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Kedar Nath v. Commissioner Of Income-Tax
Factual and Procedural Background
The reference arises under section 66(1) of the Income-tax Act from a question posed by the Income-tax Appellate Tribunal asking whether, in the circumstances of the case, the Income-tax Officer (ITO) was entitled to reopen the assessment under section 34 of the Act.
The assessee was a practising barrister assessed by the ITO, Moradabad, for the assessment year 1940–1941 on 28 January 1941. The assessment covered income from profession, property, interest and dividends. During the assessment it emerged that the assessee had purchased and sold shares and suffered losses on those transactions; the ITO who made the original assessment declined to allow those losses as deductions on the ground that the assessee was not carrying on a business of buying and selling shares. That officer remarked that "Purchasing and selling of shares is not his business."
The original assessing officer was transferred and succeeded by another officer. On 12 February 1942 the successor issued a notice under section 34 and conducted supplementary proceedings, resulting in an enhanced assessment by order dated 13 August 1942. The successor recorded that he found no notes in the file to support his predecessor's remark, that the assessee did not furnish an explanation or a statement of purchases and sales when given an opportunity, and that he therefore assessed the income from the share transactions to the best of his judgment.
The supplementary assessment was affirmed on appeal by the Appellate Assistant Commissioner and was upheld by the Income-tax Appellate Tribunal. The Tribunal then referred the limited question on the correctness of reopening under section 34 to this Court.
Legal Issues Presented
- Whether, in the circumstances of this case, the Income-tax Officer was entitled to reopen the assessment under section 34 of the Income-tax Act.
- Whether the conditions expressed in section 34 — in particular the requirement of "definite information" and that the discovery must be in consequence of such information — were satisfied before the ITO acted under section 34.
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Badar Shoe Store, Agra | Interpreting section 34: the phrase "definite information" is intended to protect the assessee from reopening based on mere suspicion or rumour; "definite information" must be something more than gossip and must lead to the discovery (or belief) that income has escaped assessment. | The Court relied on the principle articulated in this earlier decision to underline that section 34 requires definite information leading to discovery, and to conclude that mere re-examination, suspicion, or a different view taken by a successor officer does not satisfy the statutory precondition for reopening. This precedent informed the Court's conclusion that the section's conditions were not met. |
Court's Reasoning and Analysis
The Court analysed section 34 by identifying three prerequisite elements that must be satisfied before an ITO can act under that provision:
- There must be "definite information" which has come into the possession of the Income-tax Officer.
- There must be a discovery that income, profits, or gains chargeable to tax have escaped assessment, or that they were under-assessed, assessed at too low a rate, or were the subject of excessive relief.
- The discovery must have been made "in consequence of" that definite information (i.e. a causal link between the new information and the discovery).
The Court emphasised the protective purpose of the phrase "definite information": it must be something more than mere suspicion, gossip, or rumour. The Court reiterated (following the earlier case of Badar Shoe Store, Agra) that a mere change of opinion by an officer on the basis of facts already in the file, or a reinvestigation that re-examines the same material, does not amount to a "discovery" in the sense required by section 34. The Court therefore considered it necessary to examine the actions of the ITO before issuing the section 34 notice to see whether the statutory preconditions were satisfied.
Applying this framework to the record in the present case, the Court found that:
- The supplementary assessment order, the Appellate Assistant Commissioner's order, and the Tribunal's order did not disclose what "definite information" had come into the possession of the second ITO that caused the discovery of under-assessment.
- There was no trace in the available orders or files of any new information that preceded and caused the discovery; the material suggested instead that the successor ITO could have been merely dissatisfied with the view taken by the first ITO and undertook a reinvestigation.
- The Court held that a reinvestigation, a closer study of facts already in the file, or mere suspicion (however well founded) do not satisfy the statutory requirement that discovery be in consequence of definite information that has newly come into the officer's possession.
The Court further noted the legislative context: the Amendment Act of 1939 had made the language of section 34 more stringent, reflecting the Legislature's intention to avoid harassment of assessees by repeated reopenings except in special circumstances contemplated by the section.
Justice Braund, in concurring remarks, reinforced the distinction between (a) the ultimate legal conclusion that income escaped assessment and (b) the "definite information" of facts which must have come into the officer's possession and have produced the discovery. He observed that the record contained no material showing that any definite information was received prior to the successor ITO's reinvestigation.
Holding and Implications
Holding: The Court answered the referred question in the negative and held that the Income-tax Officer was not entitled to reopen the assessment under section 34 of the Indian Income-tax Act in the circumstances of this case.
