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Radheshyam Ladia v. Income-Tax Officer
Factual and Procedural Background
The short point before the court was whether an assessee is obliged at the time of his assessment to disclose any transfers made by his wife of assets that had been gifted to her by the assessee and which might have resulted in capital gains during the accounting year.
Procedural facts (as stated in the opinion): The petitioner was assessed to income-tax for the assessment year 1960–61 under section 23(3) of the Income-tax Act, 1922 on 4 March 1961 by the Income-tax Officer, “C” Ward, Special Survey Circle-IV, Calcutta. Assessments for the years 1961–62 and 1962–63 were made under section 143(3) of the Income-tax Act, 1961 on 10 and 11 June 1963 respectively. The assessment orders for 1961–62 and 1962–63 recorded that certain interest received by the assessee's wife had been included in the assessee's total income under section 16(3) of the old Act and/or section 64 of the new Act; the 1961–62 order also observed that the assessee had made a gift of Rs. 1,00,000 to his wife during the accounting year.
Three notices purportedly under section 148 of the 1961 Act, all dated 6 January 1968, were served on the assessee by the respondent Income-tax Officer, “B” Ward, District I(2), Calcutta, to whom the assessee's file had been transferred. After the assessee's protest was not heeded, this court issued a rule on 21 May 1968 requiring the respondents to show cause why the notices should not be quashed and why further action should be prohibited.
In opposition, the respondent Income-tax Officer stated that during the assessment of the assessee's wife (Smt. Sushila Debi) for 1963–64 she contended she had received valuable assets from the petitioner between 11 December 1955 and 28 October 1960 without adequate consideration: over 1,203 tolas of gold and jewellery (about 11 December 1955) and Rs. 1,00,000 (about 28 October 1960). It was represented that the jewellery was sold between 1959 and 1962. The respondent asserted that income from those assets and/or capital gains arising from their sale had not been disclosed by the assessee in his return and had not been included in his total income for assessment years 1960–61 to 1962–63; hence the impugned notices were issued on the ground that the assessee failed to disclose fully and truly all material facts necessary for assessment.
Legal Issues Presented
- Whether an assessee has an obligation at the time of his assessment to disclose transfers made by his wife of assets gifted to her by the assessee that may have resulted in capital gains during the accounting year.
- Whether the omission to disclose any such capital gains or income (arising to the wife from assets transferred by the assessee) justified the Revenue in issuing notices under section 148 (and assuming jurisdiction under section 147/34 as argued) for reassessment.
Arguments of the Parties
Petitioner's Arguments (as presented by Dr. Pal)
- Relying on the Calcutta Discount Company's case, a duty was cast on every assessee to disclose fully and truly all material facts necessary for assessment; however, once the primary facts are disclosed the assessing authority must draw the necessary inferences and determine the correct tax—there is no obligation on the taxpayer to spell out every inferred or legal conclusion.
- The assessee had disclosed transfers to his wife (including the Rs. 1,00,000) at the time of original assessment and the Income-tax Officer had included interest accruing to the wife in the assessee's total income. Any question whether capital gains arose from sales of transferred assets was for the Income-tax Officer to investigate from the primary facts already disclosed; the assessee was not obliged to disclose that capital gains had accrued.
- He relied upon the Supreme Court decision in Muthiah Chettiar v. Commissioner of Income-tax, which held that section 16(3) imposed an obligation on the Income-tax Officer to compute items includible in an assessee's total income, but imposed no obligation on the taxpayer to disclose incomes includible under section 16(3); therefore reassessment could not be commenced under section 34(1)(a) for mere failure to disclose such income.
Respondent's / Revenue's Arguments (as presented by Mr. Mitter and the Income-tax Officer)
- The Muthiah Chettiar decision was distinguishable because it was based on the interpretation of section 22 of the 1922 Act, whereas the 1961 Act introduced section 139 which requires filing a return in prescribed form and furnishing prescribed particulars—this represented a material change.
- Under section 139 and the Indian Income-tax Rules, 1962 (Form No. 3), the return contains a note stating that if income of any other person is includible under sections 60–64 of the 1961 Act, such income should be shown separately in the return; therefore it was the petitioner's duty to disclose in his return any income (including capital gains) accruing to his wife from assets transferred without adequate consideration.
