1. These three connected writ petitions have been filed by the Hyderabad Allwyn Metal Works Ltd., and all of them can be conveniently disposed of by a single judgement as they raise common questions of fact and law. In these petitions, the petitioner-company challenges the legality of three notices dated 20-3-1959 issued to it by the Income-tax Officer, Special Investigation Circle (the 1st respondent herein), under section 34 of the Indian Income-tax Act in respect of the three assessment years 1950-51, 1951-52 and 1952-53, and seeks an appropriate writ, order or direction in each case prohibiting the Income-tax Officer from taking any action on the basis of the concerned notice.
2. The sum and substance of the contention on behalf of the petitioner is that the conditions precedent to the execrise of jurisdiction under section 34 of the Income-tax Act did not exist in the present cases, and consequently the Income-tax Officer had no jurisdiction to issue the three impugned notices the conditions precedent being: (1) that the Income-tax Officer must have reason to believe that income, profits or gains chargeable to income-tax have escaped assessment for the relevant year of have been under-assessed, and (2) that he must have also reason to believe that such a result has been brought about by the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that year. It was contended that in the present cases there was no material whatever upon which the Income-tax Officer could have entertained such reasonable belief. To decide the issue involved in these cases, it is necessary to set out in chronological order the facts leading upto the filing of these writ petitions.
3. The petitioner's assessment for the years 1950-51, 1951-52 and 1952-53 had been completed on 24-10-1950, 19-3-1952 and 30-3-1957 determaning a loss of Rs. 5,03,572/-, Rs. 4,51,625/-, and Rs. 7,54,617/- respectively. The loss for the assessment year 1950-51 was subsequently revised to Rs. 6,74,964, and for the year 1952-53 to Rs. 7,57,223/-. In the course of the assessment proceedings for the year 1954-55, the then Income-tax Officer, Special Investigation Circle. Mr. D.S Sarma, made a detailed investigation of the account books maintained by the petitioner. In the course of the examination of the accounts for the year 1954-55, the Income-tax Officer had occasion to ascertain the gross profit margins of similar concerns engaged in the maunfacture of steel furniture and he discovered that the gross profit returned by the petitioner was phenomenally low. It was also noticed that the cash-book maintained by the petitioner was defective in that on various dates withdrawals were much in excess of deposits for which there was no convincing explanation. Further the Income-tax Officer noticed numerous discrepancies between stock balances as per the stock ledger cards and actual balances as per physical verification. On several dates it was found that there were variations and shortgages for which there was no satisfactory explanation. These and various other defects came to light as a result of the meticulous scrutiny of the accounts pertaining to the assessment year 1954-55. These discrepancies and inaccuracies naturally gave the Income-tax Officer food for thought since the petitioner had shown huge losses in the previous years as well; and after investigation, he was ‘prima facie’ satisfied that by resorting to similar devices the petitioner had got away with under-assessments for the years 1950-51, 1951-52 and 1952-53. It is the case of the Department that the Income-tax Officer had in fact called for the cash-books of the three accounting years corresponding to the three assessment years 1950-51, 1951-52 and 1952-53 and on a scrutinity of those books, had found that the accounts had been looked up by manipulating cash, raw materials, closing-stocks and expenses, the petitioner-company had shown huge losses which had been accepted by the assessing authority and allowed to be carried forward It is the further case of the Department that on the data available to him, the Income-tax Officer had reason to believe that the petitioner's income for those three years had escaped assessment by reason of the failure on the part of the petitioner to furnish true particulars of its income and expenditure.
4. It may be mentioned here that the case of the petitioner is that the Income-tax Officer had not at all looked into the petitioner's account-books for the accounting years 1948-49, 1949-50 and 1959-51 because they had not been produced before him in the course of the assessment proceedings for the year 1954-55; and that the Income-tax Officer had acted on mere suspicion and conjecture in issuing the notices in question.
