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Case Number

Writ Petition No. 1436 of 1994

Judges

Dr. B.P Saraf
M.L Dudhat, JJ.

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Smart Summary

Judicial Opinion Summary — Dr. B. P. Saraf, J.

Factual and Procedural Background

The petitioner challenged a notice dated 6 October 1993 issued by respondent No. 1, the Assistant Commissioner of Income-tax, Central Circle 11, Bombay, under section 148 of the Income-tax Act, 1961, for the assessment year 1987-88. The notice was issued after sanction by the Commissioner of Income-tax (Central-1), Bombay. The petitioner contended that because the notice was issued after the expiry of four years from the end of the relevant assessment year, the statutory conditions in section 147(a) (that income chargeable to tax should have escaped assessment “by reason of 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”) had to be satisfied and, he said, they were not satisfied because he had made true and full disclosure of material facts.

In an affidavit filed on behalf of the respondents, it was stated that during the accounting year relevant to AY 1987-88 the petitioner received Rs. 45,00,000 for assignment of his beneficial interest in Lokhandwala Developers. The assessee reported this receipt in his return and relied on the Supreme Court decision in CIT v. B.C. Srinivasa Setty to claim exemption from capital gains tax on the basis that cost of acquisition in the hands of the transferor was nil.

After completion of assessment the Assessing Officer discovered, from the trust deed and deed of assignment, that the petitioner was entitled not only to 30% of net income of the trust but also to 30% of the corpus (paragraph (b) of the deed of assignment) — which, according to the respondents, established a cost of acquisition of Rs. 300 for the beneficial interest. The respondents contended that this material fact had not been disclosed by the assessee at the time of assessment and therefore income had escaped assessment within the meaning of section 147(a). The Assessing Officer thereupon initiated proceedings under section 147(a) and obtained sanction to issue the section 148 notice.

The petitioner countered that the trust deed and the assignment deed were already on the record before the Assessing Officer; that the legal question whether there was any cost of acquisition was a question of law to be inferred by the Assessing Officer from documents; and that it was not the petitioner’s duty to indicate what inference the officer should draw or to highlight portions of the documents.

The writ petition challenged the validity of the section 148 notice; the court heard rival submissions, considered the reasons recorded by the Assessing Officer and the sanction, and delivered the impugned judgment dismissing the petition.

Legal Issues Presented

Whether a notice under section 148 issued after the expiry of four years is valid where the Assessing Officer asserts that income chargeable to tax escaped assessment by reason of the assessee's omission or failure to disclose fully and truly all material facts necessary for assessment (section 147(a) of the Income-tax Act, 1961).
Whether production of source documents (such as a trust deed and assignment deed) on the record, without more, constitutes a "true and full disclosure" of all material facts for the purposes of section 147(a) and Explanation 2 to that section, or whether the assessee must draw the assessing authority's attention to the specific primary facts (for example, existence and quantum of cost of acquisition) embedded in those documents.

Arguments of the Parties

Petitioner's Arguments

The notice under section 148 was issued after four years and therefore jurisdiction under section 147(a) could be exercised only if the statutory condition of omission to disclose material facts existed; the petitioner claimed he had made true and full disclosure.
The trust deed and assignment deed were already before the Assessing Officer; the question whether there was a cost of acquisition was a question of law or an inference for the Assessing Officer to draw — it was not the petitioner’s duty to indicate what inference should be drawn or to point out specific portions of documents.
The petitioner relied on precedent authorities (including Calcutta Discount Co. Ltd. v. ITO, CIT v. Bhanji Lavji and Calcutta Credit Corporation Ltd. v. ITO) to support the contention that his production of documents amounted to disclosure sufficient to defeat the section 148 notice.

