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Petitioner: COMMISSIONER OF INCOME-TAX, BOMBAY CITY-II VS Respondent: T. C. DOLWANI
1980 P T D 93
1980 P T D 93
[Bombay (India)]
Before Tulzapurkar and Desai, JJ
COMMISSIONER OF INCOME‑TAX, BOMBAY CITY‑II
versus
T. C. DOLWANI
Income‑tax Reference No. 15 of 1967, decided on 22nd November, 1976
Income‑tax Act (XI of 1922)‑
‑‑‑ Ss. 16(3) (a) (iii), (iv) 34(1) (b)‑Re‑assessment‑‑Condition prece dent‑‑Assessee's business taken over by firm consisting of his major son, wife and minor son‑‑Minor son and wife continuing as partner on basis capital amount gifted by assessee‑Income of mirror son and wife not clubbed with that of assessee for a number of years‑Same Income tax Officer completing assessments on firm and the assessee for relevant assessment year‑Re‑assessment proceedings to include income of wife and minor son in firm in total income of assessee‑No fresh facts or information to re‑open the assessment‑Re‑assessment proceed ings, held, not valid in law.
Section 34(1) (b) of the Income‑tax Act, 1922, applies to the following categories of cases
(1) Where the information is as to the true and correct state of the law derived from relevant judicial decisions.
(2) Where, in the original assessment, the income liable to tax escaped assessment due to oversight, inadvertence or a mistake committed by the Income‑tax Officer. This is obviously based on the principle that the taxpayer would not be allowed to take advantage of an oversight or mistake committed by the taxing authority.
(3) Where the information is derived from an external source of any kind. Such external source would include discovery of new and important matters or knowledge of fresh facts which were not present at the time of the original assessment.
(4) Where the information may be obtained even from the record the original assessment from an investigation of the materials on the record or the facts disclosed thereby or from further enquiry or research into facts or law.
It is obvious that where the, Income‑tax Officer gets no subsequent information but merely proceeds to re‑open 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)(6) would have no application.
The assessee started a business in motor spare parts in 1947 in the name of Standard Garage. In 1949, the business was taken over by a firm consisting of his major son and his wife. His minor son was admitted to the benefits of the partnership. The wife and minor son invested Rs. 40,000 each gifted to them by the assessee in the partnership. The first assessment of the firm was completed in 1951. The Income‑tax Officer who completed the assessment communicated the fact regarding the partnership to the Income‑tax Officer who dealt with the assessment of the assessee. There after, till the assessment year 1957‑58, the firm was assessed and no action was taken to club the share income of the wife and minor son with that of the assessee under section 16 of Income‑tax Act, 1922. The same Income tax Officer completed the assessment of the firm as well as of the assessee for the relevant assessment year 1957‑58. The Income‑tax Officer, however, initiated proceedings for re‑assessment under section 34(1)(6) of the Act seeking to club the incomes of the wife and minor son from the firm in the total income of the assessee. The Tribunal held that the proceedings under section 34(1) (b) had not been validly initiated. Opt a reference
Held, that even on the factual findings, two opinions were possible on the question whether the entire amount of the share of the two parties from the firm could be clubbed with that of the assessee. In spite of the communication sent by the Income‑tax Officer who completed the; first assessment of the firm the provisions of section 16(3) had not been applied for the assessment years 1950‑51 to 1957‑58. The assessment on the firm is well as the assessee for the relevant assessment year had been made been made the same Income‑tax Officer. There was nothing in the order of the Income sax officer or on record to indicate any new information or mistake or failure on the part of the Income‑tax Officer who completed the original assessment to apply any provision of law. It was clear that the re‑assessment proceeding triad been initiated as a result of a mere change of opinion. It must, there fore, be held that the re‑assessment proceedings had not been validly initiated.
Kalyanji Mavji & Co. v. C. I. T. (1976) 102 I T R 287 (S C) applied.
