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PETITIONER: CALCUTTA DISCOUNT COMPANY LIMITED

       Vs.

RESPONDENT: INCOME-TAX OFFICER, COMPANIES DISTRICT,  AND ANOTHER.

DATE OF JUDGMENT: 01/11/1960

BENCH: GUPTA, K.C. DAS BENCH: GUPTA, K.C. DAS DAS, S.K. HIDAYATULLAH, M. SHAH, J.C. AYYANGAR, N. RAJAGOPALA

CITATION:  1961 AIR  372            1961 SCR  (2) 241  CITATOR INFO :  RF         1963 SC1356  (20)  R          1967 SC 338  (5)  F          1967 SC 523  (2)  F          1967 SC 587  (4,11)  E          1968 SC  49  (4)  R          1969 SC 944  (8)  F          1970 SC1011  (11)  D          1970 SC1982  (11)  F          1971 SC1635  (7)  R          1971 SC2074  (6)  RF         1971 SC2331  (4)  RF         1973 SC 370  (11)  R          1973 SC 989  (13,14)  R          1974 SC 478  (4)  RF         1975 SC 703  (11)  RF         1975 SC1268  (4)  RF         1976 SC1753  (8)  F          1977 SC 429  (11)  F          1985 SC 989  (10)  R          1986 SC1857  (2,7)  R          1987 SC1897  (26,35)  RF         1989 SC1088  (8)  RF         1991 SC 464  (4)

ACT: Income-tax--Income  escaping  assessment--Non-disclosure  of material  facts  by assessee--" Material  facts  ",  meaning of--Indian Income Tax Act. 1922 (11 of 1922), as amended  in 1948, s. 34(1)(a), Explanation--Constitution of India,  Art. 226.

HEADNOTE: The  appellant, a private limited company, was  assessed  to income  tax  for the assessment years 1942-43,  1943-44  and 1944-45  by  three separate orders dated January  26,  1944, February 12, 1944, and February 15, 1945, under S. 23(3)  of the  Indian  Income  Tax Act on returns  filed  by  it  with statements  of  account.  On March 28, 1951,  three  notices under S. 34 of the Act were issued calling upon it to submit

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fresh returns for the said assessment years.  The  appellant filed  the returns but thereafter applied to the High  Court under Art. 226 of the Constitution for writs restraining the Income-tax Officer from initiating assessment proceedings on the  basis  of the said notices on the ground,  inter  alia, that  he had no jurisdiction to issue the-said notices.   In his  report to the Commissioner of Income-tax for  obtaining sanction  to  initiate the said proceedings  the  Income-tax Officer had stated as follows :- "  Profit of Rs. 5,46,002 on sale of shares  and  securities escaped assessment altogether.  At the time of the  original assessment  the then I. T. O. merely accepted the  company’s version that the sale of shares were casual transactions and were  in the nature of mere change of investments.  Now  the results of the company’s trading from year to year show that the  company has really been systematically carrying  out  a trade  in the sale of investments.  As such the company  had failed to disclose the true intention behind the sale of the shares as such S. 34(1)(a) may be attracted". The  question for determination was whether in  the  circum- stance  the Income-tax Officer was right in issuing  notices on the assessee under S. 34(1)(a) of the Act. Held, (per S.  K. Das, K. C. Das Gupta and N. R.  Ayyangar, jj.),  that  before  the Income-tax Officer  could  issue  a notice under $’. 34(1)(a) of the Indian Income-tax Act,  two conditions  precedent  must co-exist, namely, that  he  must have reason to believe (i) that income, profits or gains had been  under-assessed and (2) that such under-assessment  was due to non-disclosure of material facts by the assessee. 242 Although what facts would be necessary and material for  the assessment in a particular case must depend on the facts  of that  case,  there  could be no doubt  that  the  burden  of disclosing  all the primary facts must invariably be on  the assessee. The  Explanation to S. 34(1) made it clear that that  burden could  not  be  fully discharged  by  simply  producing  the account  books  and other documents, but the  assessee  must also disclose such specific items or portions thereof as are relevant to the assessment.  But once he has done so, it  is for the Income-tax Officer to draw the proper inferences  of fact  and law therefrom and the assessee cannot  further  be called  upon  to do so for him.  The  Explanation  does  not enlarge  the  scope of the section so as to  include  "  the disclosure " of such inferences. The  question whether by the sale of shares the assessee  in the  instant case intended to change the form of  investment or to make a business profit was one of an inferential  fact and  the  failure to disclose such intention  could  not  by itself  amount  to  a  failure or  omission  to  disclose  a material fact within the meaning of S. 34(1)(a) of the Act. Where,  however,  the  Income-tax Officer  has  prima  facie reasonable grounds for believing that there has been a  non- disclosure of a primary material fact, that by itself  gives him  the jurisdiction to issue a notice under s. 34  of  the Act,  and the adequacy or otherwise of the grounds  of  such belief is not open to investigation by the Court.  It is for the  assessee  who wants to challenge such  jurisdiction  to establish  that the Income-tax Officer had no  material  for such belief. Since, in the instant case, there was no non-disclosure of a primary  material  fact  which the  assessee  was  bound  to disclose  under  S.  34(1)(a) of  the  Act,  the  Income-tax Officer  had  no  jurisdiction  to  issue  the  notices   in question.

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It is incorrect to say that the question of under-assessment by reason of non-disclosure of a material fact was  relevant only  for the purpose of applying either the longer  or  the shorter  period of limitation prescribed by the section  and not for jurisdiction and, therefore, not a proper matter for investigation under Art. 226 of the Constitution. The  High  Courts have ample powers under Art.  226  of  the Constitution,  and  are in duty bound thereunder,  to  issue such  appropriate orders or directions as are  necessary  in order  to  prevent persons from being subjected  to  lengthy proceedings  and  unnecessary harassments  by  an  executive authority acting without jurisdiction.  Alternative remedies such as are provided by the Income-tax Act cannot always  be a  sufficient reason for refusing quick relief in a fit  and proper case. Per  Hidayatullah,  J.-The Explanation to s.  34(1)  of  the Indian Income-tax Act clearly indicates that the-duty of the assessee  thereunder  does  not  end  by  merely   producing evidence  or disclosing the primary facts, but also  extends to the disclosure 243 of  such  other  facts relating to  status,  agency,  benami nature of the transaction, the nature of the trading and the like,  which he knows but do not appear from  the  evidence, and  which may be necessary for interpreting  the  evidence. If  the  evidence  produced  hides  nothing  and   discloses everything, the assessee cannot be subjected to s. 34 merely because the Income-tax Officer misinterprets such  evidence. But it is otherwise if the assessee raises a contention that is  contrary to fact and requires the Income-tax Officer  to discover the truth for himself for that would be to suppress a material fact that would attract the section. Since, in the present case, an investment company dealing in stocks  and shares, not only knowingly suppressed that  fact but  contended  otherwise,  there was  non-disclosure  of  a material  fact necessary for its assessment, and  sufficient to attract S. 34(1) (a)  of the Act. Per Shah, J.-The expression " has reason to believe " in  s. 34(1)(a) of the Indian Income-tax Act does not mean a purely subjective  satisfaction  of  the  Income-tax  Officer   but predicates the existence of reasons on which such belief has to be founded.  That belief, therefore, cannot be founded on mere  suspicion  and  must  be based  on  evidence  and  any question  as  to  the adequacy of such  evidence  is  wholly immaterial at that stage. Whether all the material facts necessary for the  assessment had  or  had  not  been  fully  and  truly  disclosed  in  a particular  case  has to be examined, in the  fight  of  the Explanation to S. 34(1)(a). If  there  is disclosure of some facts but not  all,  a  tax payer cannot resist reassessment on the plea that such  non- disclosure was due to the negligence or inadvertence on  the part  of the Income-tax Officer to scrutinise the  materials before him. Where the existence of reasonable belief that there bad been under-assessment  due  to non-disclosure  by  the  assessee, which  is  a condition precedent to exercise  of  the  power under s. 34(1)(a) is asserted by the assessing authority and the  record prima facie supports its existence, any  enquiry as to whether the authority could reasonably hold the belief that  the under assessment was due to non-disclosure by  the assessee  of  material facts necessary  for  the  assessment must, be barred.