- Accordingly, omission to show such income justified issue of notices under section 148 and reassessment action.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Sevantilal Maneklal Sheth v. Commissioner Of Income Tax (Central), Bombay [1968] 68 I.T.R. 503 | Established that on inclusion of "capital gains" in the definition of income, the term "income" in section 16(3) must be construed to include capital gains (i.e., capital gains fall within income for purposes of section 16(3)/section 64). | The court used this to conclude that if capital gains arose to the petitioner's wife from assets gifted by the petitioner, such capital gains would be includible in the petitioner's total income under section 16(3) of the 1922 Act or section 64 of the 1961 Act; omission to include them would amount to escaped assessment. |
| Calcutta Discount Company's case [1961] 41 I.T.R. 191 | Held that under section 34 of the old Act (and by analogy under section 147 of the 1961 Act) a duty was cast on every assessee to disclose fully and truly all material facts necessary for his assessment; once primary facts are disclosed the assessing authority must draw inferences. | This case was relied on by the petitioner to support the proposition that an assessee need not disclose every inferred fact (such as capital gains arising to his wife) and that the assessing officer must itself draw the required factual and legal inferences from primary facts disclosed. |
| Muthiah Chettiar v. Commissioner of Income-tax (Supreme Court) | Held that section 16(3) imposed an obligation on the Income-tax Officer to compute an individual's total income by including items set out in the clauses, but imposed no obligation on the taxpayer to disclose income liable to be included under section 16(3); omission to disclose could not support reassessment under section 34(1)(a). | The court treated this authority as decisive: following Muthiah Chettiar, the court held that by not showing income of the assessee's wife which is includible under section 16(3), the assessee cannot be deemed to have failed or omitted to disclose fully and truly all material facts necessary for assessment; hence the revenue's assumption of jurisdiction was unjustified. |
Court's Reasoning and Analysis
The court structured its analysis in the following steps (as presented in the opinion):
- Statutory scope: The court first observed that section 16(3) of the 1922 Act (re-enacted as section 64 of the 1961 Act) sets out circumstances in which income of a spouse or minor child is to be included in the assessee's total income, including income arising to the spouse from assets transferred directly or indirectly by the assessee otherwise than for adequate consideration.
- Capital gains: The court relied on the Supreme Court decision in Sevantilal Maneklal Sheth to hold that, after capital gains were introduced as a head of income, the term "income" in section 16(3) includes capital gains. Therefore, capital gains realized by the wife from assets gifted by the assessee would be includible in the assessee's total income under section 16(3)/section 64.
- Consequence of non‑inclusion: If such capital gains were not included in the assessee's total income for the relevant years, that would constitute the assessee's income having escaped assessment.
- Precedent on disclosure duties: The court then addressed the petitioner's reliance on Calcutta Discount Company's case and, more importantly, on the Supreme Court's decision in Muthiah Chettiar. Muthiah Chettiar held that although section 16(3) obliges the Income-tax Officer to include certain incomes when computing total income, it does not impose on the taxpayer an obligation to disclose those incomes; failure to disclose such incomes cannot by itself justify reassessment under section 34(1)(a).
- Revenue's distinction and court's response: The Revenue argued that the earlier decisions were distinguishable because of changes in the law—particularly the shift from section 22 of the old Act to section 139 of the 1961 Act and the prescribed particulars in forms under the Indian Income-tax Rules, 1962 (Form No. 3). Form No. 3 contained a note saying income of other persons includible under sections 60–64 should be shown separately.
- Interpretation of section 139 and Form No. 3: The court rejected the submission that these changes meant the assessee was required to file a single return incorporating both his own total income and the total income of any other person in respect of which he was assessable. The court held that section 139 contemplates that a person assessable in respect of the income of another person (as a representative assessee) may have to file a return in respect of that income; it does not require the assessee to include another person's separate total income together with his own in a single return. Consequently, the presence of a note in Form No. 3 did not alter the principle in Muthiah Chettiar that a taxpayer cannot be deemed to have failed to disclose all material facts merely because income includible under section 16(3) was not shown.
