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Petitioner: KLAYANJI MAVJI & COMPANY VS Respondent: COMMISSIONER OF INCOME-TAX, WEST BENGAL II
1986 P T D 345
[Supreme Court India]
Present: K. K. Mathew and Murtaza Fazal Elahi, JJ
KLAYANJI MAVJI & COMPANY
Versus
COMMISSIONER OF INCOME‑TAX, WEST BENGAL II
Civil Appeal No. 522 of 1971 , decided on 10th December, 1975.
(a) Income‑tax Act (XI of 1922)‑
‑‑S. 34(1) (b) Escaped assessment Reopening of previous assessment‑‑Two categories of cases fur reopening previous assessment contemplated by S.34(1), namely: (1) where there has been an omission or failure on part of assessee to make a return of his income under S.22 or to disclose fully and truly all material facts necessary for his assessment; and (2) where there has been no such omission on part of assessee but Income‑tax Officer on basis of information in his possession finds that income chargeable to tax has escaped assessment for any year‑‑First category deals with cases where an assessee is himself in default acid second category deals with cases where there is no fault on part of an assessee but where income chargeable to tax has actually escaped assessment for one reason or other and Income‑tax Officer comes to know about same.
(b) Income‑tax Act (XI of 1922)‑‑
‑‑‑S. 34 (as amended), Object of Act, to see that tax collecting machinery is made as perfect and effective so that tax payer is not allowed to get away with escaped income tax.
(c) Income‑tax Act (XI of 1922)‑‑
‑‑‑S. 34 [as amended]‑‑Word "information" used in S. 34(1)(b) of Act, held, was of widest amplitude and comprehends a variety of factors‑ Nevertheless power under S. 34(l)(b) however, wide it might be was not plenary because discretion of Income‑tax Officer was controlled by words "reason to believe".
Bhimraj Pannalal v. Commissioner of Income‑tax (1961) 41 I T R 221 (S C) and Patna High Court in Bhimraj Pannalal v. Commissioner of income‑tax (1957) 32 I T R 289 rel.
(d) Income‑tax Act (X1 of 1922)‑‑
‑‑‑S. 34(1)(b)‑‑Reassessment‑‑"Information" for reopening assessment may come from external sources or even from materials already on record or may be derived from discovery of new and important matter or fresh facts‑‑Word "information" will also include true and correct state of law derived from relevant judicial decisions either of income‑tax authorities or other Courts of law which decide income tax matters Where ground on which original assessment is based is, held, to be erroneous by a superior Court in some other cases that will amount to a fresh information which comes into existence subsequent to original assess ment‑‑Objective tests and principles to determine applicability of 5.34(1) (b) of Act, discussed.
Commissioner of Wealth‑tax v. Imperial Tobacco Co. of India Ltd. (1976) 6 I T R 461, 466 (S C),(1959) 35 1 T R 1, 7, 8 (SC); Maharaj Kumar Kamal Singh (1966) 35 I T R 1, 7, 8 (S C); V. Jaganmohan Rao v. Commissioner of Income‑tax (1970) 75 1 T R 373, 379 (SC) and A. Ram and Co.'s case. (1968) 67 1 T R 11, 15, 16 (S C) rel.
(e) Income‑tax Act (XI of 1922)‑‑
‑‑‑S 34(1)(b)‑‑"Information" as contained in S.34(1)(b) of Income‑tax Act ‑Must fulfil conditions namely. (1) information may be derived from an external source concerning facts or particulars as to law relating to a matter bearing on assessment; (2) that information must come after previous or original assessment was made‑‑In fact, words "in consequence of information" a‑, used in S.34(1)(b) clearly postulate that information must be subsequent to original assessment sought to be reopened; and (3) that information may be obtained even on basis, of record of previous assessment from an investigation of materials on record, or facts disclosed thereby or from other enquiry or research into facts or law.
(f) Income‑tax Act (XI of 1922)‑‑
‑‑‑S. 34(1) (b)‑‑Determining applicability of S. 340) (b)‑‑ Tests and principles which would apply to determine applicability of section and categories of cases stated.