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JUDGMENT: CIVIL APPELLATE  JURISDICTION: Civil Appeal No. 197 of 1954. Appeal  from  the Judgment and Order dated the  25th  March, 1953,  of  the Calcutta High Court in Appeal  from  Original Order No. 54 of 1953. Sachin Chaudhury, Sukumar Mitter, S. N. Mukherjee and D.  N. Ghosh, for the appellant. 244 K.   N. Rajagopal Sastri and D. Gupta, for the respondents. 1960.   November  1. The Judgment of S. K. Das,  K.  C.  Das Gupta  and N. Rajagopala Ayyangar, JJ., was delivered by  K. C.  Das  Gupta, J. M. Hidayatullah, J. and J. C.  Shah,  J., delivered separate Judgments. DAS GUPTA J.-This appeal is against an appellate decision of a  Bench of the Calcutta High Court by which in reversal  of the  order  made by the Trial Judge the Bench  rejected  the present  appellant’s  application  under  Art.  226  of  the Constitution.   The appellant is a private  limited  company incorporated  under  the Indian Company’s Act  and  has  its registered  office in Calcutta.  It was assessed to  income- tax for the assessment years, 1942-43, 1943-44- and  1944-45 by  three separate orders dated January 26,  1944,  February 12,  1944,  and  February  15,  1945,  respectively.   These assessments  were,made under s. 23(3) of the Indian  Income- tax  Act upon returns filed by it accompanied by  statements of  account.  The first two assessments were made by Mr.  L. D.  Rozario the then Income-tax Officer and the last one  by Mr.  K. D. Banerjee.  The taxes assessed were duly paid  up. On  March 28, 1951, three notices purporting to be under  s. 34  of the Indian Income-tax Act, 1922, were issued  by  the income-tax Officer calling upon the company to submit  fresh returns  of  its  total income and the  total  world  income assessable  for the three accounting years relating  to  the three  assessment years, 1942-43 1943-44 and  1944-45.   The appellant company furnished re. turns in compliance with the notices but on September 18, 1951, applied to the High Court of Calcutta for issue under Art. 226 of the Constitution  of appropriate writs or orders directing the Income-tax Officer not  to proceed to assess it on the basis of these  notices. The  first  ground  on  which  this  prayer  was  based  was mentioned  in  the  petition  in  these  terms:-"  The  said pretended  notice  was issued without the existence  of  the necessary  conditions precedent which  confers  jurisdiction under section 34 aforementioned, whether                             245 before  or after the amendment in 1948 ". The  other  ground urged was that the amendment to s. 34 of the Income-tax  Act in  1948 was not retrospective and that the  assessment  for the  years 1942-43, 1943-44 and 1944-45 became  barred  long before March 1951. The Trial Judge held that the first ground was not made  out but  being of opinion that the amending Act of 1948 was  not retrospective, he held that the notices issued were  without jurisdiction.  Accordingly he made an order prohibiting  the Income-tax   Officer   from   continuing   the    assessment proceedings on the basis of the impugned notices. The  learned  Judges who heard the appeal  agreed  with  the Trial  Judge  that the first ground had not been  made  out. They held however that in consequence of the amendment of s. 34  in 1948 the objection on the ground of  limitation  must also  fail.  A point of constitutional law which appears  to have been raised before the appeal court was also  rejected. The  appeal was allowed and the company’s application  under Art. 226 was dismissed with costs.

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The Company has preferred the present appeal on the strength of  a  certificate  issued  by the  High  Court  under  Art. 133(1)(a) of the Constitution. The  only  point raised before us is that the  courts  below were wrong in holding that the first ground that the notices were   issued  without  the  existence  of   the   necessary conditions precedent which confers jurisdiction under s.  34 had not been made out.  As it is no longer disputed that  s. 34 as amended in 1948 applies to the present case we have to consider  the  section as it stood after  the  amendment  in 1948,  in  deciding  this  question  of  jurisdiction.   The relevant portion of the section was in these words :- " 34.  Income escaping assessment.-(1) If- (a) the Income-tax Officer has reason to believe that  by reason of the omission or failure on the part of  an assessee to make a return of his income under s.  22 for any year  or  to disclose fully and truly  all   material  facts necessary for his assessment for that year, income,  profits or gain chargeable to income-tax have escaped assessment for that year, or have been 246 under-assessed, or assessed at too low a rate, or have  been made  the  subject  of excessive relief under  the  Act,  or excessive loss or depreciation allowance has been  computed, or (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  within eight  years  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 reassess 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:- Provided that- (i)  the  Income-tax Officer shall not issue a notice  under this  subsection,  unless he has recorded  his  reasons  for doing  so and the Commissioner is satisfied on such  reasons recorded that it is a fit case for the issue of such notice; (ii) the  tax  shall be chargeable at the rate at  which  it would have been charged had the income, profits or gains not escaped  assessment or full assessment, as the case may  be; and (iii)     where  the  assessment made or to be  made  is  an assessment  made or to be made on a person deemed to be  the agent  of a non-resident person under section 43, this  sub- section  shall  have effect as if for the periods  of  eight years and four years a period of one year was substituted.                             247 Explanation-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."

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To confer jurisdiction under this section to issue notice in respect of assessments beyond the period of four years,  but within a period of eight years, from the end of the relevant year  two  conditions have therefore to be  satisfied.   The first  is  that the Income-tax Officer must have  reason  to believe that income, profits or gains chargeable to  income- tax  have been under-assessed.  The second is that  he  must have  also reason to believe that such " under assessment  " has occurred by reason of either (i) omission or failure  on the part of an assessee to make a return of his income under s.  22,  or  (ii)  omission or failure on  the  part  of  an assessee  to  disclose fully and truly  all  material  facts necessary  for  his assessment for that  year.   Both  these conditions  are conditions precedent to be satisfied  before the  Income-tax Officer could have jurisdiction to  issue  a notice for the assessment or re-assessment beyond the period of four years but within the period of eight years, from the end of the year in question. No dispute appears to have been raised at any stage in  this case  as  regards  the  first  condition  not  having   been satisfied  and we proceed on the basis that  the  Income-tax Officer had in fact reason to believe that there had been an under-assessment  in each of the assessment years,  1942-43, 1943-44  and  1944-45.  The appellant’s case has  all  along been  that  the  second condition  was  not  satisfied.   As admittedly  the  appellant had filed its  return  of  income under s. 22, the Income-tax Officer could have no reason  to believe that under-assessment had resulted from the  failure to  make a return of income.  The only question  is  whether the  Income-tax Officer had reason to believe that  "  there had  been  some omission or failure to  disclose  fully  and truly all material facts necessary 248 for  the assessment " for any of these years in  consequence of which the under-assessment took place. Before we proceed to consider the materials on record to see whether  the  appellant has succeeded ,in showing  that  the Income-tax  Officer could have no reason, on  the  materials before  him, to believe that there had been any omission  to disclose material facts, as mentioned in the section, it  is  necessary to examine the precise scope of disclosure which the  section  demands.   The words used are  "  omission  or failure  to  disclose  fully and truly  all  material  facts necessary for his assessment for that year ". It  postulates a  duty  on every assessee to disclose fully and  truly  all material facts necessary for his assessment.  What facts are material, and necessary for assessment will differ from case to  case.   In every assessment  proceeding,  the  assessing authority will, for the purpose of computing or  determining the proper tax due from an assessee, require to know all the facts  which help him in coming to the  correct  conclusion. 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  has to draw inferences 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 inferences, and ascertain  on  a  correct interpretation  of  the  taxing enactment,  the  proper  tax leviable.   Thus,  when a question  arises  whether  certain income  received  by  an assessee  is  capital  receipt,  or revenue  receipt,  the assessing authority has to  find  out what primary facts have been proved, what other facts can be inferred from them, and taking all these together, to decide what the legal inference should be.