- Conclusion from precedents and statutory interpretation: Considering the Supreme Court's definite view in Muthiah Chettiar (as applied to the comparable provisions of section 16(3) and section 64), the court concluded there had been no failure by the assessee to disclose fully and truly all material facts necessary for his assessment within the meaning of section 34(1)(a) (and by analogy section 147/148). Therefore, the Revenue's assumption of jurisdiction to reopen the assessments was not justified.
Holding and Implications
Holding:
The impugned notices purportedly issued under section 148 (and the assumption of jurisdiction under section 147/34 as contended) were unjustified and are quashed.
Implications:
- Direct effect: The respondents are prohibited from proceeding on the impugned notices; the rule was made absolute and the notices were quashed. There was to be no order as to costs.
- Broader precedent: The court applied and followed existing Supreme Court authority (notably Muthiah Chettiar and Sevantilal Maneklal Sheth). The opinion does not purport to lay down a new departure from those authorities; it applies them to the facts before the court to determine that there was no failure by the assessee to disclose such as would justify reopening the assessments.
1. The short point that arises for consideration in this application is whether there is any obligation on an assessee to disclose at the time of his assessment any transfers made by his wife of assets, gifted to her by the assessee, which might have resulted in capital gains during the accounting year. The facts shortly are that the petitioner was assessed to income-tax for the assessment year 1960–61 under section 23(3) of the Act of 1922 on 4th March, 1961. The assessment was made by the Income-tax Officer, “C” Ward, Special Survey Circle-IV, Calcutta. His assessments for the years 1961–62 and 1962–63 were made under section 143(3) of the 1961 Act on 10th and 11th June, 1963, respectively, and it appears from the assessment orders for these two years that certain interest received by the assessee's wife were included in the assessee's total income under section 16(3) of the old Act and/or section 64 of the new Act. There is also an observation in the assessment order for 1961–62 that during the accounting year the assessee had made a gift of Rs. 1,00,000 to his wife out of his income. Three notices purported to be under section 148 of the 1961 Act, all dated the 6th January, 1968, were served on the assessee by the respondent-Income-tax Officer, “B” Ward, District I(2), Calcutta, to whom the assessee's file had in the meantime been transferred. As the assessee's protest to the Income-tax Officer as to the propriety of the aforesaid notices went unheeded this rule was obtained from this court on the 21st May, 1968, requiring the respondent-Income-tax Officer, the respondent-Commissioner of Income-tax, West Bengal-III, and the respondent-Union of India, to show cause why proper writs should not be issued to quash the aforesaid notices purported to have been issued under section 148, and why a direction prohibiting the respondents from taking any further action thereon should not be given. In showing cause the respondent-Income-tax Officer, in paragraph 3 of the affidavit-in-opposition, has disclosed the following reasons for his belief that the assessee's income for the aforesaid three years had escaped assessment, viz., that during the course of her assessment for the year 1963–64, Smt. Sushila Debi, the wife of the petitioner, contended that she had received valuable assets from the petitioner between the 11th December, 1955, and the 28th October, 1960, without adequate consideration in money or money's worth. It was further contended on her behalf that she had received over 1,203 tolas of gold and jewellery on or about the 11th December, 1955, and Rs. 1,00,000 in cash on or about the 28th October, 1960. It was further represented on her behalf that the said jewellery was sold between the years 1959 and 1962. As the income from the said assets transferred to the wife and/or the capital gains arising from the sale of the said gold or jewellery had not been disclosed by the assessee in his return and had not been included in his total income for the three assessment years 1960–61 to 1962–63, the impugned notices were issued as the petitioner had failed and neglected to disclose fully and truly all material facts necessary for the purpose of his assessment for these years.
2. The income accruing or arising to the wife or a minor child of an assessee is to be included in his total income under certain circumstances.
