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Commissioner of Income-tax Vs. National Sound Studio (P.) Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 251 of 1971
Judge
Reported in[1979]117ITR422(Cal)
ActsIncome Tax Act, 1961 - Section 147
AppellantCommissioner of Income-tax
RespondentNational Sound Studio (P.) Ltd.
Appellant AdvocateS. Sen, Adv.
Respondent AdvocateS.K. Banerji, Adv.
Cases ReferredCenlon Finance Co. Ltd. v. Ellwood
Excerpt:
- .....assessee reiterated in this appeal that all, the facts were before the ito at the time when the original assessments were made andthat the reassessment proceedings were initiated on the basis of a mere change of opinion. the tribunal held as follows :'it is now well-settled that resort can be had to section 147(b) only if there is any information, from an extraneous source, which could reasonably lead the income-tax officer to believe that there has been escapement or underassessment of income. in the present case, the existence of any such information has not been brought to our notice. the decisions of the appellate assistant commissioner and the tribunal for the assessment year 1964-65 could very well have provided the basis for action under section 147(b) but, unfortunately for.....
Judgment:

Dipak Kumar Sen, J.

1. This reference arises out of reassessments made on National Sound Studio (Private) Ltd., Calcutta, under Section 147 of the I.T. Act, 1961, in respect of assessment years 1962-63 and 1963-64, the relevant previous years being the financial years ending, respectively, on the 31st March, 1962, and 31st March, 1963.

2. The facts found and/or admitted in the proceedings are shortly as follows :

3. At the material time, the assessee, who had long discontinued its original business of production of films had let out its studio building without any plant or machinery on rental basis to several tenants. Such rental income accruing to the assessee in the assessment years 1962-63 and 1963-64 was assessed to income-tax under the head 'Business'. A succeeding ITO found later that the said rental should have been assessed under the head 'Income from house properties.' Accordingly, he decided to reopen the assessments under Section 147(b) of the I.T. Act, 1961, and recorded the following reasons for such reopening :

'Perused records. The assessee took lease of a plot of land and erected building on it. At first the lease was taken for 15 years which expired in April, 1960. Thereafter, in August, 1960, the lease was renewed for a longer period. In the building constructed by the assessee, a studio was set up and the assessee started to do business as a studio owner and producer of motion pictures. The business of production of films was short lived but the assessee continued to do the business of a studio owner. After some time this business also closed down and the assessee let out the studio with its plant and machineries to one Sri M.D. Chatterjee on rental basis. In 1960, M.D. Chatterjee left the tenancy and the assessee sold out all its plant and machinery (assessment year 1961-62). Thus, in the assessment year 1961-62, assessee's business was fully dissolved. Thereafter, the assessee let out the building erected by him (from time to time more additions were made to the original building) to several tenants on monthly rent as the owner of the building.

As decided in the case of Ballygunge Bank Ltd. v. CIT : [1946]14ITR409(Cal) assessee's income from the building should have been assessed under the head ' Income from house properties '. But the assessment for the years1962-63 to 1964-65, which have already been completed, have been made as if the assessee was still carrying on the business as a studio owner. The result of the assessment has been that the assessee had been under-assessed. The assessee, however, is not responsible for this under-assessment.

Hence, it is necessary in this case to take action under Section 147(b) to assess the correct amount of income under the head 'House properties'.

Issue notice under Section 148, calling for returns for the years 1962-63,1963-64 and 1964-65.'

4. At the hearing, the assessee challenged the legality of the initiation of the reassessment proceedings and contended that a mere change of opinion could not be a ground for taking such action. The ITO rejected the contentions of the assessee and effected reassessments. On appeal, the AAC upheld the order of the ITO. There was a further appeal by the assessee to the Tribunal. The assessee reiterated in this appeal that all, the facts were before the ITO at the time when the original assessments were made andthat the reassessment proceedings were initiated on the basis of a mere change of opinion. The Tribunal held as follows :

'It is now well-settled that resort can be had to Section 147(b) only if there is any information, from an extraneous source, which could reasonably lead the Income-tax Officer to believe that there has been escapement or underassessment of income. In the present case, the existence of any such information has not been brought to our notice. The decisions of the Appellate Assistant Commissioner and the Tribunal for the assessment year 1964-65 could very well have provided the basis for action under Section 147(b) but, unfortunately for the department, both these decisions were rendered late in point of time to the reopening of the impugned assessments. In the circumstances, we have no hesitation in holding that the proceedings under Section 147(b) for both the assessment years 1962-63 and 1963-64 are without any basis. The reassessments which have been made for these two years, i.e., the assessment years 1962-63 and 1963-1964, are accordingly cancelled.'

