Kantawala, C.J:— The question involved in this petition is whether the Income-tax Officer (the respondent) had jurisdiction to initiate proceedings for reopening the assessment of the petitioner for the assessment year 1950–51, under section 147(a) of the Income-tax Act, 1961 (hereinafter referred as “the Act”), and whether such initiation of proceedings is justified having regard to the conditions precedent to be fulfilled before the provisions of the said section can be attracted.
2. The petitioner was an employee of the Dalmia Cement and Paper Marketing Co. Ltd. (hereinafter referred to as “the company”). It was his case before the authority who assessed him for income-tax for the assessment year 1950–51, that by a letter, dated October 11, 1943, he was appointed to look after the Bombay office organisation of the company at a remuneration of Rs. 4,000 per month, free of tax and with other benefits and perquisites as therein provided. It was one of the terms of the agreement as per the document filed before the taxing authority that the employment was for a definite period of 25 years commencing from April 1, 1943. The agreement also contained a provision as to what was to happen in case of premature termination of his employment. The case of the petitioner was that should the services of the petitioner be terminated before the expiry of 25 years the petitioner would be entitled to compensation calculated at the rate of Rs. 48,000 for each unexpired year of the duration of his employment. According to the petitioner his employment was terminated with effect from November 30, 1949. As a result of a mutual agreement, notwithstanding the fact that the compensation payable to him pursuant to the agreement came to a larger figure, the petitioner was to be paid Rs. 7 lakhs as compensation for the cessation of his employment. When the petitioner was being assessed for the assessment year 1950–51, the question whether the sum of Rs. 7 lakhs received by him was to be regarded as income and subjected to tax, was gone into. The Income-tax Officer took the view that the payment of the amount of Rs. 7 lakhs was not compensation for loss of employment but the said amount was paid to him in view of the past meritorious services rendered by him to the company. In an appeal by the assessee the Appellate Assistant Commissioner reversed the finding of the Income-tax Officer. In his order he, inter alia, observed that the services of the petitioner were terminated seven years after the agreement, in other words, nearly 18 years before the term provided for and instead of paying him Rs. 8,64,000 calculated at the rate of Rs. 48,000 per year, the company made a lump sum payment of Rs. 7 lakhs. This amount, in the opinion of the Appellate Assistant Commissioner, was received by the petitioner as substitution of the source of income and not as substitution of the income. He took the view that as the amount was received solely as compensation for loss of employment it was not liable to tax as income in the hands of the assessee. In an appeal by the revenue the finding of the Appellate Assistant Commissioner was confirmed by the Tribunal. The Tribunal, inter alia, observed that on the evidence on record the amount of Rs. 7 lakhs received by the assessee was not a payment made for past services. It was a receipt of a capital nature and was not assessable to tax. Both the Accountant Member and the Judicial Member of the Tribunal in their separate orders practically came to the same conclusion. An application by the revenue to the Tribunal to refer the case to the High Court was dismissed and a further application to the High Court for directing the Tribunal to refer the case to it for disposal was also dismissed. Thereupon, the revenue preferred a petition for special leave to appeal to the Supreme Court both against the order of the Tribunal as well as against the order of the High Court. The Supreme Court granted special leave to appeal against the order of the High Court and against the appellate order of the Tribunal subject to the condition that in the appeal against the order of the Tribunal no question of fact shall be allowed to be raised. While disposing of this petition for leave to appeal to the Supreme Court, the court directed the Tribunal to refer the following question to the High Court for determination, namely:
“Whether, on the facts and in the circumstances of the case, the sum of Rs. 7 lakhs is liable to tax under section 7 of the Indian Income-tax Act?”
3. The income-tax reference was heard by the High Court and decided in favour of the assessee. The judgment of the High Court is reported in [1965] 56 I.T.R 7241. Against the order of the High Court answering the question referred to above an application for leave to appeal to the Supreme Court was presented to the High Court, but later on it was withdrawn. On December 23, 1965, the petitioner was served with a letter of the same date by the respondent, inter alia, informing him that information has come to his possession that the basis on which the decision was taken treating the sum of Rs. 7 lakhs as capital receipt was incorrect and that in the light of the information that has come to his possession thereafter, which has been considered by him, he has come to the conclusion that there has been under-assessment for the assessment year 1950–51, as a result of which he contemplated action under section 147(a) of the Act after obtaining approval from the Central Board of Direct Taxes. By this letter the attention of the petitioner was invited to the finding of the Vivian Bose Enquiry Commission that the letter appointing the petitioner on which reliance was placed by him before the taxing authority was fraudulent and antedated. He pointed out in this letter that the validity of the proceedings under section 147(a) of the Act was justified because of the fact that at the time of giving the decision the Appellate Assistant Commissioner accepted the genuineness of the agreement as being beyond doubt. The fresh facts which had come to his notice thereafter changed the complex of the case completely. He, therefore, intended to start proceedings under section 147(a) for the assessment year 1950–51, mainly with the intention to add the sum of Rs. 7 lakhs in the total income of the assessee for that assessment year. By this letter an opportunity was given to the petitioner to show cause why such proceedings should not be initiated. By his letter dated December 30, 1965, the petitioner sent his reply giving reasons why he objected to such initiation of the proceedings.
