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S.D Sachdeva v. Commissioner Of Income-Tax, Patiala.

Punjab & Haryana High Court

Jul 26, 1971

Judgment

Subsequent
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Factual and Procedural Background

The assessee is an individual for assessment year 1954-55 (previous year ended 31 March 1954). On 31 March 1959 the assessee was assessed under section 23(3) of the Income-tax Act, 1922, on a total income of Rs. 99,475 (which included Rs. 48,802 as income from other sources). The assessee did not accept that assessment; ultimately his total income was determined at Rs. 14,597.

On 8 December 1953 the assessee sold the building, machinery and furniture of a cold storage to a partnership firm, Messrs. Karnal Cold Storage, in which the assessee became a partner with a one-half share. The original assessment order dated 31 March 1959 did not disclose that the Income-tax Officer had taken into account any surplus arising from that sale under the proviso to section 10(2)(vii).

The Income-tax Officer concluded that the assessee had omitted to disclose fully and truly all material facts necessary for assessment and therefore initiated proceedings under section 34(1)(a). The assessee maintained that he had disclosed all material facts (including drawing the officer's attention to the sale) and that the Income-tax Officer was aware of the facts; this contention was rejected by the Income-tax Officer, who held that profit under section 10(2)(vii) had arisen and had been omitted from the return. The assessee's appeals to the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal (ITAT), Delhi Bench "C", were unsuccessful.

The ITAT found that the primary fact of the sale and the realisation of a surplus over written down value was not disclosed at the time of the original assessment and that appending account copies did not amount to full and complete disclosure of all material facts. The assessee then moved the Tribunal under section 66(1) seeking reference of several questions of law; the Tribunal referred only the first question to the court for opinion.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the provisions of section 34(1)(a) were rightly invoked? (This is the question that was referred to the court by the ITAT.)
The assessee originally sought the following additional questions to be referred (these were asked of the Tribunal, but note that the Tribunal refused to refer questions (ii)-(iv) and only referred question (i)):
1. Whether, on the facts and in the circumstances of the case, it could be validly held within the meaning of the provisions of section 34(1)(a) that income, profits and gains chargeable to income-tax had escaped assessment for that year?
2. Whether, on the facts and in the circumstances of the case, there was any sale within the meaning of section 10(2)(vii) of the Act?
3. If the answer to the above question (sale) is in the affirmative, whether on the facts there was any income, profits and gains which had escaped assessment?
4. Whether the Appellate Tribunal's judgment is vitiated in law owing to its failure to deal with the contentions of the assessee on merits?

Arguments of the Parties

Appellant's (Assessee's) Arguments

The assessee (through Mr. A.R. Aggarwal) contended that there was in fact no sale of the building, machinery and furniture to the partnership firm.
The assessee argued that the question whether section 34(1)(a) applied (question referred) required first answering whether there was any profit chargeable under section 10(2)(vii); accordingly, that issue had to be resolved before invoking section 34(1)(a).
The assessee relied on the observations of the Supreme Court in Malegaon Electricity Co. P. Ltd. v. Commissioner of Income-tax [1970] 78 I.T.R. 466 (S.C.), contending that the referred questions could not be answered without the Tribunal first deciding whether the sale price amounted to profits under section 10(2)(vii).
The assessee maintained that all material facts had been placed before the Income-tax Officer — copies of accounts were appended to the return and the assessee asserted that the Income-tax Officer had knowledge of the sale during original assessment proceedings.

Respondent's (Revenue's / Income-tax Officer's) Position, as reflected in the opinion

The Income-tax Officer's primary position was that there had been an omission by the assessee to disclose fully and truly all material facts necessary for assessment — specifically the surplus realised on sale over the written down value — and therefore proceedings under section 34(1)(a) were properly initiated.
The Income-tax Officer and the Appellate Assistant Commissioner determined that profits had arisen from the sale and were chargeable under section 10(2)(vii); these assessments of profit were not agitated before the Tribunal and were accepted in the subsequent proceedings.
The ITAT concluded that merely appending accounts to the return did not amount to a full disclosure of primary facts (sale and surplus), and observed that records did not show that the Income-tax Officer had considered the applicability of section 10(2)(vii) during the original assessment.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Malegaon Electricity Co. P. Ltd. v. Commissioner of Income-tax [1970] 78 I.T.R. 466 (S.C.)	The principle that questions referred under section 66(1) should not be answered if they cannot be resolved without first deciding whether part of a sale price received by an assessee amounts to profits under section 10(2)(vii); additionally, the decision emphasises the assessee's duty to "disclose fully and truly all material facts" and that mere production of account books may not amount to disclosure for the purposes of section 34(1).	The court distinguished Malegaon on the point that in that case the profits had not been determined; here the Income-tax Officer and the Appellate Assistant Commissioner had determined the profits and that determination was not contested before the Tribunal. Nevertheless, the court relied on the Malegaon observations concerning the duty to disclose (including the Explanation to section 34(1)) to support its conclusion that the assessee failed to disclose the surplus/written down value and therefore section 34(1)(a) was rightly invoked.

