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Petitioner: PHOOL CHAND BAJRANG LAL and another VS Respondent: INCOME TAX OFFICER and JUDGMENT
Court Name: Supreme Court of India Judge(s): S. C. Agarwal, A. S. Anand Title:PHOOL CHAND BAJRANG LAL and another vs INCOME TAX OFFICER and
JUDGMENT
Reported As: 1994 PTD 1216 Result: Reference answered Judgment JUDGMENT ' DR. A.S. ANAND, J.---This appeal, on a certificate of fitness granted by the High Court under Article 133 of the Constitution of India, is directed against the judgment in Civil Miscellaneous Writ Petition No,1541 of 1974 (1977) 110 ITR 834) decided by the Allahabad High Court on November 24, 1976, and arises in the following circumstances: ' The appellant is a firm which was assessed to income-tax at Azamgarh (U.P.). In the income-tax returns for the assessm ent year 1963-64, the assessee claimed that it had borrowed a sum of Rs,50,000 from M/s. Jain Finance Distributors (India) Private Limited, Calcutta (hereinafter called "the Calcutta company), on May 19, 1962. An entry dated May 25, 1962, in that behalf, was made by the assessee in its books of account as well as in the balance-sheet as a liability. The loan was stated to have been raised in cash and it was also claimed to have been returned in cash in 1968, though the interest on loan was stated to be paid by cheque/bank drafts till repayment in 1968. During the assessm ent proceedings, the Income Tax Officer directed the assessee to file a copy of the account of the Calcutta company to support the loan transaction. The assessee produced a confirmatory letter, dated November 15, 1963, from the Calcutta company, confirming the payment of loan of Rs,50,000 to the assessee. The case of the assessee before the Income Tax Officer was that one of its partners, namely, Bajrang Lal (since deceased) had gone to Calcutta on May 19, 1962, with draft for Rs,31,000 and Rs,151 in cash in order to make payment of outstandings at Calcutta. For making certain purchases of cloth and for payment of other outstandings against the assessee, the said partner, while in Calcutta, raised a cash loan of Rs,50,000 from the Calcutta company and, on his return to Azamgarh on May 25, 1962, necessary entries were made in the
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books of account of the assessee showing a credit of Rs,50,000 from the Calcutta company by way of cash loan to the assessee. The Income Tax Officer finalised the return and for each of the assessm ent years 1963-64 to 1968-69, the Income Tax Officer allowed deduction of interest claimed to have been paid to the Calcutta company by the assessee. From a perusal of the record, it appears that the Income Tax Officer entertained some doubts about the genuineness of the loan transaction and accordingly he addressed a letter the Income Tax Officer, District Companies (III)-196/J/1, Central Building, Calcutta on May 19, 1970, enquiring if the Calcutta company feIl within its jurisdiction. It was stated by the Income Tax Officer in that letterlhat he wanted to gather certain information from the case records of the Colcutta company. In reply, the Income Tax Officer, Calcutta on July 7, 1970, sent the following communication to the Income Tax Officer, Azamgarh See (1977) 110 ITR 834, 839): "Confidential Regd. Post A/D. Office of the Income Tax Officer, "K" Ward, Companies Distt. III P/7, Chowringhee Square, Calcutta No,C-III/J-46/A/1606, Dated: 7th July, 1990 ' Income Tax Officer, A-Ward, Azamgarh, (by name) ' Sub: M/s. Jain Finance Distributors (India) Private Ltd., 34/1B, Sudhir Chatterji St., Calcutta. ' Ref: Your letter No,P306/A, dated 19-5-1970, addressed to ITO, "I" Ward, Companies Distt. III, Calcutta. ' Please refer to your above letter asking for some information about Jain Finance Distributors India Private Ltd. This company is now assessed to tax in my ward. I have, however, to inform you that, according to the confession of Shri Tara Chand Surana, Managing Director of the company, it appears that the so-called company is really a dummy concern of Shri Surana. The company never actually advanced any loans to any person and according to the confession of Shri Surana the business of the company consisted entirely of name-lending. The company lent its name to enable different parties to bring into their books 'black money' under the guise of loan from Jain Finance Distributors (India) Pvt. Ltd. No fmance was ever distributed, only the name of the concern was lent. ' This position has been accepted in the assessments of the company for 1962-63, 1963-64 and 1964-65. In the circumstances you are requested not to treat any transaction with this concern as genuine. ' I can furnish further information to you if you send me full particulars of transactions which you may be enquiring about. (Sd.) A.R. Das Gupta, Income Tax Officer, 'K' Ward, (Companies Distt. III, Calcutta." ' After receipt of the above communication, the assessing authority, on August 26, 1971, issued a notice to the assessee stating therein that he was prima fade satisfied that the loan transaction of Rs,50,000 was not genuine and that since the assessee had failed to disclose fully and truly all the material facts necessary for assessment for the