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PETITIONER: KANTAMANI VENKATA NARAYANA & SONS

       Vs.

RESPONDENT: FIRST ADDITIONAL INCOME-TAX OFFICER,RAJAHMUNDRY

DATE OF JUDGMENT: 27/10/1966

BENCH: SHAH, J.C. BENCH: SHAH, J.C. RAMASWAMI, V. BHARGAVA, VISHISHTHA

CITATION:  1967 AIR  587            1967 SCR  (1) 984  CITATOR INFO :  F          1970 SC1011  (14)  RF         1975 SC 703  (11)

ACT: Income-tax    Act    (11   of    1922),    s.    34--Escaped assessment--Notice,  whether  necessary  to  state   clause- Grounds of challenge.

HEADNOTE: During the assessment proceedings of a company, the  Income- tax Officer discovered that there. was a large accretion  to the wealth of the assessee, which had not been disclosed  in the assessment proceedings of the assessee, and the, Officer issued  notices under s. 34 for the reassessment  of  income during  that period.  The assessee filed writ  petitions  in the  High  Court, in reply to which the  Income-tax  Officer filed  affidavits  stating that relying on  the  information received by him, he had reason to believe that the  assessee had not disclosed fully and truly all material facts and  in consequence,   income   chargeable  to   tax   had   escaped assessment.  The writ petitions were rejected and the  order was  confirmed in appeal by the High Court.  In  appeals  by the assessee, this Court, HELD : The appeals must be dismissed. From  the,  affidavit of the Income-tax Officer  it  clearly appeared  that there had been considerable increase  in  the investments  in  the  transactions and  the  wealth  of  the assessee.   The  Income-tax  Officer  was  not  seeking   to reassess the income on a mere change of opinion. [989 B] The  Income-tax  Officer had prima facie reason  to  believe that  information material to assessment had been  withheld, and  that  on  account of withholding  of  that  information income liable to tax had escaped assessment.  From the  mere production  of  the  books  of account.,  it  could  not  be inferred that there had been full disclosure of the material facts necessary for the purpose of assessment.  Sections  23 and  24 of the Act lay that the assessee is under a duty  to disclose  fully and truly material facts necessary  for  the assessment  of  the  year and that duty  is  not  discharged merely  by the production of the books of accounts or  other evidence.   It is the duty of the assessee to bring  to  the

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notice  of  the Income-tax Officer particular items  in  the books  of  account  or  portions  of  documents  which   are relevant.   Even  if  it  be assumed  that  from  the  books produced, the Incometax Officer, if he had been circumspect, could  have found out the truth, the Income-tax Officer  may not  on that account be precluded from exercising the  power to assess income which had escaped assessment. [989 G990 B] It is not necessary or imperative that a notice under s.  34 must  specify under which of the two clauses-cl. (a) or  cl. (b) of sub-s. (1) of s. 34, the notice is issued. [986 A] P.   R.  Mukherjee  v.  Commissioner  of  Income-tax,   West Bengal, 30 I.T.R. 535, approved. Two  conditions  precedent must co-exist,  before  a  notice under s. 34 (1)(a) of the Act may be issued : the income-tax Officer must have reason to believe (1) 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.  Where the Income-tax Officer has prima 985 facie reasonable grounds for believing that there has been a non-disclosure  of  primary material fact,  that  by  itself gives  him jurisdiction to issue notice under s. 34 and  the adequacy  or otherwise of the grounds of such belief is  not open to investigation by the Court. [1987 C] Calcutta  Discount  Company  Ltd.  v.  Income-tax   Officer, Companies District 1 [1961] 2 S.C.R. 241 and S.  Narayanappa v. The Commissioner of Income-tax, Bangalore [1967] 1 S.C.R. 596 relied on.

