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Punjab Produce and Trading Co. Ltd. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 28 of 1976
Judge
Reported in(1983)34CTR(Cal)206,[1984]146ITR95(Cal)
ActsIncome Tax Act, 1961 - Sections 66(1), 147 and 256
AppellantPunjab Produce and Trading Co. Ltd.
RespondentCommissioner of Income-tax
Appellant AdvocateD. Pal and ;R.N. Murarka, Advs.
Respondent AdvocateB.L. Pal and ;Ajit Kr. Sengupta, Advs.
Cases ReferredIn India Cements Ltd. v. Commissioner of Income
Excerpt:
- sabyasachi mukharji, j.1. in this reference under sub-section (2) of section 256 of the i.t. act, 1961, as directed by this court, for the assessment years 1961-62 to 1967-68 the following questions have been referred to us :for the years 1961-62 to 1967-68 '1. whether, on the facts and in the circumstances of the case, the proceedings initiated under section 147(a) of the income-tax act, 1961, were valid and legal ? 2. whether, on the facts and in the circumstances of the case, the tribunal was justified in holding that there was no relationship of employer and employee between the assessee-company and shri a.v. birla, smt. priyamvada devi birla and smt. sunanda devi birla : 3. whether, on the facts and in the circumstances of the case, the tribunal was justified in holding that the.....
Judgment:

Sabyasachi Mukharji, J.

1. In this reference under Sub-section (2) of Section 256 of the I.T. Act, 1961, as directed by this court, for the assessment years 1961-62 to 1967-68 the following questions have been referred to us :

For the years 1961-62 to 1967-68

'1. Whether, on the facts and in the circumstances of the case, the proceedings initiated under Section 147(a) of the Income-tax Act, 1961, were valid and legal ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that there was no relationship of employer and employee between the assessee-company and Shri A.V. Birla, Smt. Priyamvada Devi Birla and Smt. Sunanda Devi Birla :

3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the remuneration paid to Shri A.V. Birla, Smt. Sunanda Devi Birla and Smt. Priyamvada Devi Birla were not incidental to the business and could not be allowed as business expenditure ?

4. Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the payments made to Shri A. V. Birla, Smt. Sunanda Devi Birla and Smt. Priyamvada Devi Birla as salaries were not for any service rendered by them to the assessee-company but was only due to extra-commercial consideration is based on any relevant material and evidence and -not perverse ?'

For the assessment year 1968-69 the following questions have been referred to this court:

For the year 1968-69

'1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that there was no relationship of employer and employee between the assessee-company and Shri A.V. Birla, Smt. Priyamvada Devi Birla and Smt. Sunanda Devi Birla ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the remuneration paid to Shri A.V. Birla, Smt, Sunanda Devi Birla and Smt. Priyamvada Devi Birla were not incidental to the business and could not be allowed as business expenditure ?

3. Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the payments made to Shri A.V. Birla, Smt. Sunanda Devi Birla and Smt. Priyamvada Devi Birla as salaries were not for any service rendered by them to the assessee-company but was only due to extra-commercial consideration is based on any relevant material and evidence and not perverse ?'

Now, we may at the outset mention that for the assessment years 1961-62 to 1967-68 the assessee impugned the reassessment and the first question, for these years, as we have set out hereinbefore, challenges the reopening of the original assessment for the assessment years 1961-62 to '1967-68. The other three questions, viz., Q. Nos. 2, 3 & 4, for these years challenge the validity and the propriety of the order impugned on the reopening. In view of the findings of fact made on this aspect by the Tribunal, learned advocate for the assessee did not press for any answer in respect of Q. Nos. 2, 3 & 4 for the assessment years 1961-62 to 1967-68. Therefore, these questions we decline to answer and the findings of fact against the assessee on these questions must remain.

2. For the assessment year 1968-69, three questions have been raised challenging the validity and propriety of the original assessments. No reopening was involved in this year as mentioned hereinbefore. No argument challenging the findings of the Tribunal was advanced before us. In this premises, in view of the findings made by the Tribunal, we answer all these questions in the affirmative and in favour of the Revenue.

