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Narayandas Paramananddas v. Income-Tax Officer

Calcutta High Court

Aug 18, 1975

Judgment

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Factual and Procedural Background

The assessment year in question is 1963–64. The original assessment for that year was completed on 30 March 1972 and by a notice dated 30 March 1972 the assessment was sought to be reopened under section 148 of the Income-tax Act, 1961. The reopening was challenged by the petitioner under article 226 of the Constitution.

The petitioner is a partnership firm (assessed as M/s. Narayandas Paramananddas). The petitioner states that it received a letter dated 21 June 1971 (received 28 June 1971) from the Income-tax Officer (I.T.O., “J” Ward, Dist. IV(I), Calcutta) informing it that the I.T.O. had information suggesting that M/s. Atlas Agencies (51/59, Dariastan Street, Bombay-3) was a concern of the petitioner and that the income of that concern should have been assessed in the petitioner’s hands for the assessment years 1963-64, 1964-65 and 1965-66. The petitioner replied denying that Atlas Agencies was its concern.

At the time of the original assessment the petitioner's representatives (Mr. A.K. Sen and Mr. H.M. Mehta) had discussions with the assessing officer about existence, validity and genuineness of parties, including M/s. Atlas Agencies. The name of Atlas Agencies was disclosed in the balance-sheet and a statement of sales and purchases was filed. The original assessment order and a subsequent rectification order show that the Income-tax Officer scrutinised transactions with various parties and disallowed transactions where not satisfied as to genuineness.

The petitioner filed a writ petition under article 226 contending there was no material to form the belief required to reopen the assessment under section 147/148. The revenue did not file an affidavit in opposition, but at the hearing produced records and reasons for reopening which were placed before the court by the Income-tax Officer (Manohar Lal).

Legal Issues Presented

Whether the reopening of the assessment for assessment year 1963–64 by issuing notice under section 148 (proposed under clause (a) of section 147) was valid — i.e., whether the Revenue had material from which the Income-tax Officer could form the belief that there was omission or failure on the part of the assessee to disclose truly and fully material facts resulting in income escaping assessment.
Whether the materials relied upon by the Income-tax Officer were facts which came to the Revenue's knowledge after the original assessment (and therefore could support reopening) or whether those facts were already available/known or could have been gathered at the time of the original assessment.

Arguments of the Parties

Petitioner's Arguments

The petitioner (partnership firm) had disclosed transactions with M/s. Atlas Agencies in the balance-sheet and had filed detailed statements of sales and purchases showing dealings with Atlas Agencies.
The petitioner's representatives (Mr. A.K. Sen and Mr. H.M. Mehta) had detailed discussions with the assessing Income-tax Officer at the time of the original assessment regarding existence, validity and genuineness of all parties, including Atlas Agencies.
The petitioner responded to the I.T.O.'s show-cause notice denying that Atlas Agencies was a concern of the petitioner.
The petitioner contended there was no new material to justify the formation of the requisite belief under clause (a) of section 147 that income had escaped assessment due to omission or failure by the assessee.

