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PETITIONER: INCOME TAX OFFICER, AZAMGARH & ANR.

       Vs.

RESPONDENT: MEWALAL DWARKA PRASAD & VICE VERSA

DATE OF JUDGMENT10/02/1989

BENCH: MISRA RANGNATH BENCH: MISRA RANGNATH PATHAK, R.S. (CJ)

CITATION:  1989 AIR 1088            1989 SCR  (1) 604  1989 SCC  (2) 279        JT 1989 (1)   239  1989 SCALE  (1)349

ACT:     Income  Tax  Act,  1961:  Sections  142,  143,  147  and 148---1. T. 0. issuing notice in respect of three entries on the  ground  of  escapement  of  income--Validity   of   the notice--Jurisdiction   of  High   Court  to  examine--Limits thereof.

HEADNOTE:     In  respect of assessment year 1965-66,  the  Income-tax Officer  issued  notices to the assessee under s.  148  read with  ss.  142(1) and 143(2) of the Act on the  ground  that income  has  escaped  assessment in respect  of  three  cash credit entries totaling Rs. 1 lakh. The assessee  challenged the notices by way of writ petitions before the High  Court. The  High  Court gave a finding that the notice  was  within jurisdiction only in respect of an entry of Rs.30,000 and in respect  of  the  other  two  entries  viz.  Rs.40,000   and Rs.30,000  it directed the Income-tax Officer not to  reopen the assessment.     These two appeals are against the High Court’s judgment. The appeal by ReVenue, by certificate, is in respect of  the two entries of Rs.40,000 and Rs.30,000 and the other  appeal of  the  assessee, by special leave, is in  respect  of  the entry of Rs.30,000.     On behalf of the Revenue, it was contended that once the High  Court  sustained  the notice in respect of  a  sum  of Rs.30,000,  that  gave full jurisdiction to  the  Income-tax Officer  to  reopen the assessment and that the  High  Court should  not have examined time tenability of the  assessee’s contention  in regard to the two transactions  of  Rs.30,000 and  Rs.40,000 and that aspect should have been left  to  be considered by the Income-tax Officer while making the  reas- sessment.     The  contention of the assessee was that the notice  was issued more than 7 years after the assessment was  completed and  was  also beyond the period of limitation,  viz.,  four years, that the escapement of the income from assessment had not  resulted  from failure on the part of the  assessee  to disclose  fully and truly all material facts  necessary  for the assessment. 605

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   Allowing the appeal of the assessee, and dismissing  the appeal by the Revenue.     HELD:  1. The notice issued under s. 148 of the  Act  is quashed. It was not for the High Court to examine the valid- ity of the notice under s. 148 in regard to the two items if the  High Court came to the conclusion that the  notice  was valid at least in respect of the remaining item. Whether the Income-tax Officer while making the reassessment would  take into  account the other two items, should have been left  to be considered by the Income-tax Officer in the fresh assess- ment proceeding. [610C-D]     CIT.  Punjab, H.P. & Bilaspur, Simla v. Jagan  Nath  Ma- heshwary,  32  AIR 418 and Pulavarthi  Viswanadham  v.  CIT. A.P., 50 ITR 463 approved.     V.  Jagan Mohan Rao & Ors. v. CIT & Excess Profits  Tax, A.P.,  75  ITR  373 and Parimisetti  Seetharamamma  v.  CIT, [1963] 50 ITR 450 referred to.     2.1  The three amounts mentioned in the notice under  s. 148  of the Act were found in the assessee’s account by  the Income-tax  Officer when he examined the same in  course  of the assessment proceedings. He had called upon the  assessee to substantiate the genuineness of the transactions and  the assessee  had  produced material to support  the  same.  The Income-tax  Officer  accepted  the  documents  produced  and treated all the three transactions to be genuine and on that footing  completed  the assessment. The primary  facts  were before  the  Incometax Officer at the time  of  the  regular assessment and he called upon the assessee to explain to his satisfaction that the entries were genuine and on the  basis of  materials  provided by the  assessee,  satisfaction  was reached. It was then open to the Income-Tax Officer to  make further probe before completing the assessment if he was  of the view that the material provided by the assessee was  not sufficient  for  him  to be satisfied  that  the  assessee’s contention was correct. [610E-H]      2.2  The expression ’material facts’ used in s.  147(a) referred only to primary facts and the duty of the  assessee was  confined to disclosure of primary facts and he had  not to indicate what factual or legal inferences should properly be drawn from primary facts and this clause did apply to the facts  of  the  present case as the  alleged  escapement  of income  for assessment had not resulted from failure on  the part of the assessee to disclose fully and truly all materi- al  facts  necessary for its assessment for that  year.  The notice in the instant case, did not indicate 606 Whether it was a case covered by cl. (a) or cl. (b). On  the finding  of this Court that cl. (a) was not  invokable,  the power  under  cl.  (b)  could be  called  in  aid  under  s. 149(1)(b)  of the Act within four years from the end of  the relevant  assessment year. Admittedly, the notice  has  been issued  beyond  a period of four years and,  therefore,  the notice  itself was beyond the time provided under  the  law. The  High  Court overlooked to consider this aspect  of  the matter. [610H; 611A-C] Calcutta Discount Company Ltd. v. ITO, 41 ITR 191, followed.