3. The only question upon which some arguments were advanced, before us, was on Q. No. 1 for the assessment years 1961-62 to 1967-68. We may, however, mention that if this question is answered against the Revenue, then the answers to Q. Nos. 2, 3 & 4 for the assessment years 1961-62 to 1967-68 would become academic. If the reassessment is held to be invalid then the order passed on the reopening would be of no avail. Therefore, the only question upon which we must address ourselves is Q. No. 1 for the assessment years 1961-62 to 1967-68. This question, as we mentioned hereinbefore, challenges the propriety of the reopening. The facts were as follows:

The assessment years are 1961-62 to 1968-69. The assessee derives income from dividend, interest and rent and also owns tea gardens. In the course of the assessment proceedings for the assessment year 1968-69, the ITO noticed payment of salary to the following persons:

Rs.(1)Shri A. V. Birla24,000(2)Smt. Priyamvada Devi Birla24,000(3)Smt. Sunanda Devi Birla18,000

He noticed that the above persons were connected with the management directly or indirectly either as shareholders or otherwise. The ITO gave opportunity to the assessee to prove whether they rendered any services to the assessee-company. The assessee was required to produce Shri A.V. Birla but the assessee-company in its letter dated December 5, 1969, informed the ITO that there was no necessity for his personal appearance. In the letter dated September 9, 1969, the assessee-company stated that the above persons were executives who looked after the general administration. When the ITO required the assessee-company to produce documentary evidence for their performing duties the company in its letter dated December 4, 1969, stated 'it is to say the least, unusual for advisory services of such a nature to be represented by paper work which can be produced for examination'. The ITO in his letter dated February 4, 1970, gave opportunity to the assessee to explain why the salary paid to them should not be disallowed. In reply, the assessee submitted a letter dated February 9, 1970, reiterating the submissions made earlier. The ITO found that no evidence was produced to prove the nature of services rendered by Shri A.V. Birla, Smt. Priyamvada Devi Birla and Smt. Sunanda Devi Birla. He further found in the assessment order that Shri A.V. Birla. and his wife, Smt, Sunanda Devi Birla, normally stayed at Bombay and Shri A.V. Birla was assessed to income-tax at Bombay. He also found that Shri A.V. Birla was an employee of M/s. Birla Gwalior Pvt. Ltd. and his place of duty had been stated to be at Bombay. Thus, he held that Shri A.V. Birla and his wife, Smt. Sunanda Devi Birla, did not render any services to the assessee-company. He also held that no evidence was produced to prove any services rendered by Smt. Priyamvada Devi Birla. He further held that the normal procedure for appointment of employees was not followed for appointing these persons. He held that the payments made to the above persons were more for personal considerations than for the purpose of business. Thus, he disallowed the payment of Rs. 66,000 in the assessment year 1968-69 being not incurred wholly and, exclusively for the purpose of the assessee's business.

4. In the original assessments for the assessment years 1961-62 to 1967-68, the ITO had allowed the total amount of salary claimed by the assessee-company. In the assessment year 1968-69, he held that the salary paid to Shri A. V. Birla, Smt. Priyamvada Devi Birla and Smt. Sunanda Devi Birla was not allowable. He reopened the assessment proceedings under Section 147(a) of the I.T. Act, 1961, for the assessment years 1961-62 to 1967-68, on the ground that the assessee failed to disclose fully and truly the material facts at the time of the original assessment proceedings. In response to the notices issued under Section 148 of the I.T, Apt, 1961, the returns were filed under protest. The reopening of the assessments under Section 147(a) wasobjected to by the assessee-company. The ITO held that the assessee did not even furnish the details of salary paid, names of employees, their functions, etc., and hence there were enough material to hold that the assessee failed to disclose material facts at the time of original assessments. He also observed that the point regarding the payment of salary to Shri A.V. Birla, Smt. Sunanda Devi Birla and Smt. Priyamvada Devi Birla had been fully discussed in the assessment order for 1968-69, and for the same reasons given therein he disallowed the payment of salary to the above three persons in the assessment years 1961-62 to 1967-68 in the reassessment orders.

5. The assessee preferred appeals before the AAC who passed a separate order for the assessment year 1968-69, and a consolidated order for the assessment years 1961-62 to 1967-68. In his order for 1968-69, he held that the ITO was justified in disallowing the salaries paid to Shri A.V. Birla and Smt. Sunanda Devi Birla. In coming to this conclusion, he gave the following reasons :

' I have reached this conclusion for the following reasons:'-

(i) Shri A.V. Birla and Smt. Sunanda Devi Birla stay in Bombay where Shri A.V. Birla is working full-time for another company. The assessee-company' has neither any branch office nor any business in Bombay.

(ii) No evidence has been produced to establish that either of them did any work for the business carried on by the assessee-company. Further, there is no evidence to show that any one of them gave any specific advice with regard to the investments of the assessee-company.