4. Apart from the sum of Rs. 7 lakhs above referred to there is another item of Rs. 2 lakhs and interest thereon amounting to Rs. 15,238 which has been referred to in the petition. On January 17, 1966, the respondent wrote to the petitioner enquiring whether he has shown the said sum of Rs. 2 lakhs and the interest thereon amounting to Rs. 15,238 as part of his income in the assessment year 1950–51. That letter was replied to by the petitioner on January 25, 1966, and the attention of the Income-tax Officer was also drawn to an earlier letter dated November 20, 1964, addressed to him by the chartered accountants of the petitioner in relation to the said sum of Rs. 2 lakhs. It was thereafter that on March 26, 1966, a notice was issued under section 148 of the Act informing the petitioner as under:
“Whereas I have reason to believe that your income chargeable to tax for the assessment year 1950–51 has escaped assessment within the meaning of section 147 of the Income-tax Act, 1961;
I, therefore, propose to reassess the income for the said assessment year and I hereby require you to deliver to me within 30 days from the date of service of this notice, a return in the prescribed form of your income assessable for the said assessment year;
This notice is being issued after obtaining the necessary satisfaction of the Central Board of Revenue.”
5. This notice has been signed by the respondent as Income-tax Officer. A couple of days after the above notice was issued, on March 26, 1966, the respondent wrote another letter to the petitioner informing him that after obtaining the approval from the Central Board of Direct Taxes, proceedings under section 147(a) have been started. The main reasons for starting these reassessment proceedings are the receipt of Rs. 7 lakhs from the company and the loan given to V.G Pettie and the interest thereon. The petitioner was requested to file the return within the prescribed period of 35 days from the date of service of the notice. On April 5, 1966, the petitioner sent his reply to the respondent calling upon him to withdraw the notice and informing him that in case his request was rejected, he would adopt appropriate proceedings to restrain him from taking further action. It was thereafter that on April 11, 1966, the petition was filed in this court under article 226 of the Constitution contending that the notice issued by the respondent and the action of the respondent in proposing to bring to tax the said amount of Rs. 7 lakhs and the said loan of Rs. 2 lakhs and the interest thereon are void, illegal, without or in excess or improper exercise of jurisdiction, competence and authority and vitiated by errors apparent on the face of the record upon the grounds set out in the petition. By this petition the petitioner prayed for quashing and setting aside the said notice dated March 26, 1966, and for issuing of a writ of prohibition or mandamus so that further proceedings pursuant to the said notice for reassessment should not be taken.
6. The petition is resisted by the respondent. He has filed an affidavit in support of his contentions. In this affidavit he has contended that the letter of appointment dated October 11, 1943, was forged and antedated as found by the Vivian Bose Commission; that it is evident from the assessment order passed by the Income-tax Officer that he did not at all apply his mind to the question of genuineness of the said letter of appointment; that the question whether the said document was genuine was not gone into by the Appellate Assistant Commissioner. For reopening the assessment in relation to the said sum of Rs. 7 lakhs the case of the respondent is that the previous decision in respect of the said sum was based on premises that the said letter of appointment was genuine which premises have now been found to be incorrect. It has been now found by the Vivian Bose Commission that the letter of appointment dated October 11, 1943, is forged and antedated. The respondent has also denied the allegation of the petitioner objecting to the inclusion of the sum of Rs. 2 lakhs and interest in the total income for the relevant assessment year.
7. Three contentions are urged by Mr. Kolah in support of the petition. Firstly, he contended that every primary fact required to be disclosed by the assessee was brought to the notice of the Income-tax Officer at the time of the original assessment; that even the original letter of appointment dated October 11, 1943, and the letter terminating the services dated February 14, 1950, were filed before the Income-tax Officer; that these facts are recorded both by the Income-tax Officer and the Appellate Assistant Commissioner in their respective orders; that the genuineness of the agreement was gone into by the Income-tax Officer and the Appellate Assistant Commissioner and also by the Tribunal and their ultimate finding is based upon a conclusion that the original letter of appointment was a genuine one. His submission was that it is the duty of the assessee to put all primary facts before the Income-tax Officers and it is for the officers to draw their conclusions and inferences. Upon disclosure of all the primary facts both the Appellate Assistant Commissioner and the Tribunal have taken the view that the payment of Rs. 7 lakhs was compensation for premature termination of services and the finding of the Income-tax Officer that it was with a view to rewarding the past meritorious services was not accepted. The submission in short was that as this question in relation to the sum of Rs. 7 lakhs being regarded as part of income or as capital receipt was finally gone into by the taxing authorities at the time of the original assessment, it was not permissible to the Income-tax Officer to initiate the reassessment proceedings. Secondly, he submitted that there is no material produced by the respondent to show that he formed a reasonable belief that the sum of Rs. 7 lakhs in respect of which he initiated the reassessment proceedings was a part of the income of the assessee and, lastly, he submitted that if regard be had to the notices given from time to time by the Income-tax Officer by reopening the assessment, it is quite apparent and clear that action can only be taken under section 147(b) of the Act and that no case is made out for initiation of proceedings under section 147(a) thereof. In that view of the matter his submission was that such an action was clearly barred by limitation, because an action under section 147(b) cannot be initiated after a lapse of four years from the end of the assessment year concerned.