5. To proceed with the course of events, on 5-2-1959 the Income-tax Officer as required by the proviso to section 34 of the Act, made a report to the Commissioner setting out the reasons for his belief that there had been escapement of assesment for the three years and requesting the Commissioner to accord his sanction for the issue of notices under Section 34(1)(a) of the Act. The Commissioner, being apparently satisfied that they were fit cases for re-opening the assessments, gave the requisite sanction on 17-2-1959. Thereafter on 20-3-1959 the Income-tax Officer issued the three impugned notices under section 34(1)(a) of the Act in respect of the three assessment years 1950-51 1951-52 and 1952-53 calling upon the petitioner to submit fresh returns not later than 28-4-1959 of its total income assessable for the three accounting years relating to the said three assessment years, These notices were served on the petitioner on 21-3-1959.
6. On 24-4-1959 the petitioner wrote to tie Income-tax Officer re questing him to grant its time for filing the returns till the first week of June, 1959. The Income-tax Officer complied with this request Again on 29-5-1959, the petitioner sent another letter requesting for extension of time till the 20th of next month to submit the returns on the ground that its legal adviser Mr. M.J Swamy was out of station and its employee Mr. Gopalrao was also on leave. The Income-tax Officer acceded to the petitioner's request. Once again on 15-6-1959 the petitioner asked for time till the 15th July for filing the returns. Time was granted accordingly. By another letter dated 22-7-1959 a further extension of time was asked for till the 10th of August, on the ground that the returns were not ready. This request also was granted by the Income-tax Officer. Ultimately on 29-7-1959 the petitioner filed its returns for the three years with a covering letter requesting the Income-tax Officer to supply the petitioner with a copy of the grounds on which action under section 34(1)(a) of the Income-tax Act had been taken and complaining that the notices issued to it did not give the necessary particulars.
7. Subsequently notices under sections 23(2) and 22(4) of the Act were issued to the petitioner on 31-12-1959 fixing the date of hearing as 16-???-1960. There after the matter was adjourned from time to time and on 4-8-1960 Mr. V. Ramamurthy, Income-tax Officer, Special Investigation Circle, who had succeeded Mr. D.S Sarma, ag in issued no ice under section 22(4) and 23(2) of the Act fixing the enquiry for 17-8-1960. On that day, one Y.V Anjaneyulu of Messrs S.G Dastagir & Co. appeared before the Income-tax Officer with a letter from the petitioner company staling that the Chief Accounts Officer art the concerned accountant of the company were on sick-leave and were there fore unable to attend the office, and requesting the Income-tax Officer to adjourn the matter. The latter acceded to the request and posted the enquiry to 24-8-1960. On that date the Income-tax Officer had also fixed a program me of visit to the petitioner's factory as per the direction of the Appellate Asistant Commissioner in the course of appellate proceedings for the year 1954-55 wherein the company was contending that its factory should be class ed as a second class factory for purposes of depreciation whereas the assessing Officer had taken it as a first class factory. The enquiry itelf was to be taken up in the afternoon on that date after the Income tax Officer's visit to the facotry. The Income-tax Officer finished his visit to the factory by 2 P.M At 2 P.M the company's representative requested the Income-tax Officer to take up the enquiry on another day and further promised to telephone to him at 4 P.M with regard to the exact date to which the cases may be adjourned for enquiry. At that stage, the Chief Accounts Officer of the petioner's company informed the Income-tax Officer that they had already filed writ petitions in the High Court in respect of the assessment proceedings and obtained orders of ad interim injunction. At about 4 P.M the same day i.e 24-8-1960 the Chief Accounts Officer's office and filed a letter enclosing copies of the orders of temporary injunction passed by the High Court on 23-8-1960. It may be mentioned here that the writ petitions had been filed on 22-8-1960 and had come up for orders before this Court on 23-8-1960. Rules nisi had been issued on that day and orders of interim injunction passed. Yet the Income-tax Officer had been kept in the dark about all this.