'(iii) A perusal of the assessment records for the last few years shows that most of the changes in investments, whenever they were made, were made through brokers in Calcutta,

(iv) Even if it is presumed that some advice with regard to changes in investments was given by either of them, the salary paid to them would still, be not an admissible deduction against the business income of the assessee (the assessee is not a dealer in shares). Nor would it be admissible against the dividend income. '

With regard to the salary paid to Smt. Priyamvada Devi Birla he accepted the submissions of the assessee. He held that Smt. Priyamvada Devi Birla had been rendering services to the assessee-company in Calcutta and she had been a director of another company where remuneration paid to her had been allowed. Thus, he deleted the disallowance of salary paid to her and upheld the disallowance of salaries paid to Shri A.V. Birla and Smt. Sunanda Devi Birla.

6. In the consolidated order for the assessment years 1961-62 to 1967-68, dated June 9, 1971, the AAC held that at the time of the original assessments the assessee had not even furnished the details of the names of the persons to whom salaries had been made and thus the assessee did not fully and truly disclose all the material facts necessary for the assessments at the time of original assessment proceedings. Thus, he justified the action of the ITO in reopening the assessments under Section 147(a) of the I.T. Act, 1961. On merits, following his order for the assessment year 1968-69, he sustained the disallowance of the salary payments to Shri A.V. Birla and Smt. Sunanda Devi Birla and allowed the payment of salary to Smt. Priyamvada Devi Birla for all the assessment years, i.e., 1961-62 to 1967-68.

7. The assessee as well as the Department preferred appeals before the Income-tax Appellate Tribunal for the assessment years 1961-62 to 1968-69. On behalf of the assessee, it was urged that all the primary facts were disclosed at the original assessment stage and there was no failure on the part of the assessee of any non-disclosure of the primary facts and the income had not escaped assessments. It was also urged that no reasons had been given by the ITO for reopening the assessments and the reasons recorded by the ITO did not have reasonable nexus. It was also urged that the ITO never asked the assessee to furnish the names of the employees. It was also urged that the assessments had been reopened due to change of opinion. It was further urged that the conditions precedent for reopening the assessment under Section 147(a) had not been satisfied and thus the reassessment proceedings were illegal and invalid. It was further submitted that the Commissioner did not apply his mind before giving necessary sanction for, reopening the assessments and in a mechanical way he had granted sanction and no reasonable man would have given sanction on the basis of the reasons recorded by the ITO, Reliance was placed on the decision of the Supreme Court in Calcutta Discount Co. Ltd. v. ITO : [1961]41ITR191(SC) , and also in the case of CIT v. Burlop Dealers Ltd. : [1971]79ITR609(SC) and Chhugamal Rajpal v. S.P. Chaliha : [1971]79ITR603(SC) . It was further urged that Shri A.V. Birla was appointed as an executive of the company by a resolution passed by the board of directors at the meeting held on February 20, 1958. Similarly, Smt. Sunanda Devi Birla and Smt. Priyamvada Devi Birla were also appointed as executives of the company by a resolution passed by the board of directors at, the meeting held on April 12, 1960, and they were employees of the company rendering services and payment of salaries made to them were business expenditure and should have been allowed. On behalf of the Revenue, it was urged that the primary facts were not disclosed fully and truly in the original assessment proceedings. The names and details of the employees were notfurnished at the original assessment stage and thus there was nondisclosure of primary -facts on the part of the assessee. It was further urged that the ITO has recorded the reasons for the reopening of the assessments under Section 147(a) and the Commissioner was satisfied with the reasons and granted the necessary action. Thus, it was urged that the reassessment proceedings were valid. If was further urged that no evidence was placed by the assessee to prove that the above three persons rendered services to the assessee-company and thus the payments made to them as salaries were not allowable. It was also pointed out that Shri A.V. Birla and Smt. Sunanda Devi Birla actually resided at Bombay and they could not have rendered any services at Calcutta. It was further urged that the payments made to them were not for the purpose of business consideration, but only due to some extra considerations. It was also pointed out that Birla families had large shareholdings in the assessee-company and due to those considerations the payments to the above three persons had been made as salaries,

8. In the departmental appeals, the learned departmental representative urged that no evidence had been produced to prove that Smt. Priyamvada Devi attended to the business of the company or rendered any services. Hence, the payments made to her were not allowable. He also pointed out that the letters of appointment had not been issued to the above three persons and even the letters of acceptance by them were not produced.

9. In reply, the learned counsel for the assessee submitted that though the names and details of the employees were not furnished at the original assessment stage, the total figure for salaries, wages and bonus were separately given. The balance-sheet and profit and loss account were filed. The figures towards payment of salaries were found in the profit and loss account. Thus, it was urged that the ITO in the original assessment stage allowed the entire salary but due to change of opinion by his successor the assessments had been reopened. It was urged that the entire payments to all the three persons should have been allowed.