8. It is the case of the respondent that proceedings for reassessment of the petitioner for the assessment year 1950–51 are legally initiated under the provisions of section 147(a) of the Act. Having regard to the language of that section it is quite clear that two distinct conditions precedent are required to be fulfilled before the Income-tax Officer can exercise jurisdiction under clause (a) of section 147 : (1) he must have reason to believe that by reason of the omission or failure on the part of the assessee to make a return or to disclose fully and truly all material facts necessary for his assessment for the relevant year there is escapement of income; and (2) he must have reason to believe that income has escaped assessment.
9. The principles which govern a case for proper initiation of reassessment proceedings are now well-settled in view of the decision of the Supreme Court in Calcutta Discount Co. Ltd. v. Income-tax Officer, Companies District I, Calcutta. The ratio of this decision has almost become locus classicus. It is the duty of an assessee to disclose all the primary facts which have a bearing on the question. The law does not require the assessee to state the conclusion that can reasonably be drawn from the primary facts. It is for the assessing authority to draw an inference from the material facts taken in conjunction with the surrounding circumstances. That was a case under section 34 of the Indian Income-tax Act, 1922, and the Supreme Court laid down that to confer jurisdiction under section 34 to issue notice in respect of assessments beyond the period of four years but within a period of eight years from the end of the relevant year two conditions had to be satisfied. The first was that the Income-tax Officer must have reason to believe that income, profits or gains chargeable to income-tax have been under-assessed. The second was that he must have also reason to believe that such under-assessment has occurred by reason of either: (i) omission or failure on the part of an assessee to make a return of his income under section 22; or (ii) omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment for that year. Both these conditions were conditions precedent to be satisfied before the Income-tax Officer could have jurisdiction to issue a notice for the assessment or reassessment beyond the period of four years, but within the period of eight years, from the end of the year in question. The words “omission or failure to disclose fully and truly all material facts necessary for the assessment for that year” used in section 34 postulated a duty on every assessee to disclose fully and truly all material facts necessary for his assesement. What facts were material and necessary for assessment differed from case to case. In every assessment proceeding, the assessing authority would, 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 disclosure by the assessee, 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. So far as the primary facts are concerned, it is the assessee's duty to disclose all of them. The duty, however, does not extend beyond the full and truthful disclosure of all primary facts. Once all the primary facts are before the assessing authority, it is for him to decide what inferences of facts could be reasonably drawn and what legal inferences have ultimately to be drawn. It is not for somebody else—far less the assessee—to tell the assessing authority what inferences, whether of facts or law, should be drawn. If there were in fact some reasonable grounds for the Income-tax Officer to believe 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 the notices under section 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 assessed some prima facie grounds for thinking that there had been some nondisclosure of material facts. 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. The question whether the Income-tax Officer has reason to believe that under-assessment has occurred by reason of non-disclosure of material facts is a question of jurisdiction which can be investigated by the High Court in an application under article 226 of the Constitution.
10. This principle laid down in the Calcutta Discount Co.'s case has been uniformly followed in all the later decisions. After accepting the ratio of this decision in S. Narayanappa v. Commissioner of Income-tax, the Supreme Court points out that the expression “reason to believe” in section 34 does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The belief must be held in good faith; it cannot be merely a pretence. It is open to the court to examine whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section. To this limited extent, the action of the Income-tax Officer in starting proceedings under section 34 of the Act is open to challenge in a court of law. It is also pointed out in this case that there is no requirement in any of the provisions of the Act or any section laying down as a condition for the initiation of the proceedings that the reasons which induced the Commissioner to accord sanction to proceed under section 34 must also be communicated to the assessee.
11. In proceedings under article 226 of the Constitution challenging the jurisdiction of the Income-tax Officer to issue a notice under section 34(1)(a) the High Court is only concerned to decide whether the condition which invested the Income-tax Officer with power to reopen the assessment did exist: it is not within the province of the High Court to record a final decision about the failure to disclose fully and truly all material facts bearing on the assessment and consequent escapement of income from assessment and tax. See Kantamani Venkata Narayana & Sons v. First Additional Income-tax Officer, Rajahmundry [1967] 63 I.T.R 638.
