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Messrs Abdul Rab Abdul Salam v. Income-Tax Officer, A Ward Tinsukia And Another

Gauhati High Court
Jun 22, 1988
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Structured Summary of the Provided Opinion

Factual and Procedural Background

The petitions were filed by the partnership firm M/s Abdul Rab Abdul Salam. According to the opinion, the firm was constituted on July 1, 1965 with four partners (two named in the firm's name and two others, Abdul Barik and Abdul Jabbar). The firm was said to have been reconstituted on April 1, 1949, with four additional partners inducted on that day. The firm's main office was at Tinsukia (Assam) with branches at Sonari (Sibsagar District) and Calcutta (West Bengal). The firm dealt in stationery and ready-made goods and acted as agent of the Bata Shoe Company at all three places of business.

The litigation concerns income-tax notices to reopen assessment years 1968-69 and 1969-70. The revenue called for returns on June 6, 1968 under sub-section (2) of section 139. For 1968-69 the firm filed a return showing income of Rs. 46,465, later revised to Rs. 73,300. For 1969-70 the return showed income of Rs. 1,08,030. The Income Tax Officer (ITO) finalized orders for assessment years 1967-68, 1968-69 and 1969-70 on September 27, 1971.

The Sales Tax Department's Enforcement Branch searched and seized account books at the firm's Tinsukia office. The Sales Tax Authorities revised turnovers for certain quarters (details set out below), concluding that substantial turnover had escaped assessment. On receipt of particulars from the Sales Tax Authorities, the ITO recorded reasons under Section 147 of the Income-tax Act and served notices to reopen the 1968-69 and 1969-70 assessments. The assessee protested (letters dated October 24, 1973 and November 13, 1973) and ultimately filed two Civil Rules seeking quashing of the impugned notices and to restrain the ITO from reopening the assessments.

Sales Tax particulars furnished to the ITO (as stated in the opinion):

  • Quarter ending September 30, 1967: turnover originally Rs. 3,98,136, revised to Rs. 9,20,463.
  • Quarter ending March 31, 1968: originally Rs. 3,84,381, revised to Rs. 8,46,420. (Together these gave a financial-year-1968 total of Rs. 17,66,892 as ascertained.)
  • Quarter ending September 30, 1968: originally Rs. 4,23,187, revised to Rs. 8,38,997.
  • Quarter ending March 1969: original turnover Rs. 7,51,814 (not revised). (Together these gave a financial-year-1969 total of Rs. 15,90,211 as ascertained.)

Legal Issues Presented

  1. Whether the notices issued under Section 147 (and referred to provisions of Section 148 in the limitation context) to reopen the assessments for assessment years 1968-69 and 1969-70 were valid.
  2. Whether the notice for assessment year 1968-69 (served October 20, 1973) was barred by limitation under clause (b) of Section 148.
  3. Whether the assessee had "disclosed fully and truly all material facts necessary for assessment" so as to preclude reopening under clause (a) of Section 147.

Arguments of the Parties

Assessee's Arguments

  • The assessee contended it had placed its account books before the ITO and that the assessments were finalised on September 27, 1971; therefore, the revenue could not reopen those assessments.
  • The assessee argued the notice for the 1968-69 assessment (served October 20, 1973) was barred by limitation under clause (b) of Section 148, since it was issued more than four years after the assessment order.
  • The assessee relied on authority (57 ITR 637 — Madhya Pradesh Industries Ltd. v. Income-tax Officer, Special Investigation Circle ‘B’ Nagpur) to contend that the High Court may examine the jurisdiction of the ITO in proceedings under Article 226 and that there are grounds (e.g., delay, acquiescence, existence of adequate alternative remedies) on which the High Court may refuse relief.
  • The assessee also relied on decisions limiting reopening power and requiring that the ITO have "reason to believe" (not merely to suspect) and that there be a live link between material before the ITO and the belief that income escaped assessment.