Revenue's (Respondent's) Case as Stated in the Reasons Produced

The Income-tax Officer's written reasons (signed Manohar Lal, I.T.O.) asserted that M/s. Atlas Agencies was a benamidar (benami concern) of the petitioner for reasons including: financing of the firm by the petitioner, absence of capital contribution by the named partners, hundi loans borrowed not independently but guaranteed by the petitioner, and a reconstitution (for assessment year 1961–62) adding minors and a trust connected to the petitioner's partners without any capital contribution.
The reasons asserted that the line of business of Atlas Agencies and the petitioner was the same (dyes and chemicals) and that the apparent reconstitution created a mechanism to channel Atlas Agencies' income to the partners of the petitioner.
The I.T.O. recorded that he discussed the matter with Shri Poratlal Narayandas (a partner), who maintained Atlas Agencies was a separate entity and that guarantees for hundi loans were normal business practice.
On these facts the I.T.O. stated he had reason to believe there was omission/failure by the assessee and proposed action under section 147(a) and issuance of notice under section 148; the I.T.O. also noted a discrepancy between Atlas Agencies’ return (Rs. 72,481) and the figure likely to be assessed (Rs. 1,68,041) based on facts on file.
It is recorded that no affidavit was filed by the Income-tax Officer in opposition to the petition, though records and the reasons were produced at hearing.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Commissioner Of Income Tax, Calcutta v. Burlop Dealers Ltd. [1971] 79 ITR 609 (SC)	Cited as part of the body of authorities on principles governing reopening of assessments.	The decision was brought to the court's attention by counsel as one of the authorities on the settled principles relevant to reopening; the opinion does not extract a specific passage beyond this citation.
Bengal Luxmi Cotton Mills Ltd. v. Income-tax Officer [1973] 87 ITR 618 (Cal)	Cited as an authority on principles concerning reopening assessments.	The court noted reliance placed on this decision by counsel; the opinion does not state a detailed rule from the case but treats it as one of the references on the settled law.
Income-tax Officer v. Calcutta Chromotype Pvt. Ltd. [1974] 97 ITR 55, 60 (Cal)	Cited as an authority on principles concerning reopening assessments.	The court recorded that reliance was placed on this case; the opinion does not elaborate specific holdings from it beyond being a cited precedent.
Commissioner of Income-tax v. Panama Private Ltd. [1974] 97 ITR 210 (Cal)	Cited as an authority on principles concerning reopening assessments.	The decision was cited by counsel and noted by the court among relevant authorities; the opinion does not extract a detailed rule beyond its use as precedent.
Gemini Leather Stores v. Income-tax Officer [1975] 100 ITR 1 (SC)	Principle that where primary facts were discovered during original assessment, the officer must make enquiries and draw proper inferences; oversight by the officer (failure to bring discovered facts to tax) does not justify reopening under clause (a) of section 147.	The court specifically described and relied on the Gemini Leather Stores decision to illustrate that where facts were discoverable or discovered during the original assessment, reopening cannot be justified as a case of omission by the assessee if the officer failed to make or draw necessary inquiries — i.e., oversight is not sufficient to invoke section 147(a).

Court's Reasoning and Analysis

The court proceeded by examining whether the Revenue had produced materials from which the Income-tax Officer could legitimately form the belief required by clause (a) of section 147 that income had escaped assessment owing to omission or failure by the assessee to disclose material facts.

Key steps in the court's reasoning were:

The court noted as a factual finding that the transactions with M/s. Atlas Agencies had been disclosed in the petitioner's balance-sheet and in statements filed at the time of the original assessment, and that the petitioner's representatives had held detailed discussions with the assessing officer about the parties and the genuineness of transactions (paragraph 9 of the petition remained uncontradicted).
The court observed that the original assessment order and a rectification order showed the assessing officer had scrutinised transactions with various parties and had disallowed some transactions and interest where he was not satisfied with genuineness, demonstrating that scrutiny of parties had occurred at the time of original assessment.
The court considered the reasons the Revenue produced (the I.T.O.'s written reasons concluding Atlas Agencies was benamidar of the assessee) and identified gaps in the Revenue's account: it was not made apparent whether the I.T.O. had gathered those facts from the assessment order of Atlas Agencies, nor whether that assessment preceded or followed the assessment of the present assessee, nor whether the facts in the Atlas file were facts that could not have been gathered at the time of the original assessment of the petitioner.
The court emphasised the burden on the Revenue to show that the relevant facts came to its knowledge only after the original assessment such that the belief under section 147(a) could be properly formed. The court found that the Revenue had not discharged this onus; crucially, no affidavit was filed by the Income-tax Officer, and the reasons produced did not answer whether the facts were newly available or were discoverable earlier.
The court applied the principle articulated in Gemini Leather Stores (SC) that where primary facts were discoverable or were discovered during the original assessment, the officer must make enquiries and draw proper inferences and that mere oversight by the officer does not convert the situation into one of omission by the assessee warranting reopening under section 147(a).
On the basis of the above, and given that the petitioner had disclosed the transactions and there was evidence of scrutiny at the original assessment, the court concluded the Revenue had not established that facts came to its knowledge only after the original assessment or that there had been omission/failure on the part of the assessee such that income escaped assessment.

