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Niranjan and Co. (P.) Ltd. Vs. Commissioner of Income-tax and ors. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberMatter No. 113 of 1965
Judge
Reported in75CWN741,[1972]84ITR427(Cal)
ActsIncome Tax Act, 1961 - Sections 147 and 148; ;Constitution of India - Article 226
AppellantNiranjan and Co. (P.) Ltd.
RespondentCommissioner of Income-tax and ors.
Appellant AdvocateD.K. De and ;Biswarup Gupta, Advs.
Respondent AdvocateD. Gupta and ;Ajit Sen Gupta, Advs.
Cases ReferredMahabir Prasad Munna Lal v. Commissioner of Income
Excerpt:
- b.c. mitra, j. 1. this appeal is directed against a judgment and order dated april 30, 1970, whereby a rule nisi issued under article 226 of the constitution was discharged.2. for the assessment year 1962-63 the appellant filed its income-tax return on november 29, 1962, showing rs. 2,092 as its profits. according to the appellant a mistake had occurred in the preparation of the return, inasmuch as the profit of rs. 10,718.46 arising from construction work was left out from the return, but along with the return a copy of the balance-sheet and profit and loss account was filed by the appellant. in the profit and loss account, however, the profit from the construction work was shown. the income-tax officer made the assessment on november 27, 1963, and it appears from the assessment order.....
Judgment:

B.C. Mitra, J.

1. This appeal is directed against a judgment and order dated April 30, 1970, whereby a rule nisi issued under Article 226 of the Constitution was discharged.

2. For the assessment year 1962-63 the appellant filed its income-tax return on November 29, 1962, showing Rs. 2,092 as its profits. According to the appellant a mistake had occurred in the preparation of the return, inasmuch as the profit of Rs. 10,718.46 arising from construction work was left out from the return, but along with the return a copy of the balance-sheet and profit and loss account was filed by the appellant. In the profit and loss account, however, the profit from the construction work was Shown. The Income-tax Officer made the assessment on November 27, 1963, and it appears from the assessment order that the profit from the construction work was taken into account in making the assessment. The appellant, however, had filed a revised return showing the general profit of Rs. 2,092 as also the profit from the construction work aggregating Rs. 12,797.65. After having made the assessment order on the basis of the first return the Income-tax Officer issued a notice to the appellant under Section 147 of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'). The ground for issue of this notice was that the revised return was not before the Income-tax Officer when the assessment order was made, but came to her possession later on, when it was forwarded to her on December 3, 1963. On receiving the notice under Section 147 the appellant wrote to the Income-tax Officer challenging her jurisdiction to issue such a notice and also alleging that there were no grounds for issue of the notice. Thereafter, not being satisfied with the explanation given by the Income-tax Officer, the appellant made an application under Article 226 of the Constitution, and obtained a rule nisi which was discharged by the order dated April 30, 1970.

3. The first ground of attack advanced by Mr. De, counsel for the appellant, on the order under appeal, was that the foundation of a notice under Sections 147 and 148 of the Act was escapement of income, and in this case there was no such escapement, because the profit from construction work which was the item left out from the first return, and included in the revised return, was in fact taken into consideration by the Income-tax Officer in making the assessment order. It was argued that this item of profit was not only before the Income-tax Officer, as it was included in the profit and loss account, but it was in fact taken into consideration by the Income-tax Officer in making the assessment order. The specific amount which provided the ground for the issue of a notice under Section 147 having been taken into consideration by the Income-tax Officer in making the assessment, it could not be said, it was argued, that any income or profit had escaped assessment.

4. Mr. Dipankar Gupta, counsel for the respondents, sought to repel this contention on behalf of the appellant by referring to the provisions in Section 147 of the Act. He argued that the Income-tax Officer had jurisdiction to issue a notice under Section 147 if he was satisfied that income had escaped assessment. In this case, it was argued, the only document before the Income-tax Officer at the time when the assessment was made, was the first return filed by the appellant in which the profit from construction work was left out. When the revised return came before her, the Income-tax Officer was amply justified in issuing the impugned notice. It was further argued that merely because profit from construction work was shown in the balance-sheet and profit and loss account filed with the first return, it could not be said that there was a full disclosure of all incomes and profits by the appellant. It was difficult to gather, it was argued, from the numerous figures included in the balance-sheet and the profit and loss account of the appellant what exactly the profit or income of the assessee was.