Court's Reasoning and Analysis

The court's reasoning proceeded in distinct steps, applying the recorded facts and the cited Supreme Court authority strictly as they relate to disclosure obligations under section 34(1)(a):

On the "no sale" contention: The court refused the argument that there was no sale because the assessee had sought to have the question of sale (question (ii)) referred to the court but the Tribunal declined to refer that question. The assessee did not pursue the alternative procedural remedy under section 66(2) to compel the Tribunal to refer question (ii). As a consequence, the court held that the proceedings from the start proceeded on the basis that there was a sale, and the "no sale" argument could not be raised at that stage against the Tribunal's refusal to refer.
On whether question (i) required first deciding the section 10(2)(vii) issue: The court considered the Supreme Court's decision in Malegaon but concluded that the observations in Malegaon about refraining from answering section 66(1) references where profits had not been determined did not apply in the same way here because the Income-tax Officer and the Appellate Assistant Commissioner had already determined that profits had arisen. The court therefore regarded the assessment of profits by the authorities below as accepted in the present proceedings.
On the disclosure obligation: The court closely followed the reasoning in Malegaon concerning the assessee's duty to disclose fully and truly all material facts. It emphasised that in Malegaon the assessee had not included the price realised in excess of the written down value in the return, had not shown that amount in the relevant section of the return, and had not shown the written down value; and that merely producing account books did not necessarily constitute disclosure within the meaning of section 34(1), as stated in the Explanation to that section.
Application to the present facts: The court found that the assessee in the instant case did not disclose the sale in Part V of the return and had scored out column 5 (the column which should have contained information about sale of building and machinery). The court held that merely filing copies of accounts did not amount to disclosure of material facts in view of the Explanation to section 34(1)(a). Consequently, the court concluded that there was a failure to disclose fully and truly the material facts necessary for assessment.
Conclusion of analysis: On the basis that primary facts (sale and surplus over written down value) were not properly disclosed and that the determination of profit by the Income-tax Officer and Appellate Assistant Commissioner stood, the court answered the referred question in the affirmative against the assessee.

Holding and Implications

Holding: The court answered the referred question in the affirmative — in other words, it held that the Tribunal was correct in law in holding that the provisions of section 34(1)(a) were rightly invoked.

Implications:

The direct effect is against the assessee and in favour of the department: the court found that the assessee omitted to disclose material facts (the surplus realised on sale over written down value) and therefore proceedings under section 34(1)(a) were properly invoked to bring the profits to tax.
The court recorded that there would be no order as to costs.
The opinion applies and relies on existing precedent (Malegaon Electricity Co. P. Ltd.) to interpret the scope of the disclosure obligation under section 34(1), but the court did not purport to lay down a novel legal principle or to treat the case as establishing a new precedent beyond the application of the cited authority to the facts before it.

Question answered in the affirmative.

Show all summary ...

1. The following question of law has been referred for our opinion by the Income-tax Appellate Tribunal, Delhi Bench “C”:

“Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the provisions of section 34(1)(a) were rightly invoked?”.

2. The assessee is an individual. The assessment year is 1954-55. The previous year ended on 31st March, 1954. The assessee was assessed on 31st March, 1959, under section 23(3) of the Income-tax Act, 1922, on a total income of Rs. 99,475, which included Rs. 48,802 as income from other sources. This assessment was not accepted by the assessee and ultimately his total income was determined at Rs. 14,597.

3. The building, machinery and furniture of the cold storage were sold by the assessee on 8th December, 1953, to a partnership firm known as Messrs. Karnal Cold Storage in which the assessee became a partner with a half share. The assessment order (dated March 31, 1959), in the assessee's case did not disclose that the Income-tax Officer had taken into account any surplus arising from the sale of building, machinery and furniture in the total income of the assessee by virtue of the proviso to section 10(2)(vii).