Holding and Implications

Holding:

The impugned notice dated 30th March 1972 issued under section 148 of the Income-tax Act, 1961, is quashed.

The court further ordered that the respondents are restrained from taking any proceeding in respect of that notice; and if any assessment has already been made pursuant to the impugned notice, that assessment is also quashed and set aside. The rule made absolute insofar as indicated, with no order as to costs. The operation of the order was stayed for six weeks from the date of the judgment.

Implications:

Direct effect: The reopening notice and any assessment proceeding founded on it were nullified; the petitioner was protected from further proceedings on that notice (subject to the six-week stay).
Broader implications: The opinion relied on established authorities (including Gemini Leather Stores) to reinforce the principle that the Revenue must show that materials justifying reopening came to its knowledge after the original assessment and that mere oversight by the assessing officer is not a ground for reopening under section 147(a). The opinion does not purport to lay down a new legal principle or to state that a new precedent is established beyond applying these principles to the facts of the case.

No additional information beyond what appears in the provided opinion has been added. Sections reflect only the facts, arguments, precedents, reasoning and orders expressly contained in the text.

Show all summary ...

Sabyasachi Mukharji, J.:— The assessment year involved in this application is 1963-64. The assessment for the aforesaid year was completed on 30th March, 1972(?). By a notice dated 30th March, 1972, the said assessment is sought to be reopened under section 148 of the Income-tax Act, 1961. The said attempt is under challenge in this application under article 226 of the Constitution.

2. The petitioner which is a partnership firm states that the firm received a letter dated 21st June, 1971, on the 28th June, 1971, from the Income-tax Officer, “J” Ward, Dist. IV(I), Calcutta, whereby the petitioner was informed that there was information in the possession of the said Income-tax Officer on the basis of which the Income-tax Officer held that M/s. Atlas Agencies of 51/59, Dariastan Street, Bombay-3, was a concern of the petitioner. Accordingly, the Income-tax Officer wrote that the income of that concern should have been assessed in the hands of the petitioner. The petitioner was, therefore, asked to show cause why action should not be taken against him to reassess the alleged income of the petitioner for the assessment years 1963-1964, 1964-65 and 1965-66 for including the alleged income of M/s. Atlas Agencies in the hands of the petitioner. The petitioner states that the petitioner duly replied to the said show-cause notice stating that the said M/s. Atlas Agencies was not the concern of the petitioner. It is the further case of the petitioner in paragraph 9 of the petition that at the time of the original assessment, the petitioner's representatives, Mr. A.K Sen and Mr. H.M Mehta, had full discussion with the assessing Income-tax Officer with regard to the existence, the validity and the genuineness of all the parties with whom the petitioner had transactions including the said M/s. Atlas Agencies of Bombay. In the balance-sheet the name of the said M/s. Atlas Agencies along with others was disclosed and also a statement showing the details of sales and purchases with various parties including M/s. Atlas Agencies was filed before the Income-tax Officer. The petition has been verified by an affidavit of the said Hasmukhlal Mehta.

3. The assessment order indicates that Mr. Sen and Mr. Mehta attended on behalf of the petitioner. Further, the assessment order also indicates that in respect of transactions with some other parties, the Income-tax Officer was not satisfied and had disallowed the transactions of those parties. There was a rectification of the said assessment and after that the rectification order also indicates that the Income-tax Officer, when he was not satisfied about the genuineness of the loan transaction, disallowed the interest thereon.