5. At the instance of the CIT, West Bengal-I, Calcutta, the Tribunal under Section 256(1) of the I.T. Act, 1961, has referred the following questions as questions of law arise from its aforesaid order.

6. For the assessment year 1962-63 ;

'Whether, on the facts and in the circumstances of the case, notice under Section 147(b) of the Income-tax Act, 1961, was validly issued for the assessment year 1962-63 ?'

7. For the assessment year 1963-64 :

'Whether, on the facts and in the circumstances of the case, notice under Section 147(b) of the Income-tax Act, 1961, was validly issued for the assessment year 1963-64 ?'

8. Mr. Suhas Sen, learned counsel for the revenue, contended before us at the hearing that the order of the Tribunal was erroneous inasmuch as the Tribunal proceeded on the sole consideration that the information within the meaning of Section 147(b) did not reach the ITO from an extraneous source but was present in the material on record at the time of the original assessment. Mr. Sen submitted that the settled law was that information for the purpose of initiating a reassessment may be gathered also from existing materials. All that was necessary to be established was that the officer concerned had gathered such information on a further investigation into the existing materials. In support of his contentions Mr. Sen cited the following decisions:

(a) Anandji Haridas and Co. (P.) Ltd. v. S.P. Kushare, STO : [1968]1SCR661 . In this case, the appellants who were registered dealers in iron and steel material had discontinued to file returns of their turnover asrequired under the Central Provinces and Berar Sales Tax Act, 1947. Notices were issued to the appellant, inter alia, under Section 11A of the said Act, which was as follows (p. 332):

'(1) If in consequence of any information which has come into his possession, the Commissioner is satisfied that any turnover of a dealer during any period has been under-assessed or has escaped assessment or assessed at a lower rate or any deduction has been wrongly made therefrom, the Commissioner may, at any time within three calendar years from the expiry of such period, after giving the dealer a reasonable opportunity of being heard and after making such enquiry as he considers necessary, proceed in such manner as may be prescribed to reassess or assess, as the case may be, the tax payable on any such turnover ; and the Commissioner may direct that the dealer shall pay, by way of penalty in addition to the amount of tax so assessed, a sum not exceeding that amount...'

9. The appellant challenged the notices in proceedings under Article 226 of the Constitution and being unsuccessful before the High Court went up on a further appeal to the Supreme Court. The Supreme Court found that Section 11A of the said Act was in pari materia with Section 34(1) of the Indian I.T. Act, 1922, and held that by reason of the appellant's failure to submit returns along with proof of payment the turnovers in question had escaped assessment. The Supreme Court then went on to consider if any information had come to the possession of the assessing authorities whereby it could be satisfied about such escapement. The knowledge of the assessing authorities that the appellants had neither submitted their returns nor challans of payments was held by the Supreme Court to be sufficient information for the purposes of this section. It was contended on behalf of the appellant that 'information' contemplated by the section should be received from an outside source and not something that could be gathered by the assessing authority from his own records. This contention was rejected by the Supreme Court and it was laid down as follows (p. 337):

'In our judgment, the knowledge of the fact that the appellants had not submitted their quarterly returns as well as the treasury challans, constituted an information to the assessing authority from which it could be satisfied and in fact it was satisfied that the turnovers with which we are concerned in this, case had escaped assessment.'

(b) Kalyanji Mavji & Co. v. CIT : [1976]102ITR287(SC) . The facts in this case were that in the assessment year 1958-59, the assessee, a firm, had claimed, as in the two preceding years, deduction of interest paid on loans. On enquiry the ITO found that the amount obtained on such loan had been utilised for giving interest-free loans to the partners of the firm for clearing up their income-tax dues. It was held that the loan obtained was not for the business of the firm and the claim was disallowed.

10. Thereafter, notices were issued by the ITO under Section 34(1)(b) of the Indian I.T. Act, 1922, the assessment for the earlier year 1956-57 was reopened and the interest allowed as deduction was included in the total income. The reassessment was confirmed on appeal by the AAC. On further appeal, the Tribunal held that the belief of the ITO as to the escapement of the assessee's income in the year in question was not based on any fact except that it was derived from the materials already on record which were available at the original assessment. The appeal of the assessee was accordingly allowed. On a reference, this High Court upheld the contentions of the revenue and found that Section 34(1)(b) was applicable to the facts as the information on which the ITO proceeded was based on subsequent facts and also obtained from existing materials on more careful scrutiny. The matter went up finally before the Supreme Court:

11. The Supreme Court observed, inter alia, as follows (pp. 296, 297):

'On a combined review of the decisions of this court the following tests and principles would apply to determine the applicability of Section 34(1)(b) to the following categories of cases :...

