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Dharam Vir Virmani v. Commissioner Of Income Tax, Simla
Structured Summary of the Opinion
Factual and Procedural Background
This reference arises from a question posed by the Income-tax Appellate Tribunal, Delhi, under section 66(1) of the Income-tax Act asking whether a notice issued by the Income-tax Officer under section 34 was valid and legal.
The facts, as stated in the opinion, are: the assessment of Shri Dharam Vir Virmani for the assessment year 1949–50 (account year ending 31 August 1948) was completed by the Income-tax Officer on 27 September 1949 for a total income of Rs. 29,942. The assessee disclosed that he was a partner in three firms (Dhanpatmal Jawaladas, Bombay; Shri Mahabir Ingar Pattra Colliery Co., Katras Garh; and Ram Narain Satya Paul, Jullunder) and provided figures from those firms' books which, according to the statement to the court, showed a small net loss from those sources.
The Income-tax Officer, however, in the assessment order refused to accept those partnership figures as trustworthy and stated that he would "ignore these shares" for the time being and that "necessary rectification will be made on receipt of intimation about the assessed shares of profit or loss."
After the partnerships' own assessments were completed later, the Income-tax Officer issued a notice under section 34, received by the assessee on 30 March 1954, calling upon him to submit a return of income alleged to have escaped assessment. The assessee challenged the legality of that notice under section 34(1)(b); the objection was overruled by the Income-tax Officer, and the inclusion of the partnership income led to a revised computation of total income at Rs. 71,798. The assessee's challenge failed before the Appellate Assistant Commissioner and the Appellate Tribunal. The Appellate Tribunal, however, allowed the assessee's application under section 66(1) and referred the legal question to this court.
Legal Issues Presented
- Whether the notice issued by the Income-tax Officer under section 34 of the Indian Income-tax Act (specifically section 34(1)(b)) was valid and legal?
Arguments of the Parties
Assessee's Arguments (as recounted in the opinion)
- The assessee challenged the legality of the section 34 notice under section 34(1)(b), relying on prior authorities which, it was argued, limited the use of section 34 where the Income-tax Officer had not truly "discovered" new information after completing the original assessment.
- Counsel for the assessee relied specifically on two decisions (Chuni Lal Nayyar and Debi Prasad) that were said to support the proposition that where the Income-tax Officer had knowledge or reasonable cause to expect later information, he could not use section 34 to reopen an assessment already completed.
- The assessee also suggested that if the Income-tax Officer distrusted the partnership figures he should have postponed completing the assessment until the partnership assessments were available, rather than finishing and later reopening under section 34.
Revenue / Income-tax Officer (as recounted in the opinion)
- The Income-tax Officer treated the partnership figures as untrustworthy at the time of the original assessment and deliberately left the matter to be adjusted later "in accordance with the law when reliable information becomes available." After partnership assessments were finalised, the Officer issued a notice under section 34(1)(b) and proceeded to reassess.