4. All these were stressed, in my opinion, rightly by the counsel for the petitioner, to indicate that the Income-tax Officer examined in detail the transactions with various parties to find out the genuineness of those transactions. It is also apparent that the transactions with Atlas Agencies were disclosed. It is the case of the petitioner in paragraph 9 of the petition that the question of genuineness, existence and validity of all the parties including M/s. Atlas Agencies were scrutinised by the Income-tax Officer at the time of the above assessment.

5. The petition under article 226 of the Constitution was filed on the ground that there was no material for the Income-tax Officer to form the belief for reassessing the income of the petitioner under section 148 of the Income-tax Act as mentioned hereinbefore. The reopening, in view of the time lag, must have been under clause (a) of section 147 of the Income-tax Act, 1961. There must be materials from which the Income-tax Officer could form the belief that there was omission or failure on the part of the assessee to disclose truly or fully material facts, as a result of which failure and omission the income of the assessee has escaped assessment or has been under-assessed. There must be further evidence on which the Income-tax Officer has formed such belief. A rule nisi was issued but no affidavit was filed by the revenue; the Income-tax Officer who made the original assessment or the Income-tax Officer who issued the impugned notice has not chosen to file any affidavit-in-opposition to this petition. At the hearing of this application, however, on behalf of the revenue the records were produced and the reasons for reopening the assessment were placed before me. The said reasons are to the following effect:

“M/s. Narayandas Paramananddas has been assessed in the status (sic) total income of Rs. 1,65,289. The following facts have now come to my notice:

‘M/s. Atlas Agencies of 51/59, Dariaston Street, Bombay-3, has been assessed separately by 8th Income-tax Officer, Hundi Circle, Bombay. I hold that that firm is a benamidar of my assessee, M/s. Narayandas Paramananddas for the following reasons:

The entire financing of the above firm was done by my assessee. There was no capital contribution by the so-called two persons of the first constitution of the firm. The huge hundi loans were borrowed by M/s. Atlas Agencies but not independently and not of their own; the alleged loans were shown to have been guaranteed by my assessee. In the first constitution of M/s. Atlas Agencies two persons were shown as parties, one Shri C.P Jhaveri and another, Shri L.C Jhaveri. The former was an employee of M/s. Narayandas Paramananddas over 16 years. He was alleged to have been made active partner. Both of the gentlemen were not of such worthiness in financial resources as to start business on a large scale as in M/s. Atlas Agencies. Subsequently, in relation to assessment year 1961-62, there was so-called reconstitution of the firm in terms of a deed by which 5 minors and one trust styled “M/s. Narayandas Paramananddas Trust” were alleged to have been made additional parties. These minors were sons and daughters of the partners in the firm styled M/s. Narayandas Paramananddas assessed in my charge. There was no capital contribution by the minors or the trust. It is very clear that the idea of the alleged reconstitution was to create on legal footing a machinery through which the benefits of the income of M/s. Atlas Agencies should go to the partners of M/s. Narayandas Paramananddas. Further, the line of business of my assessce and M/s. Atlas Agencies was the same, i.e, business in dyes and chemicals.

The matter was discussed by me with Shri Poratlal Narayandas, one of the partners of M/s. Narayandas Paramananddas. I asked him as to why on the basis of the above facts M/s. Atlas Agencies should not be treated as benamidar of M/s. Narayandas Paramananddas. He stated that M/s. Atlas Agencies was a separate entity with which they had no connection whatsoever save and except as required in the course of their business and standing guarantee for hundi loans as per normal business practice by which a new firm takes the help of the other in starting the new business.

On the facts and circumstances stated above, I hold that M/s. Atlas Agencies is a benamidar of my assessee. Hence, I have reason to believe that by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for assessment year 1963-64, the income chargeable to tax escaped assessment. Hence, proposal is put up under section 147(a) for approval of the Commissioner to issue notice under section 148.

As per return filed in the name of M/s. Atlas Agencies, income was Rs. 72,481, but as per facts available on the file relating to M/s. Atlas Agencies, the income is likely to be assessed at Rs. 1,68,041.

Sd/- Manohar Lal 23/3/72

(Manohar Lal)

I.T.O ‘J’ Ward, Dist. IV(I)

Calcutta.”

