Commissioner Of Income-Tax, Delhi-Ii v. Banwari Lal & Sons Ltd.

Goswamy, J.:— At the instance of the Commissioner of Income-tax, New Delhi, the following questions of law have been referred for our opinion:

“1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in cancelling the assessments made by the Income-tax Officer in pursuance of proceedings under section 147(a) of the Income-tax Act, 1961, against the assessee?

2. If the answer to the first question is in the affirmative, whether,. on the facts and in the circumstances of the case, the Tribunal was right in not converting provisions of section 147(a) into provisions of section 147(b) of the Income-tax Act, 1961?”

2. The assessee is a limited company.

3. It owned a building known as Radha Krishan Bhawan, Darya Ganj, Delhi. The building was let out to the American Embassy for some years and the assessee was charging a rent of Rs. 3,212.50 per month. During the accounting year relevant to the assessment year 1961-62, the American Embassy vacated the building and it was requisitioned by the Government for its own use. The assessee filed its return for the said year and appended the following note in connection with the property of Radha Krishan Bhawan;

“The company's building known as Radha Krishan Bhawan at Darya Ganj, Delhi, has been occupied by the Government, authorities, having been requisitioned by the Collector. The question of monthly rent is under dispute and no rent is being received. Previously this building had been leased out to the American Embassy at the fate of Rs. 3,212.50 per month, which was an exceptional transaction. We are not certain as to what would ultimately be settled. We have, therefore, not returned any rental of this building. If the same must be included, then it is requested that it would be safe to take it at Rs. 2,500 per month. The balance can be assessed in the hands of the company at the time of the actual receipt on settlement of the dispute. In case, despite the above submission, the rental is assessed at the rate of Rs. 3,212.50 per month, it is submitted that it may please be specifically stated in the assessment order that on actual settlement of the dispute and in respect of the rent, the excess shall be included or the deficiency shall be allowed by revising the assessment order u/s. 35 of the Income-tax Act or else the full amount of deficiency shall be allowed as irrecoverable rent in the year of actual receipt and similarly excess received, if any, shall also be taxed in the year of receipt.”

4. During the course of assessment proceedings, the ITO calculated the annual letting value on the basis of the rent of Rs. 3,212.50. After completing the assessment for the years 1961-62 to 1965-66, the ITO found that the rent fixed by the Government in respect of the aforesaid building was Rs. 4,658 per month and in this view of the matter the ITO initiated proceedings under s. 147(a) of the Act, 1961, and charged to tax the difference between the revised figure and the original figure in the assessment under reference.

5. Dissatisfied with the assessment, the assessee appealed to the AAC. The AAC held that the assessee failed to disclose fully and truly all material facts necessary for assessments and as such the proceedings under s. 147(a) were valid. He further held that in the circumstances the ITO could change the letting value of the property. With these findings, the appeal of the assessee was dismissed. The assessee came up in appeal before the Tribunal. On behalf of the assessee it was contended that the provisions of s. 147(a) were not validly invoked against the assessee as the assessee had disclosed fully and truly all material facts necessary for assessments in the income-tax return itself. It was contended that the primary facts having been disclosed by the assessee, it was for the ITO to draw the correct and legal inference. The Tribunal came to the conclusion that from the note in the return filed by the assessee it could be found that the assessee made a disclosure to the ITO that at the time of original assessments there were chances of getting higher rent and in such circumstances the ITO should have directed the assessee to let him know any such further facts in terms of s. 23(2) of the Indian I.T Act, 1922, or under s. 143(2) of the I.T Act, 1961, to determine the annual letting value of the property. In the circumstances, the assessee could not be said to be guilty of non-disclosure or omission to disclose all material facts necessary for the assessment. Reliance was placed by the Tribunal on the case of S.M Dahanukar v. CIT, [1968] 69 ITR 504 (Bom).

6. It was contended by the department before the Tribunal that the assessments were in any case saved in view of the provisions of s. 147(b) of the I.T Act,; 1961, as the information about the enhanced rent was tantamount to information within the meaning of s. 147(b) of the Act. The question whether the Tribunal can convert the proceedings under s. 147(a) into s. 147(b) was answered by the Tribunal against the department on the basis of a Full Bench judgment of the Allahabad High Court in the case of Raghubar Dayal Ram Kishan v. CIT, [1967] 63 ITR 572.

7. As regards question No. 1 the grounds upon which action under s. 147(a) can be taken is stated in the section itself and the said section reads as under:

“147. If—

(a) the Income-tax Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under section 139 for any assessment year to the Income-tax. Officer, or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year.”