Revenue's Arguments

  • The revenue's position (as recorded) was that additional account books were seized during the Sales Tax Department's search which had not been placed before the ITO during the original assessment. Those seized books revealed that substantial turnover had escaped assessment.
  • On the basis that true account books were not filed before the ITO, the revenue asserted that the ITO was justified in recording reasons under Section 147 and reopening the assessments.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
41 ITR 191 — Calcutta Discount Co. Ltd. v. Income-tax Officer There is no duty on the assessee to disclose further facts which, on due diligence, the assessing authority might have discovered; assessee's duty is to disclose material facts necessary for assessment. The Court cited the principle to explain the limits of the assessee's duty of disclosure and to contrast cases where the assessee did or did not furnish true material.
71 ITR 609 — Commissioner of Income-tax, Calcutta v. Burlop Dealers Ltd. Emphasis on the words "omission or failure" and that the assessee's duty is only to disclose material facts necessary for assessment; what facts are material varies case to case. The Court relied on the decision to clarify that the ITO must determine what inferences to draw from disclosed materials and that an assessee is not obliged to indicate which inference should be drawn against it.
118 ITR 1 — Income-tax Officer, 1-ward, Hundi Circle (Calcutta) v. Madnani Engineering Works Ltd. Where an assessee tenders books of account and evidence from which material facts could be discovered, the assessee may be held to have discharged its obligation; it is for the ITO to decide genuineness of documents. The Court used this to show limits of reassessment where the assessee produced books; contrasted with the instant facts where additional books were seized and not produced earlier.
Haystead v. Commissioner of Taxation (Privy Council), 1926 AC 155 Reopening assessments without proper basis would lead to endless litigation; parties cannot begin fresh litigation simply because new views are entertained. The Court quoted this principle (applied previously in 114 ITR 404) to underline the policy favouring finality and to warn against unrestricted reopening; applied it contextually to stress the need for true nondisclosure before reopening.
114 ITR 404 — Sripur Paper Mills Ltd. v. ITO Applied the Privy Council passage and the principle that reopening should not be used to obtain "another judgment upon a different assessment of fact." Referred to as an instance where the passage was applied by one of the judges; used to support the broader principle of finality unless nondisclosure or concealment is shown.
57 ITR 637 — Madhya Pradesh Industries Ltd. v. Income-tax Officer, Special Investigation Circle ‘B’ Nagpur High Court may examine jurisdictional questions in proceedings challenging a notice; High Court may refuse relief on grounds like delay, acquiescence, existence of alternative remedy, or failure to disclose material facts. The Court acknowledged this authority to confirm that the assessee could challenge the ITO's jurisdiction in the High Court but observed that the High Court's inquiry into the correctness of inferences is limited.
67 ITR 11 — Commissioner of Income-tax, Gujarat v. A. Raman and Co. Taxpayer may challenge the validity of a notice under section 147 on the ground that the condition precedent does not exist, but the High Court should not investigate whether the inferences drawn by the ITO are correct. The Court cited this to delineate the scope of judicial review when a taxpayer challenges a reopening notice.
103 ITR 437 — Income-tax Officer, 1 ward, Dist. VI, Calcutta v. Lakhmani Mewal Das The words of the statute require "reason to believe" and not merely "reason to suspect"; reopening after many years requires a live link/close nexus between material and belief that income escaped assessment. The Court relied on this to stress that reopening must be based on adequate grounds forming a close nexus between material before the ITO and the belief that income escaped assessment.
63 ITR 219 — S. Narayanappa v. Commissioner of Income-tax, Bangalore Procedure: before issuing a notice, the officer must record reasons for initiating action and obtain the sanction of the Commissioner (under the earlier section 34 provision). The Court cited the case to emphasise procedural safeguards and requirements that attend reopening actions.

Court's Reasoning and Analysis

The Court first addressed the limitation argument. Although the assessee contended that the notice for assessment year 1968-69 (served October 20, 1973) was time-barred under clause (b) of Section 148, the Court held that no question of bar of limitation arises because the impugned notices were served on facts falling under clause (a) of Section 147 (i.e., on the basis that material facts necessary for assessment had not been disclosed). This conclusion is stated directly in the opinion.

The Court then set out the governing legal principles concerning reopening of assessments, relying on the language of clause (a) of Section 147: whether the assessee disclosed "fully and truly all material facts necessary for assessment." The Court explained the allocation of responsibilities:

  • Once an assessee has disclosed material facts necessary for assessment and the assessment is finalized, the same issues ordinarily cannot be reopened merely because the ITO later forms a different conclusion.
  • The ITO may, however, call for additional information, investigate further, and — if it is found that true facts were not disclosed (for example, true account books were not filed) — record reasons under Section 147 and reopen the assessment.

Applying these principles to the facts, the Court examined whether the assessee had placed before the ITO the true account books on which the ITO could fairly rely. The Sales Tax Department's search produced additional account books that were not before the ITO when the assessments were finalized on September 27, 1971. The Court accepted the revenue's position that those seized books disclosed true facts that had not been placed before the ITO and that, therefore, the ITO was entitled to record reasons and reopen the assessments under Section 147.

