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Tax Case No. 76 of 1959 (Reference No. 30 of 1959), decided on 15th February 1962.
Belief that income has escaped assessment‑Scope of jurisdiction of High Court in reference to test reasonableness‑Information on which belief based proving ill- founded‑Effect‑Income‑tax Act, 1922, Ss. 34(1)(b) & 66.
"Information" and "reason to believe" constitute the essential requisites and the basic foundation to set in motion the machin ery of reassessment under section 34(1)(6) of the Indian Income- tax Act, 1922. The Income‑tax Officer has no jurisdiction to start upon a venture of reassessment in a haphazard fashion on mere suspicion in the hope of unearthing an escapement of tax. It is open to the assessee to assail the jurisdiction of the officer on the ground that he had no information upon which he could reasonably believe that any income had escaped assessment. While the complete absence of information knocks the bottom out of the jurisdiction of the officer; so long as there is some information in his possession upon which a belief of escapement of assessment could be said to be not unreasonably entertained, the jurisdiction is well‑founded. Such jurisdiction cannot be impugned merely on the ground that some other officer or some other tribunal might not have, on the same information, entertained a reasonable belief of escape ment of income, profits or gains. The advisory jurisdiction of High Court under section 66 of the Act is so narrow in its sphere that the Court cannot substitute its judgment for that of the officer to test the reasonableness of the belief.
An Income‑tax Officer may rightly commence proceedings under section 34 if he has, in consequence of particular infor mation in his possession, reason to believe that income has escaped assessment and may, even if that particular information proves to be ill‑founded at the conclusion of the enquiry, yet bring to tax such escaped income as comes to light as a result of the enquiry. The non‑existence of, the original ground which led the officer to believe that income had escaped assessment is not a bar to reassessment of escaped income and does not vitiate such reassessment. The statutory requirement of reason able belief rooted in information in the possession of the officer is to safeguard the assessee from vexatious proceedings and is not a mantle of protection against taxation of income found to have escaped assessment.
It is now well settled that an action under section 34 of the Act cannot be justified on the ground of a mere change of opinion regarding chargeability of income on the part of the reassessing officer different from his own previous opinion or from that of his predecessor‑in‑office. But income which escapes assessment as a result of the lack of vigilance of the Income‑tax Officer or due to inadvertance or negligence or to the perfunctory performance of his duties without due care and caution, can well be within the ambit of section 34(1)(6) provided the requirements of that section are satisfied.
Chimanram Motilal v. Commissioner of Income‑tax (1943) 11 I T R 44 and Commissioner of Income‑tax v. Gopal Vajinath Manohar (1935) 3 I T R 372 ref.
In compliance with the requisition of the High Court under section 66(2) of the Indian Income‑tax Act in Tax Case Petition No. 25 of 1958, dated Tuesday, the 12th August 1958, on the file of the High Court of Judicature at Madras, we state the case, agreed to by the parties, and refer it to the High Court.
2. The questions of law on which the Tribunal has been directed to state the case are as follows:
"(i) Whether, on the facts and in the circumstances of the case, the reassessment on the joint family made under section 34 of the Act is valid
(ii) Whether, on the facts and in the circumstances of the case, there was material to sustain the estimated addition of Rs. 10,000 as the income of the assessee "
We shall, therefore, confine ourselves as far as possible to the facts relevant to those questions.
3. The assessee is the erstwhile "Hindu undivided family" of V. A. M. Sankaralinga‑Nadar (now disrupted) which carried on business in arecanuts in India till April 12, 1950, in the following three vilasams, which are the names of its members:
(i) V. A. M. Sankaralinga Nadar, Father.
(ii) V. A. M. S. Muthumaniratna Nadar, Son.
(iii) V. A. M. S. Nagarajan, Son.