8. The scope and extent of this expression in s. 147(a) which, is similar to s. 34(1)(a) of the 1922 Act has been the subject-matter of pronouncement by the Supreme Court in several cases. In the case of Calcutta Discount Co. Ltd. v. ITO, [1961] 41 ITR 191, the Supreme Court laid down that to confer jurisdiction under s. 34 to issue notice in respect of an assessment beyond the period of four years but within a period of 8 years from the end of the relevant year two conditions have to be satisfied. The first was that the ITO must have reason to believe that income, profits and gains chargeable to income-tax had been under-assessed. The second was that he must also have reason to believe that such under-assessment had occurred by reason of either omission or failure on the part of an assessee to make a return of his income under s. 22 or omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment for that year. It may be that the first condition is satisfied in the present case inasmuch as the income of the assessee has certainly been under-assessed. As regards the second condition, it is clear from the note, appended to the return filed by the assessee that all primary facts necessary for the assessment had been disclosed by the assessee. The primary facts were the existence of the property, its previous letting value, the property having been requisitioned and the dispute regarding the actual rent being pending. All these facts were clearly disclosed by the assessee in the said note and were in the possession and knowledge of the department, which is not disputed. There was no further obligation on the assessee to disclose the correct legal inference in respect of those facts. In the circumstances, the income which had escaped assessment was not due to the failure or omission on the part of the assessee to disclose fully and truly all material facts. The Tribunal correctly relied upon the decision of the Bombay High Court in the case of S.M Dahanukar v. CIT, [1968] 69 ITR 504. In that case during the accounting year 1949-50 the assessee acquired certain plots of land which had been requisitioned by the Government under the Defence of India Rules. As the Government was considering the question of payment of compensation in respect of these plots the assessee did not show any income from property for the assessment year 1950-51. The ITO, however, estimated the income from the requisitioned property at Rs. 1,000 and included it in the assessment for the year 1950-51. Similar assessments were made for 1951-52 to 1957-58. The assessment of the income for 1956-57 and 1957-58 was made under s. 12 while for the earlier years it was made under s. 9. The proceedings for fixing the compensation in respect of those plots were being pursued by the assessee and ultimately in 1958 the amount of compensation was fixed as Rs. 823-6-0 per month from the year 1949. In his return for the year 1958-59 the assessee showed a sum of Rs. 9,880 from this source. The ITO proposed to assess the entire amount received by the assessee as income of 1958-59 but on the objections of the assessee that all the amounts cannot accrue on a particular date issued notices under s. 34(1)(a) for 1950-51 to 1954-55 and under s. 34(1)(b) for the other years. The assessee objected to the said notice under s. 34(1)(a) on the ground that the requirements of the said section were not fulfilled. The High Court held that the statements made by the assessee at the time of original assessment were correct and there was no omission or failure on the part of the assessee to disclose fully and truly all material facts and hence it was a case which did not fall under s. 34(1)(a). The facts in the present case are similar to the facts in the Bombay case and following the said decision we hold that on the facts and in the circumstances of the case the Tribunal was right in cancelling the assessments made by the ITO in pursuance of the proceedings under s. 147(a) of the I.T Act, 1961, and answer question No. 1 in the affirmative.

9. As regards question No. 2 the contention of the learned counsel, for the petitioner was that the assessment in any case are saved in view of the provisions of s. 147(b) of the I.T Act, 1961, as the information about the enhanced rent is tantamount to information within the meaning of s. 147(b) of the Act. The Tribunal did not go into the question whether the material conditions required for a notice under s. 147(b) were fulfilled and negatived the case of the department on the ground that the Tribunal had no jurisdiction to convert or alter the assessment made by the ITO under s. 34(1)(a) to an assessment under s. 34(1)(b) on the basis of the judgment of the Allahabad High Court in the case of Raghubar Dayal Ram Kishan v. CIT, [1967] 63 ITR 572 referred to above. In the Allahabad case there was a difference of opinion between the two learned judges and it was referred to a third learned judge. It was observed by the third learned judge that where an ITO assessed ah income under s. 34(1)(a) and the Appellate Tribunal on appeal came to the conclusion that it should have been assessed under s. 34(1)(b) the Tribunal had no jurisdiction to convert or alter the assessment made by the ITO under s. 34(1)(a) to an assessment under s. 34(1)(b) and maintain it as such. It was further observed that cl. (a) and cl. (b) of s. 34(1) contemplated two distinct and mutually independent jurisdictions. It was also observed that the two notices were separate and distinct from each other and that was apparent from prov. (1) to s. 34 where specific reference was made to a notice under cl. (a) of sub-s. (1), This case was dissented from by the Calcutta High Court in the case of Mriganka Mohan Sur v. CIT, [1914] 95 ITR 503 and the Calcutta High Court preferred to follow the minority view of Manchanda J., given in that case. We are in respectful agreement with the view taken by the Calcutta High Court and the minority view of Manchanda J., in the Allahabad case. The learned counsel for the assessee placed strong reliance on the case of Johri Lal (Huf), Agra v. Commissioner Of Income Tax., [1973] 88 ITR 439 (SC). That was a case where a notice under s. 34(1)(b) had been issued and it was sought to be justified by the Tribunal under cl. (a) of sub-s. (1) of s. 34. Their Lordships of the Supreme Court felt obvious difficulties in that matter. Their lordships of the Supreme Court held in that case that a notice issued on the ground of cl. (b) of s. 34 cannot be later treated as issued under cl. (a) of s. 147 because certain specific and special conditions are required to be complied with in the cases under s. 147 which normally and in ordinary cases are not required to be complied with in the cases under s. 147(b). All these circumstances have been mentioned in the judgment. Thus, the judgment is confined to the conversion of a notice under cl. (b) of s. 147 to one under cl. (a) of s. 147. The Calcutta High Court in the case of ITO v. Eastern Coal Co. Ltd, [1975] 101 ITR 477 held that there was no impediment in treating the notice issued under cl. (a) of s. 147 as one issued under cl. (b) of that section provided the ingredients of s. 147(b) were fulfilled.

10. It was next contended by the learned counsel for the assessee that at least for one of the years the notice was barred by limitation if the same was treated as one under s. 147(b). It was further contended that in any case the rent should be based on the municipal value and not on the figure and actual rent received by the assessee. It was also contended that the award could not be treated as an information for the purpose of s. 147(b) of the I.T Act, 1961. As we have already observed above, all these contentions have not been considered by the Tribunal and the Tribunal has only held that it has no jurisdiction to convert or alter the assessments made by the ITO under s. 34(1)(a) to an assessment under s. 34(1)(b) and maintaining it as such. Subject to the consideration of all these contentions by the Tribunal, which the Tribunal will have to consider, we answer the second question in the negative, i.e, in favour of the department and against the assessee. In the circumstances of the case there will be no order as to costs.