5. This contention of counsel for the respondent sounds attractive but, on a closer scrutiny, it seems to us that there is little merit in this contention. The Income-tax Officer not only had before her the balance-sheet and profit and loss account of the assessee, in which the profit from construction work was clearly shown, but it is evident from the assessment order itself that this particular item of profit or income was taken into consideration by her in making the assessment order.

6. If this item was not taken into consideration the contention of counsel for the respondents would, in our view, have prevailed. But, since that is not so, and we find that the particular item was in fact considered by the Income-tax Officer, we are not persuaded that the omission to include that item from the first return and the submission of a revised return including that item conclusively proved escapement of income.

7. In the revised return the profit or income from all sources has been stated to be Rs. 12,797.65. In the balance-sheet, which was submitted with the first return, the profit from construction work was shown at Rs. 10,718.46. According to the appellant, a loss of Rs. 18.07 (shown in the balance-sheet) has to be deducted from this amount and, if so deducted, the profit comes to Rs. 10,700.39. If the profit disclosed in the first return of Rs. 2,096.26 is added to the amount of Rs. 10,700.39 the total amount comes to Rs. 12,796.65. It thus appears that the total profit and income calculated on the basis of the first return and the balance-sheet comes to Rs. 12,796.65, and this is less by Re. 1 only from the profit and income disclosed in the revised return which is Rs. 12,797.65. It seems to us, therefore, that nearly the entire amount disclosed in the revised return was taken into consideration by the Income-tax Officer in making the assessment order. But, by filing a revised return the appellant invited the Income-tax Officer to make an assessment order on the basis of the same. The appellant cannot now contend that no notice should be taken of the revised return, though, prima facie, it discloses higher income and profits, I shall advert to this aspect of the case later in the judgment.

8. It is very curious that in the assessment order itself the Income-tax Officer has noted the profit from construction account as follows :

'Profit on construction account as returned Rs. 10,718.'

9. This makes it abundantly clear that the Income-tax Officer did take into consideration the profit or income which is alleged to have escaped assessment. When the attention of Mr. Gupta was drawn to this part of the assessment order, he said that he was unable to explain satisfactorily how the Income-tax Officer took into consideration the profit on construction account unless it was on the basis of the profit and loss account, which the Income-tax Officer had before her at the time when the assessment order was made. In paragraph 3 of the affidavit-in-opposition affirmed by the Income-Officer on May 28, 1965, it is stated that the assessment order was made on the basis of the return and profit and loss account and balance-sheet filed on November 29, 1962. It is true that this statement makes it quite clear that in making the assessment order, the Income-tax Officer had taken into consideration the profit of Rs. 10,718.46 on construction account as disclosed in the profit and loss account which was filed along with the first return. But, the question in this case is whether on the basis of the income disclosed in the revised return the issue of the impugned notice was justified.

10. The court below appears to have taken into consideration only one of the two questions raised on behalf of the appellant, namely, whether the assessment order was made on the basis of the revised return which was filed on August 2, 1963, and discharged the rule only on the finding that the revised return was not before the Income-tax Officer when the assessment order was made. It is clear to us that the basic questions are, firstly, whether any income or profit has escaped assessment and, secondly, whether there were any materials to provide grounds for issue of a notice under Sections 147 and 148 of the Act, were not considered by the court below. The foundation for a notice under Sections 147 and 148 of the Act are the existence of materials to provide grounds for being satisfied that income has escaped assessment which should, therefore, be re-opened.

