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PETITIONER: INCOME TAX OFFICER, JODHPUR

       Vs.

RESPONDENT: PURUSHOTTAM DAS BANGUR & ANR.

DATE OF JUDGMENT:       22/01/1997

BENCH: S.C. AGRAWAL, G. T. NANAVATI

ACT:

HEADNOTE:

JUDGMENT:          [WITH CIVIL APPEALS NOS. 3234-35 OF 1983]                       J U D G M E N T      CIVIL APPEALS NOS. 3041-43 OF 1983      These appeals  are directed against the judgment of the Rajasthan High  Court dated  November 29,  1979, whereby the Writ Petitions  filed by  the respondents  have been allowed and the notice issued under Section 147(b) of the Income Tax Act, 1961  (hereinafter referred  to as ‘the Act’) have been quashed.      C.A. No.  3041 of  1983 arises out of Writ Petition No. 1177 of 1974 filed by Purushottam Das Bangur, respondent No. 1. it  relates to  the assessment of the said respondent for the assessment  year 1969-70.  During  the  accounting  year relevant to  the said  assessment year  the assessee claimed that he  had suffered  long term  capital loss  on scale  of shares of  Maharaja Shree Umaid Mills Ltd. during the period March 5,  1969 and March 30, 1969 at the price quoted in the Official  Report   and  quotations  of  the  Calcutta  Stock Exchange Association.  According to  the  assessee,  he  had incurred a  loss of  Rs. 1,57,792/-.  The said  claim of the assessee was  accepted by  the Income Tax Officer, ‘C’ ward, Jodhpur  while  making  the  assessment  and  the  same  was affirmed in  appeal by the Appellate Assistant Commissioner. Subsequently, the Income Tax Officer received a letter dated March 21,  1974  from  Shri  S.M.  Bagai,  Deputy  Director, Directorate of  Inspector (Investigation), Special Cell, New Delhi, wherein  it was  stated that  on information obtained from the  Bombay Stock Exchange Directory the book value per equity share  of Maharaja  Shree Umaid  Mills Ltd, rose form Rs. 318,55  for the  year ending  December 21,  1965 to  Rs. 401/- for  the year ending December 31, 1970 and the earning per share rose from Rs. 8.37 per share to Rs. 44/- per share during the  abovementioned  period  and  that  the  dividend percentage also rose from 2% to 10% for the same period, but the quotations of the shares in Calcutta Stock Exchange fell from Rs.  168/- to  Rs.85/- per share during this period. In the said  letter of  Shri Bagai  it was  stated that  it was clear from  these facts that the quotations appearing are as a result  of certain  manipulated transactions  between  the group and  in cannot be said that to reflect the fair market

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value of  the company.  Alongwith the said letter Shri Bagai had annexed the information which was gathered by him on the basis of  the Bombay  Stock  Exchange  Directory  and  other information. The  said letter  of Shri Bagai was received by the Income Tax Officer on March 26, 1974. On March 27, 1974, he issued  a notice  under Section 147(b) of the act whereby the assessee  was informed  that the  Income Tax Officer had the reason  to believe  that assessee’s income chargeable to tax for  the assessment  year 1969-70 had escaped assessment and, therefore, the assessing authority proposed to reassess the income for the said assessment year and the assessee was required to  deliver to  him a return in the prescribed form of his  income for  the said  year. Feeling aggrieved by the said notice,  the assessee  filed Writ  Petition No. 1177 of 1974 in the Rajasthan High Court.      Similar notices  under Section  147(b) of  the Act were issued to  respondent No.  2, Rang Lal Bangur, in respect of the  assessment   year  1969-70   and  1971-72   which  were challenged by him by filing Writ Petitions Nos. 1182 of 1974 and 57 of 1975 before the Rajasthan High Court.      All the  three Writ  Petitions have been decided by the High Court  by a  common judgment  dated  October  26,  1979 whereby the High Court has held that in the facts and in the circumstances of  the case,  it could  not be  said that the Income Tax  officer had  in his  possession  information  in consequence of  which he  could have  reason to believe that income chargeable  to tax  had escaped  assessment  for  the relevant assessment  years. The  said decision  of the  High Court has  been assailed by the Income Tax Officer by filing these appeals.      Section 147(b)  of the Act, as it stood at the relevant time, provided as follows :-      "147. If -      (a) (Omitted)      (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      chargeable  to   tax  has   escaped      assessment for any assessment year,      he may subject to the provisions of      sections  148  to  153,  assess  or      reassess such  income or  recompute      the  loss   or   the   depreciation      allowance, as  the case may be, for      the   assessment   year   concerned      (hereinafter in sections 148 to 153      referred   to   as   the   relevant      assessment year)."      A perusal  of clause  (b) of Section 147 shows that for taking action under the said provision what was required was that (i) the Income Tax Officer has received information and (ii) in  consequence of  such information  he has  reason to believe that income chargeable to tax has escaped assessment for any  assessment year.  The question  is whether  in  the present case  after he had completed the original assessment the Income Tax Officer had received information on the basis of which  he could  have reason  to believe  that the income chargeable to tax had escaped assessment.      Shri D.R. Gupta, Income Tax Officer, ‘B’ Ward, Jodhpur, who was  the assessing  authority and  who  had  issued  the impugned notice, filed his counter affidavit in reply to the