year 1963-64, income chargeable to tax had escaped assessm ent and that he, therefore, proposed to reopen the case for the assessment year 1965-66 under section 147(a) of the Income Tax Act, 1961 (hereinafter called "the Act"). Objections were invited from the assessee. In his reply dated November 25, 1972, the assessee contended that there had been no non-disclosure on its part in respect of the loan transaction of Rs,50,000 and that since all the primary facts had been disclosed by the ,assessee at the stage of the original assessm ent, the provisions of section 147(a) were inapplicable. After considering the reply, the Income Tax Officer issued a notice under section 148 of the Act to the assessee proposing to reassess his income, after recording that he had reason to believe that the assessee's income in respect of which he was assessable to tax had escaped assessment within the meaning of section
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147 of the Act. The assessee was called upon to file its return for the assessment years 1963-64 to 1968-69, within 30 days from the date of service of the notice. The proposal of the Income Tax Officer to reopen the assessm ent had been submitted earlier to the Commissioner of Income-tax on January 1, 1972, with the relevant record and sanction of the Commissioner for reassessment was obtained on February 7, 1972. On June 26, 1972, the assessee filed its return for the assessment year 1963-64 and later appeared before the Income Tax Officer in person on September 26, 1973. The assessee filed before the Income Tax Officer, Azamgarh, an affidavit from the creditor, Calcutta company, in support of its contention that the cash loan had in fact been raised from the creditor. The Income Tax Officer directed the assessee to produce the Calcutta creditor for cross- examination in respect of his affidavit. The creditor, Shri Surana, Managing Director of the Calcutta company, appeared and was cross-examined by the Income Tax Officer. During the course of his cross-examination, he admitted before the Income Tax Officer that he had made a confession to the Income Tax Officer at Calcutta, on the lines which had been indicated in the letter of the jurisdiction, Income Tax Officer from Calcutta dated July, 7, 1970. The creditor was thereafter re- examined by counsel for the assessee but nothing was elicited from the creditor regarding the correctness or otherwise of the "confession" alleged to have been made by him before the Income Tax Officer at Calcutta, during the assessment proceedings relating to his company at Calcutta. After considering the entire material on the record, a show-cause notice was issued by the Income Tax Officer, Azamgarh, to the assessee detailing all the facts gathered by him from the contents of the letter of the Income Tax Officer at Calcutta, the confession allegedly made by the creditor before the Income Tax Officer at Calcutta, in resmt of assessment years 1962-63 to 1964-65 and the statement of the creditor before him. The assessee was called upon to reply but he did not give any reply to the show-cause notice. While matters rested thus, the assessee filed Writ Petition No,1541 of 1974 in the High Court of Judicature at Allahabad, on March 18, 1974, seeking the quashing of the notices issued under section 148 of the Act and to restrain the Income Tax Officer from continuing with the reassessm ent proceedings. ' A Division Bench of the High Court, after a detailed consideration of facts and law, came to the conclusion that the information furnished by the Income Tax Officer, Calcutta, could form the basis for entertaining a reasonable belief on the part of the Income Tax Officer, Azamgarh, that, as a result of a false representation made by the assessee regarding the raising of cash loan from the Calcutta company, his income had escaped assessment during the relevant assessment year and it dismissed the writ petition with costs on November 24, 1976. The assessee applied for a certificate of fitness to file an appeal to the Supreme Court under Article 133 of the Constitution. The Division Bench of the High Court, while granting the certificate, opined: "On one of the questions which arise out of our order in the writ petition, there is considerable divergence of views amongst different High Courts. Some High Courts have taken the view that in...The cases of loans borrowed by an assessee, if he has disclosed the details thereof to the Income Tax Officer at the time of the original assessment, he (the assessee) is under no further obligation to inform the Income Tax Officer that such loans were bogus ones. Whether such loans are genuine or bogus, according to this view, is a matter of inference which the Income Tax Officer has to draw on the facts disclosed after proper verification and that, if he has treated such loans as genuine, he cannot, later, reopen the assessment merely because he has subsequently reason to believe that such loans were not genuine. ' A few other High Courts have taken a contrary view on the above question. ' The aforesaid question is, in our opinion, a substantial question of law of general importance which needs to be decided by the Supreme Court." ' That is how the matter is before us.