Anandji Haridas & Co. v. Khushore, S. T. O. (1968) 21 S T C 326 (S C);
C. I. T. v. Holck Larsen (H) (1972) 85 I T R 467 (Bom.); C. I. T. v. Prem Bhai Parekh (1970) 77 I T R 27 (S C) ; C. I. T. v. Raman (A.) & Co. (1968) 67 I T R 11 (S C) ; C. I. T. v. Rathinasabapathy Mudaliar (1964) 51 I T R 204 (Mad.); Dalai (Dr.) (M. R.) v. C. I: T. (1963) 49 I T R 492 (Bom.); Dhanwatay (B. R.) v. C. I. T. (1956) 29 I T R 257 (Nag.); Kamal Singh (Maharaj Kumar) v. C. I. T. (1959) 35 I T R I (S C) and Sankarulinga Nadar (V. A. M.) v. C. L T. (1963) 48 I T R 314 (Mad.) ref.
R. J. Joshi with V. J. Pandit instructed by V. B. Shastri (Attorney) for the Commissioner.
R. J. Kolah instructed by Gograt & Co. (Attorneys) for the Assessee.
JUDGMENT
DESAI, J. ‑This is a reference by the Income‑tax Appellate Tribunal under section 66(1) of the Indian Income‑tax Act, 1922, made at the instance of the Commissioner. A few facts may be stated:
The assessee is an individual. The reference pertains to the assessment year 1957‑58, the accounting year being the year ended on 31st March, 1957. The original assessment for this year of the assessee was completed on 27th January, 1959, in the sum of Rs. 80,119. Subsequently, the said assessment was reopened under section 34(l)(b) on the ground that incomes derived by the assessee's wife and a minor son as partners of a firm called Messrs Standard Garage were liable for inclusion in the total income of the assessee under section 16(3) (a) (iii) and 16(3) (a) (iv) of the Act of 1922. The reason why the Income‑tax Officer considered that these provisions for clubbing were applicable was that the entire capital of Rs. 80,000 contributed by the assessee's wife and minor son came from the assessee himself. The assessee, prior to 1947, had been carrying on extensive business in his individual capacity in various places which subsequently became part of Pakistan. After Partition he came down to India and in December, 1947, he started a business in Bombay in motor spare‑parts in the name of Standard Garage. The assessee's family joined him in Bombay some time in 1948. On 1st April, 1949, the business of Standard Garage was taken over by a partnership consisting of the assessee's major son, Jaidev Tekchand Dolwani who is the assessee's son by the first wife who died in 1935) and Sint. Haribai, the assessee's second wife, whom he married in 1936. To the benefits if this partnership the assessee's minor son, Vishindas (by his second wife) was admitted. The share of Jaidev was 5 annas 6 pies in a rupee, while the shares of Haribai and Vishindas were 5 annas 3 pies each. The latter two parties invested Rs. 40,000 each in the partnership. This firm of Standard Garage was assessed as a registered firm from 1950‑51 itself. The first assessment of the firm was made on 15th October, 1951, by the Income tax Officer, Special Survey Circle III, after which the cage was transferred to the territorial ward, i. e., Ward D‑11. At the time of completing this first assessment of the firm for 1950‑51, the income‑tax Officer prepared a note regarding the conversion of the business of Standard Garage into a firm. The other facts relating to the formation of the firm as ascertained by him were also recorded in the note. This note has been extracted in full in the Tribunal's order 'and we shall have occasion to refer to the same in extenso later on. After the file of the registered firm of Standard Garage was transferred to D‑II Ward, all its assessments up to and including the assessment for 1957‑58, were handled by the 4th Income‑tax Officer, D‑II Ward. The assessee's case, where also the first assessment was for 1950‑51, was handled by various Income‑tax Officers, D‑It Ward. For the assessment year in question, viz., 1957‑58, the original assessment was made by the 4th Income‑tax Officer, one Shri Bhagwat, on 27th January, 1959. Thus, for the material year the original assessment of the assesses, as well ac the assessment of the firm of Standard Garage in which his wife and minor son were interest ed were handled by the same Income‑tax Officer. But that Income‑tax Officer, Sari Bhagwat, did not include in the assessee's income the shares of the assessee's wife and the minor son in the firm. Later on, the assessee's case came to be transferred to the 1st Income‑tax Officer, Officer, D‑1I Ward, who, as stated earlier, purported to re‑open the asessment under section 34(1)(b) of the Act. He rejected all the contentions of the assessee and completed the re‑assessment on 31st December, 1962. The assessee contested the re‑assessment before the Appellate Assistant Commissioner both on the question of jurisdiction of the Income‑tax Officer to act under section 34(1)(b) as well as the merits of the addition. Both the contentions were rejected by the Appellate Assistant Commissioner. Thereafter, the assessee went in second appeal to the Tribunal, where the re‑assessment was challenged on the following grounds :‑‑‑
(1) Action under section 34(1)(b) was taken without jurisdiction ;
(2) The capital of Rs. 80,000 invested by the wife and. the minor son did not flow from the assessee; and
(3) On a proper construction of section 6(3) it could not be said that that section was applicable to profits from business even assuming that the wife and the minor son received the capital contributed by them from the assessee.