3. Under section 16(3) of the 1922 Act, which has been re-enacted in section 64 of the 1961 Act, it is provided that in computing the total income of an individual, there shall be included all such income as arises directly or indirectly—
(i) to the spouse of such individual from the membership of the spouse in a firm carrying on a business in which such individual is a partner;
(ii) to a minor child of such individual from the admission of the minor to the benefits of partnership in a firm in which such individual is a partner;
(iii) to the spouse of such individual from assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart;
(iv) to a minor child, not being a married daughter of such individual, from assets transferred directly or indirectly to the minor child by such individual otherwise than for adequate consideration;
(v) to any person or association of persons from assets transferred otherwise than for adequate consideration to the person or association of persons by such individual, to the extent to which the income from such assets is for the immediate or deferred benefit of his or her spouse or minor child or both.
4. After the introduction of the tax on capital gains the heads of income chargeable to tax were enlarged from 5 to 6 by the inclusion of capital gains. It is now settled by the decision of the Supreme Court in Sevantilal Maneklal Sheth v. Commissioner Of Income Tax (Central), Bombay [1968] 68 I.T.R 503, that on the inclusion of “capital gains” in the definition of income, the term “income” as used in section 16(3) must be construed to include capital gains and that there was nothing in the context or in the language of section 16(3) to suggest that capital gains was excluded from its scope. It is, therefore, clear that if any capital gains had arisen to the petitioner's wife from the transfer of any assets gifted by the petitioner to his wife, such capital gains would be included in the total income of the petitioner either under section 16(3) of the 1922 Act or section 64 of the 1961 Act, and if no such capital gains have been so included it is clearly a case of the assessee's income escaping assessment.
5. Dr. Pal for the petitioner contended that it is now settled by the decision of the Supreme Court in Calcutta Discount Company's case [1961] 41 I.T.R 191, that under section 34 of the old Act or section 147 of the 1961 Act a duty was cast on every assessee to disclose fully and truly all material facts necessary for his assessment. 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 is to draw inference 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 inference and ascertain on a correct interpretation of the taxing enactments the proper tax leviable. 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. Dr. Pal submitted that in this case the assessee had disclosed to the Income-tax Officer at the time of his original assessment that he had transferred certain assets to his wife including a sum of Rs. 1,00,000 without adequate monetary consideration and the Income-tax Officer had included the interest accruing or arising to the petitioner's wife from the assets transferred in the total income of the petitioner in these years. Whether any capital gains could have arisen to the assessee's wife due to the sale of any of the assets transferred was to have been investigated and determined by the Income-tax Officer from the primary facts disclosed and there was no obligation on the petitioner to have disclosed the fact that any such capital gains had accrued to the wife either in his return or subsequently in the course of the assessment. For this proposition, Dr. Pal relied on a recent decision of the Supreme Court in Muthiah Chettiar v. Commissioner of Income-tax. The facts in that case were that the wife of the assessee was a partner in a firm of which the assessee was a partner while his minor child had also been admitted to the benefits of that partnership. In accordance with the provisions of section 22(5) of the 1922 Act the names of the partners of the firm including the assessee's wife and minor child were shown in Part III of the return, but the share income of the wife and the minor child was not included in the assessee's total income in the return. On the Income-tax Officer issuing a notice for reassessment under section 34(1)(a), the Supreme Court held that section 16(3) of the Act imposed an obligation upon the Income-tax Officer to compute the total income of an individual for the purposes of assessment by including the items of income set out in clauses (i) to (iv), but thereby no obligation was imposed upon the taxpayer to disclose the income liable to be included in his assessment under section 16(3). For failing or omitting to disclose that income proceedings for reassessment could not be commenced under section 34(1)(a). Certain passages in the judgment of the court are quoted below in order to meet certain arguments advanced by the learned counsel for the respondents:
“Section 23 dealt with the assessment. It conferred power upon the Income-tax Officer to assess the total income of the assessee and to determine the sum payable by him on the basis of such return submitted by him. Rule 19 framed under section 59 of the Income-tax Act, 1922, required the assessee to make a return in the form prescribed thereunder, and in Form A applicable to an individual or a Hindu undivided family or an association of persons there was no clause which required the disclosure of income of any person other than the income of the assessee, which was liable to be included in his total income. The Act and the Rules accordingly imposed no obligation upon the assessee to disclose to the Income-tax Officer in his return information relating to income of any other person by law taxable in his hands.”