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' Before we take up for consideration the rival submissions made by learned counsel for the parties and consider the authorities cited by them, it would be appropriate to first notice some of the. Provisions of the Act. The relevant provisions of sections 147, 148 and 149 as they stood at the relevant time for the purpose of this case read as under: "147. Income escaping assessm ent.--- If (a) the Assessing Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under section 139 for any assessm ent year to the Assessing Officer or to disclose fully and truly all material facts necessary for his assessm ent for that year, income chargeable to tax has escaped assessment for that year, or 148. Issue of notice where income has escaped assessment--- (1) Before making the assessm ent, reassessm ent or recomputation under section 147 the Income Tax Officer shall serve on the assessee a notice containing all or any of the requirements which may be included in a notice under subsection (2) of section 139; 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... 149. Time limit for notice.--- (1) No notice under section 148 shall be issued.--- (a) in cases falling under clause (a) of section 147-- (i) for the relevant assessm ent year, if eight years, have elapsed from the end of that year, unless the case falls under sub-clause (ii)... (b) in cases falling under clause (b) of section 147, at any time after the expiry of four years from the end of the relevant assessm ent year." ' From the plain phraseology of the above sections of the Act, it appears that two conditions precedent which are required to be satisfied before the Income Tax Officer can acquire jurisdiction to proceed under clause (a) of section 147 read with sections 148 and 149 of the Act, beyond the period of four years but within a period of eight years from the end of the relevant year, are: (a) that the Income Tax Officer must have reason to believe that the income, profits or gains chargeable to tax had either been underassessed or had escaped assessment and (b) that the Income Tax Officer must have reason to believe that such escapement or underassessment was occasioned by reason of omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. Both these conditions must co-exit in order to confer jurisdiction on the Income Tax Officer. The Income Tax Officer is obliged, before initiating proceedings under section 148 of the Act, to record the reasons for the formation of his briefs to reopen the assessm ent. ' Shri G.C. Sharma, learned senior counsel appearing for the appellants, submitted that the obligation on an assessee during the assessment proceedings is primarily to disclose all material and relevant facts, i,e, the primary facts and once that disclosrue has been made, it is for the Income Tax Officer to draw the necessary inferences therefrom on the basis of such facts and that the assessee is under no obligation also to state as to what inferences could be drawn from those primary facts. He submitted that it is for the Income Tax Officer to draw the correct inferences from those primary facts and if an Income Tax Officer draws some inferences at the time of the assessm ent proceedings from those disclosed primary facts and accepting the same concludes the assessm ent proceedings, any subsequent information which may create an impression on the mind of the Income Tax Officer that either the primary facts were not true and full or that the inferences drawn therefrom were not correct, would not clothe him with the jurisdiction to initiate action for reopening of a concluded assessment. Mr. Sharma argued that, since in the instant case, the assessee had disclosed the primary facts and the Income Tax Officer, after accepting those facts, had completed the original assessment, he could not reopen the assessment, on getting information from the Calcutta Income Tax Officer to the effect that the Calcutta company was merely a name-lender and had not advanced loan to any party. Learned counsel contended that,
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even if it be assumed that the Income Tax Officer, Azamgarh, had entertained doubts about the genuineness of the loan transaction and sought information from the Calcutta Income Tax Officer, the reply furnished by the Calcutta Income Tax Officer could at best be said to cast a suspicion on the genuineness of the transaction but could not form the basis for "reason to believe" that income chargeable to tax had escaped assessment during the relevant assessment year on account of omission on the part of the assessee to disclose true and full facts during the assessment proceedings. Learned counsel maintained that the subsequent information from the Income Tax Officer, Calcutta, was vague and, therefore, the enquiry under section 147 of