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Writ Petition  wherein he  stated that during the assessment proceedings it  was represented  to him  on  behalf  of  the assessee that  the shares of Maharaja Shree Umaid Mills Ltd. were regularly  quoted in  the stock  exchange and  that the sale was  affected by  the assessee  at the prevalent market rate. A  share quotation  list was  also shown to him and in these circumstances,  he accepted  the version  given by the assessee without  making any  further inquiry  regarding the market rates  of the  shares, as, at that time, there was no material before him to suspect that the fair market value of the shares  was higher  than the sale price given out by the assessee. He  has further  stated that on March 26, 1974, he received  a   letter  through  Shri  C.S.  Jain,  inspecting Assistant Commissioner,  Jodhpur Range,  Jodhpur  from  Shri S.M.  Bagai,  Deputy  Director,  Directorate  of  Inspection (Investigation), Special  Cell, New  Delhi, dated  March 21, 1974, along  with some annexures and also a telegram by Shri Bagai from Calcutta giving certain information regarding the shares of  Maharaja Shree  Umaid Mills Ltd., Pali, which had been collected  by the  said Director  Shri S.M.  Bagai. The telegram by  Shri Bagai  from  Calcutta  indicated  that  on inquiries he  had found  that the shares of the said Company were not  regularly quoted in the Stock Exchange, Shri Gupta further stated  that he  applied his  mind to  the aforesaid information and it appeared to him that the quotation of the shares of  the Mills at Calcutta Stock Exchange was a result of certain manipulated transactions between the Bangur Group itself, ad  he, therefore,  calculated the fair market value of the share at Rs.250/-, per share on the relevant dates as against Rs. 84/-, and Rs. 85/-, per share. His case was that it was  in consequence of the aforesaid information received by him  on March  26, 1974,  that he  formed the  reasonable belief that the fair market value of the shares was far more than the  sale price  and the  so-called  market  quotations shown  by   the  assessee   at  the  time  of  the  original assessment, were  manipulated ones, as a result of which the income chargeable to tax had escaped assessment.      It would  thus appear  that  the  impugned  notice  was issued by  the Income Tax Officer on the basis of the letter dated March 21, 1974 from Shri S.M. Bagai to Shri C.S. Jain. The said letter was as under :-      "My dear Jain,      Sub :     Maharaja Shree Umaid                Mills Ltd., Pali      I have  received  your  D.O.No.  C-      Misc.(56)/73-74/229   dated    19th      March, 1974 today through a special      messenger  enclosing   a  statement      regarding transfer of shares of the      captioned    company    and    also      statement regarding shareholding of      that company  on various dates. You      have  just   confirmed  to   me  on      telephone that  you have retained a      copy of the statements for your own      record.      2.   I  am   enclosing  herewith  a      statement    containing     certain      financial information regarding the      captioned company  which  has  been      extracted from  this statement  the      paid  up   equity  capital  of  the      company is  Rs. 72,00,000/- divided      into 72,000  shares  of  Rs.  100/-      each, the equity share data at page