JUDGMENT: CIVIL  APPELLATE JURISDICTION : Civil Appeals Nos.  154,  to 165 of 1966. Appeals  by special leave from the judgment and order  dated February  3, 1965 of the Andhra Pradesh High Court  in  Writ Appeals Nos. 117 to 128 of 1964. P.   Ram Reddy and A. V. V. Nair, for the appellants (in all the appeals). S.   V.  Gupte, Solicitor-General, R. Ganapathy Iyer and  R. N. Sachthey, for respondent (in all the appeals). The Judgment of the Court was delivered by Shah, J. M/s.  Kantamani Venkata Narayana & Sons-hereinafter referred  to as ’the assessee’ is a Hindu undivided  family, which was assessed to tax on income derived principally from money--lending.  In the course of proceedings for assessment of a private limited company styled "Motu Industries  Ltd.," the Incometax Officer, Rajahmundry discovered that there was a  large accretion to the wealth of the assessee  which  had not  been disclosed in proceedings for its  assessment.   On March  12,  1959,  the Income-tax Officer  issued  a  notice seeking to reopen the assessment for the year 1950-51.   The assessee  filed a return under protest.  On March  14,  1960 the  Income-tax Officer issued notice of  re-assessment  for the  year 1951-52, and on December 19, 1960, the  Income-tax Officer intimated the reasons that had prompted him to issue the notices of re-assessment.  On March 24, 1962 the Income- tax Officer issued notices under s. 34 for re-assessment  of income  of  the assessee for the years 1940-41  to  1949-50. The  assessee then presented petitions in the High Court  of Andhra  Pradesh  for  writs  of  prohibition  directing  the Income-tax  Officer to refrain from proceeding in  pursuance of  the notices for the assessment years 1940-41 to  1949-50 and  1950-51 and 1951-52.  A single Judge of the High  Court rejected the petitions and the order was confirmed in appeal

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by  a  Division Bench of the High Court.  The  assessee  has appealed with special leave. The  notice  issued  by  the  Income-tax  Officer  did   not specifically refer to s. 34(1)(a) of the Income-tax Act : it did  not set out the clause under which it was issued.   But on  that  account  the  proceeding  under  s..  34  is  -not vitiated.  It was held by the Calcutta Sup.C.1.166-18 986 High Court in P. R. Mukherjee v. Commissioner of  Income-tax West Bengal(1), that it is not necessary or imperative  that a  notice -under s. 34 must specify under which of  the  two clauses-cl. (a)an cl. (b) of sub-s. (1) of s. 34, the notice is issued.  The main notice to be issued in a case under  s. 34 is the notice under s. 22(2), and s.   34 merely authorises the issue of such a notice. The proceedings for re-assessment cover a period of 12 years 194041  to  1951-52.  Section 34 of the Income-tax  Act  has under  gone some changes during that period, but  the  basic scheme  of the section has remained substantially the  same. Power to re-assess income under s. 34(1) as amended by Act 7 of  1939  could be exercised if "definite  information"  had "come into" the possession of the Income-tax Officer, and in consequence  of  such  information it  was  discovered  that income  chargeable  to  tax had escaped  assessment  By  the Income-tax  and  Business Profits Tax (Amendment) Act  4  of 1948, s. 34(1) was recast to read as follows -               (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 section 22 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               (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,               he  may in cases falling under clause  (a)  at               any time and in cases falling under clause (b)               at  the time within four years of the  end  of               that  year,  serve  on the  assessee,  ....  a               notice   containing   all  or   any   of   the               -requirements  which  may  be  included  in  a               notice under sub-section (2) of section 22 and               may  proceed  to  assess  or  re-assess   such               income, profits or gains               (1)   30 I.T.R. 535.               987               An Explanation was also added which states               "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