The Tribunal found in favour of the assessee on the first of these three grounds and did not choose to give its findings on the other two grounds, although it recorded the rival contentions pertaining thereto. According to the Tribunal, it was not possible to say that the 1st Income tax Officer, D‑II Ward, who purported to reopen the proceedings had information that income had escaped assessment, and, accordingly, it held that action under section 34(1)(b) was taken without jurisdiction. On that limited footing arid not on the merits of the other two contentions, the assessee's appeal was allowed by the Tribunal. It may be pointed out that according the Tribunal, its decision was based on the view of the statutory provisions taken by the Nagpur High Court in D. R. Dhanwatay v. Commissioner of Income‑tax (1956) 29 I T R 257 and by the Bombay High Court in Dr. M. R. Dalal v. Commissioner of Income‑lax (1963) 49 I T R 492. The Appellate Assistant Commis sioner, who had earlier rejected the appeal, and the Income‑tax Officer had chosen to follow a decision of the Madras High Court in Commissioner of Income‑tax v. Rathinasabapathy Mudaliar (1964) 51 I T R 204. The Tribunal observed that it was bound to follow the Nagpur and Bombay decisions in preference to the said Madras decision and similarly an earlier decision of the very same High court, viz., Family of V. A. M. Sankaralinga Nadar v. Commissioner of Income‑tax (1963) 48 I T R 314, where the view of section 34(1)(b) different from that taken by the Nagpur and the Bombay High Courts had been taken. According to the Tribunal, on the facts of this case, it could not be said that this was a matter where there was a manifest error but a case where the applicability of section 16(3)(a) (iii) and (iv) had to be considered‑‑a matter on which two opinions were possible. To arrive at the conclusion the Tribunal went in detail through the history of the assessments in the case of the assessee as well as of the firm of Standard Garage arid held that the 1st Income‑tax officer who reopened the assessment, was only acting on the basis of opinion and not on the basis of fresh information.
The following question has been referred to us
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that action under section 34(1)(b) was not validly initiated?"
Mr. Joshi, on behalf of the Commissioner, submitted that the Tribunal was in error in placing reliance on the two decisions of the Nagpur and the Bombay High Courts earlier referred to, viz., Dhanwata's case and Dr. Dalal's case (1956) 29 I T R 257 and in rejecting the Madras view inasmuch as in Kalyanji Mavji & Co. v. Commissioner of Income‑tax (7), a Division Bench of the Supreme Court has taken the view substantially confirming the Madras approach and overruling the Nagpur and Bombay decisions, on which reliance was placed by the Tribunal. On the other hand, the learned counsel for the assessee drew our attention to a decision of the Bombay High Court subsequent to the two earlier Nagpur and Bombay decisions but given prior to Kalyanji Mavji's case (1972) 85 I T R 467 (Bom.) viz., Commissioner of Income‑tax v. H. Holck Larsen (1972) 85 I T R 467 (Bom.) and contended that the facts of the matter referred to us would fall squarely within the observations of Chandrachud, J. made in the above Bombay case, which observations have been approved by the Supreme Court in Kalyanji Mavji's case (at page 300). According to counsel's submission, the view taken by the 1st Income‑tax Officer represented a change of opinion unsupported by subsequent information and not a change of opinion based on information subsequently obtained. In the latter case, it was submitted that re‑opening would be within jurisdiction; in the former case the reopening was improper and the view taken by the Tribunal holding it to be so was liable to be confirmed. In these circumstances, it becomes necessary to consider these authorities and to decide in the first place the proper principles of law as are applicable to the question of re‑opening of assessment under the provisions contained in section 34(1)(b) of the Indian Income‑tax Act, 1922. However, before doing so, one further argument which counsel for the assessee sought to advance before us may be stated and rejected. It was submitted by him that, before action of reassessment under section 34(1) (b) can be considered to be valid, two conditions were required to be satisfied, (i) that