Implications:
- Direct effect on the parties: The supplementary assessment made by the successor ITO under section 34 was not justified on the record before the Court; the reopening did not meet the statutory preconditions and therefore could not stand.
- Statutory and broader consequence (as stated by the Court): The Amendment Act of 1939 tightened the scope of section 34, evidencing a legislative intent to restrict reopening of assessments so as to prevent harassment of the assessee; accordingly, valid reopening requires definite new information causally connected to the discovery of escaped income.
- Procedural note from the Court: By consent the Court made no order as to costs, and a copy of the order would be sent by the Registrar to the Income-tax Appellate Tribunal under the Court's seal.
The opinion does not purport to establish additional precedent beyond its application of section 34 as interpreted with reference to the earlier case noted; it confines itself to the direct conclusion that, on the materials before the Court, the statutory conditions for reopening were not satisfied.
Pathak, J.:— This is a reference under section 66(1) of the Income-tax Act made by the Income-tax Appellate Tribunal for decision by this Court of the following question:—
“Whether in the circumstances of the case the Income-tax Officer was entitled to reopen the assessment under section 34 of the Act.”
The assessee, in this case, is a practising Barrister who was assessed for the assessment year 1940-1941 by the Income-tax Officer, Moradabad, on 28th January, 1941. He was assessed in respect of income from, profession, property, interest and dividends. In the course of the assessment proceedings, it transpired that the assessee had purchased and sold shares in companies and suffered losses in the course of those transactions. Such losses, were not allowed as deductions as, in the opinion of the Income-tax Officer, the assessee was not carrying on business in the sale and purchase of shares. The said Officer observed:
“Owing to war the assessee tried to dispose of his shares and purchase new ones. Purchasing and selling of shares is not his business.”
It appears that the Officer who made the original assessment was transferred and was succeeded by another Officer. On 12th February, 1942, a notice was issued to the assessee by this new Officer under section 34 of the Income-tax Act and, in pursuance of that notice, supplementary proceedings for the assessment in respect of the year 1940-1941 were taken with the result that the assessment was enhanced by the order, dated 13th August, 1942. It is necessary to note what this Officer had to say with regard to the transaction of purchase and sale of shares. After referring to the above remarks made by his predecessor this Officer proceeded to observe:—
“As I could not find any notes in the miscellaneous file on the basis of which this remark was incorporated in the assessment order, I gave an opportunity to the assessee to clarify the situation but he did not explain anything. He did not even furnish a statement showing the purchases and sales made by him. I, therefore, proceed to assess the income from this source to the best of my judgment.”
The result was that in addition to other matters, the Income-tax Officer made an assessment on the assessee in respect of profits said to have been earned by the assessee in what was found to be business in the purchase and sale of shares. In appeal, the Appellate Assistant Commissioner affirmed the supplementary assessment and on a further appeal to the Income-tax Appellate Tribunal this supplementary assessment was upheld. It is in these circumstance that the question mentioned above has been referred to us for decision.
Shortly put, the question is whether the proceedings taken by the Income-tax Officer were justified by the provisions of section 34. In other words, were the terms of section 34 satisfied before the Income-tax Officer took action under that section? Section 34, so far as it is material, is as follows:—
“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 or have been assessed at too low a rate, or have been the subject of excessive relief under this Act, the Income-tax Officer may, in any case in which he has reason to believe that the assessee has concealed the particulars of his income or deliberately furnished inaccurate particulars thereof, at any time within eight years, and in any other case at any time within four years of the end of that year, serve on the person liable to pay tax on such income, profits or gains…. 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….”
It is manifest from the language of this section that three conditions must be satisfied before an Income-tax Officer can take action under it:—(1) there must be definite information which has come into the possession of the Income-tax Officer, (2) there must be discovery of under-assessment etc., and (3) the discovery must have been the result of that definite information. The true interpretation of this section came in for consideration on an earlier occasion before my learned brother sitting with Mr. Justice Malik in the case of Badar Shoe Store, Agra(1). In that case, the requirements of section 34 were considered at considerable length and it was pointed out that the words “definite information” are placed in section 34 of the Indian Income-tax Act to protect the subject against any assault by the Income-tax Officer based upon mere suspicion. It was further remarked: “The ‘definite information’, which is something more than mere gossip or rumour, must lead to the discovery, or ‘belief’ as we have described it above”.
