Calcutta Credit Corporation Ltd. v. Income-Tax Officer, Central Circle Xiv, And Others.

The Judgment of the Court was delivered by

K.L Roy, J.:— This is an application under article 226 of the Constitution challenging the validity of certain notices issued under section 148 of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), and served on the petitioner by the respondent-Income-tax Officer with the object of reopening the petitioner's assessments for the years 1959–60, 1960–61 and 1961–62, on the ground of the petitioner's failure to disclose fully and truly all material facts for the purpose of its assessments for these years.

2. Section 147 of the Act is more or less identical in terms with section 34(1) of the repealed Income-tax Act, 1922, and provides as follows:

(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 or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned….

Explanation (2).—Production before the Income-tax Officer of account books 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 this section.”

3. The petitioner is a company carrying on the business, inter alia, of financing hire purchase of automobiles. For the assessment years 1959–60, 1960–61 and 1961–62 the petitioner was duly assessed by the Income-tax Officer, “I” Ward, Companies District I, Calcutta, and in making these assessments the petitioner claimed an allowance of a sum of Rs. 5,000 in each year as financial commission paid to Messrs. Purushottam Chowbey & Co. This claim of the petitioner was allowed by the Income-tax Officer in making the assessments for the aforesaid years. The petitioner's appeals to the Appellate Assistant Commissioner, and, thereafter, to the Tribunal, against the quantum of the assessments were partially successful. By three notices purported to be under section 148 of the Act, all dated the 21st November, 1967, the respondent-Income-tax Officer, Central Circle XIV, Calcutta, to whom the petitioner's file had been transferred in the meanwhile, proposed to reopen the petitioner's assessment for the aforesaid years' and to make reassessments in respect thereof as he had reason to believe that the petitioner's income chargeable to tax for the aforesaid assessment years had escaped assessment within the meaning of section 147(a) of the Act. The petitioner's demand for information as to the reasons which prompted the respondent-Income-tax Officer to issue the said notices were rightly rejected by the Income-tax Officer as at that stage the petitioner was not entitled to that information. Thereafter, the petitioner filed the returns for the aforesaid three years as directed by the impugned notices and thereafter again demanded of the respondent-Income-tax Officer to be informed of those reasons which had prompted him to issue the notices under section 148. By his letter dated the 8th April, 1968, the respondent-Income-tax Officer informed the petitioner that during the course of the assessment proceedings for the year 1962–63, one Sri Man Singh Chaturvedi, a coparcener of Messrs. Purushottam Chowbey & Co., was examined and according to his statement no business services were rendered by Purushottam Chowbey & Co. to the petitioner-firm during the relevant accounting years. In view of the above fact it was clear that the petitioner had failed to disclose fully and truly all material facts necessary for its assessment and, hence, its income had escaped assessment for the said years. Dr. Pal for the petitioner submitted that the statements of Chaturvedi, even if assumed to be true, only constituted information within section 147(b) and would entitle the Income-tax Officer to reopen the assessment within four years as provided for in section 149 of the Act. The petitioner had filed its books of account, profit and loss accounts and its balance-sheets for the relevant accounting years and had disclosed all facts material for its assessment. At the time of the original assessments the petitioner made the claim before the Income-tax Officer that it had paid Rs. 5,000 to Messrs. Purushottam Chowbey & Co. in each of these years as financial commission and this claim had been accepted by the assessing Income-tax Officer after due investigation. There had been no failure on the part of the petitioner to disclose fully and truly all material facts necessary for its assessment and the action of the respondent-Income-tax Officer in taking proceedings under section 147(a) was not justified in law.

4. Mr. Chowdhury, the learned counsel for the respondents, submitted that, as it was the assessee's duty to disclose fully and truly all facts necessary for its assessment, it should have disclosed the fact that the payment of the amount to Messrs. Purushottam Chowbey & Co. was not related to any business assistance rendered by the latter to the petitioner and was as such not admissible as a deduction in the petitioner's assessments. Mr. Chowdhury drew my attention to paragraph 13 of the affidavit-in-opposition filed by the respondent-Income-tax Officer where the facts relating to the reasons for the Income-tax Officer's belief that the petitioner's income for the said years had escaped assessment due to its failure to disclose fully and truly all material facts are set out. In the said paragraph it is stated that Man Singh Chaturvedi, a member of the Hindu undivided family of Purushottam Chowbey & Co., was examined on the 19th and 21st November, 1966, and in the course of such examination the books of accounts produced by the said Chaturvedi for the period between 19th October and 30th April, 1962, were examined. From such examination and from the statement of Man Singh it became clear to the respondent-Income-tax Officer that if any payments had been made to Purushottam Chowbey & Co. in respect of the assessment years 1959–60, 1960–61 and 1961–62, the same were not made for the purpose of the petitioner's business. As both the learned counsel have referred to the leading authority on the subject, viz., the decision of the Supreme Court in Calcutta Discount Co. Ltd. v. Income-tax Officer [1961] 41 I.T.R 191, 200, 201, it shall be convenient to consider that decision at this stage. Referring to the words “omission or failure to disclose fully and truly all material facts necessary for his assessment for that year”, occurring in section 34(1) of the repealed Act, their Lordships observed as follows:

“It postulates a duty on every assessee to disclose fully and truly all material facts necessary for his assessment. What facts are material and necessary for assessment will differ from case to case. In every assessment proceeding, the assessing authority will, for the purpose of computing or determining the proper tax due from an assessee, require to know all the facts which help him in coming to the correct conclusion. From the primary facts in his possession, whether on disclosure by the assessee, or discovered by him on the basis of the facts disclosed, or otherwise, the assessing authority has to draw inferences as regards certain other facts; and ultimately, from the primary facts and the further facts inferred from them, the authority has to draw the proper legal inferences, and ascertain on a correct interpretation of the taxing enactment, the proper tax leviable….

