JAGADISAN J. - The following two questions have been referred to us under section 66 of the Indian Income-tax Act :
'1. Whether the proceedings under section 34 for the assessment years 1944-45, 1945-46, 1946-47 and 1947-48 are valid ?
2. Whether the assessment under section 34 and alteration of the share income of the assessee in his personal assessment for the years 1944-45, 1945-46, 1946-47 and 1947-48 (without a reassessment of the firm in the first instance) is valid ?'
The assessee and one Karumuthu Thiagarajan Chettiar were partners of an unregistered firm called Viswanathan Ginning Factory. Each of them had a half share in the said business. This partnership commenced even during the lifetime of the assessees father, Viswanathan Chettiar. Both the partners were Nattukottai Chettiars and they were good friends. Viswanathan Chettiar purchased from Volkarts United Press Co. Ltd. a ginning factory at Nallatinpudur. The business, started in the name of Viswanathan Ginning Factory, was intended to serve as a feeder to Sri Meenakshi Mills Ltd., Madurai, of which Thiagarajan Chettiar was the managing agent. Viswanathan Chettiar was also the director of Meenakshi Mills Ltd. The partnership agreement between Viswanathan Chettiar and Thiagarajan Chettiar provided that the business at Nallatinpudur was to be run in the name and style of Karunganni Factory for a period of twenty years and that the profits were to be divided equally between them and that inasmuch as Viswanathan Chettiar had paid the purchase price for the acquisition of the factory the share of profits of Thiagarajan Chettiar was to be adjusted towards the partnership capital till it was made up. Thereafter, the profits were to be divided equally. The factory was to be managed by Thiagarajan Chettiar who was to maintain proper accounts and send copies of account and balance sheet every month to Viswanathan Chettiar. Viswanathan Chettiar died in January 1937. The partnership business, however, continued between Viswanathan Chettiars son, the assessee and Karumuthu Thiagarajan Chettiar. But the assessee appears to have been merely a partner by courtesy as the business itself was completely under the control and management of Thiagarajan, the other partner.
For the four years ended April 12, 1944, April 12, 1945, April 12, 1946, and April 13, 1947 (the previous years for the assessment years i 1944 -45, 1945-46, 1946-47 and 1947-48), the firm returned as its income only rents said to have been derived by the leasing of the factory to one Palaniappa Chettiar. The assessment on the firm for these years were completed by the Income-tax Officer, Tuticorin, on the basis of rental income from Palaniappa Chettiar but treating the firm as a registered firm under section 23(5)(b). In respect of these years, the assessee did not include his share income from the firm though he disclosed the fact that he was a partner having a half share in that firm. He intimated to the Income-tax Officer, Karaikudi, who was in charge of his assessments, that he may ascertain the correct share income includible in his total income from the Income-tax Officer, Tuticorin and assess him suitably. The Karaikudi Officer accordingly got the information from the Income-tax Officer, Tuticorin, regarding the assessees share of the firms income and assessed the assessee adopting the following share income :
Date of assessment
Share income adopted
It must now be mentioned that the assessee being dissatisfied with the management of the business by the other partner instituted the suit, O. S. No. 46 of 1948, on the file of sub-court, Tuticorin, on June 15, 1948, against his partner seeking relief by way of dissolution of partnership and taking of the accounts. A notice issued by the assessee on April 6, 1948, to Karumuthu Thiagaraja proceeded the institution of the suit. One of the point for consideration in that suit was whether the alleged lease by Karumuthu in favour of Palaniappa Chettiar was a real lease or was it a bogus transaction with a view to defeat the assessee. The learned Subordinate Judge who tried the suit held that the said lease was not a bona fide lease and passed a preliminary decree for dissolution of partnership and radiation of accounts as prayed for by the assessee. Karumuthu Thiagaraja preferred an appeal to this court in A. S. No. 565 of 1950 and a Division Bench of this court affirmed the finding of the Subordinate Judge in regard t the nature of the lease It is not necesssary to refer to the actual decree passed by this court on appeal, as it is not relevant for the present purpose. In paragraph 15 of the judgment of this court Ramaswami J. observed thus (dealing with the lease) :
'On this point we are in entire agreement with the learned Subordinate Judge that the so called leases are not bona fide leases binding upon the plaintiff but only colourable and fraudulent transaction entered into by the defendant, running the factory himself through namke vasthe persons of his own.'
In this tax reference we are not concerned with the further course of the proceedings in this suit.