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    2   of   the   enclosed   statement      indicates that  the book  value per      equity share  rose from  Rs. 318.55      for the  year ending 21st December,      1965 to  Rs. 401/-,  for  the  year      ending  31st  December,  1970.  The      earning per  share  rose  from  Rs.      8.37 per  share  to  Rs.  44/-  per      share during  the  above  mentioned      period.  The   dividend  percentage      also rose  from 2%  to 10%  for the      same period.  In spite of all these      facts, the  quotation of the shares      in the Calcutta Stock Exchange fall      from Rs.  168/- per  share  to  Rs.      85/- per share during this period.      3.   It is  clear from  these facts      that the  quotations appearing  are      as a  result of certain manipulated      transactions  between   the   group      itself  and   cannot  be   said  to      reflect the  fair market  value  of      the company,  the extract  of which      you have given, shows transfer of a      very   small   number   of   shares      compared to 72,000 equity shares of      the company.      4.  The   statements  sent  by  you      contain  the   names   of   several      shareholders both corporate as well      as  non-corporate  of  Didwana  and      Pali,  who   appear  to  have  been      transferring  the  shares  of  this      company at  values  far  below  the      market value of the share. it would      be worthwhile  examining the asstt.      record of  their cases  in order to      consider the  feasibility of action      u/s 52(2)  of the  Income Tax Act/4      of the Gift Tax Act.      5.  The  equity  shareholders  list      sent by you also gives the names of      certain  shareholders  of  Didwana,      Pali and  Jodhpur. The  Wealth  Tex      asstt.  records  of  these  persons      will  have   to  be   examined   to      consider  whether   the  value   of      shares returned  by  them  for  the      purpose   of   their   wealth   tax      assessment  is   really  the   open      market value  of the  shares at the      relevant time.  I shall be grateful      if the  information sent  by me  is      passed on  to the  concerned  WTOS,      ITOS and  GTOs, so  that  they  may      apply their  mind to  the facts  of      each individual  case and lake such      appropriate action  under the  W.T.      Act, I.T.  Act and G.T. Act as they      may deem fit.      6. I  am also  enclosing herewith a      copy of  D.O. addressed  to  I.A.C.      Bikaner,   who    I   believe   has      jurisdiction over Didwana. This may      kindly be sent by special messenger

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    to him.  I am also sending one copy      to him direct by post.      7. I  am proceeding  to Calcutta on      the evening  of 22nd  and in case I      got   a    some    more    relevant      information, I  shall send the same      to   you    and   I.A.C.,   Bikaner      directly. Meanwhile I would request      you to  kindly obtain  the value of      the shares  of the  company  as  on      31.3.1969 by  the  break-up  method      and  by   the  maintainable  profit      method. These  two  values  may  be      worked out on the basis of Circular      No.   2    (W.T.)   of   1967   and      communicated  lome  telegraphically      C/o Shri  Subramanyam, I.A.C. Range      XXI,    Aayakar     Bhawan,     P-7      Chowringhes Square,  Calcutta,  You      may also convey this information to      the CIT, Rajasthan and IAC, Bikaner      so that the information reaches the      concerned  Wealth   Tax   Officers,      Income tax  Officers and  Gift  Tax      Officers, who  would  be  concerned      with  the   case   of   the   other      shareholders in Rajasthan.      With regards,      Your sincerely,           Sd/-      (S.M. Bagai)"      In the  second paragraph  of his  letter Shri Bagai has referred  to  the  statement  containing  certain  financial information regarding  Maharaja Shri  Umaid Mills Ltd. which he had  extracted from  the Bombay  Stock Exchange Directory and which  he had  forwarded as  an annexure  along with the said letter. The said information was to the effect that the paid up  capital of  the company was Rs. 72,00,000/- divided into 72,000  shares of Rs. 100/- each; the equity share data at page  2 of the enclosed statement indicated that the book value per  equity share  rose from  Rs. 318.55  for the year ending December  21, 1970  to Rs.  401/- for the year ending December 31,  1970, the  earning per share rose from Rs.8.37 per share  to Rs.  44/- per  share during the abovementioned period and  the dividend percentage also rose from 2% to 10% for the  same period.  But in  spite of all these facts, the quotation of  the shares  in the Calcutta Exchange fell from Rs. 168/-  per share  to Rs.  85/- per share during the said period. In the third paragraph of his letter Shri Bagai has, on the  basis of these facts, expressed the opinion that the quotations appearing  in the Calcutta Stock Exchange were as a result  of the  certain manipulated  transactions  between group itself  and cannot  be said to reflect the fair market value of  the company. In the other paragraphs of his letter Shri Bagai  had suggested  steps to  be  taken  for  further investigation in the matter.      The High  Court has proceeded on the basis that the aid letter of  Shri Bagai  did not  contain any  information and that there was neither evidence of manipulation nor evidence of collusive transactions referred to in the letter and that no inquiries  were made  by the Income Tax Officer after the receipt of  the letter  so as  to constitute information. We are unable  to agree  with the  said view of the High Court. The contents  of paragraph  2 of  the letter  of Shri  Bagai refer to  the  statement  containing  financial  information