11. Reliance was placed by Mr. Gupta on a decision of the Supreme Court in Commissioner of Income-tax v. A. Raman and Co., : [1968]67ITR11(SC) . In that case it was held that the jurisdiction of the Income-tax Officer to reassess income arose if he had in consequence of information in his possession reason to believe that income chargeable to tax had escaped assessment. In this appeal it is clear to us that there was information in the possession of the Income-tax Officer to provide grounds for reason to believe that income had escaped assessment. But, what is important is that in that decision it was also held that even if the information was such that it could have been obtained from investigation on materials on record relating to assessments of previous years but was not obtained by the Income-tax Officer from the materials in the assessment records of previous years, the jurisdiction of the Income-tax Officer to issue the notice under Section 147 was not affected. In the instant case now before us, it cannot be said that the Income-tax Officer had taken into account the income and profits disclosed in the revised return. As to whether the profits from construction work, which was considered by the Income-tax Officer, accounts for the entirety of the higher profits disclosed in the revised return can be ascertained only by reassessment proceedings.

12. The next contention of Mr. Gupta was based on Section 147(b) of the Act. He argued that in this case it could not be said that there was omission or failure on the part of the assessee as contemplated by Section 147(a) of the Act. But, by reason of the revised return filed by the appellant, Mr. Gupta contended, that the Income-tax Officer came into possession of information which furnished reason to believe that income had escaped assessment. In other words, he submitted that looking at the revised return the Income-tax Officer came to the conclusion that the materials disclosed in that return were sufficient to induce a belief that income had escaped assessment. At that stage, it was further argued, it was not necessary to come to a final conclusion that income liable to tax had in fact escaped assessment. All that was necessary, Mr. Gupta argued, was that the Income-tax Officer had information which might provide grounds to believe that income had escaped assessment. In support of this contention Mr. Gupta relied on a decision of the Judicial Committee in Commissioner of Income-tax v. Mahaliram Ramjidas, [1940] 8 I.T.R. 442 (P.C.), in which it was held that to enable the Income-tax Officer to initiate proceedings under Section 34 of the Indian Income-tax Act, 1922, it was enough that the Income-tax Officer on the information which he had before him and in good faith considered that he had grounds for believing that profits had escaped assessment or had been assessed at too low a rate and that the Income-tax Officer was not required to convince the assessee or to indicate to him the nature of the alleged escapement or to give him an opportunity of being heard before he decided to exercise the powers conferred by that section. The next case relied on was a decision of the Supreme Court in A.N. Lakshman Shenoy v. Income-tax Officer, Ernakulam, : [1958]34ITR275(SC) . In that case, dealing with the nature and quality of the information which the Income-tax Officer must have in his possession, it was held at page 288 of the report :

'There is no doubt, however, that the information must be definite, that is, more than mere guess, gossip or rumour. There must also be a causal connection between the information and the discovery ; but 'discovery' in the context of the section does not mean a conclusion of certainty at the stage of notice. What is necessary at the stage is that the Income-tax Officer should have formed an honest belief upon materials which reasonably supports such belief.'

13. Reliance was next placed on another decision of the Supreme Court in S. Narayanappa v. Commissioner of Income-tax, : [1967]63ITR219(SC) . In that case dealing with the question of 'reason to believe' in Section 34 of the 1922 Act, it was held that the expression did not mean a purely subjective satisfaction on the part of the Income-tax Officer and that the belief must be held in good faith and it could not be merely a pretence. It was further held that it was open to the court to examine whether the reasons for the belief had a rational connection or relevant bearing to the formation of the belief and were not extraneous or irrelevant to the purpose of the section. It was also held that to this limited extent the conduct of the Income-tax Officer in starting proceedings under Section 34 of the Act was open to challenge in a court of law. After holding that the two conditions in Section 34 of the 1922 Act, namely, that the Income-tax Officer must have reason to believe that income had been under-assessed and that such under-assessment had occurred by reason either of omission or failure to make a return or omission or failure to disclose fully all material facts, were conditions precedent to the satisfaction of the Income-tax Officer, it was held, that there were in fact some reasonable grounds for the Income-tax Officer to believe that there had been non-disclosure which would have a material bearing on the question of under-assessment, and that would be sufficient to give jurisdiction to the Income-tax Officer to issue a notice under Section 34. It was also held that whether the grounds were adequate or not was not a matter for the court to investigate. The last case relied on by Mr. Gupta was a Bench decision of the Patna High Court Mahasukhram Madanlal v. Commissioner of Income-tax, [1955] 28 I.T.R. 299 (Pat.). In that case the facts were somewhat similar to the facts now before us because the information regarding assessment of income arose out of the figures which were already disclosed in the balance-sheet and a good explanation of the income supposed to have escaped assessment could be obtained by adding up different figures from the balance-sheet for the Sambat year 1997-98 and also from profit from business and rent for the following year. It was held that the jurisdiction of the Income-tax Officer to start a proceeding under Section 34 did not depend upon the ultimate result of the proceeding and that even if it was found ultimately that there had been no escapement of income it could not be held that there was no jurisdiction to initiate proceedings under Section 34. It was further held that the test of jurisdiction was not the ultimate result of the inquiry but the test was whether the Income-tax Officer entertained a bona fide belief upon the information presented before him that income had escaped assessment.