4. In the books of Nos. (i) and (ii) above, for the year ended April 12, 1950, the "previous year" for the assessment year 1950 51, there were credits totalling to 89.5,524 in the name of Muthumaniratna Nadar of Colombo. For the said assessment year, the assessee family returned the following incomes from the three vilasams:
|
| Rs. |
| (i) V. A. M. Sankaralinga Nadar | 3,204 |
| (ii) V. A. M. S. Muthumaniratna Nadar | 4,506 |
| (iii) V. A. M. S. Nagarajan | 14,782 |
| Total | 22,492 |
The Income‑tax Officer completed the assessment under sec tion 23(3) for the above year in which he considered the profits shown by the, aforesaid three businesses only: He took no notice of the aforesaid credits:
5. The said family became disrupted on April 13, 1950, and each of the aforesaid three members took the respective business for himself and carried it on for the benefit of his own branch of the family. In the course of the assessment for 195‑1‑52 of Muthumaniratnam aforesaid; the Income‑tax Officer found that he had also a Ceylon business which was exporting arecanuts to Muthumaniratnam in India and also to the business of Sankara linga Nadar in No. (i) above. With this information, as the profit from the said Colombo business had escaped assessment for the earlier year 1950‑51, he reopened the assessment under section 34 on February 17, 1954. He found excess credit balance of Rs. 3,666 and Rs. 1,852 standing in the name of Colombo Muthumaniratnam in the books of Nos. (i) and (ii) above. For the purpose of assess ing these excess credit balances as the income of the assessee family which had escaped assessment originally, he asked the assessee to produce the books for the said Colombo business for the aforesaid year. The books were not produced. So he examined the rates of purchases of arecanuts shown in the books of Nos. (i) and (ii) above, i.e., Sankaralinga Nadar and Muthumaniratnam, in the purchases shown in the third set of books in the name of Nagarajan aforesaid, which contained larger dealing with outsiders. The Income‑tax. Officer found that the rates of profit disclosed by V. A. M. Sankaralinga Nadar and Muthumaniratnam were far below that shown by, Nagarajan, that the purchases effected by Sankaralinga Nadar and Muthumaniratnam were entirely from the concern of Colombo. V. A. M. S. Muthumanirat nam which was owned by none other than Muthumaniratnam himself that the cost of nuts purchased from Colombo Muthumaniratnam by Sankaralinga Nadar and Virudhunagar Muthumaniratnam were Rs. 11,740 and Rs. 24,131 respectively, that only Rs: 5,006 and 18,700 were paid towards the said amounts respectively by the said persons, that it was not known how the balance was made up, that even after taking into account the opening debit balance's in the folios of Colombo Muthumanirat nam, there were excess credit balances of Rs. 3,666 and Rs. 1,858 respectively for which the assessee had no explanation, that it was obvious that the cost of the imported nuts declared before the customs authorities was; much less, than the actual figure debited in the purchase account, that if the assessee could persuade him self to circumvent the rules of the Government department by furnishing wrong declaration, there was no reason why he should not do the same thing with the income‑tax department, that the figures were incorrect was further confirmed by the fact that vouchers for the purchases of nuts in Colombo were not available, that the assessee also pleaded inability to produce the same, that the conclusion was that a good portion of the income was segre gated by inflating the cost of nuts and that the huge difference in the rate of profit had not been explained at all. The Income‑tax officer further held that, in the subsequent year, it was found that the assessee was having transactions with others also, that, in the absence of vouchers and bills and accounts for the business in Ceylon, the income could only be estimated on the basis of local enquiries and, therefore, the income‑tax Officer estimated the income segregated from the books at Rs. 10,000 and added it to the income originally assessed. The Income‑tax Officer's original order under section 23(3) is Annexure "A" and his order under section 34 is Annexure "B" and form part of the case.
6. The assessee preferred an appeal to the Appellate Assistant Commissioner challenging the legality of the reassessment and con tended, inter alia, that there was no fresh material before the Income-tax Officer justifying the reopening of the assessment under section 34(i)(b), that the action of the Income‑tax Officer amounted to mere change of opinion on the same facts which does not warrant the action under section 34, that the assessee family had no business in Ceylon in the year of account that the business of "Colombo S. Muthmaniratnam" did not belong to the assessee family, that it was obvious from the statement of the Income‑tax Officer that the said business belonged to Muthumani ratam independently of the assessee family, that the alleged income from such Colombo business had no connection with the family, that no such income was ever brought into the family by Muthumaniratnam, that there was absolutely no justification for estimating the income from Ceylon business at Rs. 10,000. The grounds of appeal before the Appellate Assistant Commissioner and the additional grounds of appeal before him are Annexures "C" and "D" and form part of the case.
7. The Appellate Assistant Commissioner held that section 34 had been rightly invoked and that the quantum of addition being near about Rs. 9,637 which was the computed inflation on the basis of the prices paid by Nagarajan was reasonable and deserved to be sustained. The order of the Appellate Assistant Commis sioner is Annexure "E" and forms part of the case.
