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income-tax Officer, 'M' Ward and Ors. Vs. Textile Mills Agents P. Ltd. (18.03.1974 - CALHC) - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberAppeal No. 185 of 1972
Judge
Reported in[1981]130ITR733(Cal)
ActsIncome Tax Act, 1961 - Sections 147 and 148; ;Constitution of India - Article 226
Appellantincome-tax Officer, 'M' Ward and Ors.
RespondentTextile Mills Agents P. Ltd.
Cases ReferredChhugamal Rajpal v. S. P. Chaliha
Excerpt:
- .....of money-lending. what he held, however, was that the said murshidabad co, was doing genuine jute business up to the middle of 1962 and the transaction related to this period. therefore, according to the aac, on the basis of the confession regarding the bogus money-lending business after the middle of june, 1962, no adverse inference could be drawn against the assessee. the aac, however, was not also concerned with the question whether for the assessment year 1963-64, there was any genuine transaction of money-lending or whether the assessee dealt in genuine money-lending business at the relevant time. the question, therefore, is whether on the basis of the finding recorded for the assessment year 1964-65 and on the basis of the confession of sewalal jain recorded in the said.....
Judgment:

Sabyasachi Mukharji, J.

1. The assessment for the assessment year 1963-64 for income-tax was completed on August 31, 1965. In the saidassessment, the assessee claimed deductions on account of payment of certain interest to various parties including, inter alia, the Murshidabad Jute Co. It appears that the account in the name of Murshidabad Jute Co. originated for the first time, according to the assessee, in the relevant financial year for the assessment year 1963-64 when credits aggregating to Rs. 90,000 figured on nine different dates. The said interest was allowed. Thereafter, there was assessment of the assessee for the assessment year 1964-65, which was completed on December 30, 1967. In the said assessment, the ITO examined the accounts and came to the conclusion that the transaction with Murshidabad Jute Co. was fictitious and for this purpose he relied on certain confessions alleged to have been made by one Sewlal Jain, who is the proprietor of the said Murshidabad Jute Co. The ITO, accordingly, disallowed the said interest. He recorded that what Sewlal Jain had done was to lend the name of Murshidabad Jute Co. to the assessee in order to accommodate the assessee to introduce its concealed income in the form of loans in the accounting year corresponding to the assessment year 1963-64. Therefore, according to the said ITO, the credings aggregating to Rs. 90,000 figuring in the books of the assessee-company in the name of Murshidabad Jute Co., in fact, represented concealed income of the assessee. He, accordingly, directed reopening of the assessment under Clause (a) of Section 147 of the I.T. Act, 1961. Thereafter, there was an appeal to the AAC for the assessment year 1964-65 and the AAC passed an order on August 22, 1968. Before that, on March 22, 1968, notice under Section 148 of the I.T. Act, 1961, was issued to the assessee reopening the assessment for the assessment year 1963-64. In the appellate-order of the AAC for the year 1964-65, the AAC observed that the transaction with Murshidabad Jute Co. started from October, 1961, and ended in June, 1962. The AAC further observed that the company had already been on the record of the ITO, Berhampore, and a certified copy of the account had been filed which brought forward a balance of about Rs. 91,802 during the year 1962-63. The AAC was, therefore, of the view that M/s. Murshidabad Jute Co, was a genuine concern and doing genuinely business in jute up to the middle of 1962 and the transaction related to this period. He was, therefore, of the opinion that on the confession of the bogus money-lending after the middle of 1962 no adverse inference could be drawn against the assessee. He, accordingly, allowed the interest which was disallowed by the ITO for the assessment year 1964-65. In this connection, it would be relevant at this stage to set out from the confessions recorded in the assessment year 1964-65 by the ITO by Sewlal Jain. The said confession was made on November 24, 1965, before the ITO. The extracts from the question and answers are hereunder:

' Q. What arc your source of income ?

A. I am also the proprietor of M/s. Murshidabad Jute Co., which is having its head office at Jiaganj and branch at 46, Strand Road, Calcutta. This firm was started some time in 2000 Ratlia Jatra as a partnership concern and in about 2010 or 2012 R.J. I became the proprietor of the concern which had main jute purchasing centre at Lalgola in most of the years and had commission agency business in jute in Calcutta till R.J. year ended in the middle of the calendar year 1962. So far as I remember since then there is no business nor Mursliidabad jute except bogus name-lending from its Calcutta branch.

Q. Since when you started this business of Jamakharcha ?

A. I am carrying on the business of Jamakharcha for about last six or seven years prior to which I carried on really business as stated above.