As a result of the above litigation the Income-tax Officer, Karaikudi, issued notice under section 34(I)(a) of the Act to the assessee on March 27, 1953, for reassessment of the income of the four assessment years 1944-45 to 1947-48. In due course, order of reassessment were made on July 31, 1953. Holding that Palaniappa Chettiar was only a benamider or an alias for Karumuthu Thiagarajan Chettiar the income earned by Palaniappa out of the business was treated as the income of the firm. The share of profits of the assessee was thus computed in respect of the assessment years.
Share of profits Rs.
The Income-tax Officer, Tuticorin, also took action under section 34(I)(a) of the act against the firm on the information furnished by the findings in the civil suit regarding the bogus nature of the lease in favour of Palaniappa. But these section 34 proceedings against the firm were commenced only for the three assessment years 1945-46, 1946-47 and 1947-48, and these were commenced on February 23, 1954. Evidently no action was taken under section 34 against the firm in respect of the assessment year 1944-45, due to the bar of lamination. Reassessments on the firm were completed on February 28, 1950. As per those reassessments the share of the assessee for the various years would be as follows :
The reassessments of the firm were challenged by way of appeals to the Appellate Assistant Commissioner who however by his order dated July 2, 1957, confirmed the order of the Income-tax Officer. There was no further appeal to the Tribunal.
Against the orders of reassessments made on him, the assessee preferred appeals to the Appellate Assistant Commissioner. He contained that section 34 proceeding were not valid, and that therefore the reassessments should be quashed. These appeals were dismissed. The assessee took the matter by way of further appeals before the Appellate Tribunal. The Tribunal by its order dated January 10, 1957, set aside the Appellant Assistant Commissioners order and directed the Assistant Commissioner to re-hear the appeals and dispose them of according to law. The Assistant Commissioner re-heard the appeals and again reached the conclusion that the order of reassessment made by the Income-tax Officer were correct and proper. One of the contentions raised by the assessee before the Appellate Assistant Commissioner was that the assessees share income could not be determined or computed by way of reassessment without a reassessment of the firm itself determining the total income of the firm. We have already stated that in respect of the assessment year 1944-45 there were no section 34 proceedings at all against the firm and, consequently, there was no reassessment of the firms income for that year. In respect of the other years 1945-46, 1946-47, and 1947-48 reassessments on the firm were made only on February 28, 1955, while the reassessments of the assessees share income in respect of h is individual assessments were made earlier, namely, on July 31, 1953. This contention was not accepted by the Appellate Assistant Commissioner. A plea of limitation was also raised before the Appellate Assistant Commissioner but that also was repelled. It was observed by the Appellate Assistant Commissioner that even if the proceedings under section 34 started against the assessee were invalid for one reason or other, the orders of reassessment can be justified as it would fall within the power of the Income-tax Officer under section 35(5) of the Act.
This is what the Appellate Assistant Commissioner observed in affirming the orders of reassessment :
'Therefore, even assuming that the proceedings under section 34 are invalid or that the reassessments made before the reassessment of the firm were completed are incorrect in law since the assessments of the firm have been made only on February 28, 1955, it would still be within the power of the Income-tax Officer to modify the assessments under section 35(5). Even if it is held that the Income-tax Officer to, modify the assessments under section 35(5) since the appellant has come in appeal before me and since it is competent for me to enhance an assessment the imitation of the action under section 34 being valid I consider that it is within the powers vested in me to so modify the assessments as to include the appellants share income from of Viswanathan Ginning Factory. . . . Therefore, even if otherwise the reassessments are held to be improper, it must be deemed that I have by the power vested in me modified the assessments of the appellant accordingly.'
The assessee again preferred appeals before the Income-tax Appellate Tribunal. The assessee pressed the contention before the Tribunal that there cannot be a reassessment of the assessees income, without a reassessment of the firms income. Though the contention is set out by the Tribunal, it has not expressed its opinion on the point raised. The Tribunal preferred to rest its decision on the ground that the Income-tax Officer had power to modify the original assessment under section 35(5) of the Act. The Tribunal observes :
'Even if we assume, for arguments sake, that the procedure adopted by the department is irregular it cannot be disputed that under section 35(5), the Income-tax Officer has power to modify the assessment in the light of the assessment on the firm. . . . Undoubtedly, there is power with the Income-tax Office to resort to the machinery provided by section 35(5). In this view of the matter there is no substance in this objection raised by the learned counsel.'
The assessee raised a further contention before the Tribunal that the proceedings under section 34 only fall, if at all, under section 34(I) (b) and not under section 34 (I)(a) of the Act, and that four years having lapsed the bar of limitation operated. This contention was repelled by the Tribunal in these terms :
'His contention is that the assessments were made out of time, i.e., beyond the four years limited, and that eight year rule cannot apply because the assessee did not conceal any particulars but actually wanted to be assessed on his share of income from the firm. In our opinion there is no force in this objection because the case is governed by the present section as modified by the amendment in 1948.. .. In our opinion, the case is quite clearly governed by section 34(I)(a) because the correct share income of the assessee escaped assessment by reason of the omission or failure on the assessees part to disclose fully and truly all material facts necessary for his assessment.