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There  can be no doubt that the duty of disclosing  all  the primary  facts  relevant  to the decision  of  the  question before  the  assessing authority lies on the  assessee.   To meet  a possible contention that when some account books  or other  evidence has been produced, there is no duty  on  the assessee to disclose further facts, which on due  diligence, the Income-tax                             249 Officer  might have discovered, the Legislature has  put  in the  Explanation, which has been set out above., In view  of the Explanation, it will not be open to the assessee to say, for  example-"  I have produced the account  books  and  the documents: You, the assessing officer examine them, and find out  the facts necessary for your purpose: My duty  is  done with disclosing these account-books and the documents".  His omission  to  bring to the assessing  authority’s  attention these  particular  items  in  the  account  books,  or   the particular  portions of the documents, which  are  relevant, amount  to  "  omission  to disclose  fully  and  truly  all material facts necessary for his assessment." Nor will he be able  to  contend successfully that  by  disclosing  certain evidence,  he  should  be deemed  to  have  disclosed  other evidence, which might have been discovered by the  assessing authority  if he had pursued investigation on the  basis  of what  has been disclosed.  The Explanation to  the  section, gives  a quietus to all such contentions; and  the  position remains  that so far as primary facts are concerned,  it  is the  assessee’s  duty  to  disclose  all  of  them-including particular entries in account books, particular portions  of documents  and  documents, and other evidence,  which  could have  been discovered by the assessing authority,  from  the documents and other evidence disclosed. Does  the duty however extend beyond the full  and  truthful disclosure of all primary facts ? In our opinion, the answer to  this  question must be in the negative.   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. It  is not for somebody else-far less the assessee--to  tell the assessing authority what inferences-whether of facts  or law  should  be drawn.  Indeed, when it is  remembered  that people  often  differ as regards what inferences  should  be drawn  from  given facts, it will be meaningless  to  demand that the assessee must disclose 32 250 what  inferences-whether of facts or law-he would draw  from the primary facts. If  from  primary facts more inferences than  one  could  be drawn,  it  would not be possible to say that  the  assessee should have drawn any particular inference and  communicated it  to  the assessing authority.  How could an  assessee  be charged  with failure to communicate an inference, which  he might or might not have drawn ? It  may  be  pointed out that the Explanation  to  the  sub- section has nothing to do with " inferences " and deals only with  the  question  whether  primary  material  facts   not disclosed could still be said to be constructively disclosed on the ground that with due diligence the Income-tax Officer could   have  discovered  them  from  the   facts   actually disclosed.  The Explanation has not the effect of  enlarging the section, by casting a duty on the assessee to disclose " inferences  "-to draw the proper inferences being  the  duty imposed on the Income-fax Officer.

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We have therefore come to the Conclusion that while the duty of  the assessee is to disclose fully and truly all  primary relevant facts, it does not extend beyond this. The  position therefore is that if there were in  fact  some reasonable grounds for thinking that there had been any non- disclosure  as regards any primary fact, which could have  a material bearing on the question of "under assessments  that would  be sufficient to give jurisdiction to the  Income-tax Officer  to issue the notice,% under s. 34.   Whether  these grounds were adequate or not for arriving at the  conclusion that there was a non disclosure of material facts would  not be open for the court’s investigation.  In other words,  all that is necessary to give this special jurisdiction is  that the  Income-tax  officer had when he  assumed  jurisdiction some  prima facie grounds for thinking that there  had  been some non-disclosure of material facts. Clearly  it is the duty of the assessee who wants the  court to hold that jurisdiction was lacking, to establish that the Income-tax  Officer  had no material at all before  him  for believing that there had  been such 251 non disclosure.  To establish this the company has relied on the statements in the assessment orders for the three  years in  question  and  on the statement  of  Kanakendra  Narayan Banerjee  in the report made by him to the  Commissioner  of Income-tax for the purpose of obtaining sanction to initiate proceedings  tinder s. 34 and also on his statement  in  the affidavit on oath in reply to the writ petition.  The report is in these words:- "  Profit of Rs. 5,48,002 on sale of shares  and  securities escaped assessment altogether. At  the  time of the original  assessment  the  then  I.T.O. merely  accepted  the  company’s version that  the  sale  of shares  were casual transactions and were in the  nature  of mere  change  of  investments.   Now  the  results  of   the company’s  trading from year to year show that  the  company has  really been systematically carrying out a trade in  the sale  of  investments.  As such the company  had  failed  to disclose  the true intention behind the sale of  the  shares and as such s. 34(1)(a) may be attracted." The  only nondisclosure mentioned in the report is that  the company  had failed to disclose " the true intention  behind the  sale of the shares ". Mr. Choudhury contends that  this is  not an omission to disclose a material fact  within  the meaning  of  s. 34.  The question whether sales  of  certain shares were by way of changing the investments or by way  of trading  in shares has to be decided on a  consideration  of different  circumstances,  including the  frequency  of  the sales, the nature of the shares sold, the price received  as compared  with  the cost price, and several  other  relevant facts.   It is the duty of the assessee to disclose all  the facts which have a bearing on the question; but whether  the assessee  had  the intention to make a  business  profit  as distinguished  from the intention to change the form of  the investments  is  really  an inference to  be  drawn  by  the assessing  authority  from  the  material  facts  taken   in conjunction  with  the surrounding circumstances.   The  law does  not require the assessee to state the conclusion  that could reasonable drawn from the primary facts.  The 252 question of the assessee’s intention is an inferential  fact and  so  the  assessee’s  omission  to  state  his  "   true intentions  behind the sale of shares " cannot by itself  be considered  to  be  a failure or omission  to  disclose  any material  fact  within  the meaning of s.  34.   Indeed,  an

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assessee  whose contention is that the shares were  sold  to change the form of investment and not with the intention  of making a business profit cannot be expected to say that  his true  intention was other than what he contended it to  be.. Dealing  with  this question the learned Chief  Justice  has said:- " The expression that the Respondent had failed to  disclose "  the true intention behind the sale of shares "  may  lack directness,   but  that  deficiency  of  language   is   not sufficient  to enable the Respondent to contend, in view  of the circumstances alleged, that no failure to disclose facts was  being  complained of.  On the facts as  stated  by  the Income-tax  Officer,  it  is clear that  there  had  been  a failure  to  disclose  the fact that the  Respondent  was  a dealer  in shares and what the Income-tax Officer  meant  by the  language  used by him was that the Respondent  had  not disclosed that the sale of shares had been of the nature  of a trading sale, made in pursuance of an intention to make  a business  profit,  and  not of the nature  of  a  change  of investment, made in pursuance of an intention to put certain capital  assets  into another form.  If that be  so,  it  is equally  clear that the Income-tax Officer who, by the  way, was  a successor to the officers who had made  the  original assessments, was not merely changing his opinion as to facts previously known, but was taking notice of a new fact." The  learned  Chief Justice seems to have proceeded  on  the basis  that  when from certain facts inferences  are  to  be drawn  there  is a duty on the assessee to  state  what  the correct  inference  should  be and if he has  made  a  wrong statement as regards the inferences to be drawn that also is an " omission or failure to disclose a material fact ".  For the  reasons given earlier we do not think that this is  the correct position in law. It is clear therefore that if one looked at this report                             253 only  it would not be possible to say that the  Income.  tax Officer  had  any non-disclosure of material  facts  by  the assessee in mind when he assumed jurisdiction.  It has to be remembered   however  that  in  sending  a  report  to   the Commissioner the Income-tax Officer might not fully set  out what he thought amounted to a non-disclosure, because it  is conceivable  that the report may not be drawn  up  carefully and  may not contain a reference to all the  non-disclosures that operated on his mind.  We have however on the record an affidavit  sworn by the same Income-tax Officer who  started the  s. 34 proceedings.  It is reasonable to expect that  in this  affidavit which was his opportunity to tell the  court what  non-disclosure  he took into  consideration  he  would state  as clearly as possible the material facts in  respect of  which  there had not been in his view a  full  and  true disclosure.   Mr. Banerjee’s statements in this  matter  are contained  in paras. 5, 6 and 7 of his affidavit.  They  are in these words:- It  5.  With  reference to paragraphs 2 and 3  of  the  said petition, I crave reference to the assessment orders therein mentioned.   The assessment order dated the  15th  February, 1945,  was  made  by Sri Kali Das  Banerjee  now  Income-tax Officer  Companies District II and the other two  assessment orders  were  made  by  L. D. Rozario  who  is  now  in  the employment  of M/s Lovelock & Lewes.  I find from the  notes made by me in the order sheet of the assessment year 1944-45 and my order dated the 7th July, 1944 that Mr. Smith of M/s. Lovelock  &  Lewes attended before me and  stated  that  the profits  of  the company arising out of dealings  in  shares were  not taxable as the company was not a dealer in  shares