(g) Income‑tax Act (XI of 1922)‑‑
‑‑‑Ss. 34(1)(b) & 66(1)‑‑Escaped assessment‑‑Reopening of original assessment‑‑Assessee claiming deduction in assessment subsequent on account of amount of interest allegedly paid by him on debts incurred by him for partnership business‑‑Income‑tax Officer suspecting correctness of return during course of subsequent assessment proceedings finding that amount of deduction claimed was utilised for giving interest‑free loan to partners for clearing up their income‑tax dues which could not be said to be a loan incurred for expenses of partnership business and coming to conclusion that deduction was wrongly claimed by assessee‑‑Income‑tax Officer proceeded against assessee for reopening original assessment on basis of 'information' which came to his knowledge after original assessment, by fresh facts revealed in subsequent assessment proceedings as well as by conduct of assessee in not adducing any evidence on material to prove his plea that deduction was validly made‑‑Order of Income‑tax Officer upheld‑‑View taken by Tribunal that it was a case of mere change of opinion by Income‑tax Officer or on materials already on record was not acceptable in circumstances.
(1968) 67 1 T R 11, 15, 16 (S C) rel.
Bankipur Club Ltd. v. Commissioner of Income‑tax (1971) 82 I T It 831 (S C) ref.
S.R. Banerjee, N.V. Goswamy and Arviud Minocha for Appellant.
B.A. Ahuja and S.P. Nayar for Respondent.
JUDGMENT
MURTAZA FAZAL ELAH1, J.‑‑This appeal leave involves the interpretation of the scope, extent and ambit of section 34 (1) (b) of the Indian Income‑tax Act, 1922, with particular reference to the connotation and import of the ward "information" used in section 34 (1) (b). Although the question appears to have been settled in one form or the other by the decisions of this Court, the changing and diverse society such as ours, dealing in complex commercial activities continues to produce multifarious facets of taxable income which has escaped assessment cloaked under difficult propositions and knotty legal problems. It is the onerous task of this Court to dispel the doubts and resolve and reconcile the differing views taken by the High Courts in various situations which every time poses a new problem.
The points involved in the instant case baffled many a legal brain so much so that the High Court also appears to have been in two minds whether to place the information in the instant case as based on the materials already on the record of the original assessment of 1956‑57 revealed by closer circumspection or to the information derived from subsequent or fresh facts. Before, however, examining the legal incidents of section 34 of the Indian Income‑tax Act, 1922, it may necessary for us to travel into the domain of the facts of the present case, which are short and simple.
The assesses‑appellant Messrs kalyanji Mavji & Company as a registered partnership firm dealing in various commercial activities. The said firm filed its return for the year 1956‑57 corresponding to the accounting Gujarati Diwali year 2001 showing a total income of Rs.7,44,551 after claiming a deduction of a sum of Rs.4,31,116 being the amount of interest paid by the assessee on the debts incurred for the partnership business. The Income‑tax Officer accepted the return but on appeal to the Appellate Assistant Commissioner the assessment was reduced by a sum of Rs.9,200 by his order, dated July 3, 1958. For the assessment year 1957‑58, the assessee showed the same income and the deduction claimed was allowed. The next year 1958‑59, however, presented quite a different complexion. While the assessee filed its return in the year 1958‑59, the Income‑tax Officer concerned suspected the correctness of the return particularly the deduction interest and found that as the amount of the deduction claimed was utilised for giving interest‑free loans to the partners for clearing up their income‑tax dues not be said to be a loan incurred for the expenses of the partnership business and he accordingly disallowed the deduction claimed by the appellant. This discovery led the Income‑tax Officer to issue notice to the appellant under section 34 (1) (b) of the Indian Income‑tax Act, 1922 hereinafter referred to as "the Act" ‑‑for reopening the assessment of the year 1956‑‑57‑‑hereafter to be referred to as "the original assess ment"‑ on the ground that the deduction having been wrongly allowed, taxable income had escaped assessment. After hearing the appellant the income‑tax Officer completed the assessment and included the sum of Rs.43,116 to the total income shown by the assesses. Thereafter, the appellant filed an appeal before the Appellate Assistant Commissioner against the order of the Income‑tax Officer but the appeal was dismissed by the appellate authority, which confirmed the order of the Income‑tax Officer. It may be pertinent to note here that in his order the Appellate Assistant Commissioner pointed out that in the assessment years 1958‑59, 1959‑60 in the Income‑tax Officer found that the appellant had no evidence with it to show that the funds borrowed on which the interest was paid were utilised for the purpose of the business and not diverted to