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Jatindra Nath Sarmah v. Income-Tax Officer, A Ward, Dibrugarh, And Another

Gauhati High Court

Dec 15, 1976

Judgment

Subsequent
References

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Comprehensive Summary of the Opinion (Civil Rules Nos. 101 & 102 of 1974)

Factual and Procedural Background

The two cases before the court involve the same parties and substantially the same facts; the only differences are the assessment years (Civil Rule No. 101 of 1974 — assessment year 1964–65; Civil Rule No. 102 of 1974 — assessment year 1965–66). Both petitions sought writs of certiorari to quash notices purportedly issued under section 148 of the Income-tax Act, 1961, and the resulting assessment orders passed by the Income-tax Officer, “A” Ward, Dibrugarh.

Procedurally: two notices under section 148 were issued requiring returns; the petitioner did not respond to those notices. Notices under section 142(1) were later issued on February 12, 1969, seeking production of accounts for 1964–65 through 1967–68. The petitioner supplied letters explaining he was a partner in M/s. Traders and Builders Corporation (a now-dissolved firm), disclosed certain receipts (salary, sums from his father, loans from friends), and provided a capital/loan account entry showing Rs. 29,041.08 as capital in the defunct firm’s balance-sheet as on March 31, 1964.

The Income-tax Officer proceeded to assess the petitioner: for 1964–65 total income was determined at Rs. 51,160 (demand raised); for 1965–66 total income was determined at Rs. 16,150 (demand raised). The petitioner did not appeal those assessments but applied to reopen them under section 146; the applications were rejected by the Income-tax Officer and by the Appellate Assistant Commissioner on appeal. The petitioner filed revision petitions under section 264; the Additional Commissioner (acting) granted some reliefs by a common order dated November 12, 1973. The petitioner then obtained these writ rules on March 15, 1974.

Legal Issues Presented

Whether the notices purportedly issued under section 148 of the Income-tax Act, 1961 were valid given the contention that subsection (2) of section 148 (requirement to record reasons before issuing notice) and clause (a) of section 147 were not complied with.
Whether the Income-tax Officer was justified in treating the sums (including Rs. 29,041.08 shown as capital in the firm’s balance-sheet and further additions) as income from undisclosed sources — i.e., whether the Department discharged its burden to establish those amounts as taxable income or whether the petitioner’s explanations sufficed.
Whether the Additional Commissioner’s partial acceptance of some explanations and rejection of others rendered his order without jurisdiction or otherwise unsustainable.

Arguments of the Parties

Appellant's (Petitioner’s) Arguments — as presented by Mr. P. G. Baruah

The notices under section 148 were incompetent and void ab initio because they were not issued in accordance with section 147(1) and subsection (2) of section 148 (i.e., the Income-tax Officer did not record reasons before issuing the notices).
The addition of Rs. 29,041.08 as income from undisclosed sources for assessment year 1964–65 is bad in law because the Department failed to discharge the burden of proof that this sum was income.
Because the Commissioner accepted some parts of the petitioner’s explanation as genuine, he had no jurisdiction to reject the remainder — implying inconsistency or lack of legal basis in the Commissioner’s treatment.
Specifically, it was contended that the capital deposit was in the 1963–64 assessment year and therefore could not be assessed for 1964–65 (this point was raised in relation to timing of the deposit).

Respondent's (Revenue / Department’s) Position — as reflected in the record and assessment)