(2) where in the original assessment the income liable to tax has escaped assessment due to oversight, inadvertence or a mistake committed by the Income-tax Officer. This is obviously based on the principle that taxpayer would not be allowed to take advantage of an oversight or mistake committed by the taxing authority;...

(4) where the information may be obtained even from the record of the original assessment from an investigation of the materials on the record, or the facts disclosed thereby or from other enquiry or research into facts or law.

12. If these conditions are satisfied then the Income-tax Officer would have complete jurisdiction to reopen the original assessment. It is obvious that where the Income-tax Officer gets no subsequent information, but merely proceeds to reopen the original assessment without any fresh facts or materials or without any enquiry into the materials which form part of the original assessment, Section 34(1)(h) would have no application.' The Supreme Court distinguished its earlier decision in Bankipur Club Ltd. v. CIT : [1971]82ITR831(SC) and held that the following facts had come into existence after the original assessment for the year 1956-57: (1) In the assessment year 1958-59, the ITO did not accept the assessee's plea that he should be allowed deduction for the interest paid; (2) The failure of the assessee to prove that the deduction claimed was in connection with the partnership business. The subsequent discovery that the deduction was wrongly claimed and disallowance of the deduction and the conduct of the assessee itself in not adducing any evidence or materials to prove its standthat the deduction was validly claimed constituted information on which the reopening under Section 34(1)(b) could be validly made.

(c) Parkin v. Cattell [1971] 48 TC 462. This decision was cited for observations of Lord Denning made in the context of a corresponding section of the English statute as follows (p. 473):

'If an inspector or the Board discover--(a) that any income which ought to have been assessed to tax at the standard rate or to surtax has not been assessed...the inspector or, as the case may be, the Board may make an assessment in the amount, or the further amount, which ought in his or their opinion to be charged.' Lord Denning observed (p. 474):

'The word 'discover' simply means 'find out'. That is what Lord President Normand said in Commissioners of Inland Revenue v. Mackinlay's Trustees [1938] 22 TC 305, witrTthe approval of Tucker L.J. in Commercial Structures Ltd. v. Briggs [1948] 30 TC 477; [1949] 17 ITR (Supp) 30. An Inspector of Taxes 'discovers' (that income has not been assessed when it ought to have been), not only when he finds out new facts which were not known to him or his predecessor, but also when he finds out that he or his predecessor drew a wrong inference from the facts which were then known to him and further, when he finds out that he or his predecessor got the law wrong and did not assess the income when it ought to have been. That appears in Cenlon Finance Co. Ltd. v. Ellwood [1962] AC 782; [1965] 58 ITR 255. I venture to quote what I said at page 799 : 'Every lawyer who, in his researches in the books, finds out that he was mistaken about the law, makes a discovery. So also does an Inspector of Taxes '.'

13. Mr. Banerjee, learned advocate for the assessee, submitted on the other hand that the reasons as recorded by the ITO do not justify the reopening of the assessment inasmuch as such reasons do not disclose that there was any 'information' which could lead the ITO to believe that any income had escaped assessment. All that the ITO discovered was that an item of income has been taxed under one head whereas according to him it should have been taxed under another head. From this, it did not follow that any income had escaped assessment. Mr. Banerjee submitted further that some information must reach the ITO subsequent to the original assessment before he could reopen the assessment. If the information is self-evident from existing materials it would not give jurisdiction to the ITO to reopen the assessment. A mistake if discovered may be rectified in proper proceedings but on a mere change of opinion an assessment could not be reopened.

14. Mr. Banerjee finally submitted that the Tribunal has found as a fact that the ITO did not come to be in possession of any information and this finding has not been challenged.

15. Mr. Banerjee cited the following decisions in support of his contentions :

(a) CIT v. Dinesh Chandra H. Shah : [1971]82ITR367(SC) . The assessee in this case was assessed at Calcutta. In the return for the assessment year in question the assessee's share in the income of a firm at Madras had been disclosed and recorded in the proceedings but was not included in the computation of total income. Thereafter, a notice under Section 34(1)(b) of the Indian I.T. Act, 1922, was issued on the ground that this item had escaped assessment. The Supreme Court found that the ITO sought to justify the reopening of the assessment on a mere change of opinion and held that this could not be a valid ground for reopening the assessment. The question whether an inadvertent omission by the ITO could justify the reopening of an assessment on subsequent discovery of such omission was, however, left open.