the Income‑tax Officer had, in consequence of information in his possession, reason to believe that some income, profits or gains had escaped assessment, and (ii) that such income, profits or gains were chargeable to income‑tax. Mr. Kolah submitted that he would be able to substantiate that even if it may be assumed that the entire capital contributed by the wife of the assessee and his minor son had emanated from the assessee himself, the share of the profits of the firm of Standard Garage to which these two parties were entitled under the deed of partnership could not be clubbed with the income of the assessee, i. e., to show that the second condition was not satisfied. According to his sub mission, if he was able to win this, then the re‑opening under section 34(l)(b) would be demonstrated to be improper as the second condition requisite would not be satisfied. For the purpose of satisfying us that the entire share of profits earned by these two parties, i. e., the wife and the minor son of the assessee could not be clubbed under any of the provisions of section 16, Mr. Kolah drew our attention to the observations to be found in Commissioner of Income‑tax v. Prem Bhai Parekh (1970) 67 I T R 27 (S C) at p. 30, where the Sup reme Court has observed on similar facts that the connection between the gift and the income in question must be considered to be remote. According to the Supreme Court, there was no nexus between the transfer of the assets and the income in question, and for the purpose of being clubbed the income in question must arise as a result of transfer and not in some manner connected with it.
In our opinion, this aspect of the argument would have relevance only qua the third branch of the argument of the assessee before the Tribunal on which the rival contentions have been noted by the Tribunal but on which no decision has been given by it. A fair reading of the statutory provision permitting re‑opening would suggest that at the initial stage all that the income‑tax Officer is required to have is a reasonable belief that such income, profits or gains has escaped assessment. It is possible to conceive of a case where after proceedings by way of re‑assessment have been validly initiated the assessee is able to satisfy the Income‑tax Officer that such income, profits or gains in respect of which the Income‑tax Officer did possess reasonable belief of having escaped assessment had in fact not escaped assessment or were in fact not liable to be assessed as income of the assessee. A full consideration of any such aspect of the matter will only arise at a later stage of the proceedings; and, with respect to the learned counsel for the assessee, it will not be possible for us to consider this aspect of the matter while considering whether the Tribunal was right in coming to the conclusion that the proceedings by way of re‑opening had not been validly initiated. As a matter of fact, the Tribunal itself has not at all applied its mind to any such argument and, thus, it cannot be considered to be an aspect arising from the order of the Tribunal.
It becomes necessary, therefore, to briefly refer to the Nagpur, Bombay and the Madras authorities indicated in the order of the Tribunal and the two later decisions in Holck Larsen's case and Kalyanji Mavji's case which decisions came to be given after the Tribunal decided the appeal in question in favour of the assessee.
In Dhanwatay's case a Division Bench of the Nagpur High Court consisting of Mudholkar and Deo, JJ. held that under section 34(I)(b) of the Indian Income‑tax Act, 1922, for the purposes of reassessment the belief entertained by the Income‑tax Officer that income has escaped assessment must be based upon information of a fact and not of law. In that case the assessee his wife and of a firm, in which firm his two minor sons were the benefits. 'The Income‑tax Officer overlooked the provisions of sec tion 16(3)(i) and (ii). He assessed the assessee, his wife and the minor sons separately. A successor to that Income‑tax Officer realised that an error had been committed and issued a notice of reassessment under section 34(1)(b). It was held in Dhanwatay's case that the Income‑tax Officer must be deemed to have been conversant with the provisions of law and if he had omitted to apply them, neither he nor his successor could resort to clause (b) of sub section (i) of section 34 for the purpose of re‑assessment.