The departmental record shows an assessment of the partnership firm M/s. A. Sarmah (partners A.N. Sarmah and J.N. Sarmah), with the firm assessed to income of Rs. 26,050 and therefore the petitioner’s share being Rs. 13,025; the petitioner nevertheless did not file returns for the relevant years. These facts formed the basis for the Income-tax Officer's belief that income chargeable to tax had escaped assessment under clause (a) of section 147.
The Income-tax Officer recorded reasons in departmental files (even if not set out on the face of the notices) before issuing notices under section 148; the departmental files contain recorded grounds directing initiation of proceedings and issuing notices to the partners.
Books of the defunct partnership M/s. Traders and Builders Corporation showed deposits of Rs. 29,041.08 as capital in the petitioner’s name as on March 31, 1964; the petitioner was thus required to explain the sources of these investments but his explanations were not accepted as satisfactory, justifying application of section 69 (unexplained investments) and addition to income.
The Additional Commissioner reviewed the records and allowed some reliefs (treated some savings and loans as genuine) but otherwise upheld additions where explanations were unsatisfactory.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Income-tax Officer v. Lakhmani Mewal Dass, [1976] 103 ITR 437 (SC)	The grounds/reasons leading to the Income-tax Officer's belief under section 147(a) must have a material bearing on escapement of income; sufficiency of grounds is generally not justiciable but the court may examine whether reasons have a rational connection with the belief and are not extraneous.	The court applied the principle that the existence of a rational connection between recorded reasons and the belief is examinable; finding departmental records (assessment of firm, partner's share, failure to file returns) provided such rational connection, the court held that the Income-tax Officer had reasons under section 147(a) and complied with section 148(2).
Calcutta Discount Co. Ltd. v. Income-tax Officer, [1961] 41 ITR 191 (SC)	Referenced (through Lakhmani) as authority on the limited scope of judicial inquiry into the sufficiency of reasons for forming belief under corresponding earlier provisions.	Cited as part of the line of authority supporting the proposition that courts can test rational connection of reasons but not re-evaluate their sufficiency; used in the chain of reasoning quoted from Lakhmani.
S. Narayanappa v. Commissioner of Income-tax, [1967] 63 ITR 219 (SC)	Referenced (through Lakhmani) on the scope of judicial review of the Income-tax Officer’s reasons under corresponding provisions of prior statute.	Referred to as part of the authorities establishing the limited nature of judicial inquiry into the formation of belief; the court relied on that jurisprudence (via Lakhmani) in upholding departmental action here.

Court's Reasoning and Analysis

The court proceeded in a step-wise manner, applying statutory text and the precedents cited:

On the formal requirement in subsection (2) of section 148 that "The Income-tax Officer shall, before issuing any notice under this section, record his reasons for doing so," the court observed that absence of reasons on the face of the notices does not necessarily mean that reasons were not recorded at all. The inquiry is whether reasons were in fact recorded prior to issuing the notices.
The court examined departmental records (requested to be produced) and found recorded material showing that while assessing the firm M/s. A. Sarmah (unregistered), the Income-tax Officer had assessed income of Rs. 26,050 for the firm; the petitioner (being a partner) had a share and had failed to file returns. The departmental file contained an order to start files in the names of the partners and to issue notices under section 148.
Applying clause (a) of section 147, the court concluded that these materials gave the Income-tax Officer "reason to believe" within the meaning of section 147(a) — namely, that by reason of omission or failure to make returns under section 139, income chargeable to tax had escaped assessment. The court relied on the legal principle from Income-tax Officer v. Lakhmani Mewal Dass that while the sufficiency of reasons is not generally justiciable, the court can test whether the reasons have a rational connection to the belief.
On the challenge to the assessment additions (particularly Rs. 29,041.08 shown as capital in the partnership's balance-sheet), the court noted that the sum was shown in the balance-sheet as at March 31, 1964, and that the petitioner was an admitted partner. Consequently, the sum belonged to the petitioner and the burden lay on him to explain the source of the investment.
The petitioner's explanations (salary savings, sums from father, loans from friends and relatives) were considered by the Income-tax Officer and ultimately not accepted as fully satisfactory. The court found that the taxing authorities' reasons for rejecting the explanations were not unreasonable or perverse.
The court applied section 69 (unexplained investments): where an assessee has made investments not recorded in books and offers no satisfactory explanation, the value of such investments may be deemed to be the assessee's income. Given the petitioner’s failure to establish satisfactory sources, the court held that the additions were permissible under section 69.
On the contention that partial acceptance of some explanations by the Additional Commissioner undermines the order, the court explained that allowance of some reliefs does not invalidate the rejection of other explanations where, after consideration, the taxing authority found them unsatisfactory. The Additional Commissioner had granted some relief (e.g., Rs. 5,000 for 1964–65 and Rs. 2,400 for 1965–66) but otherwise sustained the assessments; the court found no legal objection to that result.
As to the timing point, the court examined records and found the deposits were reflected in the balance-sheet as on March 31, 1964, i.e., relevant to assessment year 1964–65, and hence the petitioner's argument on timing lacked substance.

