisfaction which he had on the objective material disclosed before him cannot be said to be an unreasonable conclusion, or a proposal which was absolutely without any basis whatsoever. It was a reasonable conclusion and based on material.

15. In Madhya Pradesh Industries Ltd. v. Income-tax Officer, Nagpur : [1970]77ITR268(SC) , the original assessment was completed on the basis that certain amounts were paid by a company engaged in mining manganese ore to another limited company on the foot that it rendered services to the assessee-company as its selling agent. The Income-tax Officer made the original order of assessment on the presumption that such payments made by the borrowing company to the so-called selling agent was a permissible deduction. Thereafter, action was taken under Section 34 of the Income-tax Act, 1922, for reopening the assessment and disallowing the payment of commission on the ground that the recipient did not render any service as a selling agent. Negativing the right of the Income-tax Officer to reopen such a closed assessment, the Supreme Court, on the facts of the case, held that the Income-tax Officer could be rightly interdicted in those circumstances. That was a case where the Income-tax Officer who originally assessed the assessee, enquired the recipient company, had the benefit of the evidence of the director of the agency company, scrutinised the accounts of the recipient company and indeed called upon the company to produce certain certificates and statements which the company did and it was after such an elaborate and a full enquiry that the first order of assessment was completed. In those circumstances, the Supreme Court was of the view that the original assessment could not be deemed to be an order which was a casual one, but it was based on primary facts disclosed, found and discovered by the revenue in the course of the assessment proceedings. In the instant case, however, the Income-tax Officer bona fide believed that the assessee was truthful and when he discovered that he was not so, he issued the impugned notice. It would be just putting a premium on dishonesty if it were to be held as a matter of course that all statements given by the assessees, even if they are false, must be deemed to be sufficient material within the meaning of Section 147(a), which would disentitle the Income-tax Officer to reopen the same even if he finds on subsequent discovery that such material is false and such material is untrue and not full. It is common knowledge that in trade and commerce cash credits are obtained as a matter of course and it is not such an unsual event which would provoke even in the first instance any assessing authority to delve and probe into the genuineness of the transaction. It would be highly impossible for commerce to run the trade if the revenue were to take such an attitude and begin to suspect every such credit obtained by a bona fide dealer or trader in the normal course of his business. It is only in cases where there is later information founded on reliable evidence and data which would shock the conscience of a reasonable person and provoke him to act under Section 147 read with Section 148 that it could be said that the Income-tax Officer when he issues a notice under Section 148 in such circumstances had the necessary jurisdiction to do so. The ratio in Madhya Pradesh Industries Ltd. v. Income-tax Officer, Nagpur, is not therefore applicable to the facts of this case.

16. As already stated, this is a case where without examining the creditor, who was described to be the real and genuine creditor of the assessee, the original assessment was concluded. But, it transpires that the credit in the books of the assessee to the tune of Rs. 50,000 in the instant case is an entry, which, having regard to the testimony and the statement made by the creditor himself later is prima facie untrue. We have already said that in Section 147 the conjunction ' and ' appearing in the section as between the Words ' true ' and ' full ' has to be fully given effect to. Therefore, if there is any untruth in the statements disclosed by the assessee, it necessarily follows that the statements fall short of being true and full as is expected in law. Considering, therefore, the facts as discovered by the Income-tax Officer, we are of the view that the action contemplated by the Income-tax Officer is well within his jurisdiction.

17. The petitioner is asking for a writ of prohibition and seeking to interfere with the exercise of a statutory jurisdiction of the assessing authority even at the threshold. A writ of prohibition is issued by a superior court to an inferior court or a quasi-judicial tribunal, when it is firmly of the belief that such court or tribunal has usurped a jurisdiction with which it is not legally vested and to keep them within the bounds of their jurisdiction. A writ of prohibition is not a discretionary writ in the view that it is issued at the discretion of this court exercising visitorial jurisdiction under Article 226 of the Constitution. It is a writ of right and not of course in the sense that it is granted ex debito justitiae on the application made by an aggrieved person that the tribunal or the court is about to act in excess of its jurisdiction or assuming jurisdiction when it has none. We have already expressed that in this case there was ample material for the Income-tax Officer to act and issue the notice challenged. We are, therefore, of the view that no writ of prohibition in the circumstances of this case can issue.

18. We are not noticing the facts in the other cases as they have not been referred to before us for the reason that the facts are similar.

19. The Writ Petitions Nos. 2071 and 2073 of 1968 are, therefore, dismissed with costs; counsel's fee Rs. 250 in each. W.P. No. 2093 of 1968 is also dismissed.


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