JAGADISAN J. - This is a petition under article 226 of the Constitution for the issue of a writ of prohibition or any other appropriate writ restraining the Income-tax Officer, Special Investigation Circle B, Madras, from proceeding further in the matter of assessment in pursuance of his notice dated March 15, 1962, purporting to be under section 34 of the Indian Income-tax Act.
The facts are these : The petitioner, Messrs. Gordon Woodroffe & Co. Ltd., London, is a limited company incorporated in the United Kingdom. It has its registered office at Carrington House, 130, Regent Street, London. It will be convenient to refer to the petitioner as the 'London Company' in this judgment. This company holds shares in an Indian company called Messrs. Gordon Woodroffe & Co. (Madras) Private Ltd. The London company has no business activity in the taxable territory of India and its only income in this territory is the dividend paid by the Indian company in respect of the shares held by it. For the assessment year 1949-50 corresponding to the previous year ending June 30, 1948, the Income-tax Officer, First Circle Madras, called upon the Indian company as agents of the London company to submit a return of the latters income. A return was submitted by the Indian company on September 1, 1950, setting out the details of income. It was then claimed that the London company was a 'non-resident' as the income arising outside India exceeded the income arising within the territory. This claim was based on section 4A (c) of the Indian Income-tax Act which reads, 'a company is resident in the taxable territories in any year (a) if the control and management of its affairs is situated wholly in the taxable territories in that year, or (b) if its income arising in the taxable territories in that year exceeds its income arising without the taxable territories in that year, account not being taken in either case of income chargeable under the head capital gain.'
The department, however, appears to have initially resisted the claim of the London company as being 'non-resident' in status not on the ground that the control and management of the business of the company was wholly within the taxable territory but on the ground that its income within the territory was in excess of its income outside such territory. But the statement of income furnished on behalf of the London company showed that its outside income was in excess of its inside income. We are using the expressions 'outside' and 'inside' with reference to the taxable territory. The Income-tax Officer by his communication dated November 15, 1960, in response to the claim made on behalf of the London company, submitted that as the income accruing and arising in India was greater than that arising outside India the company would be considered as a resident under section 4A (c) of the Act. To this the Indian company, acting as the agents of the London company, sent a reply on November 22, 1950. It was pointed out that the income arising in India by way of dividend from the shares held in Messrs. Gordon Woodroffe and Co. (Madras) Ltd., amounted to Pounds 11,393-16-3 and that, comparing this income with the income that arose outside India, the London company should be deemed to be a 'non-resident'. After considering the material placed before the department, the Income-tax Officer ultimately accepted the plea of the London company and declared its status to be a 'non-resident'.
The order of the officer dated December 29, 1960, taking that view was in these terms : 'The assessee is a sterling company deriving income from dividend from Messrs. Gordon Woodroffe and Co. (Madras) Ltd. The dividend was paid in the year from out of the sterling balances of the Madras company in London. The net dividend paid to this sterling company in the year is Rs. 2,09,250, or Pounds 15,278, while its income outside the taxable territories is Pounds 17,256. As the latter is greater than the former, the company will be held to be a non-resident under section 4A (c) of the Act.' The assessment followed on this basis.
Eleven years after this order of assessment, the Income-tax Officer wrote to the London company stating that the status was wrongly declared to be that of a 'non-resident' in respect of the assessment year 1949-50 because the income accruing outside the taxable territory has to be compared with the income accruing outside the territory and that the term 'income' in this context would mean only actual income or real income and would not mean notional income computed for income-tax purposes. On this basis, there was a fresh computation of income in respect of the assessment year 1949-50 and it was pointed out that the income which accrued or arose in India was the net dividend of Rs. 2,09,250, that the income outside India amounted only to Rs. 1,90,733 and that, therefore, the Indian income exceeded the foreign income and the assessee would be a 'resident'. A reply was sent by the company on November 21, 1961, stating that the computation made by the officer was not correct, that there was no justification for reducing foreign income by deducting items disallowed and added back by the United Kingdom income-tax authorities, that the reason for such disallowance was due to certain statutory provision in the United Kingdom, and that, in any event, it would not be proper to take steps under section 34 (1) (a) of the Indian Income-tax Act to cancel the original assessment made on the footing of 'resident' and to make a reassessment on the basis of 'resident'. But the Income-tax Officer was apparently not satisfied with this reply and has now actually commenced proceedings under section 34 (1) (a) of the Act.
