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Petitioner: TRUSTEES AND EXECUTORS OF THE LATE SHRI SHAMJI KHETA VS Respondent: INCOME-TAX OFFICER, CENTRAL CIRCLE, NAGPUR
1986 P T D 557
1986 P T D 557
[Bombay High Court (India)]
Before Tulpule and Bhonsle, JJ
TRUSTEES AND EXECUTORS OF THE LATE SHRI SHAMJI KHETA
Versus
INCOME-TAX OFFICER, CENTRAL CIRCLE, NAGPUR
Writ Petition No. 2085 of 1976, decided on 2nd August, 1981.
(a) Income-tax Act (XI of 1822)--
--Ss. 23 & 34 (1) (a)--Income escaping assessment--Assessment on basis of material disclosed or where no material is disclosed cannot bar reopening of assessment under S. 34--I.-T.O. making assessment specifically referring to failure to produce account books by executor of will who was the then assesses--Executor-of-will making concession of no objection if assessment is reopened under S.34--Trustees appointed under will, held, were precluded from challenging proceedings under S.34.
The jurisdiction to issue notice under section 34 of the Income-tax Act, clause (a) or (b) as the case may be, turns upon the circumstances and conditions prescribed as a condition precedent laid down in the section itself and nowhere else. Hence the making of an assessment on the basis of material disclosed, or where no material is disclosed ca of bar the reopening of an assessment under section 34.
A I R 1961 S C I 372 and 1971 Tax LR 1541 fol.
It is not proper to read into section 34 of the Income-tax Act, 1922 any other pre-conditions than the ones which are there to acquire jurisdiction for issuance of a notice under section 34. If a proceeding under section 34 were to be barred on the making of the assessment, then there would certainly be found some words in section 34 indicating it to be so. On the other hand a best judgment assessment made under section 23(4) is at best an estimate of the income which might have been, and must have been received by the assessee. It is not determination of the income which the assessee had received. It is only an estimate and at best a guess founded upon the material which is available, and information or result of an enquiry which the I.-T.O. makes. The proceeding which is contemplated under section 34 is for the purpose of determining as to what is the income which has escaped assessment. The foundation therefore, is only a formation of a-belief and opinion by the I.-T.O in the twin circumstances mentioned in subsection (1) of section 34 that income has escaped assessment. Where there is a reasonable formation of such belief, then notwithstanding that an estimate of the income which must have been received by the assessee is made and taxed, that would not prevent or preclude the power to determine exactly as to what was the income which had escaped assessment. Therefore, it cannot be said that the making of assessment on the basis of income on available and produced material or as estimated by the I.-T.O. where there is absence of material resulting in a failure to disclose truly or fully all material facts, that an action under section 34 is precluded.
A I R 1956 Mad. 432 and (1974) 95 I T R 251 (Guj.) (FB) distinguished.
The assessees were trustees appointed under a will and the I.-T.O. while making an assessment under section 23, referred specifically to the failure to produce account books which undoubtedly amounted to a failure to disclose truly and fully all material facts the basis of which assessments ref the income of deceased, the executor of will, could have been made, not only that, but the figures of income or expenses were not accepted and believed by the I-T.0. and there was even a concession made before him that the executor-of-will had no objection to a proceeding under section 34 and the I.-T.0. proceeded to issue notices under section 34 to the executor of the trust who was then alive. The executor did not seek to challenge those notices.
Held, that in view of the concession made by the deceased executor-of-will who was the assessee then and in view of his conduct in tiling a return pursuant to notices under section 34, the trustees under the will were precluded from challenging the issuance of notices under section 34. In the circumstances, the fact of making an assessment ay the Income-tax Officer does not bar the issuance of notices under section 34 of the Act where the conditions precedent laying down the circumstances in which the I.-T.O. acquires jurisdiction to issue a notice under section 34 are satisfied. The making of an assessment no bar to such a proceeding.
(b) Income-tax Act (III of 1922)---
--Ss. 24-B & 34--Legal representatives--Trustees under will can be called to participate in proceeding of reassessment of deceased-assesses only for previous year of his death and not for many years earlier.