The Court reviewed the precedents cited (including decisions that limit reopening where the assessee had tendered genuine books and the ITO could, with due diligence, have discovered the facts). It recognized the policy reasons against unrestricted reopening (quoting Privy Council authority on finality) but concluded that the present case fell on the other side of the line because of nondisclosure of true material (the additional seized books).

The Court also considered the scope of High Court review in challenges to reopening notices, acknowledging authorities that permit jurisdictional review but prohibiting the High Court from reweighing the inferences drawn by the ITO from the material before him. On the facts, the Court found no ground to interfere with the ITO's action.

Holding and Implications

Holding: The Civil Rules (the writ petitions) challenging the notices to reopen the assessments for assessment years 1968-69 and 1969-70 are DISMISSED.

Consequences and implications as stated in the opinion:

  • The impugned notices to reopen the two assessments were held to be valid; the Court found no vice in the notices.
  • The limitation objection to the notice for 1968-69 was rejected because the notices were issued under clause (a) of Section 147 (nondisclosure of material facts), not under clause (b) of Section 148.
  • The Court confirmed that while the High Court has jurisdiction to examine jurisdictional challenges to an ITO's notice, it will not undertake investigation of whether the ITO's inferences from the material are correct; on the facts here, there was no basis for interference.
  • The Civil Rules were dismissed with costs of Rs. 250 in each case.
  • The opinion indicates the Court applied established principles rather than creating any new precedent; the decision enforces existing law concerning reopening where true material was not disclosed to the assessing officer.

No other points were argued, and the Court recorded that no further interference was warranted on the facts presented.

Show all summary ...

A. Raghuvir, C.J:— These two writ petitions are filed by a partnership firm called M/s Abdul Rab Abdul Salam. The firm was constituted on July 1, 1965 with four partners. Two among the partners are indicated in the firm's name. The other two are Abdul Barik and Abdul Jabbar. The firm was reconstituted on April 1, 1949 and four more partners were inducted on that day. The main office of the firm is at Tinsukia in Assam and branch at Sonari in Sibsagar District and another branch at Calcutta in the State of West Bengal. The firm deals in stationary ready-made goods and is the agent of the Bata Shoe Company at all the three places of business. The issue raised in the two Civil Rules pertain to Income-tax orders of the firm for assessment years 1968-69 and 1969-70. The circumstances which prompted the firm to file the two Civil Rules are set out below and as to what has preceded the impugned notices and as to why the revenue has served the two notices on the firm.

2. On June 6, 1968 the assessee was called upon to submit return for the assessment year 1968-69 under sub-section (2) of section 139 of the Income Tax Act. In response the assessee (the firm) filed the return showing the income of Rs. 46,465/-. This amount was later revised to Rs. 73,300/-. For the assessment year 1969-70 the assessee filed a return after a like notice by the revenue showing the income of Rs. 1,08,030/-. In the inquiry held the assessee offered books of account and filed the books of profit and loss balance-sheets for each accounting year of main office and two branches. On September 27, 1971 the Income Tax Officer finalised orders for the assessment year 1968-69 and 1969-70 and on that day also for assessment year 1967-68. The impugned notices were served on the assessee by the Income Tax Officer to reopen the assessment of 1968-69 and 1969-70. Therefore the assessee approached this Court to quash the two notices. What prompted the revenue to re-open the assessments is concerned with the events that have had transpired in the Enforcement branch of the Sales tax Department. The Head Office of the assessee at Tinsukia was searched and in that account books were seized. It was found enormous turnover of the business of the assessee was discovered by the Sales tax Department to have escaped assessments. Therefore the assessment orders were revised including the assessment orders relevant to Income tax year 1968-69 and 1969-70.

3. When information reached the Income-tax Officer of seizure of books and revision of assessment orders the Superintendent of Taxes was requested to furnish necessary particulars of the revisions made by that Department. In response the Sales Tax Authorities furnished, particulars showing the quarter ending September 30, 1967 the turnover shown at Rs. 3,98,136/- before the books were seized, was, later revised to Rs. 9,20,463/-. The quarter ending March 31, 1968 the original turnover of Rs. 3,84,381/- was revised to Rs. 8,46,420/-. Thus, for financial year 1968 figures Rs. 9,20,463/- plus Rs. 8,46,429/- was the total turnover of Rs. 17,66,892/- was ascertained. Likewise, for the quarter ending September 30, 1968 the original turnover was Rs. 4,23,187/- which was revised to Rs. 8,38,997/-. The original turnover for the succeeding quarter ending with March, 1969 Rs. 7,51,814/- was not revised. Thus the total of the turnover for the financial year 1969 was ascertained Rs. 7,51,814/- plus Rs. 8,38,397/- = Rs. 15,90,211/-.