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and securities.  Subsequently on the 18th August 1944,  M/s. Lovelock  &  Lewes  wrote a letter to  me  setting  out  the contentions  of  their clients and inter  alia  stated  that throughout  the whole history the company bought  no  shares what  so. ever.  Sri K. D. Banerjee was accordingly  led  to believe that the dealings in shares were casual transactions and were in the nature of mere change in investments and the profits resulting therefrom were 254 not  taxable.  The assessment orders were made on the  basis that the petitioner did not carry on any  business  dealings in shares.  A copy of the said letter dated the 18th August, 1944,  as  also the relevant portion of the note  sheet  are included in the schedule hereto annexed and marked " 6.   In the assessments for 1945-46 and 1946-47, which  were completed in April 1950, the profits on sale of shares  were included  in the total assessable income of the  company  it having been then discovered that the petitioner was in  fact carrying   on   business   in   shares   contrary   to   its representation  that it was not.  The company filed  appeals before  the  Appellate Assistant  Commissioner,  which  were rejected  in  September  1950,  and  the  assessments   were confirmed.   The  company thereafter filed a  second  appeal before  the  In.  come-tax Tribunal which  appeals  are  now pending. 7.   With reference to para. 5 of the said petition, I  deny that I pretended to act under s. 34 of the Income-tax Act as alleged.   I have reasons to believe that by reason  of  the omission  or  failure of the company to disclose  fully  and truly all material facts necessary for its assessments,  the income,  pro.  fits and gains chargeable to  income-tax  had been  under assessed.  I recorded my reasons and made  three reports  (one  for  each year) in the  prescribed  form  and submitted them before the Commissioner of Income-tax and the latter  was satisfied that it was a fit case for issue of  a notice  under  s. 34 of the Income-tax  Act.   Thereafter  I issued the prescribed notices under s. 34 of the  Income-tax Act.   The  said  reports were made and  notices  issued  in respect of all the three years mentioned in the petition and copies  of the report and notice for one of such  years  are included  in the schedule hereto annexed and marked "  A  ". The  report and notices for the two other years are  exactly similar." It  appears  from  this that the statements made  by  or  on behalf   of  the  company  which  the  assessing   authority considered  to  amount to non-disclosure of  material  facts were these:-(i) the company was not                             255 whole   of  its  history  the  company  bought   no   shares whatsoever.   It has not been suggested before us  that,  in fact  at  any time up to the conclusion  of  the  assessment proceedings  for the years 1942-43, 1943-44 and 1944-45  the company  did  in  fact make a  single  purchase  of  shares. Clearly  therefore the Income-tax Officer had no  reasonable ground for thinking that anything as regards the purchase of shares had not been disclosed.  The company does not dispute that the statement was made on its behalf that it was not  a "I dealer " in shares and securities.  It appears clear that the  Income-tax  Officers who made the assessments  for  the years  1942-43, 1943-44 and 1944-45 proceeded on  the  basis that  this  was  an investment company  and  considered  the question whether in spite of its being an investment company certain sales of shares wherefrom the company made a  profit were by way of trading in shares and not by way of  changing the   form  of  investment.   Whether  these  sales  by   an

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investment  company  should  in law be  treated  as  trading transactions,  and the profits made from the  sales  trading profits  liable  to  tax, was the matter which  it  was  the Income-tax  Officer’s  task to decide.  No duty lay  on  the company  to  admit that these transactions were  by  way  of trade.  The fact that on behalf of the company Mr. Smith  of Lovelock & Lewes stated that the company was not a dealer in shares  and  securities  does not  therefore  amount  to  an omission to disclose fully and truly any material fact. To  ascertain whether the Income-tax Officer could have  had in mind any non-disclosure as a ground for thinking that  by reason  of  such  non-disclosure  an  under  assessment  had occurred-apart  from what was mentioned in the  affidavit-we enquired from respondent’s counsel whether he could suggest any  other non-disclosure that might have taken place.   Mr. Sastri  suggested two.  One is that the sales had  not  been disclosed;  the  other that the memorandum and  articles  of association  of  the  company  had  not  been  shown.   This suggestion  is against the record and we have no  hesitation in  repelling it.  Not only is it not the ground set out  by the Income-tax Officer at any 256 stage-not  even in the affidavit in court, but the  ,matters mentioned by the officer that the assessee had claimed  that the  profits  realised  were of a  casual  nature  obviously indicate  that  the  assessee  disclosed  ,that  a   surplus resulted from the sales which were also disclosed. The assessment orders it is true do not mention the  details of the sales.  They state however that the audited  accounts of  the  company were furnished.  The sales of  shares  were expressly  mentioned in the report.  In these  circumstances it  is reasonable to believe that as regards sale of  shares full details were in fact disclosed. Nor  can we believe that the two Income-tax Officers  L.  D. Rozario and K. D. Banerjee concluded the proceedings without referring  to the memorandum and articles of association  of the company.  These officers known well that the company was claiming  to  be an investment company only.   They  had  to consider  the question whether sales were of the  nature  of trade  or  of  the nature of change of  investment.   It  is unthinkable  that they would not examine the  memorandum  of association.  Besides, it is pertinent to note that in para. 4 of his affidavit Kanakendra Narayan Banerjee refers to the Memorandum and articles of Association and states that "  by its   memorandum  of  association  the  company   has   been authorised to carry. on the various kinds of business  which have  been specified in sub-section (1) and (2) of cl. 3  of the said memorandum of associations He does not say that the articles  or  the memorandum of association were  not  shown during  the  assessment proceedings for the  years  1942-43, 1943-44  and 1944-45.  If he had any reason to believe  that these were not shown he would have certainly mentioned  that fact.   For  that would undoubtedly to non-disclosure  of  a material fact. It  must therefore be held that the Income-tax  Officer  who issued the notices had not before him any non-disclosure  of a material fact and so he could have no material before  him for  believing  that  there  had  been  any  material   non- disclosure by reason of which an under-assessment had  taken place.                             257 We are therefore bound to hold that the conditions precedent to  the exercise of jurisdiction under s. 34 of the  Income- tax  Act  did  not  exist and  the  Income-tax  Officer  had therefore  no  jurisdiction to issue  the  impugned  notices