The assessee failed to disclose the correct state of affairs namely that he was entitled to a half share in the entire income from the factory and that he was disputing the claim of the lessee Palaniappa Chettiar. The assessee cannot be heard to say that he was not aware of Palaniapa Chettiars claim at the time of completion of the original assessment because even on the 6th April, 1948, he had questioned the validity of the lease in the suit notice given by him.'
The Tribunal therefor dismissed the appeals. On the assessees application under section 66(I) of the Act the Tribunal has referred the above question to us.
We shall now deal with question No. 1. If this question is answered in favour of the assessee, there is no necessity to answer question No. 2.
The precise scope of question No. I is whether the proceedings for reassessments fall within section 34(I)(a) of the Act. Section 34(I) reads :
'(a) If the Income-tax Officer has reasons to believe that by reasons 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 this 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 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
(b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Income-tax Officer has in consequence of information in his positions, reasons to believed that income, profits or gains chargeable to income-tax have escaped assessment for any year, or have been under-assessed, or assessed at too low a rate, or have been made the subject of excessive relief under this Act, or that excessive loss or depreciation allowance has been computed, 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.'
It may be noted that the cases falling within section 34(I)(b) have to be dealt with within the period of four year limitations as prescribed while cases falling under clause (I)(a) are not restricted by such period of limitation. In the present case the proceedings having been commenced on March 27, 1953, would be barred by limitation if the department were to treat the case of the assessee as falling within clause (I)(b). The assessment year are 1944-45, 1945-46, 1946-47 and 1947-48, and it is obvious that even with reference to the last of the assessment years the period of four years, if the case is one within section 34(I)(b), lapsed on March 30, 1952.
Mr. S. Ranganathan, learned counsel for the department, made it quite plain that the proceedings would be time-barred if they did not fall within section 34(I)(a). Now this sub-section cannot operate unless there be an omission or failure on the part of the assessee to make return under section 22 or to disclose fully and truly all material facts necessary for his assessment. this is an essential condition to the exercise of jurisdiction by the Income-tax Officer when proceedings are started beyond four years from the relevant assessment year and when they are sough to be brought within the compass of section 34(i)(a). The foundation of a proceeding under this clause is the suppression by the assessee of material facts necessary for assessment. In the collocation of the words of the statute it seems to us that the omission or failure must have been deliberate and willful. It is however contended by the learned counsel for the department that casual or inadvertent omission or failure would also attract this sub-section. Without expressing our concurrence with this contention we can well say that even so the thing suppressed or not disclosed must be 'material facts' necessary for assessment.
The meaning and true import of these terms has been considered by the Supreme Court in Calcutta Discount Co. Ltd. v. Commissioner of Income-tax.
The Supreme Court observes :
'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 theprimary facts relevant to the decision of the question before the assessing authority lies on the assessee. . . . . Does the duty however extend beyond the full and truthful disclosure of all primary facts In our opinion the answer to this question must be in the negative. Once all the primary facts are before the assessing authority, he requires no further assistance by way of disclosure. . . . We have, therefore, come to the conclusion that while the duty of the assess is to disclose fully and truly all primary relevant facts, it does not extend beyond this.'
An exhaustive commentary on the precise content of these crucial words of the statute cannot be written with any measure of success. To repeat the favourite judicial dictum, everything depends on the facts of each case; 'material facts' have no legal connotation and the undisclosed facts are material or not according to the circumstances of the assessment in the particular case. The Supreme Court has given the words the meaning : primary relevant facts'. It is the duty of the asses to reveal the major facts which have a bearing on the assessment to be made. He must of course make a clean breast of all the sources of his income and the income derived therefrom. He must not hide any books of account or documents which would help the computation of the income. He is not expected to do more than this. He cannot delve into the mind of the Income-tax Officer and try to fathom it and predicate what are material facts in the view of the office. The facts must be such that if take into account, they would have an adverse effect on the assessee by the passing of a greater assessment than the one actually made. the rule of full and true disclosure of material and necessary facts should not be so fastidiously construed as would enable the department to say that non-disclosure of a fact which may have a remote bearing on the assessment attracts the section, as the assessing officer would have material use of it to charge the assessee more than what he did. The Income-tax Officer cannot certainly fall back on the section to make good his deficiencies in the first completed assessment. Case sought to be brought within section 34(I)(a) should strictly fall within that provision and it is for the department to show that the necessary conditions for the exercise of jurisdiction are fully present. The department is not at liberty to take hold of any and every circumstance, call it non-disclosure of material facts and set the machinery of reassessment in motion. If this were to be permitted there is every danger of this provision of law being used as an instrument of oppression against the assessee. The true position is that if the Income-tax Officer was left in the dark in respect of basic and crucial facts, relevant to the assessments be has jurisdiction to reopen the assessment and pass orders of reassessment.