8. It will be seen from the foregoing narration of facts that the writ petitions were filed in the High Court on 22-8-1960, that is to say, one year and five months after the impugned notices had been issued to the petitioner, and more than one year after the petitioner had filed its fresh returns for the three years in question in pursuace of those notices. Furthermore the petitioners had induced the Income-tax Officer to grant extensions of time for filing the returns and to adjourn the enquiry from time to time on one ground or another. The inordinate delay in filing these writ petitions coupled with the conduct of the petitioner, by itself desentitles it to invoke the extraordinary jurisdiction of this court under Article 226 of the Constitution. On this ground alone, the writ petitions deserve to be dismissed. I may add that, had I known all the above acts I would have dismissed these writ petitions in limine.
9. Even on the merits, there is little force in the contentions raised on behalf of the petitioner. The first contention was that the notices in question were according to the learned counsel, “blank notices” and did not give any indication of the action proposed to be taken by the Income-tax Officer. The notices issued in these cases were in printed form and it is true that none of the clauses contained therein was scored out. But the printed form does mention that it is a notice under section 34 of the Indian Income-tax Act. Section 34 does not precribe any standard form of notice; all that the section requires is that a notice containing all or any of the requirements which may be included ??? a notice under section 22(2) shall be served on the assessee. The notices in question contain all the contingencies contemplated by sub-section (1) of section 31. It is well settled that it is not necessary that a notice under this section ailing for a return, should specify the item or items of income which have escaped assessment or indicate whether it is issued under clause (a) or clause by of sub-section (1). In the present cases, the petitioner was fully aware of the true import of the notices and the petitioner did file the returns as required by the notices. In these circumstances it is idle for the petitioner to complain that it has been misled by the form of the notices.
10. The main contention on behalf of the petitioner was that in issuing the notices under section 3???, the Income-tax Officer could not have had reason to believe that there had been omission or failure by the petitioner to disclose fully and truely all material facts necessary for its assessment for the three years in question. It was argued that the Income tax Officer had not ???sued any summons for the production of the account-books relating to the relevant accounting years, nor bad the books been produced before him. It is asserted in the affidavit filed in support of these writ petitions by the Chief accounts Officer of the petitioner's company and in the “rejoinder-affidavit” filed by the Assistantant Secretary of the company that the account-books relating to the assessment years of 1950-51, 1951-52 and 1952-53 were never produced or scrutinised by the Income-tax Officer in the course of the assessment proceedings for the year 1954-55 But, having regard to the categorical statement contained in the counter-affidavit sworn to by the Income-tax Officer. Mr. V. Ramamurty, and in view of the intrinsic evidence furnished by the contemporaneous report sent on 5-2-1959 by Mr. D.S sarma, the then Income-tax Officer, to the Commissioner, seeking the latter's sanction for initiating proceedings under section 34, I am not prepared to attach any importance to the ipse dixit of the Chief Accounts Officer and the Assistant Secretary of the Company. In this connection, it is material to note that in the affidavit sworn to by the Chief Accounts Officer, this significant statement occurs.
“In the course of the assessment proceedings of the petitioner's Company for the assessment year 1954-1955 in 1959, the then Income-tax Officer wanted the petitioners to produce the factory cash books for the accounting years 1948-49 to 1950-51. The petitioners informed the said Officer that they could produce the same if sufficient time was granted as there was change of management therein and change of office premises from time to time and it would therefore take some time to trace the books. The said Officer without waiting for the production of the books and without inspection thereof issued three notices on 20-3-1959 under section 34 of the Income-tax Act for the purpose of reopening petioner's assessments for assessment years 1950-51, 1951-52 and 1252-53 respectively.”