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under  s.  34 in respect of the years 1942-43,  1943-44  and 1944-45 after the expiry of four years. Mr.  Sastri argued that the question whether the  Income-tax Officer  had  reason to believe that  under  assessment  had occurred  " by reason of nondisclosure of material  facts  " should  not be investigated by the courts in an  application under  Art. 226.  Learned Counsel seems to suggest  that  as soon  as the Income-tax Officer has reason to  believe  that there  has  been  under  assessment  in  any  year  he   has jurisdiction  to start proceedings under s. 34 by issuing  a notice provided 8 years have not elapsed from the end of the year  in question, but whether the notices should have  been issued within a period of 4 years or not is only a  question of  limitation which could and should properly be raised  in assessment  proceedings.  It is wholly incorrect however  to suppose  that  this  is a question of  limitation  only  not touching  the question of jurisdiction.  The scheme  of  the law clearly is that where the Income-tax Officer has  reason to  believe that an under assessment has resulted from  non- disclosure  he shall have jurisdiction to start  proceedings for re. assessment within a period of 8 years; and where  he has reason to believe that an under assessment has  resulted from  other causes he shall have jurisdiction to start  pro- ceedings  for  re-assessment  within  4  years.   Both   the conditions,  (i)  the Income-tax Officer  having  reason  to believe  that there has been under assessment and  (ii)  his having  reason  to believe that such  under  assessment  has resulted from nondisclosure of material facts, must co-exist before  the  Income-tax Officer has  jurisdiction  to  start proceedings after the expiry of 4 years.  The argument  that the  Court ought not to investigate the existence of one  of these  conditions,  viz., that the  Income-tax  Officer  has reason to believe that under assessment has resulted from 33 258 non-disclosure   of  material  facts  cannot  therefore   be ,accepted. Mr.  Sastri  next  pointed out that at the  stage  when  the Income-tax  Officer  issued the notices he  was  not  acting judicially  or quasi-judicially and so a writ of  certiorari or  prohibition  cannot issue.  It is well  settled  however that  though the writ of prohibition or certiorary will  not issue  against an executive authority, the High Courts  have power  to  issue  in  a fit case  an  order  prohibiting  an executive authority from acting without jurisdiction.  Where such  action  of  an  executive  authority  acting   without jurisdiction  subjects or is likely to subject a  person  to lengthy  proceedings  and unnecessary harassment,  the  High Courts, it is well settled, will issue appropriate orders or directions to prevent such consequences. Mr.  Sastri  mentioned  more than once  the  fact  that  the company  would  have sufficient opportunity  to  raise  this question, viz., whether the Income-tax Officer had reason to believe  that  under  assessment  had  resulted  from   non- disclosure of material facts, before the Income-tax  Officer himself  in the assessment proceedings and, if  unsuccessful there,  before  the  appellate  officer  or  the   appellate tribunal  or  in the High Court under section 66(2)  of  the Indian  Income-tax Act.  The existence of  such  alternative remedy  is  not  however  always  a  sufficient  reason  for refusing a party quick relief by a writ or order prohibiting an  authority  acting without jurisdiction  from  continuing such action. In the present case the company contends that the conditions precedent  for  the assumption of jurisdiction under  s.  34

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were  not  satisfied and come to the court at  the  earliest opportunity.   There is nothing in its conduct  which  would justify  the refusal of proper relief under Art. 226.   When the  Constitution  confers on the High Courts the  power  to give  relief it becomes the duty of the courts to give  such relief  in  fit  cases and the courts would  be  failing  to perform  their  duty if relief is refused  without  adequate reasons.   In  the present case we can find  no  reason  for which relief should be refused.                             259 We  have therefore come to the conclusion that  the  company was  entitled to an order directing the  Income-tax  Officer not  to take any action on the basis of the  three  impugned notices. We are informed that assessment orders were in fact made  on March 25, 1952, by the Income-tax Officer in the proceedings started  on the basis of these impugned notices.   This  was done  with the permission of the learned Judge  before  whom the  petition  under Art. 226 was pending, on  the  distinct understanding  that these orders would be without  prejudice to  the contentions of the parties on the several  questions raised  in the petition and without prejudice to the  orders that  may ultimately be passed by the Court.  The fact  that the  assessment  orders  have already  been  made  does  not therefore affect the company’s right to obtain relief  under Art.  226.  In view however of the fact that the  assessment orders  have  already been made we think it proper  that  in addition to an order directing the Income-tax Officer not to take  any  action  on the basis of the  impugned  notices  a further order .quashing the assessment made be also issued. In the result, we allow the appeal, set aside the order made by  the  appellate  Bench of the  Calcutta  High  Court  and restore  the  order made by the Trial Judge,  Bose,  J.  The assessment  orders made in the proceedings started under  s. 34  of the Income Tax Act are also quashed.   The  appellant will get its costs here and below. HIDAYATULLAH  J.-I  have had the advantage  of  reading  the judgments  prepared by my brethren, Das Gupta and Shah,  JJ. The point involved in the case is a very short one, and  the answer,  as  it appears to me, equally  so.   The  appellant Company’s  income,  profits  and gains  for  the  assessment years, 1942-43, 1943-44 and 1944-45, were duly assessed  and taxed.   The orders were respectively passed on January  26, 1944, February 12, 1944, and February 15, 1945. On  March 28, 1951, three notices under s. 34 of the  Indian Income-tax  Act  were  issued  calling  upon  the  appellant Company to submit fresh returns in respect 260 of  the  previous years relative to each of  the  assessment years  above mentioned.  Since this action was  taken  after more  than four years, the matter fell to be governed by  s. 34(1)(a)  of the Indian Income-tax Act, as amended in  1948. The clause provided an extended period for sending a  notice calling  for  a  return  for the  purpose  of  assessing  or reassessing  income,  profits and gains  which  had  escaped assessment  or had been under-assessed for any  year  within eight  years,  if  the Income-tax Officer "  has  reason  to believe  that  by reason of the omission or failure  on  the part  of  an assessee to make a return of his  income  under section  22 for any year or to disclose fully and truly  all material facts necessary for his assessment for that year ", the  income, profits or gains chargeable to income-tax  have escaped assessment etc. In  the  present case, the appellant Company,  which  is  an investment Company, had produced in the back years a list of

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the  shares  sold by it, the statements of profit  and  loss account,  and, I am prepared to assume, also the  Memorandum and Articles of Association.  But the appellant Company gave out  that  the sales of shares were casual  transactions  of change of investments.  This statement was accepted,  though it was found that in later years the Company was dealing  in stocks  and shares as a business venture, and its  statement which was accepted, was not perhaps true. The   Income-tax   Officer  reported  the  matter   to   the Commissioner, and stated as follows: "Profits of Rs. 5,48,002/- on sale of shares and  securities escaped assessment altogether. At  the  time  of the original assessment  the  then  I.T.O. merely  accepted  the company’s version that  the  sales  of shares  were casual transactions and were in the  nature  of mere  change  of  investments.   Now  the  results  of   the company’s  trading from year to year show that  the  company has  really been systematically carrying out a trade in  the sale  of  investments.  As such, the company has  failed  to disclose  the true intention behind the sale of  the  shares and as such section 34(1)(a) may be attracted." The appellant Company applied to the Calcutta                             261 High Court for a writ Under Art. 226 which was granted by  a learned single Judge; but the order was, reversed on  appeal in  the High Court.  The appellant Company has now  appealed on a certificate under Art. 133(1)(c) of the Constitution. The  contention  of the appellant Company is  that  all  the facts  necessary to be disclosed were, in  fact,  disclosed, that  it  was not required further to concede  that  it  was trading  in shares, which was a matter of  inference,  from’ the  proved facts, for the Income-tax Officer to  draw,  and that there was thus no question of any non disclosure.  This argument  overlooks the addition of the Explanation  to  the section,  which explains cl. (a) of the first  sub-section.. It reads: "  Explanation.-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." This  means  quite  clearly  that  the  mere  production  of evidence is not enough, and that there may be an omission or failure to make a full and true disclosure if some  material fact  necessary  for the assessment lies  embedded  in  that evidence  which the assessee can uncover but does  not.   If there  is  such a fact, it is the duty of  the  assessee  to disclose it.  The evidence which is produced by the assessee discloses only primary facts, but to interpret the evidence, certain  other facts may be necessary.  Thus,  questions  of status, agency, benami nature of transactions, the nature of trading  and like matters may not appear from  the  evidence produced,  unless disclosed.  If it be merely a question  of interpretation  of  evidence by an Income-tax  Officer  from whom nothing has been hidden and to whom everything has been fully disclosed, then the assessee cannot be subjected to s. 34, merely because the Income-tax Officer miscarried in  his interpretation  of  evidence.   But it is  otherwise,  if  a contention  which  is contrary to fact, is  raised  and  the Income-tax  Officer is set to discover the hidden truth  for himself In the latter case, there is suppression of material fact, or, in 262 other  words,  that lack of full and true  disclosure  which would entitle action under s. 34 of the Act.