The assessee is here charged with non-disclosure as a result of omission or failure to inform the Income-tax Officer that he was challenging the lease in favour of Palaniappa, as not being a real business transaction. We are unable to hold that this can be called a black-out of 'material facts'. It is not as if the assessee knew positively that Palanippa had no beneficial interest in the lease; at the stage of issuing the suit notice and filing the suit against Karumuthu the assessee reasonably suspected that the lease was not a bona fide transaction. That is all. He had no positive proof available in his hand to so that the lease was a mere faked up affair. By receiving this information from the assessee, the Income-tax Officer, Karaikudi, would not have gained any advantage to compute the share income of the assessee. The assessment of the income of the firm was not in his hands but it remained with the Income-tax Officer, Tuticorin. The Karaikudi officer could only have transmitted the information to the officer at Tuticorin. Further the case of the assessee was that Karumuthu was acting fraudulently to defeat his clams as partner by creating fictions leases in the names of his dummies. It was not anybodys case that Palaniapa was benamidar for the firm. No doubt Karumuthu was bound to give a half share of the true income of the firm to the assessee. In one sense the income secretly derived by Karumuthu under cover of an ostensible lease in favour of Palaniappa may be held to be in truth and in fact the income of the firm. But the question is whether the assesee was suppressing 'material facts' when he failed to tell the Income-tax Officer, Karaikudi, that he had his own suspicions about the lease in favour of Palaniappa. He stated that he had a half share in the firm and he invited the assessing officer to include in his own total income the share income from the firm. Why should the assessee assume that the Income-tax Officer, Tuticorin, would not have discharged his duties properly and that he should be suitably prompted by the Karaikudi officer In our opinion it cannot be said that the assessee was acting irrationally in presuming that the share income of the firm would have been properly determined by the competent office. The assessee has done all that he need or could do and there is not an iota of evidence to charge him with non-disclosure of material facts in terms of section 34(I)(a).
The finding of the Appellate Tribunal that the assessee failed to disclose the correct state of affairs, namely, that he was entitled to a half share in the income from the firm is not supported by learned counsel for the department. It is now admitted that the Income-tax Officer, Karaikudi, was well aware of the fact that the assessee had a half share in Viswanatha Ginning Factory. We have already stated that it was unnecessary for the assessee to have referred to the disputed lease in favour of Palaniappa. That was not material fact necessary for the assessments. The finding of the Tribunal that there has been a failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment is not supported by any evidence on record. There are no materials from which such an inference can be drawn. We therefore answer question No. I in the negative and in favour of the assessee.
Both the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal have observed that the orders of reassessment by the Income-tax Officer can be justified though not under section 34 of the Act but under section 35(5) of the Act. This view is clearly erroneous, section 35(I) runs thus :
'35. (I) The Commissioner or Appellate Assistant Commissioner may, at any time within four years from the date of any order passed by him in appeal or, in the case of the Commissioner, in revision under section 33A and the Income-tax Officer may, at any time within four years from the date of any assessment order or refund order or refund order passed by him on his own motion rectify any mistake apparent from the record of the appeal, revision, assessment or refund as the case may be, and shall within the like period rectify any such mistake which has been brought to his notice by an assessee.'
Section 35(5) reads thus :
'35. (5) Where in respect of any completed assessment of a partner in a firm it is found on the assessment or reassessment of the firm or on any reduction or enhancement made in the income of the firm under section 31, section 33, section 33A, section 33B, section 66 or section 66A that the share of the partner in the profit or loss of the firm has not been included in the assessment of the partner or, if included, is not correct, the conclusion of the share in the assessment or the correction thereof, as the case may be, shall be deemed to be a rectification of a mistake apparent from the record within the meaning of this section, and the provisions of sub-section (I) shall apply thereto accordingly, the period of four years referred to in that sub-section being computed from the date of the final order passed in the case of the firm.'