4. After the particulars were received, the ITO under Section 147 of the Income Tax Act recorded the reasons for reopening the two assessment orders and served the two impugned notices. The assessee once on October 24, 1973 and later on November 13, 1973 by two letters protested. The validity of the notice was questioned and sought for clarifications. When nothing was heard from the revenue the assessee filed the two Civil Rules to quash the impugned two notices and flutter to interdict the ITO not to reopen the assessment orders.

5. We may here at the outset mention one aspect relevant: to the bar of limitation raised by the assessee. It is seen the two assessment orders were finalised on September 27, 1971 and from the above date one of the questions raided by the assessee relating to assessment order of 1968-69 is that the notice was served on October 20, 1973 after four yearstherefore the notice is barred under clause (b) of Section 148 of the Act, As far as the assessment order relating to 1969-70 notice is not assailed as barred. We hold no question of bar of limitation arises in either of the cases as the impugned notices are served on facts under clause (a) of section 147 not under (b) of Section 147

6. We may now consider the principal issue raised in the two cases. The issue raised is not res Integra. When assessment can be re-opened is set out in the Income-tax Act. What principles govern the issues in reopening of assessments and when assessments can be reopened was explained by Courts Nevertheless whenever such issues are raised the courts will have to apply the principles laid down to the facts of each case. In that sense in the two cases the issue has to be scrutinised from the perspective of Account Book which are not filed before the Income Tax Officer and the turnover of the assessments discovered to have been escaped.

7. The principle in such cases is culled out from the words in clause (a) of Section 147 of the Income-tax Act. The words are whether assessee disclosed “fully and truly all material facts necessary for assessment”. Once the assessee does that what inferences are to be drawn is in the hands of the Income-tax Officer. It is open for the Income-tax Officer not to act on the representation of the assessee, call for additional information or further investigate facts and pass the assessment order. In doing so he may totally reject the case of the assessee or partially accept the representation of the assessee or fully agree with the case of the assessee. Once the assessment order is finalised or issues in the inquiry are settled the same issues cannot be reopened later stating the ITO has discovered the truth later. The conclusion arrived earlier was discovered to be wrong or the assessee got away with the false representation. The ITO can reopen only if he records true facts were not disclosed; (like true account books were not filed as in this case).

8. Three decisions of the Supreme Court are cited and in that three cases the above principle is explained. The first one is 41 ITR 191 (Calcutta Discount Co. Ltd. v. Income-tax Officer) and in that case it was explained “there is no duty on the assessee to disclose further facts, which on due diligence, the Income-tax Officer might have discovered……. which might have been discovered by the assessing authority if he had pursued investigation on the basis of what has been disclosed”. There was no further duty on the assessee it was emphasised what inferences are to be drawn or for what matter what proper inferences to be drawn. Again in 71 ITR 609 (Commissioner of Income-tax, Calcutta v. Burlop Dealers Ltd.) emphasis was laid on words “omission or failure” how it is to be considered is discussed. The discussion shows the duty postulated by the assessee is only to the extent to disclose fully and truly material facts necessary for assessment. What facts are material and what are not necessary for assessment will differ from case to case. “Where on the evidence and the materials produced the Income-tax Officer could have reached a conclusion other than the one which he has reached” was juxtaposed to snow the assesses was under no obligation to inform “the Income-tax Officer which inference may be raised against him. The above cited two cases were relied in the third case 118 ITR 1 (Income-tax Officer, 1-ward, Hundi Circle, (Calcutta) v. Madnani Engineering Works Ltd.), In that case what can be done by the ITO was further explained. What is not the duty of the assesses in the discussion of the case is explained with reference to the contention raised in that case “the assessee contended that it has produced all the relevant materials and documents necessary for competing the assessment and it was under no obligation to inform the ITO about the true nature of the transaction and there was accordingly no failure on its part to disclose fully and truly and material facts necessary for its assessment……”. The assesses discharged his obligation so it was held when he tenders books of account and evidence from which material facts could be discovered. It was for the ITO to decide whether the documents produced by the assesse were genuine or false. All the aspects considered in the two earlier cases were explained and followed.