the partners. Thereafter, the appellant filed a second appeal to the Income‑tax Appellate Tribunal, "B" Bench, Calcutta. The Tribunal, after having accepted the facts culminating in the order of the Appellate Assistant Commissioner, was of the opinion that the information of the income‑tax Officer resulting in the notice under section 34 (1) (b) of the Act to the assesses was not based on any fresh facts but was derived from the materials on the record of the original assessment. The Tribunal further found that if the Income‑tax Officer while completing the original assessment would have been careful enough to scrutinise the balances‑sheet he would hays at once detected the infirmity on the basis of which the subsequent Income‑tax officer issued the notice under section 34 (1) (b) of the Act to the appellant. The Tribunal further was of the opinion on the subsequent Income‑tax Officer merely changed his opinion on the basis of the very materials that were before him when the original assessment was made any that was not sufficient to attract the provisions of section 34 (1) (b) of the Act. The Tribunal, accordingly, allowed the appeal and set aside the order of the Income‑tax officer issuing notice to the assesses under section 34 (1) (b) for reopening the original assessment. Thereafter, the respondent, namely, the Commissioner of Income‑tax approached the Tribunal for making s reference to the High Court under section 86 (1) of the Act as a result of which the Tribunal referred the case to the High Court at Calcutta after framing the following question:
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the reassessment made by the Income‑tax Officer under section 34 (1) (b) of the Indian Income‑tax Act, 1922, was incompetent?"
The High Court, after hearing the parties, differed from the view taken by the Tribunal and held, that the present case squarely fell within the ambit of section 34 (1) (b) of the Act inasmuch as the information on the basis of which the Income‑tax Officer sought to reopen the original assessment was based on subsequent facts as also on the materials of the original assessment revealed by more careful and closer circumspection of those materials. The High Court referred to a number of decisions of this court as also to the decisions of the Calcutta High Court. The appellant sought leave to appeal to this court against the order of the High Court, which having been refused, the appellant obtained special leave from this Court, and hence this appeal.
In support of the appeal it was contended by Mr. Banerjee that the view taken by the High Court is legally erroneous inasmuch as the admitted facts of this case would disclose that the information relied upon by the income‑‑tax Officer in order to reopen the original assessment was not derived from external sources but amounted to a mere change of opinion on the very facts arid materials that were present on the record of the original assessment. It was also submitted that it was not open to the Income‑tax Officer to have reopened the original assessment merely because he took a different view of the matter in the assessment year 1958‑59. Lastly, it was argued that the High Court had not correctly applied the ratio laid down by the Court in Commissioner of Income‑tax v. A. Raman and Co [1968) 67 ITR 11 (SC).
Mr. Ahuja appearing for the revenue submitted that the order of the Income‑tax Officer was fully justified and the High Court had taken the correct view of the law.
In order to appreciate the contentions advanced by counsel for the parties, it is necessary to make a brief survey of the provisions of section 34 (1) of the Indian Income‑tax Act, 1922. The section runs thus:
"34, (1) If‑‑
(a) the Income‑tax Officer has reason to believe that by reason of the omission or failure on the part of an assesses to make a return of his income under section 22 for any year or 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 for that year, pr have been under assessed, or assessed at too low a rate, or have been made the subject of excessive relief under the Act, or excessive loss or depreciation allowance has been computed, or.
(b) notwithstanding that there has been no omission or failure as mentioned in clause (e) on the part of the assessee, the Income‑tax Officer has in consequence of formation in his possession reason to believe that income profits or gains chargeable to income‑tax have escaped assessment for any year, or have been under assessed, or assessed at too low a rate, or have been made the subject of excessive relief under this Act, or that excessive loss or depreciation allowance has been computed.
He many in cases falling under clause (a) at any time and in cases falling under clause (b) at any time within four years of the end of that year, serve on the assessee, or, if the assessee is a company, on the principal Officer thereof, a notice containing all or any of the requirements which may be included in a notice under subsection (2) of section 22 and may proceed to assess or reassess such income, profits or gains or recompute the loss or depreciation allowance; and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that subsection."