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The  following  example explains the  meaning.   Taking  the present  case, I set below two statements,  one  .,involving full  disclosure  and a contention, and the  other,  only  a contention with a material fact suppressed : "  (1).   We  are  a trading company  and  our  business  is according  to  our memorandum of association   ’to  acquire, hold,  exchange,  sell and ’deal in shares,  stocks,  etc.’. These  sales,  however,  were not business  sales  but  only change of investments into trustee securities as decided  by the trustees. (2)  We  changed industrial shares into  trustee  securities because I in or about 1934, the trustees decided to  convert the  Indian  Industrial Shares held by  the  appellant  into trustee securities’." If the first is decided in favour of the assessee, there  is an  inference or decision by the Income-tax Officer  from  a full  and  true  disclosure.  If the second  is  decided  in favour  of the assessee, the question would arise  if  there was full and true disclosure. In  the present case, the question whether the  transactions were casual transactions of changing investments or  regular trading  in  stocks  and  shares  involves  not  merely   an inference, because the inference depends upon the fact  that the  appellant  Company was formed to trade  in  stocks  and shares.   It  was open to the appellant Company  to  contend that in spite of its business, a particular transaction  was this  and  not that.  But, if the appellant Company  was  an investment Company dealing in stocks and shares’ and knowing this  for a fact, did not disclose the fact,  the  statement was neither full nor true, as it involved a suppression of a material fact necessary for the assessment.  The Explanation is  quite obviously meant to reach an  identical  situation. The appellant Company might have placed the evidence  before the  income-tax  Officer,  but the  Income-tax  Officer  had reason  to believe that the disclosure was neither full  nor true, because the fact that the Company was and shares                             263 was  not  disclosed.  The Income-tax Officer in  his  report meant  no more than this.  He, therefore, felt  that,  prima facie, there was not only concealment of a fact but, on  the contrary,   maintaining  of  a  falsehood,  and   this   was sufficient to bring this matter within the extended  period. Every  contention  contrary  to  the  Income-tax   Officer’s opinion  is not necessarily concealment of a material  fact, but  some contentions made with a mental reservation  as  to the true state of affairs may amount to such concealment, if they involve non-disclosure of facts related to other  facts and known to the assessee. The  Company  still persists that the sales of  shares  were casual transactions, and this contention will, no doubt,  be decided  hereafter.  But the question will be decided  after taking into consideration the nature of the business of  the Company,  and  till  that is done,  the  Income-tax  Officer believes  that the contention raise before and persisted  in is  not  a mere contention but maintenance  of  a  falsehood about the nature of the transactions and the business of the Company.   The  existence of such a belief  is  sufficiently established by the report of the Income-tax Officer and  the satisfaction  of  the Commissioner, and this  has  not  been gainsaid. In  my  opinion,  the Divisional Bench  of  the  High  Court rightly  refused  a writ in the circumstances, and  I  would dismiss this appeal with costs. SHAH  J.-I  regret  inability to  agree  with  the  judgment delivered by my learned brother Mr. Justice Das Gupta.

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The facts which give rise to this appeal have been fully set out  by  my  learned  brother and it  is  not  necessary  to reiterate the same. Sub-section (1) of s. 34 of the Indian Income Tax Act,  1922 (in  so far it is material) stood at the relevant date  when the proceedings were commenced, as follows: S.   34:-(1) If-- (a)  the  Income-tax Officer has reason to believe  that  by reason of the omission or failure on the part of an 264 for  any  year or to disclose fully and truly  all  material ,facts  necessary for his assessment for that year,  income, profits  or  gains  chargeable to  income-tax  have  escaped assessment  for  that year, or have been  under-assessed  or assessed at too low a rate, or have been made the subject of excessive  relief  under  the  Act,  or  excessive  loss  or depreciation allowance has been computed, or (b)  notwithstanding  that  there has been  no  omission  or failure as mentioned in cl. (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 cl. (a) at any time within eight years and  in cases falling under cl. (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-s. (2) of s. 22  and  may proceed to assess or re-assess such income, profits or gains or  re-compute 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: Provided that-- (i)  the  Income-tax Officer shall not issue a notice  under this  sub-section,  unless he has recorded his  reasons  for doing  so and the Commissioner is satisfied on such  reasons recorded that it is a fit case for the issue of such notice; (ii) the  tax  shall be chargeable at the rate at  which  it would have been charged had the income, profits or gains not escaped  assessment or full assessment, as the case may  be; and (iii)     where the assessment made or to be made is 265 an   assessment made or to be made on a person deemed  to be the agent of a non-resident person under s.  43,  this  sub- section  shall  have effect as if for the periods  of  eight years and four years a period of one year was substituted. Explanation:-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. This   section   provides  machinery   for   assessment   or reassessment if it be found that income, profits or gains  " have  escaped  assessment  or have been  under  assessed  or assessed  at  too low a rate or have been  made  subject  to excessive  relief  under  the  Act  or  excessive  loss   or depreciation allowance has been computed ", which expression may  for convenience of reference be compendiously  referred to  as  are or have been under-assessed.   Notice  under  s.

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34(1)(a) may be issued if the Income Tax Officer has  reason to  believe that income in any year has been under  assessed by reason of the failure on the part of the assessee to make a  return of his income, or to disclose fully and truly  all material  facts  necessary for assessment for  the  year  in question.   The  authority  of the  Income  Tax  Officer  is manifestly  circumscribed by certain conditions, and may  be exercised only if those conditions exist and not otherwise. In the case in hand, we are concerned with the operation  of cl. (1)(a) of s. 34.  If that clause does not apply, notices of  reassessment  having been served more  than  four  years after the end of the relevant year of assessment, must fail. On  an  analysis of the relevant  provisions,  the  material conditions  proscribed  for  the exercise of  the  power  to commence proceedings for reassessment under s. 34(1)(a)  are these:’ (1)  The Income Tax Officer has reason to believe, (a)  that income, profits or gains have been underassessed, (b)  that this under-assessment is by reason of 266 omission  or  failure  to make a return under s.  22  or  by reason  of failure to disclose fully and truly all  material facts  necessary  for assessment for any year;  (2)  that  a notice containing all or any of the requirements of s. 22(2) is served on the assessee within eight years from the end of the year of assessment; (3)  that  the Income Tax Officer has recorded  his  reasons for issuing the notice and the Commissioner is satisfied  on such  reasons  recorded that it is a fit case for  issue  of such notice. The  notices  issued by the Income Tax Officer in  the  case before  us  undoubtedly  fulfil  conditions  (2)  and   (3). Notices  of  reassessment were served before the  expiry  of eight years of the end of the relevant years of  assessment. The  Income  Tax Officer also recorded his  reasons  in  the reports  submitted  by  him  to  the  Commissioner  and  the Commissioner was satisfied that they were fit cases for  the issue  of such notices.  The dispute in the  appeal  relates merely  to the fulfilment of the two branches of  the  first condition and that immediately raises the question about the true import of the expression "has reason to believe" in  s. 34(1)(a).   The expression " reason to believe "  postulates belief  and the existence of reasons for that  belief.   The belief  must  be held in good faith: it cannot be  merely  a pretence.  The expression does not mean a purely  subjective satisfaction  of  the  Income  Tax  Officer:  the  forum  of decision  as to the existence of reasons and the  belief  is not  in  the  mind  of the Income Tax  Officer.   If  it  be asserted  that the Income Tax Officer had reason to  believe that  income had been underassessed by reason of failure  to disclose fully and truly the facts material for  assessment, the existence of the belief and the reasons for the  belief, but not the sufficiency of the reasons, will be justiciable. The  expression  therefore predicates that  the  Income  Tax Officer holds the belief induced by the existence of reasons for  holding  such  belief.  It  contemplates  existence  of reasons  on  which the belief is founded, and not  merely  a belief  in the existence of reasons inducing the belief;  in other  words, the Income Tax Officer must on information  at his disposal believe that 267 income has been underassessed by reason of failure fully and truly   to  disclose  all  material  facts   necessary   for assessment.  Such a belief, be it said, may not be based  on mere suspicion: it must be founded upon information.