Holding and Implications

Holding: The court dismissed the petitions. In the court's words, the petitions were rejected, the rules discharged, and there was no order as to costs. Emphasised succinctly:

DISPOSED OF — The petitions are rejected; the rules are discharged; no order as to costs.

Implications:

Direct effect: The notices issued under section 148 and the consequent assessment proceedings are held valid; the assessments (subject to the reliefs already granted by the Additional Commissioner) stand.
The court accepted the department's factual finding that the petitioner had investments shown as capital in a firm balance-sheet and that the petitioner failed to satisfactorily explain sources; therefore additions under section 69 were sustained in principle (with the limited reliefs the Additional Commissioner had already granted).
No broader or novel legal precedent was announced by this opinion beyond applying established principles from the cited Supreme Court authorities (notably Income-tax Officer v. Lakhmani Mewal Dass) about the limited scope of judicial review of reasons for forming belief under section 147 and the application of section 69 to unexplained investments. The decision applies those precedents to the facts at hand rather than creating a new rule.

Judge N. Ibotombi Singh concurred with the judgment of Chief Justice Pathak.

Show all summary ...

Pathak, C.J:— The facts of these two cases are identical or similar and the questions of law arising for determination are also identical with the only difference that the assessment year involved in Civil Rule No. 101 of 1974 is 1964–65 and that in Civil Rule No. 102 of 1974 is 1965–66 and the parties are also the same. This judgment will, therefore, cover both these cases.

2. By these two petitions the petitioner has prayed for a writ of certiorari quashing the assessment order dated February 7, 1970, passed by the Income-tax Officer, “A” Ward, Dibrugarh, for the assessment year 1964–65 and the notice dated 17/28-12-68 issued under section 148 of the Income-tax Act, 1961, as well as the assessment order dated nil passed by the Income-tax Officer, “A” Ward, Dibrugarh, for the assessment year 1965–66 and the notice dated 17/28-12-68 issued under section 148 of the Income-tax Act, 1961.(hereinafter referred to as “the Act”). The facts of these two cases briefly are that two notices under section 148 of the Act for the aforesaid two assessment years were issued to the petitioner requiring him to submit return in the prescribed form of his income for the two assessment years. The petitioner did not respond to either of the two notices. Thereafter, two other notices dated February 12, 1969, under section 142(1) of the Act were issued to the petitioner for production of accounts for the assessment years from 1964–65 to 1967–68. By letter dated February 22, 1969, the petitioner informed the Income-tax Officer that amongst other things he was a partner of M/s. Traders and Builders Corporation, Dibrugarh, and he had no other source of income and that an assessment proceeding of the said firm was pending at the relevant time but the firm had in the meantime been dissolved. Thereafter, the petitioner submitted another letter to the Income-tax Officer showing his capital and loan account in the defunct firm under the name and style of M/s. Traders and Builders Corporation”, Dibrugarh. In the said letter the petitioner stated that he received salary of Rs. 5,000 from the State Bank of India, Jorhat Branch, from 1958–62 and Rs. 3,000 from M/s. Sharma and Siddhanta, for the year 1962–63, respectively, and a sum of Rs. 10,000 from his father and Rs. 11,000 as loan from his friends. A copy of this letter is annexed as annexure “C” to the two petitions. The petitioner, thereafter, was again asked by the Income-tax Officer to produce evidence in respect of sources of investment to which the petitioner replied that he had no savings account in the bank in his name. Thereafter, the Income-tax Officer assessed the petitioner for the said two assessment years.