8. On further appeal to the Appellate Tribunal, the assessee repeated its contentions before the Appellate Assistant Commissioner and contended that the reassessment proceedings were illegal being based on a mere change of opinion and that the estimated addition of Rs. 10,000 was without any basis. The grounds of appeal before the Tribunal is Annexure "F" and forms part of the case.
9. The Tribunal held that the contention of the assessee regarding the legality of the assessment was untenable for the reason that if the officer had known the real nature of the account as he subsequently found it to be, he would not have failed to assess the income from the Colombo business and that the very fact that such an item had been omitted from the original assess ment clearly belied the assertion of the assessee that, from the manner in which the Colombo business had been invoicing the arecanuts to the assessee in India, it was clear that there had been an inflation, that the estimate of Rs. 10,000 did not appear to be excessive and therefore dismissed the appeal. The order of the Tribunal is Annexure "G" and forms part of the case.
10. The questions of law which we have been directed to refer are set out in paragraph 3 supra and they are accordingly referred to the High Court of Judicature at Madras.
K. Srinivasan and D. S. Meenakshisundaram for the Assessee.
S. Ranganathan for the Commissioner.
‑Sankaralinga Nadar and his two sons, Muthu manitratnam and Nagarajan, together constituted members of a Hindu undivided family. The family was carrying on business by trading in arecanuts imported from Ceylon. The business was done under the three vilasams, (1), V. A. M. Sankaralinga Nadar. (2) V. A. M. S. Muthumaniratna Nadar, and (3) V. A. M. S. Nagarajan. The family became divided on April 13, 1940, and each of the three coparceners got the business in their respective names by allotment under the partition. In respect of the year of assessment 1950‑51 relating to the previous year "ending with April 12, 1950" the business income of the family was assessed in the following sums:
|
| Rs. |
| 1. V. A. M. Sankaralinga Nadar | 3,204 |
| 2. V. A. M. S: Muthumaniratna Nadar | 4,506 |
| 3. V. A. M. S. Nagarajan | 14,782 |
| Total | 22,492 |
The order of assessment of the Income‑tax Officer on the Hindu undivided family was passed on September 4, 1950.
In the course of the assessment for the year 1951‑52 of the business income of Muthumaniratna Nadar, a quondam member of the family, who carried on business as the manager for his undivided family consisting of himself and his sons, the Income-tax Officer found that he had business in Colombo exporting arecanuts to India. The officer got information presumably from the books of account produced by Muthumaniratna and possibly from other sources as well that the business income of the erswhile Hindu undivided family of Sankaralinga Nadar and his sons, was not fully assessed in the year 1950‑51 and that the assessee family had escaped assessment in regard to a portion of its income. Thereupon the officer initiated proceedings under section 34 of the Act and as a result of an enquiry in such proceedings held that the income of the family in the year ending April 12, 1950, had escaped assessment and estimated such escaped income at Rs. 10,000. A revised assessment, as a result of the proceedings under section 34 of the Act, was made by the officer on 31st of May 1954. The assessee's appeal to the Appellate Assistant Commissioner, Madurai, and to the Income-tax Appellate Tribunal, Madras, failed. An, application under section 66(2) of the Act having been made by the assessee in this Court, the Tribunal was directed to state a case raising the following questions:
(i) Whether, on the facts and in the circumstances of the case, the reassessment on the joint family made under section 34 of the Act is valid
(ii) Whether, on the facts and in the circumstances of the case, there was material to sustain the estimated addition of Rs. 10,000 as the income of the assessee "
In the books of account of the family business standing in the name of Sankaralinga Nadar an amount of Rs. 3,666 was shown as credit balance outstanding and due to Colombo Muthumaniratnam. Similarly a credit balance for a sum of Rs. 1,858 in favour of the said Colombo Muthumaniratnam also stood in. the business account of the family standing in the name of Muthumaniratnam. These credit balances said to be due by the family to Colombo Muthumaniratnam aggregating to Rs. 5,524 gave the clue to the Income‑tax Officer that there might have been an omission to bring to tax all the income of the family in the relevant year and that the family might have escaped full and proper assessment of all its income. At the com mencement of the proceedings initiated under section 34 of the Act, the Income‑tax Officer had, in consequence of information in his possession, reason to believe that the family had escaped tax.