The only point that arises for consideration is whether the officer has jurisdiction to commence proceedings under section 34 (1) (a) of the Act. The relevant portion of section 34 (1) (a) may now be set out.
'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 that year, income, profits or gains chargeable to income-tax have escaped assessment for that year, or have been under assessed, or assessed at too low a rate, or have been made the subject of excessive relief under the Act, or excessive loss or depreciation allowance has been computed, or....
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... 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 :
Provided that the Income-tax Officer shall not issue a notice under clause (a) of sub-section (1) -
(i) for any year prior to the year ending on the 31st day of March, 1941;
(ii) for any year, if eight years have elapsed after the expiry of that year, unless the income, profits or gains chargeable to income-tax which escaped assessment... amount to, or are likely to amount to, one lakh of rupees or more in the aggregate, either for that year, or for that year and any other year or years after which or after each of which eight years have elapsed....
(iii) for any year, unless he has recorded his reasons for doing so, and, in any case, falling under clause (ii), unless the Central Board of Revenue, and, in any other case, the Commissioner, is satisfied on such reasons recorded that it is a fit case for the issue of such notice.....
Explanation. - Production before the Income-tax Officer of account books or other evidence from which material facts could with due diligence have been discovered by the Income-tax Officer will not necessarily amount to disclosure within the meaning of this section.'
Now, this provision is intended to catch fraudulent assessees who have avoided their full measure of tax liability. They can be assessed or reassessed provided the conditions mentioned in the section are present. In the present case, the department does not contend that section 34 (1) (b) is applicable for the obvious reason that a notice in terms of that provision would be time-barred, four years having elapsed from the end of the relevant assessment year (1949-50). The question is whether section 34 (1) (a) read with the proviso, clause (ii), can be called in aid. To attract the applicability of section 34 (1) (a) there must be omission or failure to make a return of income, or to disclose fully and truly all materials facts necessary for assessment. But, if the evasion by way of escapement of tax or under-assessment or a levy at too low a rate, or other circumstances mentioned amounts to more than one lakh of rupees there is no time-limit within which the department should initiate proceedings. The default to make a return, or the concealment of income which is what is denoted by failure to disclose fully and truly all material facts is a basic condition, the absence of which would deprive the officer of his jurisdiction to initiate action under section 34 (1) (a). This utter lack of jurisdiction will render the proceedings void and this court can and would issue an appropriate writ to prevent the officer from acting in excess of his statutory authority.
The petitioners contention is that there was no failure to make a return, as indeed a return was submitted, or failure to make a full and true disclosure of all material facts, and that, therefore, the present proceeding is a patent contravention of the statute and an improper assumption of jurisdiction.
The department contends that there was default on the part of the petitioner in submitting a return. The argument is that though factually a return was made, it was not a valid return as it was not signed by the London company but only by the Madras agents. It is true that if the London company were to be treated as a 'resident' the return filed would not be valid in law. But, if the company were to be treated as a 'non-resident', the return submitted by its Madras agents would certainly be valid. The validity of the return itself would depend upon the real status of the London company. There was controversy on this issue and ultimately the Income-tax Officer himself held that the company was 'non-resident'. In such circumstances, there having been a factual return and also a valid return consistent with its declared status as 'non-resident', we are unable to understand how it can now be contended that there was default on the part of the petitioner in submitting a return. Surely the department cannot assume that the real status of the petitioner was that of a 'resident' and deduce therefrom the position that the return submitted was not proper.
We have then to consider the question whether the petitioner omitted or failed to disclose fully and truly all material facts necessary for assessment for the year 1949-50. It is the true scope of the word 'omission' or 'failure' to disclose fully all material facts necessary for the assessment read along with the Explanation under section 34 (which we have already extracted above) that falls for decision in this case. The assessee owes a duty to act unreservedly without any attempt at concealment or suppression. This duty is not discharged by merely producing the relevant material and leaving the officer to his wits and to delve into the matter to arrive at the proper assessment. The assessee is of course not bound to lend his assistance to the officer to discharge his duties, but should plainly indicate all his claims. For example, if he claims that a particular amount is not income he must put forward the claim instead of being silent about it. If, later on, the assessment is reopened on the ground that it has escaped assessment, it is no answer for the assessee to say that the books of accounts already produced would show the receipt of the amounts. As was held in Seth Kalekhan Mahomed Hanif v. Commissioner of Income-tax, mere production of account books at the time of the first assessment containing cash credits would not prevent the department from treating the cash credits as concealed income and absolve the assessee from the charge of failure to make a full and true disclosure.