The trustees or executors cannot be called upon to participate in a proceeding relating to reassessment of the deceased-assesses not for the previous year of his death, but many years earlier. The extension ox the personality of the deceased-assesses is only for the recovery of tax for the previous year in the hands of his legal representatives and heirs.
A I R 1963 SC 1448 and AIR 1964 SC 1761 fol.
(c) Income--tax Act (XI of 1922)--
--S. 23(2)--Writ petition by trustees appointed under will challenging notices issued to them under S.23(2) of Income-tax Act--Purpose of trust exhausted--Writ petition does not become infructuous as trust would continue for purposes of administration and accounts until final discharge is obtained.
(1974) 95 ITR 251; 77 ITR 1; (1971) 79 ITR 349 (Cal.); 51 ITR 345; 48 ITR 59; 41 ITR 191; 28 ITR 615 and 5 ITC 100 ref.
C.J. Thakar for Petitioners.
A. Shelat for Respondent.
JUDGMENT
TULPULE, J. --This petition by the Trustees appointed under the will of deceased Shamji Kheta under Articles, 226 and 227 of the Constitution challenges the issuance of a notice to the trustees under section 23(2) of the Income tax, 1992 hereinafter referred to as the Act on 15-11-1975. This was preceded by earlier letters in 1971 requiring the executors to attend, by the I.-T.O. in the matter of proceedings who was started under section 34 of the Act against the deceased-assess- Shamji Kheta.
2. The facts giving rise to this litigation and challenge are that Shamii Kheta owned extensive immovable properties and was carrying on numerous businesses and had lucrative properties. He was an owner of cinema house in Nagpur, Gondia and Jabalpur wherein he ran the business of exhibition of films. Besides he had also money lending business and also earned large income from several immovable properties. The assessee was assessed to Income-tax by the I.-T. O., B Ward, Nagpur. The assessments in question and which are the subject-matter of this petition are assessments made on the assesses for the years 1947-49 and 1949-50, i.e. accounting years 1946-47, 1947-48 and 1948-49. For the assessment year 1947-48, the assessee was assessed to tax on a total income computed by the I.-T.O. at Rs. 96,854. For the assessment year 1948-49, the said income was calculated at Rs. 1,10,514 and for the year 1949-50 at Rs. 81,532.
3. While making the assessment orders which were made under section 33(3) of the Act, which was then in force, the I.-T.O. observed with regard to certain items of income arid certain items of expenditure which were shown to him that "huge withdrawals the assesses makes are utilised in some investments and this particular source is not disclosed by the assesses". It appears that before the I.-T.O. for the assessment years 1948-49 and 1949-50 the assessee failed to produce his account books for the money lending business on the ground that the "account books for this business are alleged to have been taken away by Mr Raojibhai, who was the manager of the assesses". The I.-T.O. did not wait until the account books were produced and proceeded to make the assessments on the basis of the information and assessed that income at Rs.20,000 instead of Rs.16,844 which was voluntarily disclosed by the assessee. He observed that this he was taking "subject however to revision under section 34 in revision the actual income is found to be higher afterwards".
4. Similarly, the I.-T.O. found that the account books of the business of Shamji Kheta & Co. were similarly not produced and that they were in the possession of the Court. According to the assessee haft suffered losses is that business and the I.-T .O. was not prepared to accept that statement without verification and, therefore, proceeded to ignore the losses as it was not quantified and assessed that also as an income stating therein that the assesses was willing to submit to any action under section 34 in case- there is any income found and on verification of the accounts books when they will be released".
5. For the assessment year 1949-50, the same was the position with regard to account books to the money lending business. The I.-T.O. noted that the "position remains the, same this year. The assesses ex-Munim Shri Raojibhai is alleged to have as wonded kith the sets of Recounts maintained in respect of money lending business". He did not accept that statement and felt it to be suspicious. In that year, there a reference to income received or account of the assessee being a Partner in two firms "Bhawanji-Maoji." and "Shyamji Kheta" of Cuttack and the income was also estimated like last year subject to verification and rectification on production of accounts. He again observed that a, bin observed the assessee is also willing to submit to any action under section 34 if necessary". The income was, therefore, estimated in regard to both these businesses on the basis of the material of the previous years and the assessment order made.