12. At the outset it may be pointed out that initiation of proceedings for reassessment for inclusion of a sum of Rs. 2 lakhs and interest thereon amounting to Rs. 15,000 and odd will not be justified in any view of the matter. The proceedings are for reopening of the assessment for the assessment year 1950–51, for which the relevant accounting year is from April 1, 1949, to March 31, 1950. Prior to the commencement of the accounting period in March, 1949, the assessee had filed a suit against V.G Pettie to recover the amount in which ultimately a decree was passed, but nothing was realised by the assessee. The case of the assessee is that this is a benami transaction under which with a view to oblige his friend in his name he lent money which really belonged to one Bellaram Chopra of Bellaram Chopra and Sons, Lahore. It is unnecessary to go into the correctness of this explanation because per se it is sufficient that in no view of the matter either the sum of Rs. 2 lakhs or the interest thereon in respect of which a suit was filed in March, 1949, can be regarded as income arising or accruing during the relevant accounting year. It may also be incidentally mentioned that in the report submitted by the Income-tax Officer for obtaining the sanction of the Central Board of Direct Taxes neither the sum of Rs. 2 lakhs nor the interest thereon has been referred to and this circumstance is not relied upon by the Income-tax Officer for obtaining the permission or sanction. In this view of the matter, the part of the notice (sic), dated 28, 1966, giving reasons for reopening the assessment for the assessment year 1950–51 in so far as it relates to the sum of Rs. 2 lakhs and the interest thereon has to be quashed.
13. The question then arises whether the conditions precedent laid down by section 147(a) of the Act are fulfilled in relation to the sum of Rs. 7 lakhs which is proposed to be included in the income of the assessee for the assessment year 1950–51. At the outset it should be said that during the entire course of the original assessment proceedings, the receipt of the sum of Rs. 7 lakhs by the assessee during the relevant accounting period was disclosed to the assessing authority and whether it was liable to tax or not was considered by all the authorities in their respective orders. There is some controversy between the parties whether the original letter of appointment dated October 11, 1943, was filed before the Income-tax Officer or a mere copy thereof was filed, but one thing is clear that in the document that was produced before the Income-tax Officer there was a term in the letter as regards the period of the service and as to what was to happen in case of premature termination of services before the expiry of the scheduled period. The document that was filed showed that the period of service was fixed at 25 years and it further provided that in case the services were to be terminated before the expiry of the scheduled period, provision was made for payment of a further sum at the rate of Rs. 48,000 for each unexpired year of the duration of employment. The petitioner's services were terminated with effect from November 30, 1949, and during the relevant accounting period he received from the company a sum of Rs. 7 lakhs. In the order of the Income-tax Officer dated March 30, 1955, for the assessment year 1950–51, there is nothing to indicate that he doubted the genuineness of the document that was produced before him. The entire discussion proceeds on the footing that the document produced disclosed fully and truly all the terms of employment and the question for consideration was whether the amount that was paid to him was compensation for premature termination of the employment or it was in view of the past meritorious services rendered by the assessee to the company. The Income-tax Officer took the view that some of the terms in the letter of appointment were rather unusual; that by reason of the services of the petitioner, the Dalmia group of companies, wherein he served, earned lots of profits and this was the occasion to remunerate him suitably to reward him for the best efforts that he put in. He accordingly took the view that in view of the past meritorious service of the petitioner the company suitably rewarded him by a further payment of Rs. 7 lakhs and he accordingly brought the said sum to tax. In an appeal by the assessee, the finding of the Income-tax Officer was reversed by the Appellate Assistant Commissioner. He has observed in his order that the genuineness of the letter of appointment is not disputed and, therefore, he proceeded on the footing that the genuineness of the agreement as well as its legality were beyond doubt. He also considered the provisions of section 7 of the Indian Income-tax Act, 1922, read with Explanation 2 thereto as they were then existing. In the order he has pointed out that the services of the petitioner were terminated by the company before the expiry of the full term of 25 years. By unilateral and premature termination of employment the assessee's rights were abrogated and he lost his source of employment. In that view of the matter, he took the view that if the services have in fact been terminated, the payment would certainly be compensation for loss of service. Once the amount is paid as compensation for loss of service nothing turns on the question whether the company made the payment without there being any dispute between the company and the petitioner or without the petitioner initiating any litigation to enforce the payment. The Appellate Assistant Commissioner ultimately took the view that the petitioner received the sum of Rs. 7 lakhs as substitution of the source of income and not as substitution of the income and he accordingly held that the said sum of Rs. 7 lakhs was received by the petitioner solely as compensation for loss of employment and tax was not attracted thereon. In an appeal by the revenue before the Income-tax Appellate Tribunal, the revenue wanted to challenge the genuineness of the letter which was said to be the basis of the arrangement between the assessee and the company. It was sought to be argued on behalf of the revenue that the letter or the copy which was produced on record was brought into existence at a later date. However, the Tribunal did not permit the revenue to go into this question as its genuineness was at no stage challenged before the Income-tax Officer. It is pointed out that if the genuineness of the letter of appointment was questioned it was the duty of the Income-tax Officer to summon the assessee and examine him and as that was not done for the first time in appeal before the Tribunal the revenue was not permitted to challenge the genuineness of the document. The Tribunal observed that there was no material on record to justify a finding that the payment of Rs. 7 lakhs correlated to the past services rendered by the assessee. In fact the assessee was receiving a substantial remuneration in respect of his employment in the past and such remuneration was assessed to tax. The Tribunal took the view that the amount of Rs. 7 lakhs was received by the assessee not as a payment for past services but it was a receipt of a capital nature and was not assessable to tax. When the matter ultimately came before the Supreme Court in a petition for special leave to appeal, leave to appeal had been granted by the Supreme Court specially on the condition that in the appeal against the order of the Tribunal no questions of fact shall be allowed to be raised. It was on that footing thereafter that the High Court disposed of the reference and the judgment of the High Court is reported in [1965] 56 I.T.R 724. The High Court has taken the view that the sum of Rs. 7 lakhs was not liable to tax under section 7 of the Indian Income-tax Act.