the Act could not be commenced and, in any event, the subsequent information could not justify the reopening of the assessm ent, particularly, when it was open to the Income Tax Officer to have conducted an enquiry during the original assessm ent proceedings to clear any doubts which he may have entertained with regard to the loan transaction. Learned counsel referred to certain judgments in support of his submissions. We shall refer to them in the course of this judgment. ' Mr. K.P. Bhatnagar, learned counsel appearing for the respondent, on the other hand, submitted that the obligation of an assessee is not merely to make disclosure of the basic or primary facts at the time of assessm ent but to make a "true and full" disclosure of such basic facts, and an omission to do so would clothe the Income Tax Officer with the jurisdiction to reopen a concluded assessm ent. He contended that, in the instant case, the Income Tax Officer, at Azamgarh came to possess specific information from the Income Tax Officer, Calcutta, which was sufficient for the formation of his belief that the assessee had not made a true and full disclosure in the return and that income chargeable to tax had escaped assessment on that account. According to Shri Bhatnagar, the question as to whether the grounds are adequate or not is not a matter for the Court to investigate so long as the belief of the Income Tax Officer is based on relevant material and is otherwise bona fide. Learned counsel supported his arguments by reference to certain judgments which we shall deal with in the latter part of this judgment. ' The High Court has dealt at length with the question whether the two conditions precedent for exercising jurisdiction under section 147 of the Act had been satisfied by reference to the facts of the case and the case-law cited before it. The High Court noticed that the jurisdictional Income Tax Officer, Calcutta, had conveyed to the Income Tax Officer at Azamgarh, that the Managing Director of the Calcutta company, Mr. Surana had made a confession before him to the effect that the Calcutta company had not advanced any loan to any person during the assessment proceedings of the Calcutta company for the years 1962-63, 1963-64 and 1964-65, and since it was the case of the assessee that he had raised a cash loan of P s.50,000 in May, 1%2, from the Calcutta Company on interest, the information furnished by the jurisdictional Income Tax Officer at Calcutta, in his letter dated July 7, 1970, was sufficient for the Income Tax Officer to have reasons to believe that the Calcutta Company had prima facie not advanced any money to the assessee and, therefore, some income chargeable to tax had escaped taxation on account of the failure of the assessee to disclose full and true material facts. In the words of the High Court (at page 845):-- "As the information furnished by the Income Tax Officer, Calcutta, could form the basis for a reasonable belief on the part of the Income Tax Officer, Azamgarh, that as a result of a false representation made by the petitioner as to his having borrowed money from the Calcutta company, his income had escaped assessment, the Income Tax Officer Azamgarh, could take action under section 147(a) of the Act." ' Certain tell-tale circumstances of the case support the above view of the High Court. ' The assessee was being assessed to tax at Azamgarh. It was claimed that it had raised a cash loan of Rs,50,000 in May, 1962, from the Calcutta company on interest. According to the assessee, the loan was raised by one of the partners of the firm who had gone to Calcutta for making
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purchases of cloth, etc. In paragraph 3 of the writ petition filed by the assessee in the High Court, it was stated thus: "That, on May 13, 1962, one of the partners, namely Sri Bajrang Lal, who is since deceased, had gone to Calcutta with a draft of Rs,31,000 and of Rs,151 in cash. The amount was carried by the said partner in order to make payment of outstandings against the firm. In Calcutta the said partner raised the loan of Rs,50,000 on May 19, 1962. This loan was raised for making purchases of cloth and also for payment of other outstandings against the firm." ' The interest on the loan was being paid to the Calcutta company by draft/cheque and not in cash till the loan was claimed to have been repaid in cash in 1968. Since the assessee itself stated in paragraph 3 of the writ petition (supra) that the loan had been raised for making purchases of cloth and for clearing other outstanding debts, in the normal course of human conduct, if not the entire amount of Rs,50,000, at least a substantial amount would have been spent or paid towards the purchases and to clear off the other debts at Calcutta. However, on the assessee's own showing, it was not so. This is evident from