6. Thereafter it appears that notices were issued by the Income-tax Department acting under section 34 of the Act, to Shamji Kheta for the assessment year 1947-48 on 31-3-1956, for the assessment year 1948-49 on 30-3-1957 and for the assessment year 1949-50 on 24-3-1958. These facts are admitted and there is no dispute in this petition, in regard to what we have stated above.
7. On 15-11-1967 Shamji Kheta died. Regarding the notices which were issued to him under section 34 of the Act on the three dates mentioned above by us in the years 1956, 1957 and 1958, as to what transpired in these proceedings and to what stage they had reached, we have no record and information. It appears in any event that these proceedings for reassessment of income, which in the opinion of the I.-T.O. had escaped assessment for assessment years 1947-48, 1948-49 and 1949-50 had not been finalised. On the death of Shamji Kheta on 15-11-1967, it appears that these proceedings under section 34 were sought to be commenced and continued against the executors and legal representatives of the deceased and in particular the trustees under the will of deceased Shamji Kheta. On 8th August, 1963 the deceased had executed a will by which he brought into existence a trust which was for the benefit of his grandsons and granddaughters and was to be administered by three persons including one of them who is the present petitioner, Vesanjee son of Shamji Kheta. The petition was filed by the other two trustees A.S. Bobde and M.M. Kinkhede and they had subsequently retired from the petition and Vasanjee applied for substitution in their place, which application for substitution, we have allowed as also the prayer for retirement by the two earlier petitioning trustees. The trust was to continue till the last of the grandsons and granddaughters had attained the age of 21.
7-A. The grievance of the petitioners in short is that they are the trustees under the will of deceased Shamji Kheta. Under section 24-B (1) no tax liability can be fastened upon them nor any enquiry or proceeding could be started and continued against them in which they are called upon to participate, except for the year which is the previous accounting year of the deceased. It is their contention that proceedings under section 34, read with section 24-B of the Act cannot be continued against the trustees, and legal representatives of the deceased. That if at all they could be continued against the heirs and persons who could have and must be deemed to have been possessed of the properties of Shamji Kheta from out of which this alleged suppressed income was said to have been received. It was contended that Shamji Kheta during his lifetime disbursed his properties amongst his sons and grandsons. That these sons and grandsons who are also legal heirs are recipients of these properties which were the source of income and which is alleged to have escaped assessment. It is they, therefore, who should have been noticed to appear in the proceeding and the proceeding continued against them. The trustees being responsible for the beneficiaries who are the grandsons and granddaughters, who have not received any of the properties which could be and could have been the subject of the acquisition from the escaped income, the trustees as well as the legatees could not be held to be responsible, The trustees pointed out that the properties which are the subject-matter of the trust were acquired by the assessee long before the disputed assessments were sought to be reopened, namely prior to the accounting year 1946-47. Therefore, it was the contention of the trustees that in any event either because the property which is alleged to be the source of suppressed income or from out of which this income is said to have been made is not in the possession of the trustees or beneficiaries, as well as the notice under section 34 (1) of the Act read with section 24-B and the proceeding thereupon after the death of Shamji Kheta would be without jurisdiction against the trustees. Therefore, the directions of the ITO to appear and take part in the proceeding ought to be quashed as also the notice under section 34(1) and 24-B of the Act. It was contended that the proceeding could be continued under section 34(1) (a) only in respect of the income accrued to the deceased for the previous year in the hands of the trustees, legal representatives, executors or administrators of his estate and not in respect of years in which the deceased himself' had received that income and which event had occurred much before his actual death. It is the correctness and legality of this contention which has to be determined in this petition.