- The Appellate Tribunal upheld the legality of the notice on the authority of a decision in Koppuravari Venkateshwarlu, which had applied section 34(1)(b) in somewhat different factual circumstances.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Koppuravari Venkateshwarlu v. Additional Income-tax Officer (Guntur) | Applied section 34(1)(b) to uphold reassessment where partnership assessment later showed a materially different figure; held section 34(1)(b) applied and not section 35(5) (in that case the partnership assessment finished after the relevant date). | The court noted the Appellate Tribunal relied on this decision, but also observed that the facts in Koppuravari were not the same as in the present case (in Koppuravari the assessee had been provisionally assessed on a particular figure for his partnership share, whereas here the ITO made no attempt to arrive at a figure and ignored the partnership figures pending later adjustment). |
| Chuni Lal Nayyar v. Commissioner of Income-tax (Division Bench of this Court) | Interpreted the pre-1948 wording of section 34 (which required "definite information which has come into his possession") to mean reassessment under section 34 could be initiated only upon discovery of definite new facts that were not known at the time of the original assessment. | The court observed that this decision rested on the earlier wording of section 34 (as introduced by the Amending Act of 1939) and that the wording was materially changed in 1948; consequently, the present court regarded Chuni Lal Nayyar as of diminished applicability to the post-1948 formulation. |
| Debi Prasad v. Commissioner of Income-tax (Allahabad High Court) | Held that where the Income-tax Officer knew at the time of the original assessment that the assessee had a share in firms whose profits should be included, and decided to assess the remainder later, he could not later invoke section 34 to reopen the already-made assessment; section 23 requires a complete assessment on total income. | The present court noted the Allahabad decision had persuasive force but also rested to some extent on the earlier wording and on the admitted knowledge of profits by the Officer at the time of assessment. The court found distinctions in facts and held the persuasive weight diminished by the 1948 amendment to section 34. |
Court's Reasoning and Analysis
The court's analysis focused centrally on the effect of the change in language of section 34(1) that occurred in 1948. The opinion explains the textual difference and the legal consequence as follows:
- Textual comparison: the pre-1948 provision required "definite information which has come into his possession" and was thus interpreted to require the Income-tax Officer to have discovered some definite piece of information unknown at the time of the original assessment. By contrast, the post-1948 wording of section 34(1)(b) permits reassessment where "the Income-tax Officer has in consequence of information in his possession reason to believe that income ... have escaped assessment" (emphasis in the opinion).
- Legal effect of the amendment: the court held that there is "a world of difference" between the two wordings. The earlier formulation limited reassessment to cases where new, definite facts were discovered after the original assessment; the amended wording does not contain the word "definite" nor require that the information must have come into existence only after the original assessment. The amended formulation allows reassessment when the ITO, in consequence of information in his possession, has reason to believe that income has escaped assessment.
- Application to the facts: the Income-tax Officer had explicitly refused to accept the partnership figures as trustworthy at the time of the original assessment and left the matter to be adjusted later when "reliable information becomes available." When the partnership assessments were later finalised and reliable information reached the Officer, he issued the section 34 notice and proceeded to reassess.
- Consideration of precedent: the court reviewed Chuni Lal Nayyar and Debi Prasad which supported a narrower scope for section 34 under the pre-1948 language. The court concluded those decisions were based on the earlier wording and/or distinguishable facts and that their persuasive force was diminished by the 1948 amendment.
- Practical considerations and policy: the court rejected the argument that the Income-tax Officer was obliged to postpone completing assessments indefinitely where he suspected further information might later emerge. The opinion noted that requiring postponement in such cases would cause "great inconvenience both to the assessees and to the revenue department" and that it was not illegal for an Officer to conclude an assessment on the best available data while reserving the right to reopen if reason to believe later arose.
- Miscellaneous: the court noted the existence of section 35(5) (introduced effective 1 April 1952), which specifically deals with reopening assessments of partners when firm assessments later show omitted or incorrect shares; but the court agreed this provision could not be invoked in the present case because it post-dated the assessment in issue (September 1949).
On this reasoning the court concluded that, under the present wording of section 34(1)(b), the Income-tax Officer was not precluded from reopening the assessment when the partnership assessment information reached him.
Holding and Implications
Holding: The court answered the referred question in the affirmative: the notice issued by the Income-tax Officer under section 34(1)(b) was valid and legal.
Direct consequences and orders:
- The reassessment based on the section 34 notice was held to be competent under the amended wording of section 34(1)(b), and the Court found no illegality in the Income-tax Officer's reopening of the assessment in the present factual circumstances.
- The court ordered the assessee to bear the costs of the Commissioner, fixing the counsel's fee at Rs. 250.
Broader implications (as discussed in the opinion): the court's interpretation emphasises that the 1948 amendment to section 34(1) broadened the circumstances in which reassessment may be initiated — moving away from a strict requirement of discovery of a new and definite fact unknown at the time of the original assessment. The opinion therefore treats earlier authorities construing the pre-1948 text as having diminished applicability to cases arising under the post-1948 formulation.