Before dealing with the contentions urged on behalf of the assessee, we shall advert to the materials forming the basis of the order of reassessment resulting in the addition of Rs. 10,000 to the computation of income already arrived at in the regular pro ceedings of assessment. The account books of the family busi ness in the names of Sankaralinga Nadar and Muthumaniratnam at Virudhunagar showed that the cost of arecanuts purchased from Colombo during the year was Rs. 11,740 and Rs. 24,131 respectively. The accounts further showed that, towards these purchases from Colombo, repayments had been made by way of drafts by three persons aggregating to Rs. 5,006 and Rs. 18,700 respectively. The final casting of accounts relating to debits and credits arising out of the Colombo dealings disclosed a credit balance of Rs. 3,666 and Rs. 1,858 respectively in favour of Colombo Muthumaniratnam. It is now admitted by the assessee that Colombo Muthumaniratnam is no other than Muthumaniratnam, the son of Sankaralina Nadar, who had busi ness at Virudhunagar, in his own name, and which business was also part of the family business. The assessee failed to produce any bills or vouchers for the alleged purchases of arecanuts from. Colombo. The account books of Muthumaniratnam relating to the Colombo business were also not produced. There is no satisfactory explanation on the part of the assessee as to why no proper proof was adduced before the assessing authority to support the plea that the entries in the family accounts relating to the purchase of arecanuts from Colombo are genuine entries representing true transactions. It must not be forgotten that Muthumaniratnam was certainly one of the persons interested in resisting the proceedings under section 34 and he would have produced his Colombo accounts if those accounts also contained entries in respect of the export of nuts to India for the family. The account books of the family business in the name of Nagarajan show purchases from outsiders at Colombo but there are no outside purchases in the course of business done in. the name of Sankaralinga Nadar and Muthumaniratnam. The gross profit rates based upon the business turnover in the names of Sankaralinga Nadar, Muthumaniratnam and Nagarajan were 16.4%, 14.7% and 31% respectively. It is not without significance that where nuts were purchased by the family from outsiders at Colombo other than. Muthumaniratnam, the rate of profit was very much higher than the rates disclosed in the other businesses having imports only from Muthumaniratnam. In the declaration of the value of imports by the assessee to the Customs authorities, admittedly, the value given was very much lower than that debited in the purchase account. The veracity and the business integrity of the assessee were not beyond criticism and the Income‑tax Officer reached the conclusion that the accounts of the business in the names of Sankaralinga Nadar and Muthumaniratnam showed an inflated value of purchase of arecanuts from Colombo Muthumaniratnam. It is on these materials that the Income‑tax Officer estimated the escaped income of the family for the relevant year at Rs. 10,000. As stated already this addition by way of estimate has been confirmed by the Appellate Assistant Commissioner and by the Appellate Tribunal.
Mr. K. Srinivasan, learned counsel for the assessee, contends that section 34 of the Act was improperly invoked as the proper requisites to attract that provision are completely absent. This is a case in which the proper provision applicable and which has been applied in section 34 (1)(b) which reads as follows:
"Notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Income‑tax Officer has in consequence of information 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 may . . . . in cases falling under clause (b) at any time within four years of the end of that year, serve on the assessee . . . 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 . . ." .
The Explanation to section 34(1) reads as follows:
"Production before the Income‑tax Officer of account books and other evidence from which material facts could with due diligence have been discovered by the Income‑tax Officer will not necessarily amount to disclosure within the meaning of this section."
This Explanation is primarily referable and relevant only to section 34 (1) (a) which affords a cause of action to the Department to reopen an assessment on the ground that the assessee failed to disclose fully and truly all material facts necessary for his assessment for the relevant year.
Section 34(1) comprises two categories : (a) wilful evasion arising out of default or non‑disclosure by the assessee ; (b) other cases. Each category provides for reassessment in respect of the following matters:
(1) Escaped assessment.
(2) Under‑assessment (This may be the result of wrong computation, wrong allowances and exemptions).
(3) Assessment at too low a rate.
(4) Excessive relief.
(5) Excessive loss or depreciation allowance.
The onus of proving that income escaped assessment is on the Department: Commissioner of Income‑tax v. G. V. Manohar ((1935) 3 I T R 372) and Chimanram Motilal v. Commissioner of Income‑tax ((1943) 11 I T R 44).