8. Mr. Thakkar who appeared for the petitioners based his submissions on the provisions of the Act which it is common ground: Is the Act applicable in the present case and sections 34 and 24-B therein? Section 34(1) is in two parts, part (a) and part (b). Subsection (3) of section 34 prescribes different periods of limitation for reopening of assessments. In a case under clause (b) of subsection (1) of section 34 of the Act, the assessment can be reopened within a period of four years from the last date of the assessment order and in the, case falling under clause (a) of subsection (1) within .8 years from the relevant assessment year. In the present case, the notices under section 34 relating to the assessment years 1947-48, 1948-49 and 1949-50 have been issued in the years respectively 1956, 1957 and 1958. It is obvious, therefore, that these notices fall under section 34(1)(a) of the Act and the proceedings are under that part. Mr. Thakkar's contention firstly, therefore, was that this was not an assessment attempted to be reopened on the basis of information, subsequently received, but on the basis either of, a failure to file a return under section 22 or failure "to disclose fully and truly all material facts necessary" for the assessment of that year. It was pointed out that the first part of section 34(1)(a) does not apply inasmuch as the deceased -assessee had filed a return. Therefore, it was pointed out that the only clause available under section 34(1)(a) was that there was a failure on the part of the assessee "to disclose fully and truly all material facts necessary". It was, how ever, contended by Mr. Thakkar that looking to the inspection notes and looking to the record In this, case and looking to what has been stated, the assessments seem to have been attempted to be reopened, not because there was a failure to disclose fully and truly all material facts, but un the basis of some information received subsequent to the assessment of the deceased in those years. Mr. Thakkar pointed out in this connection a letter written to the I.-T.O. by one of the sons of Shmji Kheta.
9. So far .as subsection (1)(a) of section 34 of the Act and the relevan part thereof is concerned, namely, "failure to disclose fully and truly all material facts". Mr. Thakkar submitted firstly that the question whether all facts necessary for the purpose of assessment had been disclosed fully and truly is an objective fact or circumstance. In the present case, according to him, the deceased had disclosed all that was available and with' him at the time when the assessments were made truly and fully. It was his contention that if the I.-T.O. was not satisfied that there was a true and full disclosure of all necessary facts by the deceased, then the I.-T.O was not authorised, and it was not open for him to proceed to make an assessment. He could have there and then started proceeding under section 34 of the Act and required 'the assessee to produce all such material facts as were necessary in his opinion for the assessment of the income of the assessee in that year. The I.-T.O., he contended, had notwithstanding what was the position proceeded to assess the income of that year earned by the assessee. If that was so then according to him, where an assessment is made in that year, it would not be permissible at a later stage to turn round and say that there was no full or true disclosure of all material facts by the assessee. Where the consideration has resulted in an assessment, the assessment, he contends, operates as a bar for the reopening of any assessment where the I.-T.O. at the time of making of the assessment was not satisfied that a true and full disclosure was made. In other words, it was his contention that where assessments were made under section 23(3), i.e. assessment of total income said to have been received by the assessee, according to the I.-T.O. determined by him, then that assessment or determination cannot be reopened. He pointed out that it is only income which has escaped assessment, that under section 34 could be reopened for assessment. Where an assessment is made on the basis of the material and the I.-T.O. does not wait to collect the necessary material and facts relating to income suspected of having escaped assessment for failure of true and material disclosure of facts, and proceeds to make an assessment of income accrued in that year that is final. Mr. Thakkar contends that the I.-T.O. at that stage of assessment is free to estimate the income in respect of which the necessary material facts have not been disclosed fully and truly, to any figure. Once he does not do so and makes an assessment, his jurisdiction to reopen an assessment under section 34 of the Act and the authority to do so is lost. According to him in that case such an income cannot be deemed to have escaped, assessment, inasmuch as it has already been assessed and taxed.