- The question which has been referred to this court by the Income-tax Appellate Tribunal, Delhi, under section 66(1) of the Income-tax Act is :
"Whether the notice issued by the Income-tax Officer under section 34 of the Indian Income-tax Act was valid and legal ?"
The question has arisen in the following circumstances. The case refers to the assessment of Shri Dharam Vir Virmani for the assessment year 1949-50, the account year ending August 31, 1948. The Income-tax Officer concluded his assessment on September 27, 1949, on a total income of Rs. 29,942, but apparently the assessee, in addition to disclosing the material which less to the assessment on the above sum, had also mentioned that he was a partner in three firms styled Dhanpatmal Jawaladas, Bombay, Shri Mahabir Ingar Pattra Colliery Co., Katras Garh and Ram Narain Satya Paul, Jullunder. He had also given the figures of his income from the shares he held in these firms on the basis of the books of these firms. It is not mentioned in the statement of the case what these figures were, but it has been stated before us without contradiction that the net balance of the assessees income from these sources showed a small loss. The Income-tax Officer dealt with this matter in the following words :
"During the year of account, the assessee had shares in (1) Dhanpatmal Jawaladas, Bombay, (2) Shri Mahabir Ingar Pattra Colliery Co., Katras Garh, (3) Ram Narain Satya Paul, Jullunder, only. The other partnership concerns mentioned in the last years assessment order did not exist in the year of account. Assessed profit or loss from the partnership concerns in the year of account is not available, though according to the assessee the net result has been a loss. For the present, I ignore these shares and necessary rectification will be made or receipt of intimation about the assessed shares of profit or loss."
It seems that after the final assessments had been made of these partnerships for the years in question the Income-tax Officer issued a notice to the assessee under section 34 of the Act which was received by him on March 30, 1954, calling upon him to submit a return of the income that has escaped assessment. In response to this notice, among other pleas, the assessee challenged the legality of the notice under section 34(1)(b) but his objections were overruled by the Income-tax Officer who, after including the assessees income from the three firms, computed his total income for the relevant year at Rs. 71,798. The validity of the notice was also challenged unsuccessfully before the Appellate Assistant Commissioner and then before the Appellate Tribunal which, however, allowed the assessees application under section 66(1) and referred the question set out above.
It may be stated that the Appellate Tribunal upheld the legality of the notice under section 34(1)(b) only on the strength of the decision of a learned single judge of the Andhra Pradesh High Court in the case of Koppuravari Venkateshwarlu v. Additional Income-tax Officer, Guntur. This was a decision in a petition under article 226 of the Constitution challenging the issue of a notice under section 34(1)(b), but a perusal of the judgement shows that the facts were by no means the same as these in the present case. One of the sources of the assessees income was a share in a partnership firm and in his return for the year 1951-52 he had shown his income from his share of the firm as Rs. 8,831 or at any rate his income from that source was provisional taken to be that amount. The firms assessment for the relevant years was not completed until March, 1955, when the assessees share of the firms income was held to be Rs. 24,000 and on this the Income-tax Officer issued a notice under section 34(1)(b) for reassessment. The petition under article 226 was dismissed and it was held that section 34(1)(b) applied and not the provisions of section 35(5) which did not apply to an assessment completed before April 1, 1952.
The obvious distinction between that case and the present one is that the assess was at least provisionally assessed on a certain figure as his income from the share in the partnership firm, whereas in the present case, one the material before him, the Income-tax Officer made no attempt to arrive at any figure and left the matter to be adjusted later.