JUDGMENT:     CIVIL    APPELLATE   JURISDICTION:Civil    Appeal    No. 1970(NT) of 1975 & 855(NT)/1975.     From  the  Judgment  and Order dated  22.4.1974  of  the Allahabad High Court in Civil Miscellaneous Writ No. 152  of 1974

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   Dr.  V. Gauri Shankar, Miss A. Subhashini and  K.C.  Dua for the Appellants.     S.C.  Manchanda, Ms. S. Janani, Mrs. Urmila  Kapoor  and Ms. Meenakshi for the Respondent. The Judgment of the Court was delivered by     MISRA, J. Civil Appeal No. 1970 of 1975 is by the  Reve- nue  by certificate of the High Court while the other is  an appeal  by the assessee by special leave. Both arise out  of the  same  judgment  of  the  Allahabad  High  Court   dated 22.4.1974 in an application under Art. 226 of the  Constitu- tion by the assessee challenging the notices issued under s. 148 read with ss. 142(1) and 143(2) of the Income Tax Act of 1981,  all dated 7th of March, 1973 relating to the  assess- ment year 1965-66. The notice under s. 148 was on the  basis of three cash credit entries dated 22nd of August, 1964 from Messrs  Meghraj  Dulichand,  Messrs  Associated   Commercial Organisation Private Limited and Messrs Laxminarain Atmaram, the  first  two being for a sum of Rs. 30,000 each  and  the last  one for a sum of Rs.40,000. The High Court  ultimately found:               "The result is that the notice dated 7th March               1973,  was within jurisdiction only in  regard               to the cash credit entry from the firm Meghraj               Dulichand of Calcutta. In regard to the  other               two transactions, the case did not fall within               the purview of clause (a) of section 147.               607                         As seen above, the Income Tax  Offi-               cer  had no material in his possession on  the               basis of which he could have reason to believe               (mere suspicion apart) that income had escaped               assessment.  For this reason the case was  not               covered  by clause (b) of section 147  either.               In  regard to those two items the  notice  was               totally  without jurisdiction. The Income  Tax               Officer  had  no jurisdiction to  re-open  the               assessment in respect of these two cash credit               entries.                         In  this view it is  unnecessary  to               decide  whether the notice was barred by  time               on  the footing that it was covered by  clause               (b) to section 147.                         In the result, the petition succeeds               and is allowed in part. The respondent  Income               Tax  Officer  is directed not to  re-open  the               assessment  of  the petitioner  firm  for  the               assessment  year  1965-66 in relation  to  the               cash  credit  entries of Rs.30,000  from  M/s.               Associated  Commercial  Organisation   Private               Ltd.  and  of  Rs.40,000 in  respect  of  M/s.               Laxminarain Atmaram."     The  appeal  by the Revenue is in relation  to  the  two transactions totaling Rs.70,000 and the appeal by the asses- see is in regard to the remaining one in respect of a sum of Rs.30,000.  Dr. Gouri Shankar appearing for the Revenue  has contended that it was not for the High Court to go into  the question  as to whether the notice under s. 148 of  the  Act was  partly valid and partly not because if the  Income  Tax Officer  proceeded to issue notice under s. 148 of  the  Act for reopening the assessment, he would require the  assessee to furnish a fresh return and the entire assessment proceed- ing  has  to  be re-done after the  assessee  furnishes  the return. In the present case, along with the notice under  s. 148  of  the Act the Income Tax Officer did  call  upon  the assessee to furnish a return as required under s. 142 of the