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             section." Since  on the matter canvassed in these appeals there is  no material  change in the section, we will only refer  to  the section as amended by Act 48 of 1948. This  Court in Calcutta Discount Company Ltd. v.  Income-tax officer,  Companies District 1 and Another(1) observed  that before  the Income-tax Officer may issue a notice  under  s. 34(1)  (a)  of  the Indian Income-tax  Act,  two  conditions precedent  must co-exist : the Income-tax Officer must  have reason to believe (1) 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.   The Court  further  held that where 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 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. In  a  recent judgement of this Court in  S.  Narayanappa  & Others  v.  The Commissioner  of  Income-tax,  Bangalore,(2) Ramaswami J., speaking for the Court observed:               "  . . . the legal position is that  if  there               are  in fact some reasonable grounds  for  the               Income-tax  Officer to believe that there  had               been  any non-disclosure as regards any  fact,               which  could  have a material bearing  on  the               question  of  under-assessment that  would  be               sufficient to give jurisdiction to the Income-               tax  Officer to issue the notice under s.  34.               Whether  these grounds are adequate or not  is               not a matter for the Court to investigate.  In               other  words, the sufficiency of  the  grounds               which induced the Income-tax Officer to act is               not a justiciable issue.  It is of course open               for the assessee to contend that the Incometax               Officer did not hold the belief that there had               been such non-disclosure.  In other words, the               existence  of the belief can be challenged  by               the  assessee but not the sufficiency  of  the               reasons for the belief.  Again the  expression               $treason  to  believe" in section  34  of  the               Income-tax   Act  does  not  mean   a   purely               subjective  satisfaction  on the part  of  the               Income-tax  Officer.  The belief must be  held               in good               (1) [1961] 2 S.C.R. 241.               (2) [1967] 1 S.C. R. 596.               988               faith:it cannot be merely a pretence.  To  put               it  differently  it is open to  the  Court  to               examine  the question whether the reasons  for               the  belief  have a rational connection  or  a               relevant  bearing  to  the  formation  of  the               belief and are not extraneous or irrelevant to               the  purpose of the section.  To this  limited               extent,  the action of the Income-tax  Officer               in starting proceedings under s. 34 of the Act               is open to challenge in a court of law." It is clear from the affidavits filed in the Court of  First Up   stance  that  the  Income-tax  Officer   had   received information relying upon which he had reason to believe that the assessee had not disclosed fully and truly all  material facts  necessary  for the assessment and in  consequence  of non-disclosure-of that information, income chargeable to tax had  escaped  assessment.   In  his  affidavit,   Income-tax

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Officer stated :                    "A   scrutiny   of   the    money-lending               ’statements’  filed  by the assessee  for  the               years ended 31-3-50 and 31-3-51 revealed  that               there  were  large  investments  made  by  the               assessee  in  his  money-lending  business  in                             those  two  years.  The assessee did not  file               balance sheets for the said two years, or  for               the earlier assessment years and  consequently               it was not clear from the statements filed  by               him,  how he could make heavy  investments  in               money-lending business in those two years." The  Income-tax  Officer  also stated that in  the  year  of account  1949-50  the  total  investments  in  money-lending business  had  increased  by  Rs.  1,33,000/-  and  in   the following  year by Rs. 49,000/and the plea of  the  assessee that  growth  in the investments of the  assessee  in  those years was mainly due to "the cash balance" he by the manager out  of his share received on partition between his and  his brothers,  and cash gifts from his father-in-law which  were till   then  kept  uninvested  even  in  the   money-lending business,  was  not  supported by  any  evidence,  that  the assessee  had suppressed the account books for  the  periods prior  to  April  1, 1949, and that  the  assessee  had  not produced  the deed of partition relied upon.   According  to the  Income-tax  Officer, the net wealth of the  family  ,on April 1, 1937, inclusive of investments in the money-lending business was less than Rs. 50,000/- and the investments made by the assessee in money-lending business were approximately of the ,order of Rs. 21,000/-, that the assessments made  on the  family  from  1937-38  till  1948-49  showed  that  the assessee’s aggregate income for those years was Rs. 30,000/- , that taking into account the manager’s professional income and  the agricultural income of the assessee, the  aggregate could not exceed Rs. one lakh, and that possession of  large wealth  on April 1, 1949 which was not  explained  justified him in inferring that there "was escapement 989   assessment of huge income or in any event it had  resulted in  under-assessment  on  account  of  the  failure  of  the assessee  in  not disclosing the material  facts  fully  and truly for the assessment years 1940-41 to 1949-50." The  averments  made  by  the  Income-tax  Officer  in   his affidavit  which  have been accepted by the Court  of  First Instance, prima facie, establish that the Income-tax Officer had  reason  to believe that by reason of  the  omission  or failure  on the part of the assessee to disclose  fully  and truly  all  material  facts necessary  for  his  assessment, income chargeable to income-tax has escaped assessment. It was urged on behalf of the assessee that year after  year account books and statements of account were produced by the assessee  before the Income-tax Officer, and the  Income-tax Officer  had  computed to taxable income  on  the  materials furnished,  no case for exercising the power of the  Income- tax  Officer  under s. 34 was made out, since power  to  re- assess  may  not  be exercised merely because  on  the  same evidence the Income-tax Officer or his successor  entertains a different opinion.  In our view there is no force in  this contention.  From the affidavit of the Income-tax Officer it clearly  appears that there had been  considerable  increase since   1938  in  the  investments  in   the   money-lending transactions  of  the  assessee and in  the  wealth  of  the assessee.   The  Income-tax Officer was not seeking  to  re- assess the income on a mere change of opinion.  The increase