The learned counsel for the assessee has, however, relied on two cases which appear to be more directly in point. The first of these is a decision of a division bench of this court in Chuni Lal Nayyar v. Commissioner of Income-tax. In that case the assessee firm in its return for the year 1943-44 stated that it had a consideration share in a business carried on by a firm at Ahmedabad, but the exact figure of his share in that firm was not available and should be obtained from the Income-tax Officer, Ahmedabad. Although, however, the Income-tax Officer Amritsar, apparently sent a letter to the Income-tax Officer, Ahmedabad, enquiring about the matter this did not elicit a prompt reply and when completing the assessment of the firm he either deliberately omitted or forgot to take into consideration the income form the Ahmedabad firm. Later, after the reply had been received from the Income-tax Officer at Ahmedabad, he issued a notice under section 34 and revised the original assessment by adding the Ahmedabad income. The question referred on these facts was whether, in the circumstances of the case, the intimation as to figures received from the Income-tax Officer, Ahmedabad, could be termed a definite piece of information which the Income-tax Officer discovered so as to justify the issue of a notice under section 34, and the question was answered by G.D. Khosla and Harnam Singh JJ. in the negative on the finding that the correct interpretation of section 34 was that the evasion or escape of income must be discovered as a consequence of a fresh piece of definite information received by the Income-tax Officer and where the Income-tax Officer had already completed an assessment upon certain data he could not use the same data for revising an assessment under section 34.
The other case relied on is a decision of Malik C.J. and Bhargava J. of the Allahabad High Court in Debi Prasad v. Commissioner of Income-tax. In that case while assessing an assessee the Income-tax Officer knew that he had a one-third share in a partnership firm and that the profits from that firm has to be included in his total income, but in spite of that as the assessment and observed in the assessment order that as the assessment of the firm had not been complex necessary action for revising assessment by inclusion of the assessees share of profits in the firm would be taken later on receipt of the report from the Income-tax Officer assessing the firm. Later after receiving necessary information he issued a notice under section 34 and it was held that the notice under section 34 was illegal and that the Income-tax Officer had no authority to reopen the assessment already, made by him. The passage in the judgement, in which the law is discussed, is quite brief and reads :
"The portion quotes above clearly indicates that the Income-tax Officer knew that the Kanpur Iron Supply Company and the U.P. Iron Steel Company had made profits. He also knew that a portion of this profit which had come to the share of the assessee will have to be included in the total income. He was, however, anxious to finish the assessment on the basis of the materials before him. Section 23 of the Indian Income-tax Act contemplates that the Income-tax Officer should make a complete assessment on the basis of the total income of an assessee. It is not open to him to make assessments piecemeal and in a case where the Income-tax Officer has proceeded to assess one part of the income and has decided to assess the rest of the income on a later date, he cannot rely on the provisions of section 34 for the purpose of reopening the assessment. This is not a case where the Income-tax Officer had believed that there was no other income and the total income was as declared by the assessee on which he proceeded to assess the income-tax. From the order of assessment mentioned above, as also from several other orders, it appears that it was well known that the assess was being under-assessed. It cannot, therefore, be said that the fact was discovered later that the assessee had been underassessed. In this view of the matter notice under section 34 was clearly wrong and the Income-tax Officer had no authority to reopen the assessment already made by him."
The relevant portion of section 34(1) reads :
If -....
(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, profits or gains chargeable to income-tax have escaped assessment for any year, or have been under-assessed, or assessed at too low a rate, or have been made the subject of excessive relief under this Act, or that excessive loss or depreciation allowance has been computed, he may in cases falling under clause (a) at any time and in cases falling under clause (b) at any time within four years of the end of that year, serve on the assessee, or, if the assessee is a company, on the principal officer thereof, a notice containing all or any of the requirements which may be included in a notice under sub-section (2) of section 22 and may proceed to assess or re-assess such income, profits or gains or recompute the loss or depreciation allowance; and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section."
It is, however, to be noted that there has been quite a considerable change in the wording of section 34(1) since 1948 and that the decision of this court in the case cited above was based on the wording of this sub-section as introduced in the Amending Act of 1939 and superseded in 1948. The relevant portion of section 34(1) of the 1939 Act read :
"If in consequence of definite information which has come into his possession the Income-tax Officer discovers that income, profits or gains chargeable to income-tax have escaped assessment in any year, or have been under-assessed......"