(b) Bankipur Club Ltd. v. CIT : [1971]82ITR831(SC) . The facts in this case were that the assessee, a members' club, had submitted 'nil' returns for the assessment years 1956-57 to 1959-60. The ITO, while assessing, held that the asseasee was not liable to pay any tax in respect of amounts realised by it from its members. Subsequently, the assessments were reopened by notices under Section 34(1)(b) and it was held on reassessment that the amounts received from members of the club as guest charges were the income of the assessee and the same was brought to tax. The Supreme Court, however, found that the assessments had not been validly reopened. It was observed in its judgment as follows (p. 834):

'This court has repeatedly ruled that the information referred to in Section 34(1)(b) must be what the Income-tax Officer receives after he makesthe original order of assessment. It must come to his knowledge subsequent to the assessment sought to be reopened. In these cases it is submitted that all the facts were placed before the Income-tax Officer when hepassed the original orders of assessment. The fact that the club hadreceived certain amounts as guest charges from its members had beenplaced before the Income-tax Officer. It is not the case of the Income-taxOfficer that he did not come to know all the relevant facts when he madethe original orders of assessment. It is also not his case that at the timehe made those orders he was not aware of the true legal position. It wasfor the Income-tax Officer to show that he had received some informationsubsequent to his passing the original orders of assessment. No such materialwas placed before the Tribunal. That being so, the Tribunal, in ouropinion, was right in holding that the Income-tax Officer was incompetentto initiate proceedings under Section 34(1)(b). The High Court has givenno reason to come to the conclusion that there was any subsequent information on the basis of which the Income-tax Officer could have reassessedthe assessee under Section 34(1)(b).'' (c) ITO v. Lakhmani Mewal Das : [1976]103ITR437(SC) . This decision was cited for the following observations of the Supreme Court at page 446 of the report: 'The expression 'reason to believe' does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The reason must be held in good faith. It cannot be merely a pretence. It is open to the court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose of the section. To this limited extent, the action of the Income-tax Officer in starting proceedings in respect of income escaping assessment is open to challenge in a court of law.'

16. Mr. Banerjee contended that the law laid down in Bankipur Club Ltd. : [1971]82ITR831(SC) had not been departed from by the Supreme Court in the subsequent case of Kalyanji Mavji & Co. : [1976]102ITR287(SC) , where the Supreme Court categorically approved the earlier decision. He submitted that in the instant case also all the facts were before the ITO when the original assessment was made and nothing new had been discovered by the subsequent ITO.

17. From the order of the Tribunal it appears that the Tribunal found that no information came from any extraneous source on which the ITO could base his belief that the income has escaped assessment and on that ground held that the reopening in the instant case was invalid. The reassessment was accordingly cancelled. This conclusion of the Tribunal appears to be erroneous. The law as laid down by the Supreme Court is that an ITO can obtain information from materials already on record and it is lawful for him to reopen assessments on the basis thereof.

18. The contention of Mr. Banerjee that it has been found as a fact, that the ITO had not come into possession of any information is not borne out by the order of the Tribunal. From para. 2 of the order of the Tribunal it appears that the Tribunal found that no information came into the possession of the ITO which could lead him to believe that there was any escapement or under-assessment of the income, and not that there was no information at all. In any event, the Tribunal did not base its order on this finding.

19. We are also unable to accept the contention of Mr. Banerjee that the information received by the ITO could not lead to his belief that there has been an escapement of income. The statute does not require that ITO should have incontrovertible proof in his hands showing that income must have escaped assessment before he can reopen the assessment. The Explanation 1 to Section 147 makes the position clear. Under the Explanation, it will be deemed that income chargeable to tax has escaped assessment where such incomehas been under-assessed or has been made the subject of excessive relief. Under the Act, income derived from the source 'business' has to be computed after allowing various deductions which are not allowable where the income is derived from the source 'house property'. In the instant case the income arising from the letting out of a building has been admittedly assessed as income from business. This, in our view, constitutes sufficient reason to believe that in such a case income chargeable to tax has been under-assessed or had been made the subject of excessive relief. May be, at the final reassessment it can be demonstrated that, in fact, the actual income has neither been under-assessed nor has been made the subject of excessive relief but that is a matter with which we are not concerned while considering the validity of initiation of reassessment proceedings.

20. For the reasons given above we hold that the Tribunal's order is erroneous and that the reassessment proceedings cannot be held to be invalid onthe ground relied on by the Tribunal. To such extent both the questionsreferred are answered in the affirmative and in favour of the revenue. We,however, make it clear that in view of the law, 'clearly laid down by theSupreme Court it will be necessary for the Tribunal to go into the questionfurther and determine whether in the instant case any 'information' cameinto the possession or the hands of the succeeding ITO from the materialson record as a result of (sic) sequent investigation or enquiry so as tojustify his action in (sic) the same. The Tribunal will determine thematter as indicated above after giving the parties opportunity of beingheard on this aspect. If necessary, the Tribunal will take further evidence.There will be no order as to costs.

C.K. Banerji, J.

21. I agree.


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