9. Thus once assessee disclosed material facts necessary and assessment is finalised later for a different conclusion on the same fact the assessments cannot be reopened. If this was not the law on Privy Council case from Australia held “litigation will never end”. The assessee can never rest in peace. The revenue can always reopen and such a power to reopen the orders can be wielded to harass the assessee. Litigation can never be concluded finally. All assessment can be reopened with a view to “obtain another judgment upon a different assessment of fact”. The Privy Council further held “Parties are not permitted to begin fresh litigation because of new views they may entertain of the law of the case or new versions which they present as to what should be a proper apprehension by the Court of the legal result either of the construction of the document or the weight of certain circumstances. If these were permitted litigation would have no end except when legal ingenuity is exhausted”. These aspects were applied by one of us (Raghuvir, J.) in 114 ITR 404 in Sripur Paper Mills Ltd. v. ITO. The above passage extacted is found in Privy Council case Haystead v. Commissioner of Taxation, 1926 AC 155.

10. In the instant case on the basis of those three cases the assessee contended accounts books were placed before the ITO. The assessment orders ware concluded therefore it is no more open for the revenue to reopen orders. The reasons recorded for reopening the case are facts disclosed in search and seizure of the accounts books by the Sales Tax Authorities. The additional accounts books which were seized in the search held in May 1969 were not placed by the assessee before the revenue. It is only from accounts books seized from the assessee true facts came to light is the case of the revenue. The books seized at Tinsukia were not placed before the Revenue is obvious from the facts when the order was finalised on September 27, 1971. Therefore the assessee did not place “true material” before the ITO. Therefore it is asserted rightly by the revenue that they are entitled to reopen the assessment.

11. We have set out at first what is the principle which govern the reopening of assessments. We have applied the principles to the facts of the instant cases we hold the impugned notices did not suffer from any vice whatever.

12. It was argued on behalf of the assessee by placing reliance on 57 ITR 637 (Madhya Pradesh Industries Ltd. v. Income-tax Officar, Special Investigation Circle ‘B’ Nagpur) the assessee can question the jurisdiction of the ITO in a proceeding under Art. 226 of the Constitution. That contention is well founded. The Supreme Court in that case held: “the jurisdiction of the Income-tax officer obviously arises when he has reason to believe that by reason of cmission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment we are not seeking to lay down any rigid rule about the nature or question of enquiry which the High Court in a petition which seeks to challenge the issue of a notice under section 34(1)(a) of the Indian Income-tax Act may make. If there be other grounds which appear to the High Court to be adequate such as delay or acquiescence, existence of an adequate alternative remedy which is equally efficacious, or failure to disclose all material facts which have a bearing on the question of misrepresentation of facts, jurisdiction of the High Court to dismiss a petition in limine cannot be denied”. Again in 67 ITR 11 (Commissioner of Income-tax, Gujarat v. A. Raman and Co.) the powers of the High Court were reiterated. “……The taxpayer may challenge the validity of a notice under section 147 of the Income-tax Act, 1961, on the ground that either branch of the condition precedent does not exist, but an investigation whether inferences raised by the Income-Tax officer from the information are correct or proper cannot be made.” Finally the assessee relied on 103 ITR 437 (Income-tax Officer, 1 ward, Dist. VI, Calcutta v. Lakhmani Mewal Das) in that case the subject was fine tuned as to what the High Courts can and cannot do. “The powers of the Income-tax to reopen assessment, though wide, are not plenary. The words of the statute are ‘reason to believe’ and not reason to suspect”. The reopening of the assessment after lapse of many years is a serious matter. The Act, no doubt, contemplates the reopening of the assessment if grounds exist for believing that income of the assessee has escaped assessment. The underlying reason for that is that instance of concealed income or other income escaping assessment in a large number of cases came to the notice of the Income tax authorities after the assessment has been completed. The provisions of the Act in this respsect depart from the normal rule that there should be, subject to right of appeal and revision, finality about orders made in judicial and quasi-judicial proceedings. It is, therefore, essential that before such action is taken the requirements of the law should be satisfied the live link or close nexus which should be there between the material before the Income-tax Officer should exist.”

13. In 63 ITR 219 (S. Narayanappa v. Commissioner of Income-tax, Bangalore) another case which is cited in emphasised the subject with reference to procedure to be followed. “But before issuing the notice the proviso requires that the officer should record his reasons for initiating action under section 34 (the earlier provision under 1922 Act) and obtain the sanction of the Commissioner who must be satisfied that the action under section 34 was justified”.

14. We experience no difficulty in holding the assessee can approach the High Court for relief but on consideration of the facts we hold no case is made out in the instant cases for the interference by the Court. No other point has been argued.

15. For the aforesaid reasons the Civil Rules are dismissed with costs. The costs fixed are at Rs. 250/- in each case.