The question for consideration is whether the Income‑tax Officer had information in his possession in consequence of which he had reason to believe that income, profits or gains had escaped assessment. It is true that "information" and "reason to believe" constitute the essential requisites and the basic founda tion to set in motion the machinery of reassessment under section 34(1)(6) of the Act. There is no jurisdiction on the part of the officer to start upon a, venture of reassessment in a haphazard fashion on mere suspicion in the hope of unearthing an escapement of tax. Whether the officer had reason to believe, in consequence of information in his possession, may not be a justiciable issue in a proceeding of this Court under section 66 of the Act and to that extent it may really be a matter of subjective satisfaction of the officer concerned, but it is open to the assessee to assail the jurisdiction of the officer on the ground that he had no information upon which he could reasonably believe that any income had escaped assessment. While the complete absence of information might knock the bottom out of the jurisdiction of the officer, so long as there is some information in his possession upon which a belief of escapement of assessment could be said to be not unreasonably entertained the jurisdiction is well founded. Such jurisdiction cannot be impugned merely on the ground that some other officer or some other Tribunal might not have, on the same information, entertained a reasonable belief of leakage of income, profits or gains. The "advisory" jurisdiction of this Court, which is not a Court of appeal under the Income‑tax Act, so narrow in its sphere that we cannot substitute our judgment for that of the officer, to, test the reasonableness of the belief:
We have ourselves refused the memorandum submitted by the Income‑tax Officer to the Commissioner of Income‑tax for 'approval of the initiation of proceedings under section 34 and it seems to us that at that time the Income‑tax Officer was of the belief that the business in Colombo in the name of Muthumunirat nam was also part of the family business. It is not, now, the case of the Department that the Colombo business, if any, was anything but the sole and exclusive business of Muthumaniratnam. It may be that the belief of escapement of assessment was, to some extent, based by the officer on the misapprehension that the Colombo business was also the family business and that the income from that business had not been brought to tax in the year 1950‑51. But substantially the belief of the Income‑tax Officer was that the income of the family had escaped assessment. An Income‑tax Officer may rightly commence section 34 proceed ings if he has, in consequence of particular information in his possession, reason to believe that income has escaped assessment and may, even if that particular information proves to be ill- founded at the conclusion of the enquiry, yet bring to tax such escaped income as comes to light as a result of the enquiry. The non‑existence of the original ground which led the officer to believe that income had escaped is not a bar to reassessment of escaped income and does not vitiate such reassessment. The statutory requirement of reasonable belief rooted in information in the possession of the officer is to safeguard the assessee from vexatious proceedings and is not a mantle of protection against taxation of income found to have escaped assessment.
It is now well settled that an action under section 34 of the Act cannot be justified on the ground of a mere change of opinion regarding chargeability of income on the part of the reassessing officer different from his own previous opinion or from that of his predecessor‑in‑office. There can be no doubt of the soundness of this principle of law as otherwise the assessee might become the victim of the freaks of changes of opinions of the officers from time to time. But income which escapes assessment as a. result of the lack of vigilance of the Income‑tax Officer or due to inadvertence or negligence or the perfunctory performance of his duties without due care and caution, can well be within the ambit of section 34(1)(b) provided the requirements of that section are satisfied. We are unable to agree with the contention of the learned counsel for the assessee that, in the instant case, the officer acted merely on a change of opinion and not in the genuine belief of income having escaped. The assessment proceedings of the year 1951‑52 relating to Muthumaniratnam gave sufficient information to the officer to engender the belief that the business income .of the family, of the year 1950‑51, had escaped assessment. In our opinion, section 34 of the Act was rightly invoked by the Income‑tax Officer and the proceedings cannot be challenged as being in excess of his jurisdiction.
The learned counsel for the assessee next contends that in any event, the addition of Rs. 10,000 was not called for as the credits in favour of Colombo Muthumaniratnam which alone can, if at all, be held to be the suppressed income of the family totalled only Rs. 5,524. The finding arrived at by the Income‑tax Officer and affirmed. by both the appellate authorities is that the trading account in the name of Muthumaniratnam in the family account books does not depict the true picture and that the entries therein are merely fictitious entries brought about to show an inflated value of alleged purchases. This is a finding of fact which we must accept and we must observe there are enough materials to support this finding. Necessarily and inevitably, the officer had to estimate the income of the family business aris ing out of the import of arecanuts from Colombo through Muthumaniratnam. It is only in this connection that the gross profit rates between the business in the name of Nagarajan and the other two businesses were compared by the officer. We are unable to say that there has been any wrong approach on the part of the Department in making the addition or that the addi tion of Rs. 10,000 is, in any way, arbitrary or capricious,
Both the questions are answered in the affirmative and against the assessee who will pay the costs of, the department, Rs. 250.
Questions answered in the affirmative.
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