Sub-section 5 was inserted by the Income-tax (Amendment) Act of 1953 with effect from April I, 1952. Sub-section 5 deal with assessment or reassessment on the partners of a firm has not been included at all or not correctly included the inclusion of the share or the correct share shall be deemed to be rectification of a mistake apparent from the record within the meaning of sub-section (I) of section 35. It is now settled laws that section 35(I) would not enable the department to rectify the individual assessment of a partner based upon the assessment of the firm as it cannot be said that there is any mistake apparent from the record of the assessment by reason of the assessment on the firm which is not part of the record. This has been laid down in Lakshminarayana Chetty v. First Additional Income-tax Officer, Nellore, where Subba Rao C.J., as he then was, observed as follows :
'The mistake is not in the record but by a subsequent assessment of the firm, it was discovered that the earlier assessment was wrong to the extent of the assessees share in the firm. It is not a mistake apparent from the record but a mistake discovered from the disposal of another case.'
This observation of the learned Chief Justice has been quoted with approval by the Supreme Court in Income-tax Officer v. S. K. Habibullah. It is also now clear by reason of decisions of the Supreme Court that section 35(5) which acquired force only on and from April 1, 1952, has no retrospective operation so as to govern cases of the individual assessment of the partner made prior to April 1, 1952. In S. K. Hibibullahs case 2 the assessee was a partner in two firms, Messrs. Dinshaw & Co. and Messrs. Palaniappa Chettiar and Co. His individual assessments in relation to the assessment years 1946-47 and 1947-48 were made and completed on February 20, 1950. the assessment of the firm Dinshaw and Co. for the two years completed on October 31, 1050. The assessment of Messrs. Palaniappa Chettiar and Co. for 1947-48 was completed on June 30, 1951. The assessments in that case both on the partner individually and on the firm were all before April 1, 1952. The Supreme Court held that section 35(5) has no greater retrospective effect than has been expressly granted to it and that the power conferred ny the said clause to rectify the assessment of a partner of the firm by including or correcting his share of the profit or less of the firm can be exercised only in the case of an assessment of a firm made on or after April 1, 1952, and the Income-tax Officer has no Jurisdiction under that clause to rectify the assessment of a partner consequent on the assessment of the firm, in cases where the assessments of the firm were completed before April 1, 1952.
In a recent decision of the Supreme court in Second Additionaal Income-tax officer v. Atmala Nagaraj S. K Habibullahs case(2) has been followed. The facts in this case were somewhat different from the facts in Habibullahs case (2) The original assessees on the two assessees was completed on January 22, 1952. The two assessees held shares in two registered firms and the shares of the profits from these firms were taken to be certain amounts and were included in the total assesssable income of the assessees. The assessments of the two firms were not completed by that date. The firms were assessed by order dated October 16, 1954, and then it was known that the aggregate shares of the income from the two firms in the case of each of the asssessees were more. The original assesssment of the assesseess were rectified under section 35 of the Act and they moved the High court of Andhra Pradesh under article 226 of the constitution to quash that order of rectification. The high court issuess the writ and the matter was taken up by way of an appeal. It must be noted that in this case the assessments on the firm were made only after April 1,1952. The Supreme court following the principal laid down by it in Habibullahs case (1) held that even in a case where the firm is assesssed after April 1,1952, section 35(5) cannot be resorted to. At page 612 Hidayatullah J. observed thus :
'In S. K. Habibullahs case (1) the assessments of the partners as well as of the firms were completed before April 1,1952, and the amended provision was not held applicable. Here, the original assesssment was made before the amendment, and to that assessment the amended provision cannot still be made applicable far the reasons to be given by us, even though the assesssments of the firms were after April 1,1952. The assessment of the respondents was a final assessment before April 1, 1952 and sub-section (5) has not been madee applicable to such assessment, either expressly or by implication. It has been given a limited retrospectivity from April 1,1952, and it was held by this court in the cited case that it was not open to court to give more retrospectivity to it. Resort in this case could only be taken to the law as it stood before the introduction of sub-section (5) and as determined already by this court the record of the firms assesssment cold not then be called in aid to demonstrate an error on the record of a partners assessment... In our opinion, sub-section (5) could not be used in this case, and the decision of the High court was right.'
We are of opinion that the present case is fully goverend by the two decisions of the Supreme court cited above. The individual assessments of the asssessee in regard to all the four years were made in the year 1948-49. The records do not shoow when the firm itself was first assesssed in regard to these Years. But even assuming that the assessment orders were made after April 1,1952, section 35(5) cannot apply. Though this question has not been reffered to us specifically, it doess arise out of the order of the Tribunal, and we have expressed our opinion in the matter.
In the view that we have taken it is unnecessary to answer question No. 2.
The assessee, having succeeded in the reference before us, will be entitled to his costs from the department Counsels fee Rs. 250.