3. For the assessment year 1964–65, the Income-tax Officer determined the total income of the petitioner at Rs. 51,160 and issued demand notice and challan for the tax payable. For the assessment year 1965–66, the total income of the petitioner was determined at Rs. 16,150 and demand notice was also issued.

4. The petitioner did not prefer any appeal against these two assessment orders but filed two applications to the Income-tax Officer for reopening the two assessments under section 146 of the Act. These two applications for reopening the assessments were, however, rejected by the Income-tax Officer. The petitioner then preferred two appeals against the two orders of rejection of his prayer for reopening the assessments in respect of the two assessment years before the Appellate Assistant Commissioner who also rejected the two appeals. Thereafter, the petitioner-assessee filed two revision petitions to the Commissioner of Income-tax against the assessments under section 264 of the Act.

5. The two revision petitions under section 264 of the Act were disposed of by the Additional Commissioner of Income-tax by a common order dated November 12, 1973, by which he granted some reliefs to the assessee for the two assessment years. The petitioner has thereafter obtained these two rules on March 15, 1974.

6. Mr. P.G Baruah, the learned counsel for the petitioner-assessee, submits that (i) the two notices purported to be issued under section 148 of the Act were not in terms of section 147(1) of the Act and that being the position the notices under section 148 were incompetent and as such the two assessment proceedings were void ah initio and consequently the assessment orders passed in such void proceedings are nullities; (ii) the addition of the sum of Rs. 29,041.08 as income from undisclosed sources in the assessment year 1964–65 is bad in law inasmuch as the department failed to discharge the burden that lies on it in such matters; and (iii) the Commissioner in his order accepted some portion of the explanation given by the assessee as genuine and that being so, he had no jurisdiction to reject the other portion.

7. Regarding the first point, Mr. Baruah's submission is that before issuing the notice under section 148 of the Act the Income-tax Officer did not comply with sub-section (2) of section 148 nor was there any compliance with clause (a) of section 147 of the Act.

8. sub-section (2) of section 148 of the Act reads as follows:

“The Income-tax Officer shall, before issuing any notice under this section, record his reasons for doing so.”

9. Mr. Baruah's contention is that in the notices purported to be issued under section 148 of the Act, no reasons are recorded and so the legal presumption should be that there are no reasons recorded and, therefore, the Income-tax Officer had no jurisdiction to issue the notices under section 148 in the instant cases.

10. We have gone through the two notices. The reasons are not stated therein. It is not necessary that reasons should be stated in the notice itself, if, in fact, reasons are recorded before issuing the notice under section 148. It may be observed that in both these assessment years the petitioner did not submit return in time. Even after receiving the notices under section 148 no return was submitted. Of course, the petitioner was heard by the Income-tax Officer through his (petitioner's) representative and the assessment orders were passed. At the earliest stage the petitioner did not challenge the competence of the notices under section 148. That being the position, this matter could not be thrashed out earlier by the taxing authorities because this was not brought to their notice. We, therefore, wanted the department to produce the records. From the records produced before us, we find that an assessment order was made in respect of the income of M/s. A. Sarmah, Chiring Chapari, Dibrugarh, the partners of which are A.N Sarmah and J.N Sarmah (the present petitioner before us). In the assessment order against M/s. A. Sarmah, an unregistered firm, the income was assessed at Rs. 26,050 and necessarily the income on the share of the present petitioner would come to Rs. 13,025. That is an assessable income and that being so, it was the duty of the petitioner-assessee to submit return. Having found that, the Income-tax Officer ordered as follows:

“1. Start files in the names of the partners immediately and issue notices u/s. 148 of IT Act, 1961, as below:

(a) Sri Amarnath Sarmah, for the assessment years 1964–65, 1965–66, 1966–67 and 1967–68 and notice u/s. 139(2) for 1968–69 asstt. year.