10. The Tribunal thereafter examined the facts of the case and held as under:

'According to the assessee, Shri A.V. Birla was appointed as executive by a resolution passed at the meeting of the board of directors held on 20-2-1958, which reads as follows :

'The board decided that Shri Ashok Vardhan Birla be appointed with effect from 1st April, 1958, to look after the business of the company on a salary of Rs. 1,000 per month and that the payment of the above sum be made to him by the Calcutta office of the company.' In respect of the appointment of Smt. Priyamvada Devi Birla and Smt. Sunanda Devi Birla, as executives, a resolution is said to have been passed at the meeting of the board of directors held on 12th April, 1960,' which is as follows :

'The board decided that in view of the increase in the business of company Smt. Priyamvada Devi Birla and Smt. Sunanda Devi Birla be appointed with effect from 1st April, 1960, on a remuneration of Rs. 1,000 per month each to look after the business of the company and that the remuneration of Shri A.V. Birla be increased with effect from the aforesaid date from Rs. 1,000 per month to Rs. 1,500 per month. ' The salaries of the above two ladies were subsequently increased to Rs. 1,500 per month and Rs. 2,000 per month respectively. The salary of Shri A.V. Birla was also increased to Rs. 2,000 per month. The above resolution appointing the above three persons as well as the resolution increasing their emoluments from time to time were not placed before the Income-tax Officer at the original assessment for the years 1961-62 to 1967-68. Admittedly, the assessee did not furnish the names of the employees of the assessee-company and the details of the payment of salaries to each of them at any time during the original assessment proceedings. The assessee has merely given the total amount paid towards salary of all the employees but not the names and details of those employees. The letters of appointment or any correspondence with the above three employees were not placed before the Income-tax Officer at any time during the original assessment proceedings. The assessee did not bring to the notice of the Income-tax Officer in the original assessment proceedings the particular entries in the books of account relating to the salary paid to Shri A.V. Birla, Smt. Priyamvada Devi Birla and Smt. Sunanda Devi Birla. The Income-tax Officer was not aware of these persons being employees of the assessee-company at the original assessment proceedings as the details relating to the salaries of the employees were not placed before him. Thus, in the original assessment proceedings the Income-tax Officer without any enquiry allowed the entire salary claimed by the assessee. It is true that the profit and loss account and the balance-sheet were filed. But in the profit and loss account the total figure of the salary alone was mentioned but the details and names of the employees and the amounts paid to them have not been mentioned even in the statement accompanying them. Thus, in the original assessments, the Income-tax Officer did not have occasion to enquire in respect of the payment of salaries to Shri A.V. Birla, Smt. Sunanda Devi Birla and Smt. Priyamvada Devi Birla as their names were not disclosed to him at that stage. This would clearly show that the assessee did not disclose the primary facts at the original assessment proceedings. It is only in the course of enquiry for the assessment year 1968-69, the Income-tax Officer noticed the names of these three employees and found that they were not employees of the assessee-company and the payments made towards their salaries were not incidental to the business. He found in the course of enquiries for the assessment year 1968-69 that similar payments were made to the above three employees in the assessment years 1961-62 to 1967-68 also, which were not allowed as business expenditure as these persons, according to him, were not in the service of the assessee-company. Thus, he noticed that in the assessment years 1961-62 to 1967-68, the assessee failed to disclose the material facts and hence he had reasons to believe that the income chargeable to tax in those years had escaped assessments due to the omission or failure on the part of the assessee to disclose the material facts and, accordingly, the Income-tax Officer reopened the assessments under Section 147(a). The Income-tax Officer had prima facie grounds to reopen the assessments for the years 1961-62 to 1967-68, due to the omission and failure to disclose the primary facts fully and truly by the assessee in the original assessment proceedings. The sufficiency of the reasons cannot be questioned by the assessee. We are satisfied that the Income-tax Officer had prima facie ground to believe that the income chargeable to tax for the above assessment years had escaped assessment due to non-disclosure of the primary facts on the part of the assessee. We have seen the reasons recorded by the Income-tax Officer. He has clearly stated that in the course of the assessment for 1968-69 enquiries revealed that the salaries paid to some of the employees, i.e., Smt. Priyamvada Devi Birla and Smt. Sunanda Devi Birla, in particular, were not for business considerations and were not allowable expenditure, and that for the assessee's failure to disclose the material facts at the time of the original assessment, the assessee has been under-assessed. The Commissioner of Income-tax considered the reasons submitted by the Income-tax Officer and he was satisfied with the reasons given by the Income-tax Officer and had accorded sanction by saying 'Yes, I am satisfied'. The words' Yes, I am satisfied' were put by rubber stamp. But the Commissioner had applied his mind and after satisfying himself with the reasons affixed his signature. The reasons recorded by the Income-tax Officer, which were submitted before the Commissioner for his sanction, cannot be said that no reasonable man would have accorded sanction on those reasons. The Income-tax Officer had given good reasons which are, prima facie, valid reasons and after perusing and satisfying with those reasons, the Commissioner himself accorded sanction by affixing his signature. We do not find any illegality in the reasons recorded by the Income-tax Officer or in the sanction accorded by the Commissioner of Income-tax. In the case of Chhugamal Rajpal v. S.P. Chaliha : [1971]79ITR603(SC) , which was relied on by the learned counsel for the assessee, in the report recording the reasons submitted by the Income-tax Officer to the Commissioner, it was stated that proper investigation regarding the loans is necessary. On those facts, it was held therein that the Income-tax Officer did not have prima facie grounds for taking action under Section 148 and also held on those facts that if the Commissioner had read the report carefully he could never have come to the conclusion on the material before him that this was a fit case for issuing a notice under Section 148. In the instant case before us the Income-tax Officer had clearly recorded proper reasons and also stated that due to assessee's failure to disclose material facts, the assessee-company has been under-assessed. The Commissioner, after agreeing with the reasons recorded by the Income-tax Officer, had accorded sanction by affixing his signature. In these circumstances, the case cited by the learned counsel is not applicable to the instant case, The decision in the case of Commissioner o/ Income-tax v. Burlop Dealers Ltd. : [1971]79ITR609(SC) , relied on by the learned counsel, is also clearly distinguishable. In that case, in the original assessment, the assessee had disclosed the agreement and claimed that the payment of Rs. 87,927, being half of the profit earned from H, Manory Ltd., was paid to Ratiram Tansukhrai tinder a partnership agreement. The Income-tax Officer accepted the claim by the assessee and allowed the same in the original assessment. The assessment was reopened under Section 34(1)(a) of the Indian Income-tax Act, 1922, On those facts, their Lordships of the Supreme Court held that it was a case which would appropriately fall under Section 34(1)(b) but not under Section 34(1)(a), In the instant case, the names and the details of payments to the employees, particularly the three employees in dispute, were never disclosed to the Income-tax Officer in the original assessment proceedings. Thus, there was no disclosure of material facts on the part of the assessee and so the instant case comes under Section 147(a) but not under Section 147(b) of the Income-tax Act, 1961. Thus, the above case cited by the learned counsel is also not applicable. In our view the instant case is not a change of opinion of the successor-Income-tax Officer but due to the non-disclosure of material facts the income chargeable to tax had escaped assessments. '