14. Relying upon these decisions Mr. Gupta contended that in the original return a loss from business and profession to the extent of Rs. 4,422.89 was shown and there was a profit from other sources to the extent of Rs. 6,519.15 and therefore there was a net profit of Rs. 2,096.26 which was taxable. But in the revised return the appellant had shown a profit from business and profession to the extent of Rs. 7,461.42 and also a profit from other sources to the extent of Rs. 5,336.23 and taxable income was shown at Rs. 12,797.65. He, therefore, submitted that the figures disclosed as profit from business and other sources could not be readily obtained from the figures disclosed in the balance-sheet and the profit and loss account. Such figures could be obtained, it was argued, by a process of back calculation with a view to reconcile the profit or income disclosed in the revised return with those disclosed in the balance-sheet. He argued that in view of that position, namely, that the figures disclosed in the first return and the balance-sheet filed with it could not be readily reconciled with the profit disclosed in the revised return, the latter provided grounds for reason to believe that income chargeable to tax had escaped assessment. He further argued that it might be that if the assessment was reopened and reassessment was made the appellant would be able to sufficiently explain the discrepancy. But the issue of a notice was not dependent upon the ultimate result of the reassessment proceedings. It seems to us that there is a good deal of force in this contention of counsel for the respondents.

15. Counsel for the appellant, however, sought to repel the contention advanced on behalf of the respondents by arguing that an assessment could not be reopened under Sections 147 and 148 merely on suspicion and that there should be some materials on which the Income-tax Officer came to the conclusion that a portion of the assessee's income had escaped assessment on account of non-disclosure of material facts by the assessee. He also argued that it was not the assessee's duty to suggest the inferences that could be drawn from the facts disclosed by him. The appellant had disclosed all the facts which were to be regarded as primary materials, and the figures disclosed in the revised return could be arrived at by taking into consideration the profits shown in the balance-sheet, which was filed with the first return. In support of this contention Mr. De relied upon a Bench decision of the Andhra Pradesh High Court in Commissioner of Income-tax v. Jeskaran Bhuvalka, : [1970]76ITR128(AP) . That was a reference to the High Court under Section 66(2) of the Indian Income-tax Act, 1922, and the material question framed by the Tribunal was whether on the facts and circumstances of the case the Appellate Tribunal was justified in holding that the proceedings started under Section 34(1)(a) of the Act were bad in law. In that case returns were filed for the assessment year 1945-46 on July 19, 1945, showing a salary income of Rs. 3,737 and loss from business of Rs. 2,831. On March 26, 1946, returns were filed for the earlier assessment years 1941-42 to 1944-45 and a revised return for the year 1945-46, adding various amounts as income by way of interest accrued outside the Indian Union. The assessments for the different years were completed. For the year 1947-48 a return was filed on March 20, 1949, and along with this return statements were filed one of which was a copy of the assessee's capital account which showed a credit of Rs. 3,06,000. In this return the assessee also disclosed Rs. 57,040 as income outside the Indian Union but brought into the Indian Union. The income of Rs. 57,040 disclosed by the assessee was not accepted by the Income-tax Officer who raised it to Rs. 79,351. More than six years afterwards the assessment was reopened under Section 34(1)(a) as doubts were entertained about the receipt of Rs. 3,06,000 by the assessee and upon reassessment that amount was included as income under other sources. The assessee went up on appeal, firstly, to the Appellate Assistant Commissioner who confirmed the assessment, and then to the Tribunal which held that proceedings under Section 34(1)(a) were bad in law. Thereafter, there was a reference to the High Court under Section 66(2) of the Act. After taking into consideration the various decisions of the Supreme Court and the different High Courts and particularly the decision of the Supreme Court in Calcutta Discount Co. v. Income-tax Officer, : [1961]41ITR191(SC) , it was held that the proceedings under Section 34(1)(a) were bad in law. In doing so reliance was placed on the following observations of the Supreme Court in Calcutta Discount Company's case :