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That the Income Tax Officer has reason to believe that there was   under  assessment  in  the  material  years  was   not challenged  by  the appellant and in  our  opinion  rightly. There  are  on  the record the reports  of  the  Income  Tax Officer  in which the belief is expressly set out.  It  also appears from the assessment orders for the years 1945-46 and 1946-47  that tax has been assessed on the profits  made  by sale of shares by the company in those years. Had the Income Tax Officer reason to believe that by  reason of  failure to disclose fully and truly all  material  facts necessary  for assessment for the three years  in  question, there  had  resulted underassessment ?   The  learned  Trial judge, after setting out the evidence, held that the  Income Tax  Officer  had  materials before  him  showing  that  the company’s  trading from year to year disclosed that  it  had been  systematically  carrying  on a trade in  the  sale  of shares and securities.  He observed: "  Whether the materials were sufficient or not  or  whether the  belief or opinion is erroneous or not,  cannot......... be  enquired  into  by the court......  If  the  Income  Tax Officer has made a wrong decision as to the existence of the conditions  precedent,  the remedy is by way of  appeals  as provided  by the Income Tax Act and by stating a case  under s. 66 of the Act." In  appeal,  the High Court confirmed the order.   The  High Court  observed that " the use of the expression " the  true intention  behind  the sale of shares " used in  the  report made  by  the  Income  Tax  Officer  under  s.  34  to   the Commissioner  may  lack directness, but that  deficiency  of language was not sufficient to enable the company to contend in  view  of  the circumstances alleged that  there  was  no failure  to disclose facts being complained of ".  The  High Court also observed: "On  the  facts as stated by the Income Tax Officer,  it  is clear that there had been a failure to 268 disclose  the  fact  that the respondent  was  a  dealer  in ,shares  and  what  the  Income Tax  Officer  meant  by  the language  used  by  him  was that  the  respondent  had  not disclosed that the sale of shares had been of the ,nature of a  trading  sale, made in pursuance of an intention  to  put certain capital assets into another form.  If that be so, it is  equally  clear that the Income Tax Officer who,  by  the way,  was  a  successor to the officers  who  had  made  the original assessments, was not merely changing his opinion as to  facts previously known, but was taking notice of  a  new fact." Prima  facie,  the finding recorded by the  Court  of  First Instance  and confirmed by the Court of Appeal is one  on  a question  of fact and this court would not be  justified  in entering  upon  a reappraisal of the evidence.   But  it  is contended on behalf of the company that the finding is based on no materials, and to that plea I may advert.  By s. 22 of the  Income Tax Act, a duty is imposed upon every tax  payer whose  total  income  exceeds  the  maximum  which  is   not chargeable to income-tax to make a return in the  prescribed form  and verified in the prescribed manner,  setting  forth his total income during that year.  If the tax payer  making the  return fails to disclose fully and truly  all  material facts necessary for the assessment of the year in  question, the  jurisdiction of the Income Tax Officer to  reassess  is invited.   The  company in its petition for the issue  of  a writ  contended by paragraph 7 that the notices  were  ultra vires  and illegal and that the Income Tax Officer  was  not invested  with  jurisdiction to  proceed  thereunder,  inter

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alia, for the reason-that the " pretended notice was  issued without the existence of the necessary conditions  precedent which  confers  jurisdiction  under  s.  34  aforementioned, whether before or after amendment in 1948." The Income Tax Officer, by his affidavit, submitted: Para  4:-"  The statements made in paragraph 1 of  the  said petition  are substantially correct.  By its  Memorandum  of Association, the company has been authorised to carry on the various kinds of business which have been specified in  sub- cls. (1) to (32) of cl. (3)  of the said Memorandum of Association.                             269 Para  5:-" With reference to paragraphs 2 and 3 of the  said petition, I crave reference to the assessment orders therein mentioned.   The assessment order dated the  15th  February, 1945,  was  made by Shri Kali Das Banerjee  now  Income  Tax Officer   Companies  District  in  II  and  the  other   two assessment orders were made by Mr. L. D. Razario who is  now in  the employment of M/s.  Lovelock & Lewis.  I  find  from the  notes made by me in the order sheet of  the  assessment year 1944-45 and my order dated the 7th July, 1944, that Mr. Smith  of Messrs.  Lovelock & Lewis attended before  me  and stated  that  the  profits of the  company  arising  out  of dealings in shares were not taxable as the company was not a dealer  in shares and securities.  Subsequently on the  18th August, 1944, Messrs.  Lovelock & Lewis wrote a letter to me setting out the contentions of their clients and inter  alia stated that throughout the whole of its history the  company bought  no  shares  whatsoever.  Shri  K.  D.  Banerjee  was accordingly led to believe that the dealings in shares  were casual transactions and were in the nature of mere change in investments  and  the profits resulting therefrom  were  not taxable.  The assessment orders were made on the basis  that the  petitioner  did not carry on any  business  dealing  in shares.   A copy of the said letter dated the  18th  August, 1944,  as  also the relevant portion of the note  sheet  are included in the schedule hereto annexed and marked " A "." Para 6:- " In the assessments for 1945-46, and 1946-47 which were completed in April, 1950, the profits on sale of shares were included in the total assessable income of the  company it  having been then discovered that the petitioner  was  in fact  carrying  on  business  in  shares  contrary  to   its representation  that it was not.  The company filed  appeals before  the  Appellate  Assistant  Commissioner  which  were rejected  in  September,  1950,  and  the  assessments  were confirmed.  The  company thereafter filed  a  second  appeal before  this  Income-tax  Tribunal  which  appeals  are  now pending." Para  7:-  "  With  reference to paragraph  5  of  the  said petition, I deny that I pretended to act under 270 s.   34  of the Income Tax Act as alleged.  I  have  reasons to  believe  that by reason of the omission  or  failure  of the  company to disclose fully and truly all material  facts necessary  for its assessments, the income, profits or,  and gains  chargeable  to income-tax  had  been  underassessed.I recorded  my reasons and made 3 reports (one for each  year) in  the  prescribed  form  and  submitted  them  before  the Commissioner of Income Tax and the latter was satisfied that it  was a fit case for issue of a notice under s. 34 of  the Income Tax Act.  Thereafter  issued prescribed notices under s. 34 of the Income Tax Act.  The said reports were made and notices  issued in respect of all the three years  mentioned in the petition and copies of the report and notice for  one of  such years are included in the schedule  hereto  annexed

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and  marked " A ". The report and notices for the two  other years are exactly similar. By these averments, the Income Tax Officer asserted (a) that he had reasons to believe that by reason of the omission  or failure  of  the  company to disclose fully  and  truly  all material   facts  necessary  for  the   assessment,   income chargeable to income tax has been underassessed and that  he had recorded his reasons in that behalf in the three reports submitted by him to the Commissioner; (b) that in the course of  the assessment proceeding for the year 1944-45,  it  was represented  on  behalf  of the company that  the  sales  of shares in that year were casual transactions and were in the nature  of " mere change in investments " ; (c) that in  the orders  of  assessment  for the years  1945-46  and  1946-47 passed in April, 1950, profits earned by sale of shares held by the company were included in the total assessable  income of  the company, it having been discovered that the  company was  in  fact  carrying on the business  of  selling  shares contrary to its earlier representations; and (d) that by its Memorandum  and  Articles of Association,  the  company  was authorised  to  carry  on  the  business  of  diverse  kinds specified in sub-cls. (1) to (32) of cl. (3) thereof. Whereas by a mere bald assertion made by the company in  its petition it was averred that the conditions precedent to the exercise of jurisdiction to 271 re-assess  did not exist, the Income Tax Officer  stated  in his rejoinder that he had reasons to believe that income bad been underassessed and he also set out the grounds on  which that  belief was founded.  The existence of the  reasons  to believe  that  income  was  underassessed  has,  as  already observed,  not been challenged; nor is the  court  concerned with the question whether the materials may be regarded by a court  before  which  a dispute  is  raised,  sufficient  to sustain  the belief entertained by the Income  Tax  Officer. It  is  clear that the Income Tax Officer asserted  on  oath that  when  he issued the notice for  reassessment,  he  had reasons  to  believe  that income of the  company  had  been underassessed  and he set out the reasons in support of  the belief. Counsel  for  the company submitted that  all  the  material facts  necessary  for the assessment were  fully  and  truly disclosed  in the course of the assessment for the years  in question,  and  if the Income Tax Officer did not  draw  the correct inference, the jurisdiction to reassess could not be invoked.   He urged that it was for the Income Tax  Officer, on  the  preliminary facts disclosed to him,  to  raise  his inference  of  fact  and  to base  his  conclusions  on  the preliminary  as  well as the inferential facts, and  if,  in arriving  at  his  conclusion on  the  preliminary  and  the inferential  facts.,  the Income Tax  Officer  committed  an error,  he  could  not  seek  to  commence  proceedings  for reassessment  on being apprised of the error.  It  was  said that  the  Income Tax Officer knew that the company  was  an investment corporation, that the shares held by the  company were sold from time to time, and that profits were earned by the  sale of those shares, and that on these  materials  the Income  Tax Officer might have held that the company  was  a dealer in shares, but if he did not draw that inference, the under  assessment, if any, was not by reason of  failure  to disclose  fully  and  truly  all  material  facts.   Counsel submitted that the condition of the exercise of jurisdiction under  s.  34  is failure to disclose fully  and  truly  all material facts necessary for assessment and not failure to 272