14. The proceedings for reassessment are sought to be initiated on the ground that the petitioner omitted or failed to disclose fully and truly all material facts necessary for his assessment for the relevant year in respect of the said sum of Rs. 7 lakhs. This belief has been arrived at by the Income-tax Officer as a result of the findings of the Commission appointed under the Commission of Inquiry Act which was presided over by Mr. Justice Vivian Bose, a judge of the Supreme Court. It is as a result of the findings arrived at by the Commission in its report that the Income-tax Officer entertained a reasonable belief that the document or the copy which was produced at the time of the original assessment was not a genuine document; that in fact it was forged and antedated and he relied upon the findings of the Commission which are contained in Chapter X of the report which related to the sum of Rs. 7 lakhs. As held in S. Narayanappa's case, the expression “reason to believe” does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The belief must be held in good faith; it cannot be merely a pretence. It is always open to the court to examine the question whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section. In the notice dated December 23, 1965, which was given to the petitioner for initiation of proceedings under section 147(a) of the Act an express reference had been made to the findings arrived at by the Vivian Bose Enquiry Commission in relation to the letter of appointment and the payment of the sum of Rs. 7 lakhs to the petitioner. Even in the report submitted by the Income-tax Officer for obtaining the sanction of the Central Board of Direct Taxes there is an express reference to the findings of this Commission in relation to the letter of appointment and the payment of the sum of Rs. 7 lakhs to the petitioner.
15. The Commission of Inquiry was appointed by the Central Government under notification S.R.O No. 2993 of the Ministry of Finance (Department of Economic Affairs) on December 11, 1956, under the Commission of Inquiry act (no. ix of 1952) to inquire into and report on the administration of nine companies, the nature and extent of the control, direct and indirect, exercised over such companies and firms or any of them by…… Shriyans Prasad Jain (i.e, the petitioner), their relatives, employees and persons concerned with them and other matters mentioned in clause 1 of the notification. This Commission was presided by Mr. Justice Vivian Bose, a judge of the Supreme Court. Chapter X (at pages 553 to 566) of the report relates to payment of Rs. 7 lakhs compensation to the petitioner. As shown by the findings in this Chapter the Commission has found that fraud was committed in paying the sum of Rs. 7 lakhs as compensation to the petitioner who was the elder brother of Shanti Prasad Jain for the premature termination of his services by the company. The objects in making the payment were, (a) to benefit the petitioner, and (b) to act as a colourable device to evade income-tax on the Rs. 7 lakhs in the hands of the petitioner. The payment in the opinion of the Commission was fraudulent because,—
(1) the appointment of the petitioner was not approved by the board of directors of the company although he was said to have been appointed for a definite term of 25 years commencing from April 1, 1943, at a salary of Rs. 4,000 a month free of income-tax and was to be paid compensation at the rate of Rs. 4,000 a month for every month of the unexpired term of his engagement in the event of a breach;
(2) the letter of appointment that purports to be dated October 11, 1943, and which purports to contain the terms and conditions of the appointment was antedated;
(3) the fact that the impugned letter bears no serial number;
(4) no formal agreement was executed by the company in favour of the petitioner;
(5) the fact that the letter of appointment dated October 11, 1943, and that of the letter of termination, dated February 7, 1950, although seen by the inspector and initialled by him for identification, were destroyed and its duplicates which were sent to the petitioner have not been produced;
(6) the fact that these two letters were destroyed in the face of definite instructions not to destroy them.
16. The Commission found that the payment was also in disregard of honest commercial practice. The Commission has considered the evidence that was produced before it including that of the petitioner and has observed that “the explanation of the petitioner for not filing the original letter is unsatisfactory and is rejected. There is no proof of loss of the original. The income-tax consultant, Shri Srinivasan, has not been examined as a witness by the petitioner. This failure to produce the original which should be in the possession of either the petitioner or his income-tax consultant lends support to the conclusion that the letter, if produced, would have gone against him”. It was contended before the Commission that the question as to the genuineness of the document should not be gone into by it as the matter was sub judice. While dealing with this contention the Commission points out:
“What we are considering is the genuineness of this document. What is before the courts is the consequences that will flow from the document for income-tax purposes on the assumption that it is genuine. In the income-tax tribunals' proceedings the question of its genuineness is final, and cannot be reopened there. Actually there was no decision about this on the merits. Because of a slip at the original stage the question of its genuineness was shut out at the later stages. But, so far as we are concerned, it would not have mattered whether the matter was considered and finally decided on the merits or not. Even if there was a final decision on the merits it would be final only for the purposes of those tribunals and would not bind other tribunals or this Commission in investigating the matter afresh for another purpose.”