'If there were in fact some reasonable grounds for the Income-tax Officer, to believe 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 were non-disclosure of material facts was not open for the court's investigation. In other words, all that was necessary to give this special jurisdiction was that the Income-tax Officer had, when he assumed jurisdiction, some prima facie grounds for thinking that there had been some non-disclosure of material facts. It was the duty of the assessee, who wanted the court to hold that jurisdiction was lacking, to establish that the Income-tax Officer had no material at all before him for believing that there had been such non-disclosure.'

16. It was held in a later decision of the Supreme Court in S.N. Narayanappa v. Commissioner of Income-tax, that 'reason to believe' did not mean a purely subjective satisfaction of the Income-tax Officer, and that the belief must be held in good faith and it could not be merely a pretence. It was further held that if there were some reasonable grounds to believe that there had been non-disclosure as regards any facts which could have material bearing on the question of under-assessment, that would be sufficient to give jurisdiction to the Income-tax Officer to issue a notice under Section 34. It was also held that it was open to the court to examine whether the reasons for the belief had a rational connection or relevant bearing to the formation of the belief and were not extraneous or irrelevant to the purpose of the section. After taking into account the proceedings before the Income-tax Officer and the Appellate Tribunal, it was held that the latter was justified in holding that the proceedings under Section 34(1)(a) were bad in law. Relying upon these observations, counsel for the appellant contended that all the primary facts relating to the revised return were before the Income-tax Officer, and if in spite of such facts being before her, the assessment was to be reopened, the notice under Section 147 of the Act could be said to have been issued only on suspicion, and this, counsel for the appellant submitted, could not be done.

17. It seems to us that the materials disclosed by the appellant in the revised return were not materials with regard to which it can be said that they were disclosed in the balance-sheet and profit and loss account filed by the appellant. It is true that the income from business and profession and the income from other sources disclosed in the revised return can be arrived at after a process of calculation and addition of the various figures disclosed in the revised return. But, it is also equally true that the figures of income from business and profession and income from other sources shown in the revised return are entirely different from those in the first return. The income disclosed in the revised return, in our view, are such that the Income-tax Officer may have a bona fide ground for believing that income chargeable to tax had escaped assessment. The notice under Section 147(b) of the Act, it is to be remembered, is only for the purpose of reopening the previous assessment and make a fresh assessment of the income. If the appellant can satisfy the Income-tax Officer at such reassessment proceedings that the income disclosed in the revised return had not in fact escaped assessment, no doubt no order to its prejudice can or will be made by the Income-tax Officer. But where, as in this case, an assessee discloses figures which ex facie show that taxable income to the extent of over Rs. 10,000 was not included in the first return, the Income-tax Officer will have jurisdiction to issue a notice under Sections 147 and 148 of the Act to reopen the previous assessment and make a fresh assessment on the basis of information in his possession. In a case, such as this, it cannot be said that the Income-tax Officer had acted merely on suspicion or presumption. The assessee itself is responsible for showing as income a higher figure and now contends that those figures can be arrived at by a process of calculation from the figures available in the balance-sheet and the profit and loss account. The assessee may be right, and if it is right, no order will be made in the reassessment proceedings to its prejudice. But, at the moment we are concerned with the question if the Income-tax Officer, on the basis of materials before her, was justified in issuing the impugned notice.

18. Counsel for the appellant also relied upon a decision of the Supreme Court in Commissioner of Income-tax v. A. Raman and Co., which was earlier relied upon by Mr. Gupta. Mr. De argued that the two conditions laid down by the Supreme Court which invested the Income-tax Officer with jurisdiction were :

(i) That the Income-tax Officer had reason to believe that income chargeable to tax had escaped assessment.