There is obviously a world of difference between the words "the Income-tax Officer has in consequence of information in his possession reason to believe" and the words "if in consequence of definite information which has come into his possession the Income-tax Officer discovers". The latter words have rightly been interpreted by the courts to mean that a reassessment under section 34(1) could only be initiated in consequence of facts coming to the knowledge of the Income-tax Officer of which he was completely unaware at the time of the original assessment and this was the basis of the decision of the learned judges of this court in Chuni Lal Nayyars case. In view of the change of words this decision would seem to have ceased to be applicable.
The decision of the Allahabad High Court also appears to some extent, as can be seen from the passage cited above, to have been based on the wording regarding the discovery of new facts and to that extent its persuasive force is diminished, though the point was also raised that it was the duty of the Income-tax Officer to complete an assessment under section 23 of the Act on the total income of the assessee. There appears, however, to be some distinction between the facts of that case and those in the present case, since it was admitted there that the Income-tax Officer at the time of making the assessment knew that there were some profits from the assessees share in two other companies, whereas in the present case according to the available data at the time of assessment the net income from the assessees share in the three firms in question showed a loss, if only a small one.
As far as I can see there is nothing in the present words of section 34(1)(b) which would rule out a reassessment under these provisions in a case like the present one. Of course, the matter would have been simple, and much trouble would have been saved, if the Income-tax Officer had accepted the assessees figures from the books of the partnerships at their face value and had incurred the small loss in his computation of the assessees income. In such a case I do not consider that when the true figures were received after the assessment of the partnerships there would have been by objection to reopening the matter under section 34(1) even as it was worded before 1948.
However, he did not choose to do so and what in effect he said in the assessment order was :
"I am aware that in addition to the other income of the assessee he has shares in three partnerships, and he has shown me some figures regarding his income from theses shares which show a loss, but I do not regard these figures as trustworthy, and I suspect that there may have been some profits. I, therefore, refuse to take these figures into account and leave the matter to be adjusted in accordance with the law when reliable information becomes available."I cannot see how on the words of section 34(1)(b), as they stand at present, the Income-tax Officer can be said to be precluded from reopening the assessment under this sub-section once the information of the partnership assessments has reached him. The argument advanced on behalf of the assessee might be put this way. The Income-tax Officer cannot reopen an assessment under section 34(1)(b) where he had any reason whatever to believe at the time of the original assessment that in due course information would be forthcoming which would justify the reopening of the assessment on the ground that in come has escaped taxation. When, however, the argument is put in this way it clearly amounts to nothing mote than falling back on the wording of section 34(1) as it stood before 1948. In other words it amounts to re-importing the idea of discovery of fresh facts which evidently was deliberately omitted when the section was amended in 1948 and this I consider cannot be done.
It was suggested on behalf of the assessee that if at the time of the original assessment the Income-tax Officer would not accept the assessees figures regarding his income from shares in the partnerships it was his duty to postponed the completion of the assessment, if necessary for several years, to wait for the assessment of the partnerships but in my opinion there must be so many cases of this kind that such a course would result in great inconvenience both to the assessees and to the revenue department, and on the whole I am inclined to take the view that there is nothing illegal the Income-tax Officers concluding the assessment at the time to the best of his ability on the available data, even in a case where he may have reason to suspect that on full and reliable information becoming available the assessment may have to be reopened.
It may be mentioned that in the course of the arguments some reference was made to the provisions of section 35(5) of the Act which was introduced with effect from the 1st of April, 1952. This sub-section makes a specific provisions for reopening the assessment of a partner in a firm when on the assessment or reassessment of the firm it is found that his share in the profits has not been included or has been incorrectly calculated, but it is agreed that this sub-section could not be invoked in the present case regarding the assessment made in September, 1949. In the circumstances, I would answer the question referred to us in the affirmative and order the assessee to bear the costs of the Commissioner. Counsels fee Rs. 250.
TEK CHAND J. - I agree.
Question answered in the affirmative.
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