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Jamna Lal Kabra v. Income-Tax Officer, B Ward, Bareilly, And Others.

Allahabad High Court

Apr 28, 1967

Judgment

Subsequent
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Structured Summary of the Provided Opinion

Factual and Procedural Background

The petitioner was a Hindu undivided family (HUF) consisting of two members, Jumna Lal (karta) and Gopal Rai. The HUF owned a residential house and a dal mill at Kalibari and carried on a dal-manufacturing business, along with income from speculation and commission agency.

On April 16, 1959 (the last date of the Ram Naumi year relevant to assessment year 1959-60), a partial partition of the business was said to have been effected, but the residential house and the dal mill at Kalibari remained in the ownership of the HUF. The business activity was taken over by a partnership firm, Messrs. Jumna Lal Gopal Rai, which obtained registration under section 26A of the Indian Income-tax Act, 1922.

Income from the business for the previous year relevant to assessment year 1960-61 and subsequent years (1961-62 to 1964-65) was assessed in the hands of the partnership firm. For assessment year 1964-65 the partnership firm claimed a deduction of Rs. 3,000 as rent paid to the HUF for hiring the dal mill; this claim was disallowed by the Income-tax Officer (ITO) and dismissed on appeal by the Appellate Assistant Commissioner. The Income-tax Appellate Tribunal later allowed the partnership firm's appeal, holding that the dal mill had not been included in the alleged partition and that rent paid to the HUF was allowable.

Following the Tribunal decision, the ITO sought action: either a reference to the Court or, alternatively, initiation of proceedings under section 147 of the Income-tax Act, 1961. The Commissioner did not approve a reference and accepted the ITO's reasons as sufficient for issuing a notice under section 148. Consequently, on February 24, 1966, the ITO issued a notice under section 148 to the HUF (the petitioner), stating he had reason to believe that income chargeable to tax for assessment year 1960-61 had escaped assessment and proposing reassessment. The Commissioner’s satisfaction was recorded as required.

The petitioner challenged the section 148 notice and subsequent proceedings by filing a petition for certiorari and prohibition to quash the notice dated February 24, 1966, and to stop further assessment proceedings pursuant to it.

Legal Issues Presented

Whether the Income-tax Officer validly exercised jurisdiction under section 147 by issuing a notice under section 148 where the recorded reasons did not indicate any omission or failure by the petitioner to make a return or to disclose fully and truly all material facts for assessment (i.e., whether the requirements of clause (a) of section 147 were met).
Whether the statutory requirement that the Income-tax Officer record his reasons (sub-section (2) of section 148) is a mandatory pre-requisite to assuming jurisdiction to initiate assessment or reassessment proceedings.
Whether the Income-tax Officer may rely on reasons not recorded pursuant to sub-section (2) of section 148 when invoking the jurisdiction conferred by clause (a) of section 147.
Whether, on the recorded reasons and facts set out by the ITO, the reassessment proceedings against the petitioner were maintainable or were without jurisdiction and therefore invalid.

Arguments of the Parties

The opinion reports and treats specific positions taken before tax authorities and in pleadings; the following sub-sections summarize those positions as they appear in the opinion.

Partnership Firm's Position (as recorded in tax proceedings)

The partnership firm argued before the income-tax authorities and the Income-tax Appellate Tribunal that although the family business had been converted into a partnership, the main assets of the business (the building and the machinery, including the dal mill/godown at Kalibari) had not been partitioned and continued to belong to the Hindu undivided family.
On that basis the firm advanced a claim for deduction (rent of Rs. 3,000) for rent paid to the HUF for use of the dal mill; the Tribunal accepted that the dal mill had not been partitioned and allowed the deduction.

Income-tax Officer / Revenue's Position

The ITO recorded reasons indicating that because the partnership firm's case admitted that some assets had not been partitioned, the ITO treated the alleged partition as invalid in law (relying on the proposition that assets of a single business cannot be partitioned in part) and concluded that the business continued to belong to the HUF.
On that basis the ITO considered it necessary to reopen (reassess) the HUF's assessments from assessment year 1960-61 onwards and therefore issued a notice under section 148 after recording reasons and obtaining the Commissioner’s satisfaction.
In a counter-affidavit filed later, the ITO attempted to justify the validity of his action by asserting that the petitioner had misled the ITO by withholding the fact that certain assets (building and machinery) had not been partitioned and that the petitioner had conveyed the impression that all assets had been partitioned.