Respondents' Arguments

The petitioner had received Rs. 45,00,000 on assignment of beneficial interest but claimed exemption following CIT v. B.C. Srinivasa Setty on the basis that cost of acquisition was nil; the Assessing Officer initially accepted this because the petitioner had not disclosed any cost of acquisition.
After assessment, the Assessing Officer discovered from the trust deed and deed of assignment that the petitioner was entitled to a 30% share in the corpus of the trust; this indicated a cost of acquisition of Rs. 300 for the beneficial interest. This specific fact was material to determination of capital gains and had not been disclosed.
On that basis the Assessing Officer concluded that income chargeable to tax had escaped assessment because of the assessee's failure to disclose fully and truly all material facts, and therefore proceedings under section 147(a) / notice under section 148 were justified.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Calcutta Discount Co. Ltd. v. ITO, [1961] 41 ITR 191 (SC)	Establishes that the duty to disclose all primary facts relevant to the assessing authority lies on the assessee; production of documents does not automatically discharge that duty.	The court relied on this authority to support the proposition that mere production of documents is insufficient and that the assessee must disclose particular items/portions that are material to assessment.
Indo-Aden Salt Mfg. and Trading Co. P. Ltd. v. CIT, [1986] 159 ITR 624 (SC)	Explains Explanation 2 to section 147: production of evidence from which material facts could with due diligence have been discovered by the Income-tax Officer will not necessarily amount to disclosure.	The court cited this decision and the explanation to reject the petitioner’s contention that producing deeds on the record satisfied the duty of disclosure; the explanation was applied to hold that omission to draw attention to material embedded in documents can amount to non-disclosure.
CIT v. B.C. Srinivasa Setty, [1981] 128 ITR 294 (SC)	Held that if cost of acquisition in the hands of the transferor is nil, there will be no capital gains from the transfer of a capital asset.	The assessee relied on this precedent to claim exemption from capital gains tax. The court noted this reliance but found that the Assessing Officer, having discovered a cost of acquisition, was entitled to initiate reassessment proceedings.
CIT v. Bhanji Lavji, [1971] 79 ITR 582	This authority was cited by the petitioner (as referred to in the petitioner's submissions).	The judgment record notes the case was referred to by the petitioner, but the court's reasoning does not rely upon or discuss a specific rule from this decision in the course of its analysis.
Calcutta Credit Corporation Ltd. v. ITO, [1971] 79 ITR 483 (Calcutta HC)	This Calcutta High Court decision was cited by the petitioner in support of his position.	The opinion records that the petitioner referred to this case, but it does not articulate a specific principle from it nor base its final decision upon it.

Court's Reasoning and Analysis

The court examined the reasons recorded by the Assessing Officer for initiating proceedings under section 147(a) and for obtaining sanction, and considered the parties' rival submissions. The analysis proceeded along the following lines:

The court rejected the petitioner's submission that mere production of the trust deed or assignment deed amounted to true and full disclosure of the material facts necessary for assessment. It held that production alone is not equivalent to drawing the assessing authority's attention to the primary facts embedded in those documents.
The court treated the question whether there was a cost of acquisition of the beneficial interest as a material fact for the purpose of determining whether the Rs. 45,00,000 was assessable as capital gains. On this basis, the court held it was the assessee’s duty to inform the Assessing Officer whether there was any cost of acquisition and to disclose material facts in that regard.
The court relied on the established principle (per Calcutta Discount and the Explanation to section 147 as explained in Indo-Aden Salt) that an assessee must disclose all primary facts and that Explanation 2 was enacted to prevent an assessee from saying “I have produced the documents; you find out the relevant parts.” The court quoted and applied this reasoning to the facts before it: omission to highlight material items in disclosed documents can amount to failure to disclose fully and truly all material facts.
Applying these principles to the factual matrix — in which the Assessing Officer discovered from the deeds that the petitioner had a 30% share in the corpus (implying a cost of acquisition) — the court concluded that the Assessing Officer had material in his possession to be satisfied that income had escaped assessment on account of the assessee’s omission to disclose.
Accordingly, the court found no basis to interfere with the Assessing Officer's satisfaction and the consequent issuance of the notice under section 148 in the exercise of its writ jurisdiction.

Holding and Implications

Holding: The writ petition challenging the section 148 notice is dismissed. The court refused to interfere with the notice under section 148 on the facts before it and on the basis of the Assessing Officer's recorded satisfaction under section 147(a).

Implications:

The direct effect of the decision is that the reassessment proceedings initiated by the Assessing Officer pursuant to the section 148 notice may proceed; the petitioner remains subject to those proceedings.
The court emphasized the longstanding principle that an assessee's duty is to disclose primary facts necessary for assessment and that simply placing documents on the file without pointing out the material portions may constitute an omission under section 147(a) read with Explanation 2. The court applied existing authorities (notably Calcutta Discount and Indo-Aden Salt) rather than creating a new legal principle.
The judgment expressly permits the petitioner to raise all questions of fact and law before the appropriate income-tax authorities; the court did not foreclose recourse to statutory remedies or appellate remedies within the tax machinery.
No costs were imposed and a certified copy of the judgment was ordered expedited.