Q. In what names have you done Jamakharcha business ?

A. In five names as follows :

1. .........

2. .........

3. Mursliidabad Jute Co.

4. .........

5. .........'

2. The assessee challenged the notice issued on March 22, 1968, under Section 148 of the I.T. Act, 1961, in the application under Article 226 of the Constitution and obtained a rule nisi. The assessee contended that the conditions precedent for the issuance of the notice had not been fulfilled in this case and, therefore, the notice issued by the ITO was without jurisdiction. The rule nisi ultimately came up for hearing before B. C. Mitra J. and by an order passed and judgment delivered on June 2, 1972, the learned judge has made the rule nisi absolute and quashed the said notice. This appeal arises out of the aforesaid judgment and order passed by B. C. Mitra J. on June 2, 1972.

3. The question involved in this case is whether the conditions precedent for the issuance of the notice under Section 148 have been fulfiled in this case, This notice was issued as mentioned hereinbefore under Clause (a) of Section 147 of the I.T. Act, 1961. In order, therefore, to sustain this notice it is necessary to find out whether the ITO had formed the requisite belief that income of the assessee had escaped assessment or had been underassessed as a result of any omission or failure on the part of the assessee to disclose fully and truly all material facts relevant for the assessment. It is further accessary to enquire whether there were materials for the ITO to form that belief and if so whether these materials have a rational nexus to the formation of the belief, if any, formed in this case. As mentioned hereinbefore, the ITO who issued the impugned notice was the ITO who has made the assessment for the subsequent year, namely, for the assessment year 1964-65. The said ITO proceeded on the basis of the finding that he had arrived at in making the assessment for the assessment year 1964-65. In the said assessment year, relying on the confession of Sewlal Jain, who was admittedly one of the alleged money-lenders to whom interest was alleged to have been paid by the assessee, had made a confession. The question is whether the confession was of such a nature on which reliance could have been placed in this case by the ITO for reopening the assessment and if such reliance had been placed whether such reliance could be described as material on which a reasonable man could have acted in issuing the impugned notice.

4. Before we proceed further we have to observe that in so far as the ITO found for the assessment year 1964-65, that the Murshidabad Jute Company, being the alleged name-lender, was not a genuine concern or there was no genuine transaction with the concern and as such was not entitled to interest for the assessment year 1964-65, that finding has been upset by the AAC. The learned trial judge has referred to this aspect of the matter and has observed that it could not be overlooked that the AAC had held the transaction to be genuine and this decision of the AAC was binding on the department until it was reversed on appeal. Therefore, according to the learned judge, after this finding of the AAC, it could not be said that this loan was not genuine. It has to be noted that the finding of the AAC was arrived at on the 22nd of August, 1968, while the impugned notice had been issued on the 22nd of March, 1968. In order to determine whether the ITO had jurisdiction to issue the impugned notice we must consider the facts as these were on the date when the impugned notice was issued. Subsequent discovery of any new fact would not confer upon the ITO jurisdiction if he did not have the jurisdiction at the time of the issuance of the notice. Similarly, subsequent information regarding the falsity of the case or casting doubt on the genuineness of the information upon which the ITO had acted would not defeat the jurisdiction of the ITO if he had jurisdiction to issue the impugned notice on the materials before him. Subsequent decision of the AAC would not either confer jurisdiction if the ITO had not originally the jurisdiction at the time of issuance of the notice or defeat the jurisdiction of the ITO if he had it at the time of issuance of the notice. This proposition is well settled by the scheme of the I.T. Act and for this no authority is needed. Indeed, counsel for the respondent did not seriously dispute this proposition. What he contended, however, was that though the subsequent information would not confer or take away the jurisdiction of the ITO, the subsequent determination by a higher authority about the quality of the information was a relevant factor to be taken into consideration in determining the nature of materials upon which the ITO acted. In so far as it is stated that the subsequent determination by a higher authority as to the quality of the basis of the information is a relevant factor, in our opinion, cannot be disputed, but in this connection, it has to be borne in mind that the AAC for the assessment year 1964-65 did not make any finding that there was any regular and genuine transaction of money-lending. What he held, however, was that the said Murshidabad Co, was doing genuine jute business up to the middle of 1962 and the transaction related to this period. Therefore, according to the AAC, on the basis of the confession regarding the bogus money-lending business after the middle of June, 1962, no adverse inference could be drawn against the assessee. The AAC, however, was not also concerned with the question whether for the assessment year 1963-64, there was any genuine transaction of money-lending or whether the assessee dealt in genuine money-lending business at the relevant time. The question, therefore, is whether on the basis of the finding recorded for the assessment year 1964-65 and on the basis of the confession of Sewalal Jain recorded in the said assessment order it can be said there were materials for a reasonable man to form the belief that the assessee had not fully and truly disclosed all material facts. Counsel for the respondents contended that, in the instant case, there were no materials. According to him, the confession did not relate to the transactions or dealings of the Murshidabad Jute Company with the assessee-company. Therefore, counsel submitted that the said confession would not be any knowledge or information that the assessee had not truly disclosed the facts at the time of the original assessment. According to counsel, Sewalal Jain had confessed that the bogus money-lending business was being done from the middle of the calendar year 1962, and the transaction in question covered the period prior to that year. In this connection, reliance was placed on the Full Bench decision of this court in the case of Lakhmani Mewed, Das v. ITO : [1975]99ITR296(Cal) . In that case, however, the confession with which the court was concerned was entirely of a different nature. There the materials were to the following effect (p. 331):