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in the wealth discovered was wholly disproportionate to  the known  sources  of income of the assessee.  That  was  prima facie  evidence on which he had reason to believe  that  the assessee  had  omitted  to  disclose  fully  and  truly  all material  facts  and  that  in  consequence  of  such   non- disclosure  income had escaped assessment.   The  Income-tax Officer has said that no attempt was made by the assessee to furnish  some  reasonable proof of the source of  the  addi- tional  wealth  : the partition deed was not  produced;  the books of account prior to 1948-49 were withheld on the  plea that  all the books were lost; no evidence was  tendered  to show  that the fatherin-law of the manager was possessed  of sufficient means to give and did give any large cash amounts to him; and there was also no explanation why a large amount exceeding  a lakh of rupees was not invested in  the  money- lending or other business. The  Income-tax Officer had therefore prima facie reason  to believe that information material to the assessment had been withheld,  and  that  on  account  of  withholding  of  that information  income  liable to tax had  escaped  assessment. From  the mere production of the books of account it  cannot be  inferred  that  there had been full  disclosure  of  the material facts necessary for the purpose of assessment.  The terms of the Explanation are too plain to permit an argument being reasonably advanced, that the duty of the assessee  to disclose  fully and truly all material facts  is  discharged when  he  produces the books of account  or  other  evidence which has a material 990 bearing  on the assessment.  It is clearly implicit  in  the terms  of  ss.  23 and 34 of the  Income-tax  Act  that  the assessee  is  under  a  duty to  disclose  fully  and  truly material facts necessary for the assessment of the year, and that the duty is not discharged merely by the production  of the books of accounts or other evidence.  It is the duty  of the  assessee  to  bring to the  notice  of  the  Income-tax Officer particular items in the books of account or portions of documents which are relevant.  Even if it be assumed that from  the books produced the Income-tax Officer, if  he  had been  circumspect,  could  have found  out  the  truth,  the Income-tax Officer may not on that account be precluded from exercising  the  power to assess income  which  had  escaped assessment. It was urged that since the High Court in appeal did not de- cide whether any primary facts on which the determination of the issue of reasonable belief in non-disclosure of material facts necessary for the assessment of the previous year  and escapement of tax in consequence thereof depended, were  not disclosed,  the  judgment of the High Court  should  be  set aside.  The learned Trial Judge has dealt with in detail the affidavits of both the assessee and the In come-tax  Officer and  has come to the conclusion that there was  prima  facie evidence  of non-disclosure fully and truly of all  material facts  necessary  for the assessment and  on  the  materials placed  before  the  Income-tax Officer  he  had  reason  to believe that as a consequence of that non-disclosure  income had  escaped  assessment.  The High Court  in  appeal  after referring  to  the judgment in Calcutta  Discount  Company’s case() observed               "......without  the enquiry being held by  the               concerned   Income-tax  Officer  it   is   not               possible, on the material on record, to decide               whether  or  not the assessee  omitted  to  or               failed   to  disclose  fully  and  truly   all               material  facts necessary for  his  assessment

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             for the respective year." The High Court has pointed out that no final decision  about failure  to  disclose  fully and truly  all  material  facts bearing   on  the  assessment  of  income   and   consequent escapement  of  income  from assessment  and  tax  could  be recorded in the proceedings before them It certainly was not within  the province of the High Court to finally  determine that question.  The High Court was only concerned to  decide whether the conditions which invested the Income-tax Officer with power to re-open the assessment did exist, and there is nothing  in the judgment of the High Court  which  indicates that  they dissagreed with the view of the Trial Court  that the conditions did exist These appeals therefore fail and are dismissed with costs. There will be one hearing fee. Appeals dismissed. Y.P. (1)  [1961] 2 S.C.R. 241. 991