There can be no doubt that the duty of disclosing all the primary facts relevant to the decision of the question before the assessing authority lies on the assessee. To meet the possible 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 Income-tax Officer might have discovered, the legislature has put in the Explanation, which has been set out above… 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…

Does the duty, however, extend beyond the full and truthful disclosure of all primary facts? In our opinion, the answer to this question must be in the negative. Once all the primary facts are before the assessing authority, he requires no further assistance by way of disclosure. It is for him to decide what inferences of facts can be reasonably drawn and what legal inferences have ultimately to be drawn.”

5. In that case the assessee had shown sales of a very large number of shares during the accounting year and in the course of its assessment it claimed that the sales were made in the course of its change of investment as it was an investor in shares and not a dealer in shares. The factum of the sales of the shares were disclosed to the Income-tax Officer. In the subsequent years the volume of the sales by the assessee were so considerable that the Income-tax Officer in those years held the assessee to be a dealer in shares. In consequence of his decision in the subsequent years the Income-tax Officer tried to reopen the assessment for the year in question under section 34(1)(a) of the repealed Act which is in pari materia with section 147(a) of the present Act. Their Lordships of the Supreme Court held that the assessee had disclosed the primary fact that during the accounting year it had sold the shares. It was for the Income-tax Officer to have drawn the inference from that primary fact that the assessee was a dealer in shares. It was no part of the duty of the assessee to disclose to the Income-tax Officer that it was a dealer in shares because the contention of the assessee was to the contrary, viz., that it was an investor in shares.

6. Dr. Pal also referred to a Division Bench decision of this court, to which I was a party, in Ashoka Viniyoga Ltd. v. Commissioner Of Income-Tax. only for the following observation which has been quoted in the head-note, namely:

“That additional facts coming to the knowledge of an Income-tax Officer in the assessment for a subsequent year which led him to believe that loss had been wrongly allowed in an earlier year's assessment constitute ‘information’ sufficient to justify the reopening of the earlier year's assessment under section 34(1)(b);”

and contended that in this case also the information which the respondent-Income-tax Officer came in possession of during the proceedings of a subsequent assessment would constitute “information” within the meaning of section 147(b) and the income-tax Officer would be entitled to reopen the assessment under that section within four years from the end of the relevant assessment year. As in this case the notices had been issued and served long after the expiry of four years from the end of the relevant assessment year, the notices are invalid and should be quashed.

7. Apart from relying on the observations of the Supreme Court in Calcutta Discount Co.'s case [1961] 41 I.T.R 191 already quoted, viz., that mere production of books of account is not enough disclosure on the part of the assessee and the assessee is not entitled to argue that it might have been possible for the Income-tax Officer to discover the true facts if he had pursued investigation on the basis of what had been disclosed. Mr. Chowdhury also referred me to another decision of the Supreme Court in Kantamani Venkata Narayana & Sons v. First Additional Income-tax Officer, Rajahmundry. But in this latter case the Supreme Court merely reiterated what they had stated in Calcutta Discount Co.'s case.

8. The whole point, therefore, boils down to this: Whether it was the duty of the petitioner to disclose at the time of the original assessment not only the fact that it was claiming an allowance of Rs. 5,000 as payment made to Messrs. Purushottam Chowbey & Co. as financing commission but was also under an obligation to disclose that the latter firm did not render any service to the petitioner. I am entirely unable to accept the contention of Mr. Chowdhury that by failing to disclose the alleged fact that no services were rendered by Messrs. Purushottam Chowbey & Co. the petitioner had failed to disclose fully and truly all material facts within the meaning of section 147(a). This is exactly the proposition which was rejected by the Supreme Court in the Calcutta Discount Co.'s case. There the Supreme Court held that it was no part of the assessee's obligation to inform the Income-tax Officer that its sale of shares was in the course of its business as a dealer in shares and not in the character of an investor in shares. In the present case the assessee was claiming an allowance of Rs. 5,000 as commission paid to Messrs. Purushottam Chowbey & Co. for services rendered by that company. This payment was corroborated by its books of account produced before the Income-tax Officer. It was for the Income-tax Officer to have investigated that claim and find out whether the amount was actually spent for the purposes of the assessee's business in order to qualify for allowance under the provisions of the Act. Having made a claim for deduction how could it possibly be the assessee's duty to disclose at the same time that the deduction was not permissible? I am satisfied that in this case the impugned notices under ssction 147(a) are not sanctioned by the provisions of that section and should be quashed. The rule would be made absolute. The impugned notices and all proceedings held thereunder would be quashed. There would no order as to costs.

9. On the prayer of the learned counsel for the respondent the operation of this order would be stayed for six weeks from the reopening of the court after the Christmas vacation, but the interim order would continue in the meantime.