what the assessee stated in paragraph 4 of the writ petition which reads:-- ' "That when Sri Bajrang Lal returned to Azamgarh on May 25, 1962, he deposited Rs, 19.98 out of the money that he had taken when he went to Calcutta and the sum of Rs,50,000 which he had raised by way of loan. On the same day, namely, May 25, 1962, necessary entries were made in the books of accounts of the firm and, amongst other entries Messrs Jain Finance Distributors (India) Private Limited given a credit of Rs,50,000 by way of loan to the firm". (Emphasis supplied.) ' Thus, it is seen that the cash amount of Rs,50,000 at Calcutta, was shown to have been deposited with the assessee by Shri Bajrang Lal when he returned to Azamgarh and an entry was made in the books of account on May 25, 1962. Why the amount was not returned at Calcutta if it was not spent is anybody's guess. Again, while the loan was received in cash, the interest was alleged to have been paid by cheque or bank draft and yet the repayment of the loan was allegedly made again in cash in 1968. There is no explanation for this type of dealing with the loan alleged to have been borrowed by the assessee. The Income Tax Officer at Azamgarh, therefore, could justifiably entertain doubts about the genuineness of the cash loan of Rs,50,000 leading to the making of enquiry from the Income Tax Officer at Calcutta, after completing the assessment proceedings. When the jurisdictional Income Tax Officer at Calcutta wrote back to the Income Tax Officer at Azamgarh, conveying that the Calcutta company was an assessee with him and that the Managing Director of the Calcutta company, Mr. Surana, had made a confession about his business activities regarding the assessment years 1962-63, 1963-64 and 1964-65 and had confessed that he was only a name-lender and had not advanced any loan to any party during those assessm ent years, the Income Tax Officer at Azamgarh prima facie formed the belief that the assessee had not stated the primary facts regarding the loan transaction "fully and truly" during the original assessm ent proceedings. It was under these circumstances that the assessm ent was sought to be reopened and a notice under section 148 of the ' Here printed in italics. ' Act, after obtaining the requisite permission from the Commissioner of Income-tax was issued. ' The judgment in Chhugamal Rajpal v. S.P. Chaliha (1971) 79 ITR 603 (SC), relied upon by Mr. Sharma, is clearly distinguishable. In Chhugamal's case (1971) 79 ITR 603 (SC), the Income Tax Officer had initiated reassessm ent proceedings on the basis of a "circular" issued from the office of the Commissioner of Income-tax, Bihar and Orissa, which stated that three persons named in that circular were merely name lenders and their transactions were bogus and proper investigation regarding the loans from such persons was necessary before accepting the returns. The Income Tax Officer, merely on the basis of that "circular" initiated reassessment proceedings. This Court held that the circular by itself, without any other material and investigation, could not afford any
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basis to the Income Tax Officer for forming a reasonable belief that the assessee had not made a full and true disclosure of the relevant facts on account of which the income of the assessee chargeable to tax had escaped assessment. Unlike the general "circulars" issued by the Commissioner of Income-tax in that case, in the instant case, the Income Tax Officer at Azamgarh had entertained doubts about the genuineness of the loan transaction of Rs,50,000 and, therefore, had made enquiries from the Income Tax Officer at Calcutta. The reply received from the Income Tax Officer at Calcutta (supra) was specific and went to show that the Calcutta company was not a money-lender. The information in the present case is vastly different both in content and character from the "circular" in Chhugamal's case (1971) 79 ITR 603 (SC) which was held by this Court as not affording a basis for entertaining a reasonable belief that income chargeable to tax had escaped assessm ent. ' Mr. Sharma then placed reliance on ITO v. Lakhmani Mewal Das's (1976) 103 ITR 437 (SC) to urge that the information contained in the letter of the Income Tax Officer at Calcutta, dated July 7, 1970, was no better than the information in Lakhmani Mewal Das's case (1976) 103 ITR 437 (SC), and since the Supreme Court had characterised that information as wholly vague, indefinite, far-fetched and remote, which would not afford any basis for entertaining a reasonable belief to initiate proceedings under section 147 of the Act, the same grounds would be available in the present case also. We cannot agree. In Mewal Das's case (1976) 103 ITR 437 (SC), the assessee, in his return, claimed…
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