(b) Sri Jatindra Nath Sarmah for same years as above.”

11. Section 147(a) and (b) of the Act reads as follows:

“147. Income escaping assessment.— 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, or

(b) 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,

he may, subject to the provisions of sections 148 to 153, assess of reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned hereafter in sections 148 to 153 referred to as the relevant assessment year… …”

12. From the materials quoted above from the record, we find that the present petitioner has been a partner of M/s. A. Sarmah and this firm was started some time in 1963 and while assessment of the firm for the assessment year 1967–68 was made it was found that the two partners had assessable income and neither of these two partners filed any return for any year. That being so, it cannot but be held that the Income-tax Officer from these materials had reasons to believe that by reason of omission or failure on the part of the assessee to make a return under section 139 for the assessment years from 1964–65 onwards, income chargeable to tax had escaped assessment for those years. From the grounds recorded as found in the record, we are satisfied that the Income-tax Officer had reasons as contemplated under section 147(a) of the Act while issuing the notices under section 148 of the Act.

13. Mr. Baruah, the learned counsel for the petitioner, submits that the reasons sought to be made out by the department in the instant cases for issuing notices under section 148 have no reasonable nexus to the belief that income chargeable to tax had escaped assessment. In this connection, Mr. Baruah has referred to several decisions of the Supreme Court.

14. In Income-tax Officer v. Lakhmani Mewal Dass, [1976] 103 ITR 437 (SC) the Supreme Court has observed as follows at page 445:

“The grounds or reasons which lead to the formation of the belief contemplated by section 147(a) of the Act must have a material bearing on the question of escapement of income of the assessee from assessment because of his failure or omission to disclose fully and truly all material facts. Once there exist reasonable grounds for the Income-tax Officer to form the above belief, that would be sufficient to clothe him with jurisdiction to issue notice. Whether the grounds are adequate or not is not a matter for the court to investigate. The sufficiency of the grounds which induce the Income-tax Officer to act is, therefore, not a justiciable issue. It is, of course, open to the assessee to contend that the Income-tax Officer did not hold the belief that there had been such non-disclosure. The existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. The expression “reason to believe” does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The reason 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 formation of the belief have a rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose of the section. To this limited extent, the action of the Income-tax Officer in starting proceedings in respect of income escaping assessment is open to challenge in a court of law (see observations of this court in the cases of Calcutta Discount Co. Ltd. v. Income-tax Officer, [1961] 41 ITR 191 (SC) and S. Narayanappa v. Commissioner of Income-tax, [1967] 63 ITR 219 (SC), while dealing with the corresponding provisions of the Indian Income-tax Act, 1922).”

15. In the instant case, the Income-tax Officer found while making assessment of the firm, M/s. A. Sarmah, of which the present petitioner was one of the two partners, that the firm had an income to the tune of Rs. 26,050 and the petitioner was entitled to have half of the same and this firm existed from 1963 onwards. That being the position, it was quite reasonable on the part of the Income-tax Officer to form the belief that this firm must have some income in which the assessee in question must have had a share for which he was liable to submit the return but the assessee did not file any return in any of the assessment years including the assessment years under consideration. That being so, we are clearly of the opinion that there were good grounds on the part of the Income-tax Officer to form the belief that income chargeable to tax had escaped assessment for the two assessment years by reason of the omission or failure on the part of the assessee to make a return under section 139 of the Act for the said assessment years.

16. We, therefore, find that in issuing the notices under section 148 of the Act there was compliance with sub-section (2) of section 148 of the Act as well as there was compliance of clause (a) of section 147 of the Act and that the two notices issued under section 148 were valid in law. The proceedings initiated by these two notices cannot be said to be void ab initio as contended by the learned counsel for the petitioner.