17. The Commission further pointed out that the question before the income-tax authorities was whether the receipt of Rs. 7 lakhs was taxable or not in the hands of the petitioner. The Commission was not, however, looking into this question, viz., taxability or otherwise of the payment of Rs. 7 lakhs. What it was concerned with was the propriety of the transaction itself. The Commission further pointed out:
“It is of course legitimate to enter into a bona fide transaction in the ordinary course of business or the conduct of one's personal affairs; even that has the effect of diminishing one's liability to tax. It is legitimate to do this even when the object is to avoid payment of a higher tax. But the transaction must be genuine and not spurious. It is not permissible to create a situation artificially which is not a normal and sound business practice, just to avoid tax. It is not permissible to introduce spurious terms into a contract which were not there at the outset. Of course, the terms of a contract can be altered by mutual consent. But in the case of a limited liability company that can only be done by a decision of the board of directors in a contract of this nature. It cannot be done by antedating a letter that purports to be the original letter of appointment in order to make it appear that the terms were there from the start. It is not permissible to introduce fresh terms with a breach of the contract in view in order to reduce the incidence of tax. All that is fraud.”
18. The Commission further pointed out:
“What we are questioning here are the terms about the period of employment and the provision about the payment of compensation for the breach that finds place in the impugned letter. In our opinion that was an after-thought. We are of the view that those terms do not appear in the original contract. The scheme to defraud the exchequer by this ingenious device was devised later and the impugned letter was forged and antedated in furtherence of that scheme.”
(Underlining* is ours).
19. The conclusion has been summed up by the Commission as under:
“In the circumstances indicated above, specially regarding the destruction of the letter immediately after the inspector had drawn up his report and in face of the fact that the inspector had questioned the genuineness of this document and initialled it and affixed the rubber stamp of his office to it; and also in view of the failure of Shriyans Prasad Jain to produce before the Commission the original letter which was with him and the very important fact that during this period there were similar payments of compensation for the supposed breaches of managing agency and selling agency agreement in a number of other cases, we are entitled to draw the conclusion that this is one more instance of the device adopted to evade and avoid payment of substantial income-tax.”
20. The Commission has in this Chapter also summarised the circumstances on the basis of which these findings have been arrived at.
21. The Income-tax Officer has studied and scrutinised the findings of the Commission contained in Chapter X in relation to the sum of Rs. 7 lakhs. If upon that material he has prima facie accepted the view or the finding of the Commission that the letter of appointment was forged and antedated, inter alia, with a view to provide for a term of duration of service and for payment of compensation in the event of premature termination, it cannot be said that he had no material before him to come to a reasonable belief that the assessee at the time of his original assessment omitted or failed to disclose truly and fully all material and primary facts. In that view of the matter, in our opinion, condition precedent No. 1 above referred to exists in the present case.
22. In relation to this contention three decisions were relied upon by Mr. Kolah, all of which are reported in 79 I.T.R The first case on which reliance was placed was that of Commissioner of Income-tax v. Bhanji Lavji. This is a case which is decided upon the facts of the case and the Supreme Court has re-emphasised in this case that it is not for the assessee to satisfy the Income-tax Officer that there was no concealment with regard to any question; it was for the Income-tax Officer, if that issue was raised, to establish that the assessee had failed to disclose fully and truly certain facts material to the assessment of income which had escaped assessment. It is pointed out that when the primary facts necessary for assessment are fully and truly disclosed to the Income-tax Officer at the stage of the original assessment proceedings, he is not entitled, on a change of opinion, to commence proceedings for assessment under section 34(1)(a). The other case on which reliance was placed is the case of Chhugamal Rajpal v. S.P Chaliha. Upon appreciation of the facts of this case the Supreme Court took the view that the important safeguards provided in sections 147 and 151 were lightly treated by the officer and the Commissioner. The Income-tax Officer could not have had reason to believe that income had escaped assessment by reason of the appellant-firm's failure to disclose material facts and if the Commissioner had read the report carefully he could not have come to the conclusion that this was a fit case for issuing a notice under section 148. The notice issued under section 148 was, therefore, invalid. As the decision turns upon its own facts and as the principles applied are well-settled this case is not of much assistance to us.
23. Reliance was also placed by Mr. Kolah upon the decision of the Supreme Court in Commissioner Of Income Tax, Calcutta v. Burlop Dealers Ltd.† . This case also was decided having regard to the appreciation of its facts and the Supreme Court took the view that the respondent had disclosed its books of account and evidence from which material facts could be discovered; it was under no obligation to inform the Income-tax Officer about the possible inference that might be raised against it. It was for the officer to raise such an inference and if he had not done so in the original assessment, the income that escaped assessment could not be brought to tax under section 34(1)(a). Thus, in this case the test laid down in Calcutta Discount Co.'s case [1961] 41 I.T.R 191 was applied that as the assessee had disclosed primary facts relevant to the assessment there was no obligation for him to instruct the Income-tax Officer about the inference which he may raise from those facts.