11. It is thus clear that the Income-tax Officer did call for the account-books for the relevant three yeas, and I find it hard to believe that the Officer, without waiting for the production of the books, proceeded to issue notices under section 34 of the Act. That the Income-tax Officer had reason to believe that the petitioner had omitted or failed to disclose fully and truly all material particulars in the returns submitted by it for those three years, is amply borne out by the reasons recorded by the Officer in accordance with the satutory requirement. As pointed out already, those reasons were the embodied in the report submitted by the Income-tax Officer to the Commissioner on 5-2-1959 seeking the Commissioner's sanction. The report mentions that the cases fell under section 34(1)(a) of the Income-tax Act and the reasons recorded therein are as follows:—
While Scrutinising the books of accounts for 1954-55 to 1956-57, it was found that the books of accounts maintained by the Company were defective and that on several dates the cash outgoing as recorded in the cash cook exceeded the cash incomings. The cash books for the accounting years for the assessment years 1950-51 to 1953-54 were summoned and similar defects were found Further, it was also seen on verification that there were shortgages of raw material such as M.S Sheets. The valuation of closing stock of manufactured and semi-manufactured articles were found to have been deliberately under-valued Inflation of the expenses such as wages of temporary labour was also noticed. The gross profit disclosed by the Company was also lower than that disclosed by similar concerns. Thus, by manipulating cash, raw materials, closing stock and expenses, the Company got away with huge losses which were determined and allowed to be carried forward. In view of the defects pointed out above, the book results have to be rejected and gross profit has to be estimated which would result in the wiping of losses. Since there is prima facie evidence to show that the assesee furnished inaccurate particulars and thereby got the benefit of huge losses which were bogus, it is requested that I may be permitted to reopen the assessment for the assessment years 1950-51, 1951-52 and 1952-53 under section 34(1)(a) of the Act.”
12. It is also worthy of note that the Commissioner, on consideration of the report, was satisfied that these were fit cases for the issue of notices under section 34.
13. In view of the above circumstances, I have no hasitation in holding that the Income-tax Officer did have some relevant material before him upon which he could entertain a reasonable belief as regards the nondisclosure of material facts to the detriment of the revenue as envisaged by section 24 of the Income-tax Act. The question of the sufficiency or otherwise of the material upon which the belief was founded, is outside the purview of this Court in these proceedings.
14. In a recent case Civil Appeal No. 197 of 1954 the Supreme Court had to consider the scope and effect of section 34 of the Indian Income-tax Act. Explaining the precise scope of the disclosure which the section demands of an assessee Das Gupta, J., speaking for the majority, observed as follows:—
“The words used are ‘omission of failure to disclose fully and truely all material facts necessary for his assessment for that year’. It postulates a duty on every assessee to disclose fully and truely all material facts necessary for his assessment. What facts are material, and necessary for assessment will differ from case to case. In every assessment proceeding, the assessing authority will for the purpose of computing or determining the proper tax due from an assessee, require to know all the facts which help him in coming to the correct conclusion. From the primary facts in his possession, whether on disclosue the assesses, or discovered by him on the basis of the facts disclosed, or otherwise, the assessing authority has to draw inferences as regards certain other facts; and ultimately from the primary facts and the further facts inferred from them the authority has to draw the proper legal inferences, and ascertain on a correct interpretation of the taxing enactment, the proper tax leviable………
“There can be no doubt that the duty of disclosing all the primary facts relevant to the decision of the question before the assessing authority lies on the assessee. To meet a possible contention that when some account books or other evidence has been produced, there is no duty on the assessee to disclose further facts, which on due diligence, the Income-tax Officer might have discovered, the legislature has put in the Explanation…….in view of the Explanation, it will not be open to the assessse to say for example. “I have produced the account-books and the documents: You, the assessing officer examine them, and find out the facts necessary for you purpose. My duty is done with disclosing these account books and the documents.” His omission to bring to the assessing authority's attention those particular items in the account-books, or the particular portions of the documents which are relevant, will amount to “omission to disclose fully and truly all material facts necessary for his assessment”. Nor will he be able to contend successfuly that by disclosing certain evidence, he should be deemed to have disclosed other evidence, which might have been discovered by the assessing authority, if he had pursued investigation the basis of what has been disclosed. The explanation to the section gives a quietus to all such contentions; and the position remains that so far as primary facts are concerned, it is the assessee's duty to diclose all of them including particular entries in account-books, particular portions of documment and documents, and other evidence, which could have been discovered by the assessing authority, from the documents and other evidence disclosed.
“Dose the duty however extend beyond the full and truthful disclosure of at primary facts? In our opinion, the answer to this question must be in the nagative Once all the primary facts are before the assessing authority, he requires no further assistance by way of disclosure. It is for him to decide what inferences of facts can be reasonably drawn and what legal inferences have ultimately to be drawn………………………………………………………………………………………………………………………………………………..