The Tribunal, thereafter, held as follows :

'It is the duty of the assessee to point out that Shri A.V. Birla, Smt. Priyamvada Devi Birla and Smt. Sunanda Pevi Birla were the employees of the assessee-company and payments have been made to them. But this was not done by the assessee at the original assessment proceedings. The Income-tax Officer had no occasion to consider the salary paid to above three persons in the original assessment proceedings. Thus, it is very clear that the primary facts were not disclosed by the assessee at the assessment stage and the income chargeableto tax had escaped assessments due to the non-disclosure of the necessary facts by the assessee. The Income-tax Officer had reason to believe that the income chargeable to tax had escaped assessments. He has recorded reasons for reopening the assessments and after obtaining the sanction of the Commissioner, he reopened the assessments. He had prima facie grounds for reopening the assessments. The sufficiency of the reasons cannot be questioned, the reasons recorded and the sanction granted by the Commissioner are perfectly valid. Thus, in our view, the reassessment proceedings are valid and there is no illegality or any irregularity in the proceedings. Thus, we uphold the reassessment proceedings for the assessment years 1961-62 to 1967-68. '

Upon these, the assessee sought to raise certain questions under Section 256(1) of the I.T. Act, 1961. On the refusal by the Tribunal to refer any question to this court, the assessee came up before this court in an application under Section 256(2) of the I.T. Act, 1961, and the questions, as referred to hereinbefore, were directed to be referred to this court.