6. The question is whether in these circumstances the revenue has really established its case from the materials from which necessary belief could be formed. In this connection, the principles are well-settled. But counsel for the petitioner drew my attention to the decision of the Supreme Court in the case of Commissioner Of Income Tax, Calcutta v. Burlop Dealers Ltd.† [1971] 79 ITR 609 (SC). Reliance is also placed on the observations in the case of Bengal Luxmi Cotton Mills Ltd. v. Income-tax Officer [1973] 87 ITR 618 (Cal) and Income-tax Officer v. Calcutta Chromotype Pvt. Ltd. [1974] 97 ITR 55, 60 (Cal). Reliance is also placed on the case of Commissioner of Income-tax v. Panama Private Ltd. [1974] 97 ITR 210 (Cal). In the case of Gemini Leather Stores v. Income-tax Officer [1975] 100 ITR 1 (SC), what happened was that in the proceeding for the original assessment of the appellant-firm, though the appellant did not disclose certain transactions evidenced by certain drafts, the officer himself, however, discovered the facts relating thereto but by oversight did not bring the amounts represented by the drafts to tax as the income of the appellant. Subsequently, the Income-tax Officer issued a notice under clause (a) of section 147 of the Income-tax Act, 1961, with a view to assess the amounts as the appellant's income from undisclosed sources. On a writ petition filed by the appellant, the Allahabad High Court held that the Income-tax Officer had not applied his mind to the question whether the amounts could be treated as part of the total income of the appellant and as the appellant had not disclosed the source of those amounts which were not recorded in the account books, all the conditions for invoking the jurisdiction under clause (a) of section 147 were present. Thereafter, there was a further appeal to the Supreme Court and it was held by the Supreme Court that after discovery of the primary facts relating to the transactions evidenced by the drafts it was for the officer to make necessary enquiries and to draw proper inference as to whether the amounts represented by the drafts could be treated as part of the total income of the appellant. The officer had not done so. Therefore, it was plainly a case of oversight and it could not be said that the income chargeable to tax escaped assessment by reason of omission or failure on the part of the appellant to disclose truly and fully all material facts.

7. In the instant case, it is evident that the transaction with M/s. Atlas Agencies was disclosed. It is also evident from the original assessment order and the rectification order that the transactions with various parties were scrutinised by the Income-tax Officer. In view of the statement made in paragraph 9 of the petition which remained uncontradicted by any affidavit or counter-affidavit, the assessee had full discussions regarding the existence, validity and genuineness of all the parties including the said M/s. Atlas Agencies. It is in this background that the reasons produced by the revenue will have to be examined.

8. The first ground stated by the Income-tax Officer is that he has gathered certain facts. It is not apparent whether he has gathered those facts from the assessment order of M/s. Atlas Agencies. It is not also apparent whether the said assessment of M/s. Atlas Agencies was made prior to or subsequent to the assessment of the present assessee. Furthermore, the Income-tax Officer has not stated that the facts gathered from the said assessment order of M/s. Atlas Agencies could not have been gathered from the material facts at the time of the original assessment.

9. In the aforesaid view of the matter, in my opinion, it cannot be said that the revenue has discharged the onus which was on them to establish their case that the facts have come to the knowledge of the revenue subsequent to the original assessment order from which it can be said that there was omission or failure on the part of the assessee to disclose fully and truly material facts necessary for the assessment as a result of which income chargeable to tax escaped assessment. In that view of the matter, the impugned notice must be quashed and the rule must be made absolute.

10. In the premises, the impugned notice issued on 30th March, 1972, under section 148 of the Income-tax Act, 1961, is hereby quashed and the respondents are restrained from taking any proceeding in respect thereof. If any assessment has already been made pursuant to the impugned notice, the same is also quashed and set aside.

11. The rule is made absolute to the extent indicated above. There will be no order as to costs.

12. Operation of this order shall stand stayed for six weeks from today.