It was also pointed out that a mere change of opinion based on the same facts and figures does not amount to ‘discovery’ within the meaning of this section. In order to judge whether the requirements mentioned above of section 34—which, in our opinion, are a condition precedent to the applicability of the section—are satisfied, it is always necessary to examine how the Income-tax Officer acted before proceeding to issue a notice under section 34. It would have been helpful if it had been stated in the supplementary assessment order what was the definite information in consequence of which the discovery in question was made by the Income-tax Officer. From the supplementary assessment order and from the order passed by the Appellate Assistant Commissioner, we do not derive any assistance upon that point and from those orders it is impossible to say whether the condition precedent mentioned above was satisfied. From the order of the Income-tax Appellate Tribunal also, it does not appear what was the definite information which had come into the possession of the Income-tax Officer, nor does it appear that it was in consequence of any definite information that the discovery of under-assessment was made. The mere fact that a discovery of under-assessment was made would not justify the Income-tax Officer in acting under section 34 and, therefore, the present is a case where although it may be said that there was a discovery of underassessment, it could not be said that it was in consequence of something definite of which the Income-tax Officer had been informed that the under-assessment was discovered.
In our view, suspicion or a closer study of the facts which were gone into by the Income-tax Officer at the time of the original assessment or even a fresh investigation by him or by his successor would not bring the case within the purview of the section. The “information” must be definite and it appears from the words “which has come into his possession” that this information must be of new facts. If those facts were already in the possession of the Income-tax Officer, the language of the section would not be satisfied. The question of vital importance, in this case, is whether the discovery made by the Income-tax Officer was in consequence of such definite information as is contemplated by the section. As we have stated above, if discovery is the result of a further investigation or a closer study of the facts and circumstances of the case, such discovery would not be in consequence of “definite information” within the meaning of the section. We have quoted above the orders of the Income-tax Officer and the Appellate Assistant Commissioner and we do not find any trace of any definite information having come into the possession of the Income-tax Officer resulting in the discovery of under-assessment. We have, therefore, no option but to hold that the terms of section 34 were not fulfilled before action was taken by the Income-tax Officer under that section.
It is worthy of note that, by the Amendment Act of 1939, the language of section 34 has been made more stringent and it would be only in a limited number of cases where action would be permissible under section 34. The intention of the legislature in making the amendment was that the assessee should not be harassed by the reopening of the assessment and the assessment once made must be closed, but in special circumstances contemplated by the section, it should be open to the Income tax Officer to reopen the assessment. We have no doubt that the Income-tax Officer was not justified in taking action under section 34 and we answer the question referred to us in the negative.
Braund, J.:— I only desire to add a few words.
In my opinion it can never be supposed that section 34(1) of the Indian Income-tax Act was intended to give to an Income-tax Officer, or to any successor-in-office of an Income-tax Officer, a mere licence to reinvestigate the facts on which a previous assessment has been based. Still less can it be supposed that it was intended to enable him to do any such thing on mere suspicion, however well founded that suspicion may prove to have been.
The section has been very carefully worded; and in my opinion its object has been to avoid any possible confusion between that which is discovered and the “definite information” of which the discovery must be the consequence. As I see it, the discovery itself is one thing, while the “definite information” in consequence of which it is made is an entirely different thing. The ultimate “discovery” is, of course, in any case that “income, profits or gains chargeable to tax have escaped assessment”. But that “discovery” is itself a mere conclusion of law and must be based on the discovery of facts. And both these discoveries are required, by the section to have been made in consequence of definite information which has come into the possession of the Income-tax Officer.
In the present case, in my opinion, the whole trouble has arisen from a failure to distinguish between what was discovered and the definite information in consequence of which the discovery was made. Let us assume that everything that the Income-tax Officer in his assessment, and the Appellate Tribunal in their judgment, refer to was discovered by the later Income-tax Officer for the first time, although there is in my opinion no evidence to support that conclusion. It still remains a fact that there is not an iota of material in this record to show that the Income-tax Officer reopened the matter in consequence of any information he had received, definite or otherwise, prior to his re-investigation. The whole history of this matter, as disclosed in the record, is consistent—and perhaps more consistent—with the construction that the second Income-tax Officer was dissatisfied with the view taken by the first and, therefore, decided to reopen the matter. Even if, in the course of that reinvestigation, he then discovered what he says he did discover, that does not in my opinion satisfy the section, which requires that the discovery should have been in consequence of definite information received. The long and short of it is that in this case no “definite information” is shown to have been received in consequence of which the Income-tax Officer made his renewed investigation and ultimately assessed the assessee afresh.
By the Court:— We answer the question referred to us in the negative and hold that in the circumstances of the case the Income-tax Officer was not entitled to reopen the assessment under section 34 of the Indian Income-tax Act. By consent we make no order as to the costs of this reference. A copy of our order will be sent by the Registrar to the Income-tax Appellate Tribunal under the seal of the Court.
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