“We have therefore come to the conclusion that while the duty of the assessee is to disclose fully and truly all primary relevant facts, it does not extend beyond this.
“The position therefore is that if there were in fact some reasonable grounds for thinking that there had been any non-disclosure as regards any primary fact, which could have a material bearing on the question of “under-assessment” that would be sufficient to give jurisdiction to the Income-tax Officer to issue notice under S. 34, Whether these grounds were adequate or not for arriving at the conclusion that there was a non-disclosure of material facts, would not be open for the court's investigation. In other words, all that is necessary to give this special jurisdiction is that the Income-tax Officer had when he assumed jurisdiction some prima facie grounds for thinking that there had been some non-disclosure of material facts.
“Cleanly it is the duty of the assessee who wants the court to hold that jurisdiction was lacking, to establish that the Income-tax Officer had no material at all before him for believing that there had been such non-disclosure.”
15. Applying the above tests to the present cases, it must be held that the petitioner has not succeeded in establishing that there was no material at all before the Income-tax Officer for believing that there had been non-disclosure of primary facts, and it follows as a necessary corollary that the Income-tax Officer was acting within his jurisdiction issuing the impugned notices. In this connection, a judgment of the Judicial Committee of the privy Council in Commissioner of Income-Tax, Bengal v. Mahaliram Ramjidas . 1940 8 I.L.R 442. may also be usefully referred to Their Lordships, in construing section 34 of the Indian Income-tax Act, said this at page 443—
“The section, although it is part of a taxing Act, imposes no charge on the subject, and deals merely with the machinery of assessment. In interpreting provisions of this kind the rule is that that construction should be preferred which makes the machinery workable, ut res valeat potius quam pereat. In the present instance two considerations are in their Lordships' opinion decisive. First, no powers are imposed by the section on the Income-tax Officer to convene the assessee, or to issue notices calling upon him to produce documents, thogh these powers are essential if the Income tax Officer is to conduct a quasi judicial enquiry before deciding that profits have escaped assessment or have been assessed at too low a rate.”
16. Their Lordships, after referring to the observations of Lush, J. in Rex v. Kensington Income-tax Commissioners proceeded to observe at page 449 as follows:—
“Their Lordships are of opinion, in accordance with that reasoning, that it cannot be a condition precedent to the operation of section 34 that the Income-tax Officer should hold a quasi-judicial enquiry, because the powers necessary for such an enquiry are not conferred upon him. But there is a second consideration which is no less conclusive. The operative part of section 3-1 empowers the Income-tax Officer to proceed do novo under sub section (2) of section 22, and that in turn leads, if there should still be a question of the accuracy of the return, to an enquiry under section 23(2) and (3) and in that enquiry the assessee has a statutory right to appear and to produce evidence. Therefore a construction of section 34 which requires a quasi-judical enquiry no be held before the powers under the section can be operated, would result in mere duplication of procedure and in two enquiries of the same kind, into the same matter, conducted by the same official, and without any advantage to the parties. A construction so unreasonable and unpractical ought not to be preferred when another construction is open. Accordingly their Lordships are of opinion that the Income-tax Officer is not required by the section to convene: the assessee, or to intimate to him the nature of the alleged escapement, or to give him an opportunity of being heard, be fore he decides to operate the powers conferred by the section….
“……….Their Lordships think that the proper answer to be given is that to enable the Income-tax Officer to initiate proceedings under section 34 it is enough that the Income-tax Officer on the information which he has before him and in good faith considers that he has good ground for believing that the assesse's profits have for some reason escaped assessment or have been assessed at too low a rate.”
17. In view of the principles enunciated in the above decisions, the petitioner cannot legitimately complain that the notices issued to it under section 34 of the Income-tax Act are tainted by any illegality.
18. In the result, all the three writ petitions arc dismissed: W.P No. 574/60 with costs-Advocate's fee of Rs. 250/- and W.Ps: 575 and 576 without costs.
19. Writ petitions dismissed.