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PETITIONER: COMMISSIONER OF INCOME TAX, CALCUTTA

       Vs.

RESPONDENT: BURLOP DEALERS LTD.

DATE OF JUDGMENT21/01/1971

BENCH: SHAH, J.C. (CJ) BENCH: SHAH, J.C. (CJ) HEGDE, K.S. GROVER, A.N.

CITATION:  1971 AIR 1635            1971 SCR  (3) 410  CITATOR INFO :  R          1973 SC 989  (14)  RF         1975 SC1268  (4)  F          1979 SC1450  (4)

ACT: Income-tax  Act,  1922,  s. 34(1) (a) -Scope  of  Assessee disclosing  primary facts necessary for  assessment-Duty  of Income-tax Officer to draw necessary inferences.

HEADNOTE:  For  the  assessment year 1949-50 the assessee  submitted  a  profit  and  loss  account disclosing a  certain  amount  as  profit  in  a joint venture and claimed that  half  of  this  profit  was  paid to R under a partnership  agreement.   The  Income-tax  Officer  accepted the return and  included  only  half  of  the profit in the joint venture in  computing  the  assessee’s  total income.  In the next assessment  year  the  assessee  filed  a return accompanied by a profit  and  loss  account and claimed that it had transferred half the  profit  to   R  as  his  share.   But  the  Income-tax  Officer   on  examination of the transactions brought the entire amount of  profit  in  the  joint  venture to  tax,  holding  that  the  partnership  agreement  was got up a devise  to  reduce  the  profits  received  from the joint venture.  This  order  was  confirmed  by the Tribunal and the High  Court.   Meanwhile,  the  Income-tax Officer issued a notice under s. 34  of  the  Income-tax  Act,  1922  to reopen  the  assessment  for  the  assessment year 1949-50 and to assess the amount allowed  in  that  assessment  as paid to R. The Income-tax  Officer  re-  assessed the income under s. 34(1) (a) and added that amount  to  the  income returned by the assessee in  the  assessment  year   1949-50.    The  Appellate   Assistant   Commissioner  confirmed  that order but the Tribunal reversed.   The  High  Court,  on  reference, answered in favour of  the  assessee.  Dismissing the appeal by the Revenue,  HELD  : Under s. 34(1) (a,), if the assessee  has  disclosed  primary  facts  relevant to the assessment, he is  under  no  obligation  to  instruct the Income-tax  Officer  about  the  inference which the Income-tax Officer may raise ’from-these  facts.  The terms of the Explanation to S. 34(1) also do not  impose  a more onerous obligation.  Mere production  of  the  books of account or other evidence from which material facts

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could  with  due diligence, have been  discovered  does  not  necessarily  amount to disclosure within the meaning  of  s.  34(1); but where on the evidence and the materials  produced  the Income-tax Officer could have reached a conclusion other  than  the  one which he has reached, a proceeding  under  s.  34(1) (a) will not lie merely on the ground that the Income-  tax  Officer  has  raised an inference which  he  may  later  regard as erroneous.  The assessee had disclosed his books of account and evidence  from which material facts could be discovered.  It was  ’for  the Income-tax Officer to raise the necessary inference  and  if he did not do so the income which has escaped  assessment  cannot be brought to tax under s. 34(1) (a). [413 C]  Calcutta Discount Co. Ltd. v. Income-tax Officer,  Companies  District 1, Calcutta & Anr. 41 I.T.R. 191, 200, referred to.

JUDGMENT:  CIVIL APPELLATE JURISDICTION: Civil Appeal No. 649 of 1967.  411  Appeal by special leave from the order dated May 4, 1966  of  the  Calcutta High Court in Income-tax Reference No. 114  of  1965.  Jagadish  Swarup,  Solicitor-General, Ram  Panjwani,  R.  N.  Sachthey and B. D. Sharma, for the appellant.  C.   K.  Daphtary, B. P. Maheshwari and K. R.  Khaitan,  for  the respondent.  The Judgment of the Court was delivered by  Shah,  C.J. Burlop Dealers Ltd.-hereinafter referred  to  as  ’the assessee-is a limited company.  For the assessment year  1949-50  the  assessee submitted a profit and  loss  account  disclosing in the relevant year of account Rs. 1,75,875/- as  profit  in a joint venture from H. Manory Ltd.  and  claimed  that  Rs.  87,937/-  being half the profit  earned  from  H.  Manory   Ltd.  was  paid  to  Ratiram  Tansukhrai  under   a  partnership agreement.  The assessee stated that on June  5,  1948, it ’had entered into an agreement with-H.  Manory Ltd.  to  do  business in plywood chests and in  consideration  of  financing  the business the assessee was to receive  50%  of  the  profits of the business.  The assessee claimed that  it  had  entered  into  an agreement on October  7,  1948,  with  Ratiram  Tansukhrai  for financing the  transactions  of  H.  Manory  Ltd. in the joint venture, and had agreed to pay  to  Ratiram  Tansukhrai 50% of the profit earned by it from  the  business with H. Manory Ltd.  The  Income-tax  Officer accepted the return  filed  by  the  assessee and included in computing the total income for  the  assessment  year  1949-50 Rs. 87,937/- only  as  the  profit  earned  on  the joint venture with H. Manory  Ltd.   In  the  assessment  year  195051 the assessee field  a  return  also  accompanied by a profit and loss account disclosing a  total  profit of Rs. 1,62,155/in the relevant account ear  received  from H. Manory Ltd., and claimed that it had transferred Rs.  81,077/- to the account of Ratiram Tansukhrai as his  share.  The  Income-tax Officer on examination of  the  transactions  brought  the entire amount of Rs. 1,62,155/- to tax  holding  that  the  alleged  agreement of October  1948  between  the  assessee and Ratiram Tansukhrai had merely been "got up as a  device to reduce the profits, received from H. Manory Ltd.".  This   order  was  confirmed  by  the  Appellate   Assistant  Commissioner and by the Income-tax Appellate Tribunal.   The  Tribunal then stated a case under s. 66(1) of the Income-tax  Act  to the High Court of Calcutta.  The High  Court  agreed  with  the  view of the Tribunal and  answered  the  question