Note: This summary is confined to the information contained in the provided opinion and does not add facts or inferences beyond that text.

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Zohar Siraj Lokhandwala v. M.G Kamat And Others.

Dr. B.P Saraf, J.:— The petitioner seeks to challenge a notice dated October 6, 1993, issued by respondent No. 1, the Assistant Commissioner of Income-tax, Central Circle 11, Bombay (Assessing Officer), under section 148 of the Income-tax Act, 1961, for the assessment year 1987-88. The notice has been issued after obtaining necessary sanction of the Commissioner of Income-tax, (Central-1), Bombay. The contention of the petitioner is that the said notice, having been issued after the expiry of four years from the end of the relevant assessment year, must fulfil the conditions laid down in section 147(a) of the Income-tax Act, 1961 (“the Act”). According to the petitioner, one of the conditions for exercise of jurisdiction under section 147(a) of the Act that the income chargeable to tax should have escaped assessment for that year “by reason of 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” is absent in the instant case as he had made true and full disclosure of all material facts necessary for his assessment for that year. That being so, the impugned notice under section 148 is illegal and without jurisdiction. In support of the above contention, Shri Dastur, learned counsel for the petitioner, referred to the decisions of the Supreme Court in Calcutta Discount Co. Ltd. v. ITO, [1961] 41 ITR 191 and CIT v. Bhanji Lavji, [1971] 79 ITR 582, and the decision of the Calcutta High Court in Calcutta Credit Corporation Ltd. v. ITO, [1971] 79 ITR 483.

2. On behalf of the respondents an affidavit has been filed by the Assistant Commissioner of Income-tax, Central Circle 11, wherein it is stated that during the accounting year relevant to the assessment year 1987-88, the petitioner, Zohar Siraj Lokhandwala, had received a sum of Rs. 45,00,000 for the assignment of his beneficial interest in Messrs. Lokhandwala Developers. The assessee showed this amount in his return of income as a receipt and claimed the same to be exempt from levy of capital gains tax on the basis of the decision of the Supreme Court in CIT v. B.C Srinivasa Setty, [1981] 128 ITR 294, where it has been held that there will be no capital gain from the transfer of capital asset if its cost of acquisition in the hands of the transferor is nil. According to the respondents, the above submission was accepted by the assessing authority as the assessee did not disclose that there was any cost of acquisition of the said asset. After the completion of the assessment, the Assessing Officer discovered that the cost of the beneficial interest of the petitioner-assessee in the property transferred for a sum of Rs. 45,00,000 was Rs. 300.

3. This was found on a perusal of the trust deed as well as the deed of assignment which showed that the petitioner, who was a beneficiary of the trust, was entitled not only to 30 per cent, of the net income of the trust but also to 30 per cent, share of the corpus of the trust (paragraph (b) of the deed of assignment). It was found that the share in the corpus of the trust was the cost of the beneficial interest of the petitioner in the asset which was transferred for a sum of Rs. 45,00,000. This information, according to the respondents, is material for the purpose of determination of capital gain because, if it was so, the ratio of the decision of the Supreme Court would not apply. It was this material fact which, according to the respondents, was not disclosed by the assessee in his return or at the time of the assessment, as a result of which income of Rs. 45,00,000 chargeable to capital gains tax escaped assessment. On the basis of the above information, the Assessing Officer was satisfied that income had escaped assessment by reason of the failure of the assessee to disclose truly and fully all the material facts necessary for his assessment within the meaning of section 147(a) of the Act read with Explanation 2 thereto.