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regarding Maharaja  Shree Umaid Mills Ltd. which was annexed to the  letter of  Shri Bagai.  The said statement contained information derived from the Bombay Stock Exchange Directory about the  financial condition of Maharaja Shree Umaid Mills Ltd. during  the period  1965-70 which indicated that during this period  the company  has prospered  and that  the  book value per  equity share  had arisen  from Rs. 318.55 for the year ending  December 31,  1965 to  Rs. 401/- for the ending December 31,  1970, the earning per share rose from Rs. 8.37 per share to Rs. 44/- per share and that dividend percentage had also risen from 2% to 10% for the same period.      On the basis of the information contained in the letter of Shri  Bagai and  the documents  annexed to it, the Income Tax Officer  could have  had reason to believe that the fair market value  of the shares was far more than the sale price and the  market quotations  from Calcutta  Stock Association shown by  the assessee  at the  time of  original assessment were manipulated  ones and  as a result income chargeable to tax had  escaped assessment.  It could  not be said that the information that  was contained in paragraph 2 of the letter of Shri  Bagai was not definite information and it could not be acted  upon by  the Income  Tax Officer for taking action under Section 147(b) of the Act.      Ms. Gauri  Rasgotra, the  learned counsel appearing for the respondents, has urged that the letter of Shri Bagai was received by  the Income tax Officer on March 26, 1974 and on the very next day, that is, on March 27, 1974, he issued the impugned notice  under Section 147(b) of the Act and that he did not have conducted any inquiry or investigation into the information sent  by Shri Bagai. Merely because the impugned notice was  sent on the next day after receipt of the letter of Shri  Bagai does not mean that the Income Tax Officer did not apply  his mind to the information contained in the said letter of  Shri Bagai.  On the  basis of  the said facts and information contained  in the  said letter,  the Income  Tax officer,  without  any  further  investigation,  could  have formed the opinion that there was reason to believe that the income  of  the  assessee  chargeable  to  tax  had  escaped assessment. The  High Court, in our opinion, was in error in proceeding on  the basis  that it could not be said that the Income Tax  Officer had in his possession information on the basis of  which he could have reasons to believe that income of the assessee chargeable to tax had escaped assessment for the   relevant    assessment   years.    For   the   reasons aforementioned,  we   are  unable  to  uphold  the  impugned judgment of  the  High  Court.  The  appeal  is,  therefore, allowed, the  impugned judgment  of the  High Court  is  set aside and  the Writ  Petitions filed  by the respondents are dismissed. No order as to costs.      CIVIL APPEALS NOS. 3234-35 OF 1983      These appeals  are directed against the judgment of the High Court  of Rajasthan dated November 26, 1979 whereby the High Court  has allowed Writ Petitions Nos. 1178 and 1181 of 1974 filed  by the  respondents and  has quashed the notices dated March  27, 1974  issued under Section 17 of the Wealth Tax Act,  1957. This  judgment of the High Court is based on its judgment  in D.B.  Writ Petition  No. 1177  of 1974  and connected Writ  Petitions wherein the High Court had quashed the notices  issued by  the Income Tax Officer under Section 147(b) of  the Act.  For the same reasons the High Court has quashed the  notices under  Section 17 of the Wealth Tax Act in these  cases. The said judgment of the High Court in D.B. Civil Writ  Petition No.  1177 of  1974 and  connected  Writ Petitions,  titled  Purshottam  Das  Bangur  v.  Wealth  Tax Officer & Ors., has been set aside in the judgment delivered

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in Civil  Appeals Nos. 3041-43 of 1983. For the same reasons the impugned judgment of the High Court cannot be upheld and has to  be set  aside. the  appeals are accordingly allowed, the impugned judgment of the High Court is set aside and the Writ  Petitions  Nos.  1178  and  1181  of  1974  filled  by respondents are dismissed. No order as to costs.