11. In order to sustain the reopening, there must be reasons for the ITO, which would have rational nexus with the formation of belief that due to failure or omission on the part of the assessee to disclose fully and truly all material or relevant facts, the income of the assessee had escaped assessment. Now, that reason may, under certain circumstances, come to the knowledge of the ITO through information received by him subsequently or otherwise and on that basis he can change his opinion on the original assessment. It is well settled that a mere change of opinion would not sustain the assessment. The change of opinion is based on the formation of a belief that there was failure or omission on the part of the assessee to disclose fully and truly all relevant and material facts at the time of original assessment and that belief, which is based upon relevant and material facts, could be a ground for reopening and whether in a particular' case those relevant or material facts have rational nexus to the formation of a belief has also to be examined. Now, as mentioned hereinbefore, whether in a particular case, there was failure or omission on the part of the assessee to disclose fully and truly all relevant or material facts, in the facts and circumstances of a case, is essentially and primarily a question of fact. In this case, the findings of fact arrived at by the Tribunal have not been challenged. The only challenge is whether the action taken by the Tribunal for reopening the assessment was valid and legal. This question, as a matter of fact, is practically concluded. In our opinion, within the purview of such a question the court cannot reappraise the evidence and arrive at a fact contrary to what had been reached by the Tribunal. Reference, in this connection, may be made to the observations of the Supreme Court in the case of CIT v. Lakhiram Ramdas : [1962]44ITR726(SC) , where the Supreme Court had dealt with the similar provisions under the Indian I.T. Act, 1922. There, the Supreme Court observed that the pre-requisite condition for the initiation of a proceeding under Section 34(1)(a) was that the ITO had reason to believe that by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment for that year, income, profits or gains chargeable to income-tax had escaped assessment. That condition must be fulfilled before the ITO could take action under Section 34(1)(a) It was held that the question to be decided was, as stated by the Tribunal and the High Court, whether by reason of any omission or failure on the part of the assessee to disclose fully and truly all material facts, income had escaped assessment, and that, on the facts and circumstances, the finding of the Tribunal that there was no such omission or failure was a finding of fact and the Supreme Court, therefore, held that the application for reference was rightly rejected. In that case, at the time of the original assessment for the year 1945-46, the assessee had produced account books and balance-sheets of all his branch offices. The ITO had the account hooks examined by his subordinate, the examiner of accounts, who had submitted his report, in which he had also stated that the assessee had accounts with the Exchange Bank of India and Africa, and other banks. The assessment was made on September 13, 1946. The ITO came to know later that the assessee had taken a draft for Rs. 1,10,000 from the Bombay branch of the aforesaid bank and deposited it on July 17, 1944, in the Ahmedabad branch of the said bank, The ITO issued notice for reassessment under Section 34(1)(a) on March 24, 1954, and by revised assessment order, added the sum of Rs. 1,10,000 on October 15, 1954. The order was upheld by the AAC but the Tribunal, after considering the account books and examiner's report, reversed this order on the ground that it could not be said in the facts and circumstances of the case that there was any omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the year 1945-46. An application for reference to the High Court was rejected by the Tribunal. There, the question posed before the Tribunal was as follows :

'Whether, on the facts and in the circumstance of the case, and having particular regard to the fact that the return and the statements accompanying the return furnished by the assessee during the course of the assessment proceedings for 1945-46, did not indicate such a large transaction as Rs. 1,10,000 by a single bank draft, the Income-tax Officer was right in starting proceedings under Section 34(1)(a) on the receipt of the information about the above transaction, to make a reassessment for 1945-46?'

The Supreme Court at p. 730 of the said report (44 ITR) observed as follows :

'We agree with the view expressed by the Tribunal that the question suggested was misconceived, because what the Tribunal had to consider was whether the proceeding under Section 34(1)(a) was properly initiated by the Income-tax Officer in the year 1954. It must be remembered that the original assessment was completed on September 13, 1946, and more than four years had passed, and at the relevant time the period during which the Income-tax Officer could take action under Section 34(1) was eight years. It is true that the eight years had not expired on March 24, 1954, when the notice under Section 34(1)(a) was issued. But the pre-requisite condition for the initiation of a proceeding under Section 34(1)(a) is that 'the Income-tax Officer has reason to believe that by reason of the omission or failure on the part of the assessee... to disclose fully and truly all material facts necessary for his assessment for that year', income, profits or gains chargeable to income-tax have escaped assessment, etc. That condition must be fulfilled before the Income-tax Officer can take action under Section 34(1)(a). (See Calcutta Discount Co. Ltd. v. Income-tax Officer : [1961]41ITR191(SC) . Therefore, what the Tribunal had to consider was whether the assessee had fully and truly disclosed all material facts necessary for the assessment. The Tribunal examined all the relevant materials produced by the assessee at the time of the original assessment and came to the conclusion that there was no omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. The Tribunal referred to the account books produced by the assessee and particularly to the report of the examiner of accounts who submitted a report to the Income-tax Officer with regard to the bank account of the assessee in the Exchange Bank of India and Africa Ltd. In our opinion, in the circumstances of this case, the question whether me assessee had or had not failed to disclose fully and truly all material facts necessary for his assessment was a question of fact and we are unable to accept the argument of the learned advocate for the appellant to the contrary.'