Petitioner (HUF)

The petitioner applied for certiorari and prohibition to quash the section 148 notice and restrain further assessment proceedings. The petition contended, as framed in the court's analysis, that the recorded reasons did not show any omission or failure by the petitioner to file a return or to disclose material facts for assessment within the meaning of clause (a) of section 147, and therefore could not sustain proceedings under that clause.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The Court's analysis proceeded through a statutory and textual examination of sections 147, 148 and related procedural provisions:

The Court emphasized the statutory structure: section 147 contemplates two distinct classes of cases for reopening assessments — clause (a) (where there has been an omission/failure by the assessee to make a return or to disclose fully and truly all material facts) and clause (b) (where the ITO, from information in his possession, has reason to believe income has escaped assessment despite no omission/failure of the assessee).
The Court stressed that before making any assessment or reassessment under section 147, the ITO must issue a notice under section 148, and sub-section (2) of section 148 expressly requires the ITO to record his reasons for issuing such a notice. The recording of reasons is mandatory and is a pre-requisite to the ITO's assumption of jurisdiction to initiate reassessment proceedings.
The Court explained that where action is taken under clause (a) of section 147 the recorded reasons are particularly important because they must disclose the basis on which the ITO believed that the assessee had omitted or failed to make a return or to disclose material facts. The ITO must be confined to the reasons he recorded; he cannot rely on reasons not recorded under sub-section (2) of section 148.
Turning to the facts, the Court examined the reasons the ITO recorded (as reproduced in the petitioner’s supplementary affidavit and as found on the ITO's file). Those reasons showed that the ITO's conclusion to reopen was founded on the partnership firm's contention (made in proceedings before the ITO and Tribunal) that certain assets had not been partitioned and therefore that the business continued to belong to the HUF. The recorded reasons did not state or show any omission or failure by the petitioner HUF to make a return or to disclose material facts for assessment year 1960-61.
The Court found it significant that the case relied upon in the recorded reasons concerned the partnership firm's position; the HUF (petitioner) had not been a party to those proceedings. The recorded reasons, therefore, did not convey that the ITO had any basis to invoke clause (a) of section 147 against the petitioner — there was no express or implied statement of omission or concealment by the petitioner in those recorded reasons.
The Court rejected the attempt in the ITO's counter-affidavit to supply an alternative basis for invoking clause (a) (namely, that the petitioner misled the ITO by concealing the non-partition of assets). The Court treated that contention as inconsistent with the recorded reasons and emphasized that the ITO must be confined to the reasons actually recorded when justifying action under clause (a).
On this basis the Court concluded that the proceedings commenced by the notice dated February 24, 1966 under section 148, insofar as they relied on clause (a) of section 147 as applied to the petitioner, were without jurisdiction and invalid.

Holding and Implications

Holding:

THE PETITION IS ALLOWED; THE NOTICE DATED FEBRUARY 24, 1966 ISSUED UNDER SECTION 148 OF THE INCOME-TAX ACT, 1961, AND THE PROCEEDINGS PURSUANT THERETO ARE QUASHED.

Implications and direct effects:

The section 148 notice dated February 24, 1966, issued to the petitioner HUF is quashed and the reassessment proceedings taken pursuant to that notice are declared invalid for want of jurisdiction.
The petitioner (HUF) is entitled to its costs as stated in the order.
The judgment rests on a statutory and procedural ground — namely, that the ITO must be confined to the reasons actually recorded under sub-section (2) of section 148 and that, on the recorded reasons, clause (a) of section 147 could not validly be invoked against the petitioner. The opinion does not purport to lay down a broader new principle of substantive tax law beyond this statutory-interpretive holding; its direct effect is limited to quashing the specific notice and proceedings before the Court.

Petition allowed.

Show all summary ...