4. The Income-tax Officer came to the conclusion that there was an omission on the part of the assessee to disclose fully and truly all material facts necessary for his assessment which resulted in the assessment order dated March 31, 1959. He initiated proceedings under section 34(1)(a). The assessee challenged these proceedings. His case was that all the facts necessary and material for the purpose of his assessment were put by him to the Income-tax Officer during the course of the assessment proceedings. There was no omission or failure on his part to disclose fully and truly all material facts necessary for his assessment. According to the assessee, in fact, he drew the attention of the Income-tax Officer to the sale of machinery and building at the time of original assessment. It was also maintained that these facts were very much within the knowledge of the Income-tax Officer at the time he made the original assessment and that the Income-tax Officer took the view that no profit resulting from such sale was chargeable under section 10(2)(vii). All these contentions were rejected by the Income-tax Officer and he observed that there was profit under section 10(2)(vii) by reason of the sale of the building, machinery and furniture of the cold storage to the partnership and that the assessee had omitted to declare the same in his return of income filed before the Income-tax Officer in the course of the original assessment proceedings. Therefore, the profits of the sale of the building, machinery and furniture of the cold storage were brought to tax under section 34(1)(a). An appeal by the assessee to the Appellate Assistant Commissioner met with no success and so also his further appeal to the Income-tax Appellate Tribunal. The Tribunal, while rejecting the appeal, observed:

“…. that the primary fact, viz., the sale of the building, machinery and plant by the assessee and his realising a surplus over the written down value as a result of the sale was not disclosed by the assessee at the time of the original assessment. The mere fact that the assessee had appended to the return of income a copy of the building and machinery accounts and of the account of M/s. Karnal Cold Storage (newly formed firm), does not amount to a full and complete disclosure of all material facts necessary for the purpose of his assessment.

(ii) The assessee's contention that the Income-tax Officer had duly considered all the relevant facts of the case in the case of the original assessment and had arrived at a finding that there was no surplus liable to be included in the total income under section 10(2)(vii) is not borne out by the records at all. There is nothing to show that all the primary facts for the determination of the applicability of the provisions of section 10(2)(vii) were brought to the notice of the Income-tax Officer during the course of the original assessment and that he had applied his mind thereto and had arrived at the finding that no profit under section 10(2)(vii) was chargeable. In the order of the Income-tax Officer, there is no mention of his having considered the applicability of the provisions of section 10(2)(vii) nor does the record support the assessee's contention in this regard.”

5. The assessee then moved the Tribunal under section 66(1) and asked the Tribunal to refer the following questions of law for our opinion:

“(i) Whether, on the facts and in the circumstances of the case, it could be validly held within the meaning of the provisions of section 34(1)(a) of the Income-tax Act, 1922, 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 the year 1954-55 income, profits and gains chargeable to income-tax had escaped assessment for that year?

(ii) Whether, on the facts and in the circumstances of the case, there was any sale within the meaning of section. 10(2)(vii) of the Act?

(iii) If the answer to the above question (ii) is in the affirmative, whether, on the facts; there was any income, profits and gains which had escaped assessment?

(iv) Whether, on the facts, the Appellate Tribunal's judgment is not vitiated in law owing to its failure to deal with the contentions of the assessee on merits?”

6. The Tribunal by its order dated 24th April, 1970, refused to refer questions Nos. (ii) (iii) and (iv) but referred the first question.

7. Mr. A.R Aggarwal, learned counsel for the assessee, has contended that in fact there was no sale of the building, machinery and furniture of the cold storage to the partnership firm. We are unable to accept this contention for the simple reason that on this matter question No. (ii) was sought to be referred to this court and the reference was declined. No attempt was made by the assessee to move this court under section 66(2) to ask the Tribunal to refer this question. Therefore, the short conclusion at which we must arrive is that the assessee was satisfied with the order of the Income-tax Appellate Tribunal in refusing to state question No. (ii). That question is not before us and we cannot record an answer thereon. That ends his first contention.