24. The question then arises whether it is established in the present case that before issuing the impugned notice the Income-tax Officer had reason to believe that income had escaped assessment. It is contended by Mr. Kolah that in no view of the matter the sum of Rs. 7 lakhs could be regarded as income and if that is so, the Income-tax Officer cannot form a reasonable belief that the income has escaped assessment. At the outset we may point out that such a plea does not find itself in the petition. Rule 6 of Order 6 of the Code of Civil Procedure requires that any condition precedent, the occurrence of which is intended to be contested, shall be distinctly specified in his pleading by the plaintiff. Such a principle will equally apply to a writ petition and it was necessary for the petitioner to plead Such a ground in the petition. No ground, however, in support of such a plea is taken and that is why in the affidavit in reply filed by the respondent no averments are to be found in answer to such a plea. As, however, we have permitted Mr. Kolah to urge this contention we will deal with the same. By sections 3 and 4, the Indian Income-tax Act, 1922, imposes a general liability to tax upon all income. But the Act does not provide that whatever is received by a person must be regarded as income liable to tax. In all cases in which a receipt is sought to be taxed as income, the burden lies upon the department to prove that it is within the taxing provision. Where, however, a receipt is of the nature of income, the burden of proving that it is not taxable, because it falls within an exemption provided by the Act, lies upon the assessee. Where the case of the assessee is that a receipt did not fall within the taxing provision, the source of the receipt is disclosed by the assessee and there is no dispute about the truth of that disclosure, the income-tax authorities are not entitled to raise an inference that the receipt is assessable to income-tax on the ground that the assessee has failed to lead all the evidence in support of his contention that it; is not within the taxing provision. See Parimisetti Seetharamamma v. Commissioner of Income-tax.
25. What we are concerned with at the present stage is only the question whether prior to issuing the notice under section 148 there was prima facie material for entertaining a reasonable belief that income has escaped assessment. Strong reliance is placed by Mr. Kolah upon the fact that the question whether the receipt of Rs. 7 lakhs was a receipt of a capital nature or not was directly gone into at the time of the original assessment by all the taxing authorities and by the High Court in the reference and the Appellate Assistant Commissioner, the Income-tax Tribunal and the High Court came to the conclusion that the receipt of Rs. 7 lakhs was not income assessable to tax but was a receipt of a capital nature. The submission was that in view of such a clear finding in the earlier proceedings at the stage of the original assessment, it cannot be said that the Income-tax Officer had, prima facie, material to entertain a res???onable belief that what has escaped assessment is income. It cannot be di???puted that unless the Income-tax Officer entertains a reasonable belief that income has escaped assessment, it will not be open to him to initiate reassessment proceedings. While considering this question, the basis on which the initial orders were passed at the time of the original assessment ought not to be overlooked. At the time of the original assessment, the Income-tax Officer, the Appellate Assistant Commissioner, the Income-tax Tribunal and the High Court proceeded on the footing that the contract of employment of the petitioner contained a term that the duration of his service was 25 years and there was a provision to pay him the amount upon premature termination as referred to in those orders. If as a result of the finding of the Vivian Bose Inquiry Commission the Income-tax Officer has prima facie material to entertain a reasonable belief, that in the original letter of appointment or the contract of appointment there was no provision as regards the duration of service or payment of compensation for premature termination, then can he honestly and reasonably entertain a belief that what has escaped assessment is income? At this stage, we are not expressing any final view upon the question whether the receipt of Rs. 7 lakhs is income liable to tax or not. We are really concerned with the question whether a condition precedent requisite for initiation of reassessment proceedings is fulfilled. Ordinarily, if the Income-tax Officer proceeds on the assumption that a company whose powers and functions are restricted by its objects clause cannot make a gift of such a large amount, it cannot be said that he has acted improperly or not bona fide. In the absence of a contract of service stipulating the duration of service and payment of compensation in the event of premature termination, a question will arise whether the amount was paid to the assessee by the company as a reward in view of his past meritorious services or whether it is compensation paid for loss of employment or for premature termination of services. Even in the initial order passed by the Income-tax Officer he has observed that by reason of the services of the petitioner the Dalmia group had earned lots of profits and this was the occasion to remunerate suitably an employee who had put in the best efforts of his. He, in this view of the matter, originally took the view that the payment of Rs. 7 lakhs to the petitioner was in view of the past meritorious services of the assessee and this was a suitable reward to him in consideration of his services. Prima facie, in the absence of a term as to duration or of payment of compensation in the event of premature termination, payment of such a large amount will ordinarily be disproportionate to the compensation that can be expected by an employee having regard to the short duration for which he has rendered services to the company.