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against the assessee.  412  In  the  meanwhile on May 13, 1955, the  Income-tax  Officer  issued  a  notice  under  s. 34  to  the  assessee  for  the  assessment  year  1949-50 to re-open the assessment  and  to  assess the amount of Rs. 87,937/- allowed in the  assessment  of  income-tax as paid to Ratiram Tansukhrai.  The  assessee  filed  a  return which did not include the  amount  paid  to  Ratiram Tansukhrai.  The Income-tax Officer re-assessed  the  income  under  s. 34(1) (a) and added Rs.  87,937/-  to  the  income returned by the assessee in the assessment year 1949-  50.   The  Appellate Assistant Commissioner  held  that  the  Income-tax  Officer  was entitled to take  action  under  s.  34(1) (a) of the Income-tax Act 1922 after the ,amendment in  1948,  and  to  re-open the assessment if  income  had  been  under-assessed  owing  to  the failure cf  the  assessee  to  disclose  fully and truly all material facts  necessary  for  the  assessment.  He confirmed the order observing that  the  assessee  had misled the Income-tax Officer  into  believing  that there was a genuine arrangement with Ratiram Tansukhrai  and  had  stated  in the profit and loss  account  that  the  amount  paid  to  Ratiram Tansukhrai was the  share  of  the  latter in the partnership, whereas no much share was payable  to Ratiram Tansukhrai.  In appeal against the order of the Appellate Assistant  Com-  missioner  the Income-tax Appellate Tribunal held  that  the  assessee   had  produced  all  the  relevant  accounts   and  documents  necessary for completing the assessment, and  the  assessee  was under no obligation to inform  the  Income-tax  Officer  about  the true nature of  the  transactions.   The  tribunal  on that view reversed the order of  the  Appellate  Assistant  Commissioner and directed that the amount of  Rs.  87,937/-  be excluded from the total income of the  assessee  for the year 1949-50.  An  application under s. 66(1) of the Indian Income-tax  Act  for  stating  a case to the High Court was rejected  by  the  Tribunal.  A petition to the High Court of Calcutta under s.  66(2)  for ,directing the Tribunal to submit a statement  of  the case was also ,rejected.  The Commissioner has  appealed  to this Court.  Section  34(1)  of the Indian Income-tax Act,  1922,  as  it  stood in the assessment year 1949-50 provided:  "If-----  (a)  the  Income-tax Officer has reason to  elieve  that  by  reason of the omission or failure on the part of an assessee  to make a return of 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  413  chargeable to income-tax have escaped assessement  for  that  year, or have been under-assessed.  (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.  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,     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"  The Income-tax Officer had in consequence of information  in

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his  possession that the agreement with  Ratiram  Tansukhrai  was  a  sham  transaction reason  to  believe,  that  income  chargeable to tax had escaped assessment.  Such a case would  appropriately  fall  under  s.  34(1)(b).   But  the  period  prescribed  for  serving  a notice under s.  34(1)  (b)  had  elapsed.   Under  s. 34 (1 )(a) the Income-tax  Officer  had  authority  to serve a notice when he had reason  to  believe  that  by  reason of omission or failure on the part  of  the  assessee  to  disclose fully and truly  all  material  facts  necessary for his assessment for the year, income chargeable  to tax had escaped assessment.  As observed by this Court in  Calcutta Discount Co. Ltd. v. Income-tax Officer,  Companies  District 1, Calcutta and another(1).  "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  (1)  41 1,T.R. 191, 200.  414  in his possession whether on disclosure by the assessee,  or  discovered  by  him on the basis of the facts  disclose,  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".  We  are of the view that under S. 34(1) (a) if the  assessee  has  disclosed primary facts relevant to the assessment,  he  is  under no ,obligation to instruct the Income-tax  Officer  about  the inference which the Income-tax Officer may  raise  from those facts.  The terms of the Explanation to s.  34(1)  also  do  not  impose  a  more  onerous  obligation.    Mere  production  of the books of account or other  evidence  from  which  material  facts could with due  diligence  have  been  discovered does not necessarily amount to disclosure within  the  meaning of S. 34(1), but where on the evidence and  the  materials  produced  the  Income-tax  Officer  could   ’have  reached a conclusion other than one which he has reached,  a  proceeding  under  s. 34(1) (a) will not lie merely  on  the  ground  that the Income-tax Officer has raised an  inference  which he may later regard as erroneous.  The assessee had disclosed his books of account and evidence  from which material facts could be discovered : it was under  no  obligation  to inform the Income-tax Officer  about  the  possible inferences which may be raised against him.  It was  for the Income-tax Officer to raise such an inference  and  if he did not do so the income which has escaped  assessment  cannot be brought to lay under section 34(1) (a).  The appeal fails and is dismissed with costs.  K.B.N.                                                Appeal  dismissed.  415