8. The second contention of Mr. Aggarwal is that this question falls under question No. (i) and before the profit could be brought to tax the question had to be answered. We are, however, unable to agree. A clear stand was taken before the department, i.e, before the Income-tax Officer, to start with, that there was a sale of the building, machinery and furniture. It was not the case before the income-tax Officer that there was no sale. The only stand before the Income-tax Officer was that the factum of sale was brought to the notice of the Income-tax Officer and that he was in the know of all facts and in spite of that did not bring to tax the profit resulting from the sale. It is, therefore, not open to the learned counsel to urge that there was in fact no sale. The entire proceedings from the start proceeded on the basis that there was a sale.

9. The third contention of the learned counsel is based on the following observations of the Supreme Court in Malegaon Electricity Co. P. Ltd. v. Commissioner of Income-tax [1970] 78 I.T.R 466, 471, 472, 473 S.C.:

“For the reasons mentioned above, we are of the opinion, that the High Court should not have and we in our turn will not answer the questions referred under section 66(1) of the Act, because, in our opinion, those questions cannot be answered without first deciding whether the part of the sale price received by the assessee amount to profits under section 10(2)(vii). The Tribunal must first decide that question and thereafter decide the other questions of law arising for decision on the basis of its decision whether there was any profits falling within section 10(2)(vii).”

10. These observations do not apply to the facts of the present case. In the case before their Lordships, the profits resulting from the sale had not been determined and, therefore, their Lordships observed that before the question referred to them could be answered it was incumbent that the profits be determined. In the present case the Income-tax Officer and the Appellate Assistant Commissioner determined the profits. The question that there was no profit was not agitated before the Tribunal. Therefore, the assessment of the profits made by the two authorities below was accepted.

11. The only question that has to be answered is question No. (i). In view of the Supreme Court decision in Malegaon Electricity Co. P. Ltd. case, the question has to be answered against the assessee. The following observations in the said decision support our view:

“Admittedly, the price realised at the sale in excess of the written down value of the assets sold, had not been included as profits in the return submitted by the assessee. It had also not shown the same in Section D of Part I of the return. It may also be noted that the assessee had not shown either in its return or in any of the documents submitted to the Income-tax Officer, the written down value of the assets sold. Hence, not only the Income-tax Officer was not told that the assessee had earned any profit under section 10(2)(vii) nor even the essential fact, viz., the written down value of the assets sold was supplied to him so as to enable him to find out the price in excess of the written down value realised by the assessee. It is true that if the Income-tax Officer had made some investigation, particularly if he had looked into the previous assessment records, he would have been able to find out what the written down value of the assets sold was and, consequently, he would have been able to find out the price in excess of their written down value realised by the assessee. It can be said that the Income-tax Officer if he had been diligent could have got all the necessary information from his records. But, that is not the same thing as saying that the assessee had placed before the Income-tax Officer truly and fully all material facts necessary for the purpose of assessment. The law casts a duty on the assessee to ‘disclose fully and truly all material facts necessary for his assessment for that year’. Further, the Explanation to section 34(1) says:

‘Production before the Income-tax Officer of account books or other evidence from which material facts could with due diligence have been discovered by the Income-tax Officer will not necessarily amount to disclosure within the meaning of this section.’

12. If the assessee had disclosed to the Income-fax Officer the surplus price realised by it over and above the written down value of the assets sold or in the alternative if it had informed the Income-tax Officer the price realised as well as the written down value of the assets sold, then it could have been said that the assessee had done its duty and it was for the Income-tax Officer to draw any inference on the facts placed before him. But, the failure of the assessee to disclose to the Income-tax Officer the fact that the price realised by it by sale of its assets was more than the written down value of those assets or at least the written down value of those assets amounts, in our opinion, to a failure on its part to disclose fully and truly the material facts necessary for its assessment. From the cryptic statement of the Income-tax Officer in the original assessment order that ‘no adjustment is necessary’ the Tribunal was not justified in drawing the inference that the Income-tax Officer had considered all the relevant facts.”

13. There is no denial that the facts of the present case and that of the Supreme Court, excepting the distinction I have pointed out, are identical. The assessee in the instant case did not disclose the fact of this sale in Part V of the return of income. On the other hand, column 5 of the return in which the information regarding sale of building and machinery should have been furnished was scored, out by the assessee. Therefore, the mere filing of copies of accounts of building, machinery, etc., did not amount to disclosure of material facts in view of the Explanation to section 34(1)(a).

14. For the reasons recorded above, we answer the question referred to us in the affirmative, i.e, against the assessee and in favour of the department. There will be no order as to costs.