In Dr. Dalal's cace one Dr. Dalai had on 23rd October, 1939, made a trust settling certain shares and securities on trust for the benefit of his son and two daughters. By virtue of clause (13) of the trust deed the trust was made irrevocable for a period of seven years. At the time when the trust deed was made one of the daughters was a minor. In the assessment year 1940‑41, the income‑tax authorities accepted the trust and excluded the share of income from the trust property of the major son and daughter from the income of Dr. Dalai, but the one‑third share of the income of the minor daughter was deemed to be income of Dr. Dalai by reason of the provisions of section 16(3)(a)(iv) of the Act. This state of affairs continued till this daughter attained majority, after which date all the three children were separately assessed in respect of their share of income in the trust property and Dr. Dalai was separately assessed in respect of his income from other sources. The Court was considering the assessment year 1952‑53 for which Dr. Dalai's widow in her capacity as the legal representative of her deceased husband filed the return in respect of Dr. Dalai's income which did not include any income from the trust property. The order of assessment in respect of this income was completed on 27th January, 1952. For the same assessment year a limited company, which was one of the executors of the trust, had filed a return of income in which the Income‑tax Officer noticed that the period of seven years during which the trust had been made irrevocable had expired, after which the trust was liable to be considered to be a revocable trust, and hence the entire income from the trust property was assessable in the hands of Dr. Dalai. This Income‑tax Officer communicated his reading of the provisions of the trust deed to the Income‑tax Officer who had completed the assessment of Dr. Dalai's income, who thereupon issued a notice under section 34(1)(b) and initiated reassessment proceedings. His jurisdiction to do so was challenged and it was held by the Court that the action taken by the income‑tax authorities under section 34(1)(6) could not be justified. According to the Court, all the relevant facts, materials and documents were available on the record of the case of Dr. Dalai to the Income‑tax Officer, who had made the original assessment on 27th January, 1954. Therefore, in the opinion of the Court, it could not be said that any fresh information had come into the possession of the Income‑tax Officer merely by reason that he had received a communication from the Income‑tax Officer, A‑IV Ward, Bombay, drawing his attention to the provisions in the trust deed which made it revocable after the expiry of seven years. Accordingly, the purported reassessment was quashed.
As far as the Madras cases are concerned we think it will be proper refer to only one of them, viz., Mudaliar's case. In the said decision it is observed that the information contemplated by section 34(1)(6) which gives jurisdiction to the Income‑tax Officer to reopen the assessment is information that income, profits and gains chargeable to income-tax had escaped assessment in the assessment of the assessee. Even inadvertence or error in the making of assessment would bring a case within section 34(1)(b); and if an. error is discovered after the assessment was made, that is information subsequent to the original assessment. It was further observed that information relevant to section 34(1)(b) need not be wholly extraneous to the record but may be derived from the record of the assessment itself, as for instance, an error of inadvertence in assessment by which income had escaped assessment, is discovered after the assessment. It is unnecessary to set out the facts of the Madras case (Commissioner of Income tax v. Rathinasabapathy Mudaliar. It may be stated, however, that they are somewhat similar to the facts of Dhanwatay's case, where the Nagpur High Court had quashed the re‑opened assessment. On the other hand, the Madras High Court took the view that the reopening of the assessment of the father was permissible on the footing that the discovery of the Income tax Officer after he had made the assessment that he had‑ committed an error in not including the minor's income in the father's assessment was "informa tion" obtained after the assessment, and even though all the facts were in the original records, the case was covered by section 34(1)(b).
Chronologically, the next decision to which reference may be made is the decision of the Supreme Court in Commissioner of Income‑tax v. A. Raman & Co. (1968) 67 I T R 11. But insmuch as this decision has been cited and applied in both Holck Larsen's case and Kalyanji Mavji's case, we may consider only these two decisions.
In Commissioner of Income‑tax v. H. Holck Larsen, the question which a Division Bench of the Bombay High Court was required to consider was the validity of reopening of assessment proceedings under section 34(1)(b) of the Act of 1922. The assessee, in that case, had shown certain profits arising from the sale of shares held by him in a limited company as capital gains on the footing that the shares were held by him as investment ; and his claim to be an investor was accepted by the Income‑tax Officer who had also accepted similar claims in the previous years. The assessments for the two years in, question were completed on 29th January 1958, and 9th October, 1958, respectively. The very same Income tax Officer then took up assessment proceedings for the two subsequent years. In the course of those proceedings he reviewed the entire course of transactions from tire year 1946, and held that though the assessee was an investor till 31st, March, 1954, he had converted his investment shares into stock‑in‑trade after Ist April, 1954, and had become a dealer in shares. Accordingly, the Income‑tax Officer brought to tax the profits made by the assessee by sale of shares as business profits. In the light of this finding the Income‑tax Officer re‑opened the assessments for earlier assessment years 1957‑58 and 1958‑59 under section…
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