It would be seen that section 34 (1) contemplates two categories of cases for reopening the previous assessment: (1) where there has been an omission or failure on the part of the assessee to make a return of his income under section 22 or to disclose fully and truly all material facts necessary for his assessment; and (2) where there has been no such omission on the part of the assessee but the Officer Income‑tax on the bases of information in his possession finds that income chargeable to tax has escaped assessment for any year. It is, therefore, manifest that the first category deals with cases where an assessee is himself in default and the second category deals with cases where there is no fault on the part of an assessee but where the income chargeable to tax has actually escaped assessment for one reason or the other and the Income‑tax Officer comes to know about the same. In the instant case, however, we are concerned with clause (b) of section 34 (1) extracted (supra). Before, however, proceeding to interpret the ambit and import of section 34 (1) (b), it may be necessary to consider the history of section 34 of the Act which appears to have passed through different phases with amendments and additions made to the section from time to time.
Section 34 as it stood in 1922 was as follows:
"34. If for any reason income, profits or gains chargeable to income‑tax has escaped assessment in any year, or has been assessed at too low a rate, the Income‑tax Officer may, at any time within one year of the end of that year, serve on the person liable to pay tax on such income, profits or gains, or, in the case of a company, on the principal Officer thereof, a notice containing all or any of the requirements which may be included in a notice under subsection (2) of section 22 and may proceed to assess or reassess such income, profits or gains, and the provisions of this Act, shall, so far as may be, apply accordingly as if the notice were a notice issued under that subsection.
Provided that the tax shall be charged at the rates at which it would have been charged had the income, profits or gains not escaped assessment or full assessment, as may be."
It would be seen that in the section as it stood in 1922 the word "information" was not there at all and the section merely empowered the Income‑tax Officer to reopen the assessment of any year where income chargeable to tax had escaped assessment. No conditions or limitations on the power of the Income‑tax Officer were at all laid down under the section. It appears that the appropriate legislature in its wisdom thought that this would be too wide a power to be given to the Income‑tax Officer and may not be workable. In these circumstances, by the Indian Income‑tax (Amendment) Act, 1939, this section was recast as under:
"34. (1) If in consequence of definite information which has come, into his possession the Income‑tax Officer discovers that income, profits, or gains chargeable to Income tax have escaped assessment in any year, or have been under‑assessed or have been assessed at too low a rate, or have been the subject of excessive relief under this Act, the Income‑tax Officer may, in any case in which he has reason to believe that the assessee has concealed the particulars of his income or deliberately furnished inaccurate particulars thereof at any time within eight years, and in any other case at any time within four years of the end of that year, serve on the person liable to pay tax on such income, profits, or gains in the case of a company, on the principal officer thereof, a notice containing all or any of the requirements which may be included in a notice under subsection (2) of section 22, and may proceed to assess or re‑assess such income, profits or gains, and the provisions of this Act shall, so far may be, apply accordingly as if the notice were a notice issued under that subsection..."
It may be pertinent to note that by virtue of this amendment the concept of the 'Income‑tax Officer deriving definite information was introduced for the first time. The word "information" wall qualified by the word "definite" and an additional condition was incorporated namely, that the income‑tax Officer discovers that income chargeable to tax has escaped assessment. This provision led the Courts to approach the provisions of the section with greater circumspection and stricter scrutiny as a result of which many cases of escaped assessments had to be set at naught by some decisions of the Courts. This led Parliament to take a fresh view of the situation. Accordingly, by the Income‑tax and Business Profits Tax (Amendment) Act, 1948, the section was recast in the present form as quoted above. There were further amendments in 1954 and 1956 with which we are not concerned. Ultimately, by the Income‑tax Act, 1961 the section underwent a complete transformation and even the setting of the section was changed which now forms section 147 (a) and (b) of the Income‑tax Act, 1961. We are now concerned in this case only with section 34 (1) (b) as it stood after the amendment of 1948.