4. Shri Dastur, learned counsel for the petitioner, on the other hand, submits that the trust deed and the assignment deed were already on record before the Assessing Officer. The assessee was at liberty to claim that the receipt of Rs. 45,00,000 from assignment of the beneficial interest of the petitioner in the property in question was not subject to capital gains tax in view of the decision of the Supreme Court in CIT v. B.C Srinivasa Setty, [1981] 128 ITR 294. According to the petitioner, the question whether there was a cost of acquisition in the hands of the petitioner or not in such circumstances was a question of law or an inference of law to be drawn by the Assessing Officer on perusal of the documents and that it was no part of the petitioner's duty to tell him as to what inference he should draw or that he should peruse the assignment deed and the trust deed to find out whether there was cost of acquisition or not. In such circumstances, according to Shri Dastur, there was no nondisclosure of primary facts by the assessee.

5. We have carefully considered the rival submissions. We have also perused the reasons recorded by respondent No. 1, Assistant Commissioner of Income-tax, for initiating proceedings under section 147(a) of the Act and for obtaining approval of the Commissioner of Income-tax. On a consideration of the same, we find it difficult to accept the contention of the assessee that production of the trust deed or assignment deed by itself amounted to a true and full disclosure of the material facts necessary for the purpose of the assessment. We also do not agree with learned counsel for the petitioner that whether there was any cost of acquisition of the property or the beneficial interest of the assessee is not a material information but a question “of law or a question of inference. In our opinion, it is a material fact necessary for determining whether the sum of Rs. 45 lakhs received by the petitioner on assignment of his beneficial interest in the assets in question was assessable to capital gains tax and hence it was for the assessee to tell the Assessing Officer whether there was any cost of acquisition or not and disclose the material facts in that regard. Production of the trust deed or the assignment deed by itself will not amount to full disclosure of material facts within the meaning of section 147(a) of the Act on the ground that the Assessing Officer could have discovered the same if he had probed into the matter and acted more diligently.

6. There is no doubt, as observed by the Supreme Court in Calcutta Discount Co. Ltd. v. ITO, [1961] 41 ITR 191, that the duty of disclosing all the prjmary facts relevant to the decision of the question before the assessing authority lies on the assessee. To meet the 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 assessing authority might have discovered, the Legislature has enacted Explanation 2, which says that production before the Income-tax Officer of accounts or other evidence from which material evidence could with due diligence have been discovered by the Income-tax Officer will not necessarily amount to disclosure within the meaning of section 147. In view of this Explanation, it will not be open to the assessee 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 your 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 successfully 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 on 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 disclose all of them-including particular entries in the account books, particular portions of documents, and documents and other evidence which could have been discovered by the assessing authority, from the documents and other evidence disclosed. In other words, the mere production of evidence before the Assessing Officer is not enough and there may be an omission or failure to make a full and true disclosure, if some material for the assessment lies imbedded in that evidence which the assessee can uncover but did not. Or to put it differently, the fact that the Assessing Officer could have found out the correct position by further probing the matter does not exonerate the assessee from the duty to make a full and true disclosure of the material facts. Explanation 2 makes the position abundantly clear, (Indo-Aden Salt Mfg. and Trading Co. P. Ltd. v. CIT, [1986] 159 ITR 624 (SC).

7. We may now deal with the rival contentions of the parties in the light of the legal position set out above. The Assessing Officer's contention is that the fact that there was cost of acquisition of the property was not disclosed by the assessee, as a result of which he did not levy capital gains tax on the amount received on the transfer of the beneficial interest of the assessee in the asset in question following the decision of the Supreme Court in CIT v. B.C Srinivasa Setty, [1981] 128 ITR 294. Later, having discovered that there was a cost of acquisition for the asset, he has initiated proceedings under section 147(a). In this factual situation, we find it difficult to hold that the Assessing Officer had no material in his possession to satisfy him that the income of the assessee had escaped assessment by reason of the omission or failure of the assessee to disclose fully and truly all material facts necessary for the assessment. We are, therefore, satisfied that this is not a fit case where we should interfere with the notice under section 148 of the Act in exercise of our writ jurisdiction.

8. We, however, like to make it clear that our rejection of this writ petition will not preclude the petitioner from raising all questions of fact and law before the appropriate income-tax authorities.

9. In view of the above, this writ petition is dismissed. No costs.

10. Certified copy expedited.

Zohar Siraj Lokhandwala v. M.G Kamat And Others.

Judicial Opinion Summary — Dr. B. P. Saraf, J.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Petitioner's Arguments

Respondents' Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Zohar Siraj Lokhandwala v. M.G Kamat And Others.

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