1. The petitioner is a Hindu undivided family consisting of two members, Jumna Lal and Gopal Rai, Jumna Lal being the karta of the family. The petitioner owned a residential house and a dal mill at Kalibari. It carried on the business of manufacturing dal and also earned income from speculation and commission agency. On April 16, 1959, the last date of the Ram Naumi year, relevant to the assessment year 1959-60, it is said that a partial partition of the business carried on by the petitioner was effected, but the residential house property and the dal mill at Kalibari were left intact in the ownership of the petitioner. The business so far carried on by the petitioner was apparently taken over by a partnership firm, Messrs. Jumna Lal Gopal Rai. The income from the business for the previous year relevant to the assessment year 1960-61 was assessed in the hands of the partnership firm, which was granted registration under section 26A of the Indian Income-tax Act, 1922. Similar assessments were made on the partnership firm for the assessment years 1961-62 to 1964-65. For the assessment year 1964-65, however, the partnership firm claimed a deduction of Rs. 3,000 on account of rent paid by it to the petitioner for the hire of the dal mill, which had all along been employed by the partnership firm for the purpose of the business. The claim was disallowed by the Income-tax Officer. The petitioner appealed, but the appeal was dismissed by the Appellate Assistant Commissioner. The Appellate Assistant Commissioner took the view that as the assets of a single business could not be partitioned in part, it must be taken that all the assets of the business including the dal mill had been divided, and therefore the claim to deduction was not permissible. The petitioner then proceeded in appeal to the Income-tax Appellate Tribunal. The Appellate Tribunal allowed the appeal. It held that the dal mill, which it referred to as the Kalibari godown, had not been included in the partition and that the rent had been paid for its use by the partnership firm to the petitioner, and, therefore, the claim must be allowed. Thereafter, it seems that the Income-tax Officer applied to the Commissioner of Income-tax suggesting that the case may be carried in reference to this court or, in the alternative, proceedings under section 147 of the Income-tax Act, 1960, be initiated for the assessment year 1960-61. The Commissioner, it appears, did not approve the former course and instead expressed his satisfaction on the reasons recorded by the Income-tax Officer that it was a fit case for the issue of a notice under section 148. Accordingly, the Income-tax Officer issued a notice dated February 24, 1966, under section 148 to the petitioner stating that he had reason to believe that the petitioner's income chargeable to tax for the assessment year 1960-61 had escaped assessment, that he proposed to reassess the income for that assessment year, and he called upon the petitioner to furnish a return of its income assessable for that year. It was also stated that the notice was being issued after obtaining the satisfaction of the Commissioner. Thereafter, assessment proceedings pursuant to that notice were commenced by the Income-tax Officer. The petitioner applies for certiorari against the notice under section 148 and for prohibition against further assessment proceedings pursuant to that notice.

2. Section 147 of the Income-tax Act, 1961, contemplates two distinct classes of cases in which the Income-tax Officer may take proceedings to assess or reassess income chargeable to tax which has escaped assessment. One class of cases is that falling under clause (a) where the Income-tax Officer has reason to believe that by reason of the omission or failure on the part of an assessee to make a return for any assessment year to the Income-tax Officer or to disclose fully and truly all material facts necessary for assessment for that year, income chargeable to tax has escaped assessment for that year. The other class is contemplated by clause (b) where 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 chargeable to tax has escaped assessment for an assessment year. Before proceeding to make the assessment or reassessment under section 147, the Income-tax Officer is required by section 148 to serve a notice on the assessee. Sub-section (2) of section 148 obliges the Income-tax Officer before issuing any notice under the section to record his reasons for doing so.

3. Now no notice can be issued by the Income-tax Officer unless, as required by section 151, the Board is satisfied that it is a fit case for issue of such notice in a case where notice has to be issued after the expiry of eight years from the end of the relevant assessment year, and in a case where notice has to be issued after the expiry of four years from the end of the relevant assessment year, unless the Commissioner is satisfied that it is a fit case for issue of such notice. But whether it is the Board or the Commissioner, the satisfaction must proceed on the reasons recorded by the Income-tax Officer.

4. It is clear that the Income-tax Officer is bound to record the reasons for issuing a notice under section 148. The requirement is mandatory. Before the assessment can be had, the Income-tax Officer must issue a notice under section 148 and before that notice can be issued, he must record his reasons for doing so and must also upon those reasons obtain the satisfaction of the Board or the Commissioner. The recording of the reasons is, in my opinion, a pre-requisite to the assumption of jurisdiction by the Income-tax Officer for initiating the proceedings, for assessing or reassessing income which has escaped assessment. Those reasons are of particular significance when action is taken under clause (a) of section 147 because they indicate the reasons which the Income-tax Officer has in mind for believing that income has escaped assessment for an assessment year by reason of one or the other default of the assessee specified in that clause. Sub-section (2) of section 148 requires the Income-tax Officer to record his reasons for issuing a notice under that section and it is necessarily envisaged that he will record all the reasons he has in mind. This consideration acquires importance when the question is raised as to what were the reasons on the basis of which the Income-tax Officer invoked the jurisdiction conferred under clause (a) of section 147. To justify action by reference to clause (a) of section 147 it is not open to the Income-tax Officer, in my opinion, to refer to reasons other than those recorded by him pursuant to Sub-section (2) of section 148. If those reasons are such that on their basis it can possibly be said that income chargeable to tax his escaped assessment for a certain assessment year because of the omission or failure on the part of the assessee to make a return for that year or to disclose fully and truly ail material facts necessary for such assessment, there is a valid case for invoking the jurisdiction conferred by clause (a) of section 147. If, on the contrary, the reasons recorded by the Income-tax Officer cannot possibly lead to such conclusion, the proceedings initiated by the Income-tax Officer by reference to that clause must be struck down as invalid. In the instant case, the Income-tax Officer recorded his reasons. Those reasons are set out in the supplementary affidavit filed by the petitioner. How, and in what circumstances he succeeded in coming to know of the reasons is not a matter for consideration for the purposes of the case before me. What is relevant is the fact that they are the reasons recorded by the Income-tax Officer, and that not disputed by the Income-tax Officer. I have also perused the relevant file of the Income-tax Officer, and it does appear that the reasons set out in the supplementary affidavit are indeed the reasons recorded by the Income-tax Officer.