The Supreme Court has now considered the bearing of the Explanation on the assessees duty in the matter of disclosure in the decision in Calcutta Discount Co. Ltd. v. Income-tax Officer, Calcutta. Their Lordship observed :
'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. From the primary facts in his possession, whether on disclosure by the assessee, or discovered by him on basis of the facts disclosed, or otherwise, the assessing authority has to draw inferences as regards certain other facts; and ultimately, from the primary facts and the further facts inferred from them, the authority has to draw the proper legal inferences, and ascertain on a correct interpretation of the taxing enactment, the proper tax leviable... Once all the primary facts are before the assessing authority, he requires no further assistance by way of disclosure... It is not for somebody else - far less the assessee - to tell the assessing authority what inferences, whether of facts or law, should be drawn.'
Shortly stated, the legal position that emerges is this. The assessee is bound to be quite candid in the matter of placing all materials and facts before the department without in any trying to hoodwink the authority and to escape taxation. Equally the department is bound to discharge the statutory duty of making a proper assessment by examining with care and caution the materials that have been made available. Provided that the assessee has done all that he could or need do in the matter, the assessing authority cannot act perfunctorily with the hope and expectation that any error which he might commit by not making a proper assessment can subsequently be rectified by resorting to the machinery under section 34 of the Act. Even in cases governed by section 34 (1) (b), which is not the provision applicable to the present case, it has been held repeatedly that a mere change of opinion on the part of the Income-tax Officer on the same set of facts would not clothe him with the necessary jurisdiction to make an assessment or a reassessment (see Ananthalakshmi Ammal v. Commissioner of Income-tax, Raghavalu Naidu & Sons v. Commissioner of Income-tax and Commissioner of Income-tax v. K. M. S. Lakshmana Iyer. In a case in which section 34 (1) (a) is resorted to by the department it would be dangerous and certainly illegal to impute default on the part of the assessee in the matter of making a full and true disclosure of material facts merely from the non-performance or improper performance of the official duties by the assessing officer.
Mr. S. Ranganathan, learned counsel for the department, referred us to the report of the Income-tax Officer to the Commissioner as a result of which the necessary sanction to initiate proceedings under section 34 was obtained. In that report the officer has charged the petitioners with various 'misleading acts, statements and assertions committed and made by and on behalf of the assessee' during the previous assessment. The relevant portion of that report is as follows :
'The following are some instances to the point :
(a) In the original return only the Indian income was admitted and thus a misleading impression was created that it was a non-resident.
(b) The degree of residence was deliberately omitted to be stated in the original return.
(c) Along with the return, the assessee submitted an application for double income-tax relief under section 49, although, under the law, on its own claim, it was not entitled to any such relief, as a non-resident is liable to be taxed on Indian income only.
(d) When the Income-tax Officer questioned the assessee about its degree of residence, the assessee deliberately made the following false statements, in its letter dated November 22, 1950.
The status of the company for the assessment year was non-resident.
The U. K. income was greater than the Indian income. Thus by repeated assertions of a deliberately wrong character, the assessee managed to prevent the Income-tax Officer from exercising the due diligence which he would have otherwise exercised'.
We must observe that the argument of prevention by the assessee of the Income-tax Officer from exercising due diligence by reason of its assertion that it was 'non-resident' is hardly intelligible. In our opinion it does not deserve any consideration whatever. It was the petitioners case that the company was non-resident and it could not but have asserted it repeatedly and persistently. It was for the officer to examine the correctness of that assertion and if he failed to do so and reached, what is now stated to be, a wrong decision, no blame can be laid at the door of the petitioner. The case of the department that there has been suppression of material facts by the petitioner formerly is without substance.
It is, therefore, manifest that the proceedings now commenced under section 34 (1) (a) of the Act are wholly without jurisdiction. None of the basic conditions prescribed under section 34 (1) (a) of the Act is present. This is a proper case in which this court should interfere under article 226 of the Constitution.
In the result, the petition is allowed and the rule nisi is made absolute. The petitioner will be entitled to its costs from the department. Counsels fee Rs. 250.