This principle was again reiterated by the Supreme Court in the case of CIT v. Kamal Singh Rampuria : [1970]75ITR157(SC) . There the question posed before the court was as follows :

'Whether, on the facts and in the circumstances of the case, the assessment made under Section 34(1 )(a) of the Income-tax Act was justified in law ?'

By its judgment dated September 12, 1963, the High Court answered the question in the negative and in favour of the assessee. The SupremeCourt had observed that it appeared to the High Court that the ITO could have no reason on the materials before him to believe that there was any omission on the part of the assessee to disclose fully and truly all material facts necessary for the assessment, as stated, and the High Court was further of the view that the finding of the Tribunal in this regard was not justified. Regarding this aspect, the Supreme Court observed at p. 161 of the report as follows :

'It is well established that the High Court is not a court of appeal in a reference under Section 66 of the Act and it is not open to the High Court in such a reference to embark upon a reappraisal of the evidence and to arrive at findings of fact contrary to those of the Appellate Tribunal. It is the duty of the High Court to confine itself to the facts as found by the Appellate Tribunal and answer the question of law in the setting and context of those facts. It is true that the finding of fact will be defective in law if there is no evidence to support it or if the finding is unreasonable or perverse. But in the hearing of a reference under Section 66 of the Act it is not open to the assessee to challenge such a finding of fact unless he has applied for a reference of the specific question under Section 66(1). In India Cements Ltd. v. Commissioner of Income-tax : [1966]60ITR52(SC) , it' was pointed out by this court that in a reference the High Court must accept the findings of fact reached by the Appellate Tribunal and it is for the party who applied for a reference to challenge those findings of fact, first, by an application under Section 66(1). If the party concerned has failed to file an application under Section 66(1) expressly raising the question about the validity of the findings of fact, he is not entitled to urge before the High Court that the finding was vitiated for any reason. The same view has been expressed by this court in a later case in Commissioner of Income-tax v. Sri Meenakshi Mills Ltd. : [1967]63ITR609(SC) . We are, therefore, of the opinion that the High Court was in error in reappraising the evidence before the Appellate Tribunal and in interfering with its finding that the Income-tax Officer had no reason to believe that there was an omission on the part of the assessee to disclose fully and truly all the material facts necessary for the assessment.'

In that view of the matter, the Supreme Court was unable to sustain the order of the High Court.

12. The principle that if a finding of fact was not specifically challenged the conclusion based on such facts cannot be collaterally challenged was reiterated by this court in the case of P.C. Sharma & Sons v. CIT : [1979]116ITR758(Cal) . Reliance, however, has been placed on behalf of the assessee on the observations of the Supreme Court in the case of ITO v. MadnaniEngineering Works Ltd. : [1979]118ITR1(SC) . There, in the original assessment of the respondent for the assessment year 1959-60 completed on August 23, 1960, certain interest paid by it to creditors from whom it claimed to have borrowed monies on hundis was allowed as deductible expenditure. Subsequently on January 25, 1968, after a lapse of four years from the end of the assessment year, a notice was issued by the ITO to reopen the assessment of the respondent on the ground that the transactions of loan represented by the hundis were bogus and no interest was paid by the respondent to any of the creditors and interest was wrongly allowed. The respondent challenged the validity of the notice by filing a writ petition in the High Court. On December 5, 1968, the ITO in his counter-affidavit declined to disclose the facts on the ground that if such facts were disclosed it would cause great prejudice to the interests of the Revenue and would frustrate the object of reopening the assessment. Thereafter, he filed a further affidavit on January 27, 1970, stating that in the course of the assessment of the respondent for the assessment year 1963-64 it was discovered that various items shown as loans against the security of hundis in the respondent's books of account for the assessment year 1959-60, were in fact fictitious and credits against the names of certain persons were found not to be genuine, and that in that premise it appeared to the ITO that the respondent had failed to disclose fully and truly all material facts necessary for its assessment and by reason of such failure, a portion of its income had escaped assessment. Learned single judge of the High Court dismissed the writ petition but on appeal the Division Bench of the High Court allowed the petition and quashed the notice. On appeal, the Supreme Court affirmed the decision of the Division Bench of the High Court that the stand taken by the ITO in his first affidavit dated December 5, 1968, was obviously untenable because the existence of reason to believe on the part of the ITO was a justiciable issue and it was for the court to be satisfied whether in fact the ITO had reason to believe that income had escaped assessment by reason of failure of the assessee-respondent to make a full and true disclosure. The Supreme Court observed further that the respondent had produced in the original assessment proceedings all the hundis on the strength of which it had obtained loans from creditors as also entries in the books of account showing payment of interest and it was for the ITO to investigate and determine whether these documents were genuine or not and the respondent could not be said to have failed to make a true and full disclosure of the material facts by not confessing before the ITO that the hundis and the entries in the books of account produced by it were bogus. The Supreme Court further held that the ITO had in the second affidavit merely stated his belief but did not set out any material on the basis of which he had arrived at such belief. There were nothing, according tothe Supreme Court, on the basis of which the court could be satisfied on the affidavit that the ITO had reason to believe that a part of the income of the respondent-assessee had escaped assessment by reason of its failure to make a true and full disclosure of the material facts. In those circumstances, it was held by the Supreme Court that the notice of reassessment was void. We may point out that the controversy before the Supreme Court and in this case was similar. We may incidentally point out further that as a fact, which the Supreme Court found, that in the affidavit no surrounding circumstances or no document had been indicated from which a conclusion could be based that there was failure or omission on the part of the assessee to disclose fully and truly all the material or relevant facts necessary for assessment. The Supreme Court at pp. 5 and 6 of the said report (118 ITR) observed as follows :