26. It will be necessary in this connection to refer to the provisions of section 7 of the Indian Income-tax Act, 1922, as then existing. Explanation 2 to section 7 provided that a payment due to or received by an assessee from an employer or former employer or from a provident or other fund is to the extent to which it does not consist of contributions by the assessee or interest on such contributions a profit received in lieu of salary for the purposes of this sub-section, unless the payment is made solely as compensation for loss of employment and not by way of remuneration for past services. It is settled in view of this provision of Explanation 2 that if the object of the payment was not related to the relation between the employer and the employee it would not fall within the expression “profit received in lieu of salary”. Reliance is placed by Mr. Kolah upon the decision of the Supreme Court in Commissioner of Income-tax v. E.D Sheppard. In this case the Supreme Court had occasion to consider the provisions of Explanation 2 as then existed prior to the amendment in the year 1955. The Supreme Court by a majority judgment has taken the view that “compensation” in Explanation 2 to section 7(1) of the Income-tax Act does not mean compensation which is payable or compellable at law. Compensation for loss of employment is a well-known term: it means a payment to the holder of an office as compensation for being deprived of profits to which as between himself and his employer he would, but for an act of deprivation by his employer or some third party such as the legislature, have been entitled. When the deprivation is by the legislature there can be no question of liability or compellability to pay damages at law. The emphasis is on the act of deprivation, which may or may not give rise to any liability at law. Explanation 2 to section 7(1) did not treat every payment received by an assessee from his employer or former employer as income and did not exclude the consideration as to whether the payment related to employment or not and whether it was capital or income. On the facts of the case the Supreme Court took the view that the payment in that case was payment made solely as compensation for loss of employment and it, therefore, could not be treated under Explanation 2 of section 7(1) as profit received in lieu of salary. It is further pointed out that there was no distinction between compensation for loss of employment and compensation for loss of prospects rooted in that employment and that if the object of the payment was not related to the relation between the employer and the employee it would not fall within the expression “profit received in lieu of salary” in Explanation 2. In the absence of a contract stipulating the duration of service and payment of compensation in the event of premature termination, it is always an open question when an amount is paid to an employee by an employer upon termination of his services, whether it is a payment made in lieu of salary or by way of remuneration for past services or it is a payment made solely as compensation for loss of employment. If prior to issuing the notice under section 148 in view of the fact that by reason of the services rendered by the petitioner to the Dalmia group of companies that group made huge profits and it was as a reward for such services that it considered it necessary to pay him such a large amount, then it cannot be said that no prima facie material exists to entertain a reasonable belief that what is paid was profit received in lieu of salary or remuneration for past services. It will be only at the final hearing that the question can ultimately be decided and the rival contentions both on behalf of the revenue and the assessee can be adjudicated upon and determined, but it is not possible to take the view that prima facie no material exists so as to warrant the Income-tax Officer to entertain a reasonable belief that what has escaped assessment is income in one view of the matter. If that is so, then at the stage of issuance of the notice under section 148 of the Act it will not be permissible to this court to quash such a notice at the outset.
27. The question then arises whether, having regard to the facts and circumstances of the case, action was justified only under the provisions of section 147(b) and not under those under section 147(a). action under section 147(b) can be taken if 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 any assessment year. The phrase “notwithstanding that there has been no omission or failure as mentioned in clause (a)” in this sub-section is very relevant. If upon consideration of material before him the Income-tax Officer takes a prima facie view and entertains a reasonable belief that the assessee omitted or failed to disclose truly and fully all material and primary facts, then action under section 147(a) is always justified. It is conceivable that such reasonable belief as to omission or failure to disclose may arise as a result of information which may come to his knowledge, but even in such cases if the assessee has omitted or failed to disclose truly and fully all material and primary facts, it will always be open to take action under section 147(a). Under section 151(1) no notice shall be issued under section 148 after the expiry of eight years from the end of the relevant assessment year, unless the Board is satisfied on the reasons recorded by the Income-tax Officer that it is a fit case for the issue of such notice. The notice under section 148 in the present case has been issued after the expiry of eight years from the end of the assessment year 1950–51 but the Central Board of Direct Taxes upon a report submitted by the Income-tax Officer has accorded its sanction for initiation of proceedings against the assessee for the assessment year 1950–51 under section 147(a) of the Act. In that view of the matter it is not possible to take the view that the initiation of proceedings can be regarded as time-barred.
28. Accordingly, the notice for initiation of reassessment proceedings will have to be upheld in so far as it relates to the item of Rs. 7 lakhs paid by the company to the petitioner. In the result, the petition is dismissed. As, however, made clear earlier the Income-tax Officer will not be entitled in the conduct of the reassessment proceedings to go into the question of the loan of Rs. 2 lakhs given by the assessee to V.G Pettie and the interest thereon as forming part of the assessment during the relevant assessment year. The assessee shall pay the costs of the petition. As the hearing of this matter has taken nearly four days, we direct that the costs should be taxed on a long cause scale with one counsel allowed.
29. Petition dismissed.