10. It was then contended that the jurisdiction to issue a notice under section 34 of the Act is firstly derived where the I.-T.O. forms a belief or opinion which must be conditioned by either of two circumstances (i) failure to file a return; or (ii) failure to disclose truly and fully all material facts. Besides, the belief entertained by the I.-T.O. must be .relating to the escaping of assessment on account of the aforesaid two circumstances. In other words the I.-T.O. must form an opinion and must have reason to believe that either as a result of failure to file a return or as a result of failure to disclose truly and fully all material facts, income has escaped assessment. It is then only that a notice can be issued. It was not contended in this case, and it cannot be possibly so contended in view of the specific averments in the assessment orders to which we have made a. reference, that there was reason for the I.-T.O: to form such a belief. What was urged was that having reason to believe or form an opinion, is not the same thing as changing an opinion already formed once in regard to the existence of the two circumstances already referred to Mr. Thakkar contended, therefore, that if as a result of the failure to disclose fully and truly all material facts, the I.-T.O. proceeded to make an assessment, it was his opinion as to what was the total income when he taxed that income and assessed it. It then cannot be said that such income has escaped assessment. In that case, Mr. Thakkar submits that the very foundation for the reason to believe goes away. In the present case, it was his contention that this had happened on account of the making of the assessment by the I.-T.O.
11. Lastly, it was submitted that the material on record discloses that the action is sought to be taken not on the basis of the Income-tax officer having reason to believe that there is any escapement of income on account of failure to disclose fully and truly all material facts, but on account of certain information received by the I.-T.O. subsequently. In other words, it was Mr. Thakkar's submission that the action, if at all sought to be taken under section 34(1)(b) of the Act, which prescribed a shorter period of limitation, the notices not having been issued within a period of four years were also bad.
12. On the other hand, on behalf of the Department it was urged that an assessment has to be made within a specified period prescribed by section 23 of the Act. It was contended that the assessment in the instant case were made under section 23 (3) for the assessment years 1947-48, 1948-49 and 1949-50. The making of an assessment is no bar to the reopening of an assessment and to reassess the income which has escaped assessment, where the I.-T.O. has reason to believe that as a result of any one of the two contingencies, namely, failure to disclose fully and truly material facts or failure to file a return, income has escaped assessment. It was contended that it was not right for the assessee to contend, as was done, that assessment cannot be piecemeal. It was urged that this was not a piecemeal assessment. It was an assessment on the basis of material and facts which were available at that time. Where in the process of assessment there were reasons for the I.-T.O. to believe that any income was suppressed, then his making of such an assessment is not piecemeal assessment and does not take away his jurisdiction to reassess, and to commence proceedings under section 34 of the Act. It was urged that assessment is not bar to reassessment or reopening of assessment, and indeed it was contended that the concept of reassessment pre-supposes an earlier assessment. No income could be deemed to have escaped assessment if it is already assessed. It is only when it is assessed and later discovered, or an opinion is formed that some part of the income has not been assessed, that an enquiry under section 34 of the Act could be undertaken. An assessment does not operate as a bar to the reopening of assessment and reassessment proceedings contemplated' under 'section 34 of the Act.
13. Neither the section nor the pronouncements on the scope of the section by the Supreme Court lay down any other condition for issuance of a notice under section 34 of the Act. It was urged that the section lays down only certain circumstances in which a notice under section 34 could be issued. Where these circumstances are satisfied, the jurisdiction to issue a notice is acquired. The section does not say that no such notice could be issued where assessment proceeding has completed and there has been an assessment Where that to be the intent of the legislature, then some such words like 'before making an assessment' would have occurred in section 34(1) of the Act. Such words are absent and, therefore, it was urged that the contention should not be accepted.
14. A number of decisions were relied upon and referred to support the contention that the I.-T.O. will cease to have jurisdiction to issue a notice under section 34 of the Act and reopen an assessment where he has already assessed the income to any figure. We shall presently refer to some of these decisions. Before, however, proceeding to consider these decisions, it would be proper to have a look at section 23 of the Act. It is common ground that a person whose income exceeds the prescribed limit of exemption and whose income is taxable has to file a return in the prescribed form, set forth therein such particulars as they be necessary including total income and total earned income during that year. It such a return is filed, the Income-tax Officer proceeds to make an assessment under section 23 of the Act. In order,…
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