Another pertinent fact, which may be mentioned here is that although section 34 was the subject of several amendments, yet the word "information" which was introduced in 1939 has not been defined at all. Since the word "information" has not been defined, it is difficult to lay down any rule of universal application. At the same time it cannot be disputed that the object of the Act was to see that the tax collecting machinery is, made as perfect and effective so that the tax‑payer is not allowed to get away with escaped income‑tax. The fact that the adjective "definite" qualified the word "information" and the word "discover" which were introduced in the Income‑tax (Amendment) Act, 1939, were deleted by the Amendment Act of 1948 would lead to the irresistible inference that the word "information" is of the widest amplitude and comprehends a variety of factors. Nevertheless, the power under section 34 (1) (b), however wide it may be, is not plenary, C because the discretion of the Income‑tax Officer is controlled by the words "reason to believe". It was so held by this Court in Bhimraj Pannalal v. Commissioner of Income‑tax (1961) 41 ITR 221 (SC). While affirming the decision of the Patna High Court in Bhimraj Pannalal v. Commissioner of Income‑tax (1957) 32 ITR 289 (Pat.). This legal proposition, however, is not disputed. It, therefore, follows that information may come from external sources or even from materials already on the record or may be 'derived from the discovery of new arid important matter or fresh facts. The word "information" will also include true and correct state of the law derived from relevant judicial decisions either of the income‑tax authorities or other Courts of law, which decide income‑tax matters. Where the ground on which the original assessment is based is held to be erroneous by a superior Court in some other case, that will also amount to a fresh information which comes into existence subsequent to the original assessment. A subsequent Privy Council decision is also included in the word "information". Thus it is very difficult to lay down any hard and fast rule. But this Court has in two leading cases laid down some objective tests and principles to determine the applicability to section 34 (1) (b) of the Act, which we shall now discuss.
In Maharaj Kumar Kamal Singh v. Commissioner of Income‑tax, (1959) 35 ITR 1 7, 8 (SC), the word "information" fell for interpretation by this Court, where it was observed thus:
"We would accordingly hold that the word "information" in section 34 (1) (b) includes information as to the true and correct state of the law and so would cover, information as to relevant judicial decisions. If that be the true position, the argument that the income‑tax Officer was not justified in treating the Privy Council decision in question as information within section 34 (1) (b) cannot be accepted.
In our opinion, even in a case where a return has been submitted if the Income‑tax Officer erroneously fails to tax a part of assessable income, it is case where the said part of the income has escaped assessment. The appellant's attempt to put a very narrow and artificial limitation on the meaning of the word 'escape' in section 34 (1) (b) cannot, therefore, succeed."
It will be seen that this Court was in favour of placing not a narrow but a liberal interpretation on the provisions of section 34 (1) (b) of the Act. This decision was considered by this Court in Commissioner of Wealth‑tax v. Imperial Tobacco Co. of India Ltd. [1976] 6 1TR 461. 466. (S.C) (1959) 35 ITR 1,7,8 (SC), where Wanchoo, J., speaking for this Court, observed as follows:
It may be added that after the decision of this Court in Maharaj Kumar Komal Singh's case [1966] 35 ITR 1, 7, 8 (SC) it is now settled that information in section 34 (1) (b) included information as to the true and correct state of the law, and so would cover information as to relevant judicial decision and that such information for the purpose of section 34 (1) (b) of the Income‑tax Act need not be confined only to cases where the Income‑tax officer discovers as a fact that income has escaped assessment."
Similarly, in V. Jagamnohan Rao v. Commissioner of Income‑tax, (1970) 75 ITR 373, 379 (SC), while following the decision of this Court in Maharaj Kumar Kamal Singh's case (1959) 35 ITR 1, 7. 8 (SC) it was observed as follows:
"In these circumstances, it was held by this Court, firstly that the word information 34 (1) (b) included information as to the true and correct state of the law, and so would cover information as to relevant judicial decisions secondly, that 'escape' in section 34 (1) was not confined to cases where no return had been submitted by the assesses of where income had not been assessed owing to inadvertence or oversight or other lacuna attributable to the assessing authorities. But even in a case where a return had been submitted, if the Income‑tax Officer had erroneously, failed to tax a part of the assessable income, it was a case where that part of the income had escaped assessment. The decision of the Privy Council, therefore, was held to be information with the meaning of section 34 (1) (b) and the proceedings for reassessment were validly initiated."
The matter was again fully considered by this Court in A. Roman and Co.'s…
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