6. In answer to the arguments advanced by the revenue that “in the notes of of” for drawing up the return there were instructions that the assessee should disclose the income received by his wife and minor children from a firm of which the assessee is a partner, the court observed that “assuming that there were instructions printed in the forms of return, in the absence in the return of any head under which the income of the wife or a minor child of a partner whose wife or minor child was a partner in the same firm could be shown, by not showing that income, the taxpayer could not be deemed to have failed or omitted to disclose fully and truly all material facts necesssary for his assessment.” Dr. Pal relied on this judgment and stressed the fact that there was no material distinction between the provisions of section 16(3) of the old Act and section 64 of the present Act and the same principles would also apply in the instant case and it must be held that the Income-tax Officer was not justified in issuing the impugned notices.
7. Mr. Mitter, the learned counsel for the department, presented an interesting argument and submitted that the aforesaid decision of the Supreme Court in Muthiah Chettiar v. Commissioner of Income-tax was distinguishable as it was based mainly on the interpretation of the provisions of section 22 of the old Act from which there has been a material change in the provisions of the corresponding section 139 of the 1961 Act. While under section 22 of the old Act the Income-tax Officer had to issue a general notice under sub-section (1) and a personal notice to the assessee under sub-section (2) requiring him to furnish a return in the prescribed form and verified in the prescribed manner setting forth along with such particulars as may be specified in the notice his total income during the previous year, section 139 requires every person whose total income exceeds the maximum exempted from tax to file a return of his income within the time specified in the section in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed. There is also a provision in this section similar to section 22(2) enabling the Income-tax Officer to serve a notice on any person who in the opinion of the Income-tax Officer has a total income taxable under the Act to file a return also in the prescribed manner and setting forth such other particulars as may be prescribed. Mr. Mitter pointed out that under the old Act it was only those particulars that were asked for in the notice that were required to be furnished in the return while under the new Act the particulars as prescribed must be furnished in the return. Mr. Mitter also pointed out that it was the duty of every person, if his total income or the total income of any other person in respect of which he is assessable (under the 1961 Act) to tax exceeded the maximum amount exempted from tax to file the return in respect of such income. This is a new provision introduced in the 1961 Act and was not present in the earlier Act. So far as the latter part of the argument of Mr. Mitter is concerned, I am of the opinion that the income of any person in respect of which an assessee is assessable must refer to the income which the assessee is assessable as a representative assessee. Section 139 does not contemplate that an assessee should file one return including therein not only his own total income but also the total income of any other person in respect of which he is assessable. If he is assessable in respect of the income of any other person and if his own total income is also assessable he will be required to furnish two separate returns, one in respect of his own total income and one in respect of the income for which he is assessable. The other contention of Mr. Mitter is that the return should contain all the particulars prescribed and in the form prescribed under the Indian Income-tax Rules, 1962. Form No. 3, which is the form of a return for an individual, contains, inter alia, a note to the following effect, viz.:
“If the income of any other person is includible in your total income under section 60, 61, 62, 63 or 64 of the Income-tax Act, 1961, such income should also be shown separately in this return under the appropriate heads.”
8. Accordingly, Mr. Mitter contended that it was the duty of the petitioner to have disclosed in his return any income including capital gains accruing or arising to his wife from assets transferred to her without adequate monetary consideration. At first sight this argument sounds logical but, as I have already pointed out, before the Supreme Court in Muthiah Chettiar's case a similar contention was raised by the counsel for the department which is noticed at page 188 of the report and I have also quoted the observation of the Supreme Court in that case that assuming that there are instructions printed in the forms of return the taxpayer cannot be deemed to have failed or omitted to disclose all material facts necessary for his assessment as there were no appropriate heads under which the income of the wife or minor child could be shown. Considering the very definite view taken by the Supreme Court in the aforesaid case that by not showing the income of the assessee's wife or minor child which is includible in his total income under section 16(3), the assessee cannot be deemed to have failed or omitted to disclose fully and truly all material facts necessary for his assessment within the meaning of section 34(1)(a); it must be held in this case also that there has been no such failure on the part of the assessee and the assumption of jurisdiction under section 147(a) by the respondent-Income-tax Officer was not justified. In this view the rule must be made absolute. The impugned notices must be quashed. There will be no order as to costs.
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