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Act. That notice casts an obligation on the assessee to make a fresh return and therein it was obliged to make a complete disclosure  of its income in accordance with law and it  was open to the Income Tax Officer to examine not only the three items  referred  to  in the notice but  also  whatever  came within  the  legitimate ambit of an  assessment  proceeding. This  being  the legal position, Dr. Gouri Shankar  for  the Revenue  contends, once the High Court sustained the  notice in respect of a sum of Rs.30,000 that gave full jurisdiction to the Income Tax Officer to reopen the assessment and  take to a fresh assessment proceeding. The High Court should  not have examined the tenability of the assessee’s 608 contenton in regard to the two transactions of Rs.30,000 and Rs.40,000  and that aspect should have been left to be  con- sidered by the Income Tax Officer while making the reassess- ment.     A Division Bench of the Punjab High Court in Commission- er of Income Tax, Punjab, Himachal Pradesh & Bilaspur, Simla v. Jagan Nath Maheshwary, 32 ITR 418 examined this aspect of the  matter with reference to a proceeding for  reassessment under s. 34 of the earlier Act of 1922 and came to hold:               "When a notice is issued under s. 34 based  on               a  certain  item of income  that  had  escaped               assessment, it is permissible for the  Income-               tax authorities to include other items in  the               assessment, in addition to the item which  had               initiated  and  resulted in the  notice  under               section 34."     A  Division  Bench of the Andhra Pradesh High  Court  in Pulavarthi Viswanadham v. Commissioner of Income-Tax, Andhra Pradesh, 50 ITR 463 considered the same position with refer- ence  to s. 34 of the earlier Act. After extracting the  two clauses in sub-s. (1) of s. 34, the Court held:               "It  is immediately plain that when  once  the               Income-tax  Officer reaches the conclusion  on               the material that is before him that there has               been  a non-disclosure as regards part of  the               income, profits or gains chargeable to income-               tax by the assessee, he is entitled to issue a               notice either under clause (a) or (b), as  the               case  may be, under section 22(2) of  the  In-               come-tax Act." After extracting s. 22(2) the High Court proceeded to say:               "What emerges from sub-section (2) of  section               22  is that when once an assessee is  required               to  submit  a  return of  his  income,  he  is               obliged  to disclose the totality of  his  in-               come. The question that falls to be decided on               the language of these two sections is  whether               after notice is issued under section  34(1)(a)               the  assessment  should be  limited  to  items               which  escaped  assessment by  reason  of  the               failure  on the part of the assessee  to  dis-               close  all his income, profits or gains  which               are subject to tax. The contention of  learned               counsel for the assessee is that having regard               to  the terms of clause (b) it was not  within               the powers of the Income-tax               609               Officer  to bring to charge such of the  items               as  have escaped from being taxed without  any               remissness on his part. It is only items  that               escaped assessment due to omission or  failure               of the assessee that come within the range and

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             sweep of section 34, continues learned counsel               for the assessee. We do not think that we  can               accede  to  this proposition.  When  once  the               assessment  is reopened, no distinction  could               be made between items falling under clause (a)               and  those  coming within the pale  of  clause               (b).  As  pointed out by a Division  Bench  of               this Court in R.C. No. 12 of 1960 (Parimisetti               Seetharamamma  v. Commissioner  of  Incometax,               [1963]  50 ITR 450, to which one of us  was  a               party:               "  .....  when once an assessment is  reopened               under  section  34,  the  Income-tax   Officer               proceeds  de novo under the relevant  sections               of the Income-tax Act, i.e., he issues  notice               under section 22(2) and proceeds to assess the               assessee. He has to follow the same  procedure               as  in the case of the first assessment as  is               clear  from the clause in section 34  and  the               provisions  of this Act shall, so far  as  may               be, apply accordingly as if the notice were  a               notice  issued  under  that  subsection.   The               proceedings under section 34 must be deemed to               relate  to  proceedings  which  commence  with               publication of notice under section 22(1)."     The view taken by the two High Courts has been supported by this Court in V. Jaganmohan Rao & Ors. v. Commissioner of Incometax & Excess Profits Tax, Andhra Pradesh, 75 ITR  373. There, repelling the same argument on behalf of the assessee this Court said:               "This  argument  is not of much avail  to  the               appellant   because  once  proceedings   under               section  34 are taken to be validly  initiated               with regard to two-thirds share of the income,               the  jurisdiction  of the  Income-tax  Officer               cannot be confined only to that portion of the               income.  Section 34 in terms states that  once               the  Income-tax Officer decides to reopen  the               assessment  he could do so within  the  period               prescribed by serving on the person liable  to               pay tax a notice containing all or any of  the               requirements which may be included in a notice               under section 22(2) and may proceed to  assess               or reassess such income, profits or gains.  It               is,  therefore, manifest that once  assessment               is reopened               610               by  issuing a notice under sub-section (2)  of               section  22 the previous  under-assessment  is               set aside and the whole assessment proceedings               start afresh. When once valid proceedings  are               started under section 34(1)(b) the  Income-tax               Officer  had not only the jurisdiction but  it               was his duty to levy tax on the entire  income               that had escaped assessment during that year."      No  serious effort, however, was made by Mr.  Manchanda appearing  for the assessee-respondent to counter this  sub- mission  advanced  on behalf of the Revenue.  Accepting  the legal  position  indicated  in these cases we  come  to  the conclusion that it was not for the High Court to examine the validity  of  the notice under s. 148 in regard to  the  two items  if  the High Court came to the  conclusion  that  the notice was valid at least in respect of the remaining  item. Whether the Income Tax Officer while making his reassessment would take into account the other two items should have been