5. The Income-tax Officer said, in the reasons recorded by him, that it was the case of “the assessee” before the income-tax authorities and the Income-tax Appellate Tribunal that even though there was a partial partition of the Hindu undivided family business and its conversion into a partnership firm, the main assets of the business, namely, the building and the machinery, were not partitioned and they continued to belong to the Hindu undivided family. He pointed out that it was established law that there could be partial partition of a Hindu undivided family only if all the assets of that particular business had been partitioned. Proceeding, he observed that as admittedly all the assets of that particular business had not been partitioned, it followed that there was no actual or genuine partition of the Hindu undivided family business and that the business in fact continued to belong to the Hindu undivided family. Consequently, he considered it necessary to reopen the assessment of the Hindu undivided family for the assessment year 1960-61 onwards. Now it is pertinent to note that the assessee before the income-tax authorities and the Income-tax Appellate Tribunal, to whom reference was intended by the Income-tax Officer, was the partnership firm and not the Hindu undivided family. The claim to deduction on account of the rent paid in respect of the hire of the dal mill was made by the partnership firm and the successive appeals filed thereafter were preferred by that firm. The Hindu undivided family was not a party to those proceedings. Analysed, the reasons recorded by the Income-tax Officer amount to this, that inasmuch as the case of the partnership firm before the income-tax authorities and the Appellate Tribunal was that some of the assets of the business, namely, the building and the machinery, had not been partitioned but continued to belong to the Hindu undivided family and that as such a partial partition was not permissible in law, it must be inferred that there was no actual or genuine partition of the business which continued to belong to the Hindu undivided family. There is nothings here to suggest any default on the part of the petitioner. The entire basis is the case taken by the partnership firm in support of its claim in respect of the rent said to have been paid by it. On the basis of that case and in the light of the law as understood by the Income-tax Officer, he considered that the entire business was liable to be treated as belonging to the Hindu undivided family. If the Income-tax Officer had in mind any default on the part of the petitioner when he recorded the reasons, clearly it failed to find expression in those reasons. I am unable to find anything in those reasons which attracts the terms in which clause (a) of section 147 is set out so far as the petitioner is concerned. It is not stated that action under that provision is being taken against the petitioner because he did not file a return for the assessment year 1960-61 or that the petitioner did any thing justifying the conclusion that it omitted or failed to disclose fully and truly all the material facts necessary for its assessment for that year. An attempt has been made in the counter-affidavit filed by the Income-tax Officer to support the validity of his action by pointing out that the petitioner misled the Income-tax Officer by withholding the fact that the building and the machinery had not been partitioned and that the impression conveyed all along by the petitioner was that all the assets had been partitioned. That is a case completely inconsistent with the reasons recorded by the Income-tax Officer. It is one thing to say that the admitted case is that all the assets of the business were not partitioned and therefore in law there was no partition of the business, and quite another thing to say that the fact had been concealed that some of the business assets had not suffered partition. As I have pointed out above, the Income-tax Officer must be confined to the reasons given by him to support the validity of his action under clause (a) of section 147. In my judgment, the proceedings taken by the Income-tax Officer commencing with the notice dated February 24, 1966, under section 148 are without jurisdiction and invalid.

6. The petition is allowed. The notice dated February 24, 1966, issued under section 148 of the Income-tax Act, 1961, and the proceedings taken pursuant thereto are quashed. The petitioner is entitled to its costs.

7. Petition allowed.