'We may also point out that though it was contended in the writ petition that the ITO could have no reason to believe that any part of the income of the respondent had escaped assessment by reason of its failure to make a full and true disclosure of material facts, the ITO did not disclose in his affidavit any material on the basis of which it could be said that he had come to the requisite belief. All that the ITO stated in his affidavit was that he discovered that the transactions of loan against security of hundis were not genuine and that the credits against the names of certain persons who were alleged to have advanced loans were bogus. The ITO merely stated his belief but did not set out any material on the basis of which he had arrived at such belief so that the 'Court could decide for itself whether there was any material on the basis of which the ITO could reasonably entertain such belief.'

In those circumstances and in conjunction with other facts mentioned in the judgment of the Supreme Court, the Supreme Court was not at all satisfied with the affidavit of the ITO and came to the conclusion that there was no reason to believe that the income of the assessee-respondent had escaped assessment.

13. There is another aspect of the matter. Controversy arose in that matter whether there was omission or failure on the part of the assessee to disclose all material facts and there the writ court had found as a fact that there was omission or failure and in that context the Supreme Court went into this question. But where a fact finding body like the Tribunal has gone into the question and has found as a fact that there was failure or omission and that finding of fact, upon which the conclusion that the assessment was valid was based, was not specifically challenged as being perverse or based on no material, in such a case the ratio of the principle of the Supreme Court judgment in the above case has no application. Ifthe findings are not specifically challenged, then it is not proper for the High Court in reference jurisdiction to embark upon this question.

14. We may incidentally point out that this decision of the Supreme Court was considered in the peculiar facts of the case noted by a Division Bench of this court in the case of H.A. Nanji & Co. v. ITO : [1979]120ITR593(Cal) , but that again was in appeal from a writ application. Therefore, it is not necessary for us to go into the details of the facts of that case.

15. Our attention has also been drawn to the case of Lakshmiratan Cotton Mills Co. Ltd. v. CIT : [1969]73ITR634(SC) , where it has been reiterated by the Supreme Court that the High Court had no power to call for a statement of the case on questions which were incorporated neither in the application under Section 66(1) nor in the application under Section 66(2). The power under Section 66(4) might be exercised to call for a supplementary statement only when the court is satisfied that the statements in a case referred under Section 66(1) or (2) were not sufficient to enable it to determine the question raised by that statement. At p. 647 the Supreme Court further observed as follows :

'Correctness of an order of the High Court calling for a statement of case may be challenged at the hearing of the reference and the court may decline to answer the question referred pursuant to the direction of the High Court, if it did not arise out of the order of the Tribunal, or is a question of fact or is academic or could not have been raised because it was not incorporated in the application under Section 66(1): Commissioner of Income-tax v. Smt. Amsuya Devi : [1968]68ITR750(SC) . '

In view of the findings of fact and in view of the nature of the question sought to be raised, we answer question No. 1 for the years 1961-62 to 1967-68 by saying that initiation of proceedings was valid and legal and in favour of the Revenue.

16. In the facts and circumstances of the case, each party will pay and bear its own costs.

Suhas Chandra Sen, J.

17. I agree.


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