(ii) That it was in consequence of information which he had in his possession that he had reason so to believe.

19. Relying on this decision it was contended that the information in the possession of the Income-tax Officer was given by the assessee and, therefore, it could not be said that income had escaped assessment and that being so one of the conditions for the issue of the notice was not satisfied. I am unable to accept this contention of counsel for the appellant. Section 147(b) of the Act does not exclude informations furnished by the assessee himself. Indeed, in that case it was held that the Income-tax Officer alone was entrusted with the power to administer the Act and if he had information from which it might be said prima facie that he had reason to believe that income chargeable to tax had escaped assessment, it was not open to the High Court exercising powers under Article 226 of the Constitution to set aside or vacate the notice for assessment on a reappraisal of the evidence. Reliance was also placed by Mr. De on a Bench decision of this court in P.R. Mukherjee v. Commissioner of Income-tax, [1956] 30 I.T.R. 535 (Cal.), and also a Bench decision of the Allahabad High Court in Mahabir Prasad Munna Lal v. Commissioner of Income-tax, [1947] 15 I.T.R. 393 (All.). These decisions do not throw any further light in the matter.

20. I now turn to a question which, though not raised by counsel for the respondents, appears to me to be formidable so far as the appellant's contentions are concerned. The appellant had filed a revised return which prima facie disclosed higher profits and by filing such a return it invited the Income-tax Officer to make an assessment on the basis of such a return. According to the appellant this revised return was filed before the assessment order was made. The trial court had rejected this contention of the appellant and came to the conclusion that the revised return Was not before the Income-tax Officer when the assessment order was made. But, even assuming that the appellant's contention is right that the revised return was filed before the assessment order was made, it now appears that this revised return came to the Income-tax Officer after the assessment order, was made. This return has to be dealt with by the Income-tax Officer in accordance with the provisions in the Act, and it cannot be ignored and thrown away. The appellant itself had disclosed in this revised return certain items of profits which are prima facie higher than the profits disclosed in the first return, and as I have said earlier, the return itself is an invitation to the Income-tax Officer to make an assessment order on the basis of the return. Having come into possession of a return filed by the appellant, after the assessment order has been made, the Income-tax Officer has to deal with it in accordance with the provisions of the Act and make an assessment order on this return. Such an order, it seems to me, can only be made by reopening the assessment under Sections 147 and 148 of the Act, as the income and profits disclosed are higher than what was disclosed earlier, and by no other means. I inquired of counsel for the appellant as to what the Income-tax Officer should do with the return filed by his client. He said that either the Income-tax Officer should ignore it altogether or should treat it as a document containing information supplied by his client. I do not think that an Income-tax Officer would be justified in ignoring altogether a return filed by an assessee. If the revised return is treated as a document by which the assessee furnished additional information regarding its income and profits, even then it is a return of income under the Act and an assessment order must be made on the same. Since an assessment order has already been made on the first return filed by the assessee, the only mode and method by which the revised return can be disposed of, even assuming that it was intended to convey additional or further information, was by reopening the assessment by a notice under Section 147 as was done in this case, as the income and profits are higher than what was disclosed earlier. A return of income calls for an assessment order and a return can be disposed of by no other means. The Act does not permit an Income-tax Officer to ignore a return of income filed by the assessee or to keep it in the record without taking any notice of it. It must be dealt with according to the provisions of the Act and in a case, where an assessment order has already been made, it can be done only by reopening the assessment followed by reassessment proceedings under Sections 147 and 148 of the Act, if the revised return ex facie discloses profits or income which is, as in this case, higher than' what was disclosed in the earlier return. As the revised return; was filed by the assessee containing further or additional materials with regard to the same assessment year, disclosing higher profits, it is not open to it to turn round and challenge the notice under Section 147 on the ground that the Income-tax Officer had no jurisdiction to issue the notice. It seems to us that, on the facts of this case, the appellant is not entitled to any relief under Article 226 of the Constitution.

21. For the reasons mentioned above, this appeal must fail and is accordingly dismissed. Each party to pay its own costs.

S.K. Mukherjea, J.

22. I agree.


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