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instruct the Income Tax Officer about the legal inference to be drawn from the facts disclosed. The duty imposed by the Act upon the tax payer is to make  a full  and true disclosure of all material   facts  necessary for the assessment; he is not required to inform the  Income Tax Officer as to what legal inference should be drawn  from the facts disclosed by him nor to advise him on questions of law.   Whether on the facts found or disclosed, the  company was a dealer in shares, may be regarded as a conclusion on a mixed  question of law and fact and from the failure on  the part  of the company to disclose to the Income  Tax  Officer this legal inference no fault may be found with the company. But  on  the evidence in the case, the plea  raised  by  the company  that  all material facts were disclosed  cannot  be accepted.   The  Income Tax Officer has in para.  6  of  his affidavit  referred to the assessment of the  years  1945-46 and  1946-47:  he has also referred to  the  Memorandum  and Articles  of  Association of the company  therein.   In  the assessment  order  for  the year  1945-46,  the  Income  Tax Officer  has set out cls. (1) and (2) of the Memorandum  and Articles of Association of the company.  They are: (1) " To  acquire, hold, exchange, sell and deal in  shares, stocks,  debenture-stock, bonds, obligations and  securities issued  or guaranteed by any company, Government  or  public body constituted or carrying on business in British India or elsewhere; " (2)  "  Generally to carry on business as financiers and  to undertake and carry out all such operations and transactions (except the issuing of policies of assurances on human life) as an individual capitalist may lawfully undertake or  carry out; ". The  Income Tax Officer in his order of assessment for  that year observed that those clauses indicated the purposes  for which  the company was formed, and also that " whenever  the shares  were  first acquired, these became  the  commodities which  could  either be held or sold according to  the  best interests of the company, that whenever such a commodity  is sold,  it comes within the activities or  properly  speaking the profit making scheme as enumerated in the object 273 clauses stated above.  These shares sold in course of ten or twelve  years  whenever opportunities occurred  for  earning profits on making the sales........... This company was  not an ordinary trader investing its surplus funds in shares and securities  quite  unconnected with its  regular  course  of business  so  that the profit or loss also on sale  of  such shares  or securities may be treated as not arising  out  of its  regular business carried on.  On the other hand, it  is an Investment company of which the very first object  clause is  to  hold  and deal in shares.  Profit on  sale  of  such shares  therefore  arises  out  of  its  regular  course  of business and it must be taxable." From  that  order  of assessment, it is  manifest  that  the Assessing Officer held that the company was formed with  the object  of  acquiring,  holding,  exchanging,  selling   and dealing  in  shares,  that the shares  acquired  became  the trading  assets  of  the  company to  be  disposed  of  when opportunities  occurred  for earning profits; and  that  the activities of selling shares in which surplus assets of  the company  were invested were a part of the  regular  business carried on by the company. There  is  no evidence that the Memorandum and  Articles  of Association  referred  to in para 4 of  the  affidavit  were produced  in  the course of the assessment of  the  relevant years;  nor is there evidence to show that it was  disclosed

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that  the  acquisition  of  shares  was  incidental  to  the business  activities  and out of the surplus assets  of  the company   and  that  the  same  were  sold  at   profit   as opportunities  arose.  There is also no ground for  assuming that  these  facts must have been known to  the  Income  Tax Officer.    Counsel  for  the  company  suggested   somewhat casually  that under the Income Tax Rules and  the  practice prevailing  with the Income Tax Officer, the Memorandum  and Articles  of  Association of every company which  was  being assessed to tax are to be filed with the Income Tax Officer. But  our attention has not been invited to any rule  or  any material to support the existence of a practice requiring  a private limited company to file with the Income Tax  Officer the Memorandum and Articles of Association. 274 The plea raised by counsel for the company must be     examined in the light of the Explanation to sub-S.    (1)  of S.  34. The Explanation provides that " 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 the  section."  If  pro- duction  of documents or other evidence from which  material facts could with due diligence have been discovered does not necessarily  amount to disclosure, it would be difficult  to hold  that a presumption about the production of a  document at  sometime in the past and its possible existence  in  the files  of the Income Tax Officer relating to  earlier  years may  be  regarded as sufficient disclosure.   Disclosure  of some facts, but not all, though the facts not disclosed  may have come to the knowledge of the Income Tax Officer, if  he had  carefully  prosecuted  an  enquiry  on  the  facts  and materials  disclosed,  will not amount to a  full  and  true disclosure  of all material facts necessary for the  purpose of  assessment.  A tax payer cannot resist  reassessment  on the  plea that non-disclosure of the true state  of  affairs was due to the negligence or inadvertence on the part of the Income   Tax  Officer,  and  but  for  such  negligence   or inadvertence,  a  full and true disclosure of  all  material facts   necessary,  for  the  assessment  would  have   been resulted. There  is no evidence on the record that the Memorandum  and Articles of Association were ever produced before the Income Tax  Officer  in the course of proceedings  for  assessment. Again, the report of the Income ’tax Officer discloses  that his predecessor in office was told that the sales of  shares effected by the company were casual transactions and were in the nature of a mere " change of investments".  This was not strictly accurate.  The record therefore clearly shows  that the  company  bad  failed to disclose fully  and  truly  all material  facts in relation to assessment in  two  respects, (1) that it failed to produce the Memorandum and Articles of Association  showing the purposes for which the company  was incorporated, and                             275 (2)that the shares were acquired as part of the business  of financiers.   The  company also made a  statement  which  is partially untrue when it stated that sales were mere  casual transactions.   There were materials before the  Income  Tax Officer on which he had reason to believe that by reason  of the  failure  of  the company to fully  and  truly  disclose material  facts, its income was underassessed.   Whether  on these  facts,  a  conclusion that in fact  the  company  was carrying  on  the  business of trading in  shares  could  be founded, is at this stage entirely immaterial.  If there was

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reason  to believe, the alleged inadequacy of the  materials on  which the belief could be founded is of no moment.   The Income   Tax   Officer   has   commenced   proceedings   for reassessment  by issuing notices against the company and  he has  placed all the materials before the court on  which  it could  be said that he had reason to believe that income  of the  company had been underassessed by reason of failure  on the  part  of the company to disclose fully  and  truly  all material  facts relating to the assessment and if, on  those materials,  the  Income Tax Officer could  hold  the  belief which  he  says  he did, the court in  seeking  to  hold  an enquiry  into the question whether the Income  Tax  Officer, notwithstanding  his  affidavit  and  materials  placed   in support  thereof, had reason to hold the  requisite  belief, would be arrogating to itself jurisdiction which it does not possess.   If  the conditions precedent do  not  exist,  the jurisdiction  of the High Court to issue  high  prerogative, writs under Art. 226 of the Constitution to prohibit  action under the notice may be exercised.  But if the existence  of the  conditions is asserted by the authority entrusted  with the  power  and  the materials on  the  record  prima  facie Support the existence of such conditions, an enquiry whether the  authority  could not have reasonably  held  the  belief which he says he had reason to hold and he did hold, is,  in my judgment, barred. In that view, the proper order to pass in this appeal  would be one of dismissal with costs. BY  COURT.-In  view of the majority opinion, the  appeal  is allowed with costs here and below. 276