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left to be considered by the Income Tax Officer in the fresh assessment proceeding.      With  this  conclusion the decision of the  High  Court would  ordinarily  have been reversed. As  we  have  already stated, the assessee has also appealed against that part  of the judgment of the High Court which was adverse to it.  Mr. Manchanda contended that in this case the regular assessment had been made for the assessment year 1965-66  on 22.1.1966. Notice under s. 147 of the Act was issued  on 7th  of March, 1973, i.e., more than seven years  after  the assessment  had been completed. The three amounts  mentioned in  the  notice under s. 148 of the Act were  found  in  the assessee’s accounts by the Income Tax Officer when he  exam- ined  the same in course of the assessment  proceedings.  We had called upon the assessee to substantiate the genuineness of  the transactions and the assessee had produced  material to  support  the same. The Income Tax Officer  accepted  the documents produced and treated all the three transactions to be genuine and on that footing completed the assessment. The primary facts were before the Income Tax Officer at the time of the regular assessment and he called upon the assessee to explain  to his satisfaction that the entries  were  genuine and  on  the  basis of materials provided  by  the  assessee satisfaction was reached. It was then open to the Income Tax Officer to make further probe before completing the  assess- ment if he was of the view that the material provided by the assessee was not sufficient for him to be satisfied that the assessee’s  contention was correct. This Court  in  Calcutta Discount  Company Limited v. I. T. 0.,141 ITR 191 held  that the expression ’Material facts’ used in el. (a) 611 referred only to primary facts and the duty of the  assessee was  confined to disclosure of primary facts and he had  not to indicate what factual or legal inferences should properly be  drawn from the primary facts. In the facts appearing  on the  record we are in agreement with Mr. Manchanda that  cl. (a) of s. 147 did not apply to the facts of the case as  the alleged escapement of income for assessment had not resulted from  failure on the part of the assessee to disclose  fully and  truly all material facts necessary for  its  assessment for that year. The notice in the instant case did not  indi- cate whether it was a case covered by cl. (a) or cl.(b).  On our finding that cl. (a) was not invokable, the power  under cl. (b) could be called in aid under s. 149(1)(b) of the Act within  four years from the end of the  relevant  assessment year. Admittedly, the notice has been issued beyond a period of  four years and, therefore, the notice itself was  beyond the  time provided under the law. On the facts appearing  in the  case the High Court overlooked to consider this  aspect of  the matter. Since the proceedings before the High  Court were  under Art. 226 of the Constitution and not by  way  of reference  under the Act, the jurisdiction of this Court  is not  advisory  and confined to the  questions  referred  for opinion. On the facts we are satisfied that ends of  justice require our intervention and we would accordingly allow  the appeal  of the assessee by holding that the notice under  s. 148  of the Act cannot be sustained in law for  the  reasons indicated above.     The appeal by the assessee is allowed and the appeal  by the Revenue is dismissed. The notice under s. 148 of the Act is quashed. Both parties are directed to bear their  respec- tive costs throughout. G.N.                       Appeal by the assessee is allowed                      and Appeal by the revenue is dismissed. 612

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