'There are hundi loan credits in the names of Narayansingh Nandalal, D. K. Naraindas, Bagwandas Srichand, etc., who are known name-lenders, and also hundi loan credit in the name of Mohansingh Kanayalal, who has since confessed he was doing only name-lending. In the original assessment these credits were not investigated in detail. As the information regarding the bogus nature of these credits is since known, action under Section 147(a) is called for to reopen the assessment and assess these credits as the undisclosed income of the assessee. The assessee is still claiming that the credits are genuine in the assessment proceedings for 1962-63. Commissioner's sanction is solicited to reopen the assessment for 1958-59, under Section 147(a)..'

5. On the basis of the Supreme Court decision referred to in the said Full Bench decision it was held that a confession of this nature could not be the reason for reopening the assessment of the assessee. In the instant case, however, there is not only a confession but a finding recorded at the time of the assessment for the subsequent year that the transaction in question was not genuine. That finding is not the finding recorded by any other officer but the officer who has issued the impugned notice. In so far as the confession was that the money-lending business was done after the middle of June, 1962, it appears that it cannot be said that that was the only inference or conclusion from the said confession because it is stated that Jamakharcha is an expression which means name-lending. This Jamakharcha business was done, according to the confession, by the Murshidabad Jute Company for the last six or seven years prior to the date of the confession, that is to say, 24th of March, 1965. If in that light the confession is read or considered then the confession implied that the transaction in the name of Murshidabad Jute Company with the assessee for the relevant year was nothing but name-lending. The fact that a different (sic) would have been the proper inference is not the way to look at this stage on these materials. Reliance may be placed on the observations of the Supreme Court in the case of CIT v. A. Raman and Company : [1968]67ITR11(SC) and the observations of the court appearing at p. 16 of the report. Therefore, if an inference is possible that there was no business but name-lending in the relevant year and if that information came as a result of the confession made by the proprietor of the company in whose alleged name money had been borrowed by the assessee-company for the relevant assessment year and that confession has been recorded and relied on in the assessment order and a finding recorded by the ITO who himself has issued the impugned notice it cannot be said that the ITO noted without jurisdiction or that there were no materials upon which any reasonable man could have formed the belief that the assessee had not truly and fully disclosed the primary facts at the time of the original assessment.

6. In the aforesaid view of the matter, we are of the opinion that in this case conditions precedent were fulfilled at the time of the issuance of the impugned notice. We must observe, however, that reliance was placed by counsel in the cases of Sidh Copal Gajanand v. ITO : [1969]73ITR226(All) , Fatch Chand Jairam Dass v. CIT and ITO v. Dwarkadas Shah Brothers (P.) Ltd. : [1974]95ITR527(Cal) . In the view we have taken it is not necessary for us to refer to the said decisions in detail. We must also observe that reliance was also placed on the decision in the case of Chhugamal Rajpal v. S. P. Chaliha, : [1971]79ITR603(SC) . The facts of that case were entirely different and have been discussed fully in the aforesaid Full Bench judgment of this court in Lakhmani Mewal Das v. ITO : [1975]99ITR296(Cal) . Therefor, it is not necessary for us to discuss these again.

7. In the aforesaid view of the matter, this appeal has to be allowed and the judgment and order of B. S. Mitra J., dated the 22nd of June, 1972, are hereby set aside and the application under Article 226 of the Constitution is hereby dismissed.

8. There will be no order as to costs.

9. Operation of this order is stayed for a period of four weeks from this date.

R.N. Pyne, J.

10. I agree.


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