17. In the assessment order it has been stated that on examining the books of accounts of M/s. Traders and Builders Corporation, Dibrugarh, a sum of Rs. 29,041.08 was found to be deposited on various dates during the 1963–64 assessment year in the name of the present petitioner. The petitioner was asked to explain the sources of this deposit and he explained it by stating as follows:

Rs. “1. Savings out of salary income in the State Bank of India, Jorhat Branch, where the assessee worked for 4 years … 5,000 2. Savings out of salary income received from M/s. Sarmah & Siddhanta, Jorhat, where the assessee for worked for one year … 3,000 3. Received from father who had a grocery shop at Jhanji for more than 30 years … 10,000 4. Received from friends and relatives as loan … 11,000 29,000”

18. The Income-tax Officer considered these explanations and for the reasons stated in the assessment order added Rs. 29,000 out of capital accounts found to be deposited in M/s. Traders and Builders Corporation, Dibrugarh, and out of the loan accounts from friends and relatives added Rs. 9,000 as income from undisclosed sources. Thus, a total sum of Rs. 38,000 was added as income from undisclosed sources.

19. Loans and savings to the tune of Rs. 5,000 were considered as genuine in respect of the assessment year 1964–65 by the Commissioner of Income-tax on consideration of the materials on record, and the relief of Rs. 5,000 was allowed for the assessment year 1964–65, and for the assessment year 1965–66, a relief of Rs. 2,400 was allowed to the petitioner under the head “Income from other sources”.

20. The sum of Rs. 29,041.08 was taken from the balance-sheet as on March 31, 1964, submitted by M/s. Traders and Builders Corporation, Dibrugarh, wherein this sum was shown as capital against the name of the petitioner, J.N Sarmah, and it is also an admitted position that at the relevant time the petitioner was a partner of M/s. Traders and Builders Corporation. That being so, there cannot be any doubt that this sum belonged to the petitioner. So, the burden was on the petitioner to establish wherefrom he got this money. The petitioner gave some explanations which were not fully relied upon by the Commissioner of Income-tax for reasons stated in his order. That being so, it cannot be said that the department had any further burden to prove that this was an income of the assessee because the assessee himself stated that he got this sum of Rs. 29,041.08 from certain sources which he failed to establish.

21. The question is whether under such circumstances these amounts may be treated as income. It is found that the sum of Rs. 29,041.08/- was invested by the assessee in the firm, M/s. Traders and Builders Corporation, Dibrugarh, wherein he was a partner at the relevant time. So, there cannot be denying of the fact that this sum was invested by the assessee to M/s. Traders and Builders Corporation, Dibrugarh. The assessee sought to explain the sources of this amount wherein he failed according to the taxing authorities as his explanations were not acceptable and the reasons given by the taxing authorities do not appear to be unreasonable or perverse as submitted by the learned counsel for the petitioner. That being so, the present case will attract the provisions of section 69 of the Act, which reads as follows:

“69. Unexplained investments.— Where in the financial year immediately preceding the assessment year the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the Income-tax Officer, satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year.”

22. We do not, therefore, find any substance in the second submission of the learned counsel for the petitioner.

23. The third submission of the learned counsel for the petitioner is that a part of the explanation given by the assessee with respect to the sum invested has been accepted by the Additional Commissioner of Income-tax though the major part of it has not been accepted and on that ground the Additional Commissioner's order, it is submitted, is not sustainable. We do not find any substance in this submission. The Additional Commissioner of Income-tax, after considering the materials on record, gave some relief to the petitioner but that would not mean that his order is bad for that reason. Mr. Baruah also submits that in paragraph 2 of the assessment order which deals with “income from undisclosed sources”, it has been stated in clause (a) as “capital account deposited on various dates during 1963–64 assessment year — Rs. 29,041.08” and he points out if this deposit was in 1963–64 assessment year, then the assessment could not be made for that assessment year. We have examined the records and we find that this deposit in the balance-sheet was as on March 31, 1964, that is, the assessment year 1964–65, which is the assessment year under consideration. So, this submission also has no substance.

24. In the result, we do not find any merit in these petitions which are accordingly rejected. The rules are discharged. There will be no order as to costs.

N. Ibotombi Singh, J.:— I agree.