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PETITIONER: COMMISSIONER OF INCOME-TAX, GUJARAT

       Vs.

RESPONDENT: A.   RAMAN & COMPANY

DATE OF JUDGMENT: 18/07/1967

BENCH: SHAH, J.C. BENCH: SHAH, J.C. SIKRI, S.M. RAMASWAMI, V.

CITATION:  1968 AIR   49            1969 SCR  (1)  10  CITATOR INFO :  RF         1972 SC  29  (4)  E          1973 SC2330  (13)  F          1974 SC1358  (10)  RF         1975 SC 703  (11)  AFR        1976 SC 203  (1,4,12,15,16)  F          1977 SC 757  (31)  RF         1977 SC2129  (12)  R          1979 SC1960  (6,14)  RF         1986 SC 649  (16,47)  RF         1986 SC1853  (19,21)

ACT: Indian  Income-tax  Act,  1961, s.  147-Conditions  for  the exercise of power to re-open assessment. Constitution  of India, 1950, Art. 226-Powers of High  Court to  issue  writ when Income-tax  Officer’s  jurisdiction  to issue notice under S. 147 of the Indian Income-tax Act, 1961 is questioned-High Court must not re-appraise evidence.

HEADNOTE: The  assessee  firm  consisted  of  two  partners  who  were managers of their respective Hindu Undivided Families.   The firm  sold  its  goods to the  aforesaid  families  and  the families  again  sold the goods on their  own  account.   In income-tax  proceedings for the years 1959-60,  1960-61  and 1961-62  the  firm  and the Hindu  Undivided  Families  were separately   assessed   in   respect   of   their   incomes. Subsequently  the Income-tax Authorities took view that  the sale of goods by the firm to the families was only a  device to  divert the profits of the firm and on this  view  issued notices  under s. 147 of the Incometax Act,  1961  requiring the assessee to show cause why the assessments for the years 1959-60,  1960-61 and 1961-62 should not be  reopened.   The High  Court of Gujarat in a petition for a writ  under  Art. 226 of the Constitution quashed those notices and restrained the Income-tax Officer from taking proceedings in  pursuance thereof.   With  special leave granted by  this  Court,  the Revenue appealed. Held:(i)  The High Court may issue a  high  prerogative writ prohibiting the Income-tax Officer from proceeding with reassessment when it appears that the Income-tax Officer had

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no   jurisdiction  to  commence  proceedings   because   the conditions precedent do not exist. [12G-H; 13B-C] Calcutta Discount Co. Ltd. v. Income-tax Officer,  Companies District 1, Calcutta, & Anr. 41 I.T.R. 191, followed. It  is however not open to the High Court exercising  powers under  Art.  226  to  set aside or  vacate  the  notice  for reassessment by itself re-appraising the evidence. [15B] (ii)The condition which invests the Income-tax Officer with jurisdiction  has  two  branches: (i)  that  the  Income-tax Officer has reason to believe that income chargeable to  tax has  escaped assessment; and (ii) that it is in  consequence of  information which he has in his possession and  that  he has  reason so to believe.  The expression ’information’  in the  context  of which it occurs must  mean  instruction  or knowledge  derived from an external source concerning  facts or particulars, or as to law relating to a matter bearing on the  assessment.  If he has such information the  Income-tax Officer may commence proceedings under s. 147(1)(b).  But to commence  such a proceeding it is not necessary that on  the materials  which  came  to  the  notice  of  the  Income-tax Officer,  the previous order of assessment was  vitiated  by some error of fact or law. [13C-G] (iii)In the present case however the pre-conditions for the  issue of a notice of re-assessment did not exist.   The law does not oblige a trader to make the maximum profit that he can out of his 11 trading  transactions.  Income which accrues to a trader  is taxable  in his hands: income which he could have,  but  has not  earned  is not made taxable as income accrued  to  him. Avoidance  of  tax  liability  by  so  arranging  commercial affairs that charge of tax is distributed is not prohibited. [15D-G]

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 768 of 1966. Appeal  by special leave from the judgment and  order  dated December 18, 1964 of the Gujarat High Court in Special Civil Application No. 332 of 1964. B.Sen, S. K. A Iyar, R. N. Sachthey and S. P. Nayar,  for the appellant. S. T. Desai and 0. C. Mathur, for the respondent. The Judgment of the Court was delivered by Shah,  J.-The assessees--M/s A. Raman & Company-are  dealers in "mill stores" in the course of their business they sell " mill stores" to other dealers including two concerns trading in  the names of M/s A. M. Shah & Co. and M/s R.  Ambalal  & Co.,  which  are  owned by  the  Hindu  undivided  families, managers  of which are the only partners of  the  assessees. For  the assessment years 1959-60, 1960-61 and  1961-62  the assessees   were  originally  assessed  by  the   Income-tax Officer, Circle-1, Ward-A, Ahmedabad, while the partners  of the assessees and the Hindu undivided families which  traded in the names of M / s A. M. Shah & Co. and M / s R.  Ambalal & Co. were assessed by Income-tax Officers in other Circles. The cases of assessees, of the partners of the assessees and of the two Hindu undivided families trading in the names  of A. M. Shah & Co. and R. Ambalal & Co. were later transferred to the Income-tax Officer, Group Circle-J, Ahmedabad.   That Officer  by  letter  dated  March  20,  1964  informed   the assessees  that  he  was convinced from  a  perusal  of  the assessment  records  of the assessees,  their  partners  and their individual Hindu undivided families, that the partners

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of  the  assessees had contrived to divert  profits  of  the assessees  to their respective Hindu undivided families  and had tried to "evade proper taxation", and on that ground  he called  upon  the assessees to submit their  objections,  if any, to the reopening of the assessments for the years 1959- 60,  1960-61 and 1961-62.  The assessees in reply  contended that  the Income-tax Officer had no jurisdiction  to  reopen the  assessments since the Hindu undivided families  of  the two  partners  and the assessees had submitted  "effect  and complete  returns  of income" supported by  their  books  of account,   "quantity  details"  of  purchases,   sales   and expenses,  and  had given all material  facts  and  relevant information  necessary  for assessment at the time  of  each assessment. The  Income-tax Officer issued three separate notices  under s. 147 of the Income-tax Act, 1961, requiring the  assessees to  show  cause why the assessments for the  years  1959-60, 1960-61 12 and  1961-62  should  not be reopened.  The  High  Court  of Gujarat  in  a petition for a, writ under Art.  226  of  the Constitution  quashed  those  notices  and  restrained   the Income-tax  Officer  from taking  proceedings  in  pursuance thereof.   With  special leave granted by  this  Court,  the Commissioner of Income-tax has appealed to this Court. In support of the claim of the Income-tax Officer, to reopen the  assessments, reliance was placed in the High  Court  on cl.  (b)  of s. 147 (1), of the Income-tax Act,  1961.   The material part of s.   147(1)(b) may be read:               "If-               (a)               (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.               Explanation   1-For  the  purposes   of   this               section, the following shall also be deemed to               be  cases where income chargeable to  tax  has               escaped assessment, namely:-               (a)   where income chargeable to tax has  been               underassessed; or               *          *                 *               *               *" Under s. 147(1)(b) reason to believe that income  chargeable to tax has escaped assessment in consequence of  information in  the possession of the Income-tax Officer is a  condition precedent  to the exercise of his jurisdiction to assess  or reassess the income of the assessee.  If that condition does not  exist, steps taken by the Income-tax Officer to  assess or reassess the income will be without jurisdiction. It  was held by this Court in Calcutta Discount Co. Ltd.  v. Income-tax   Officer,  Companies  District  I,  Calcutta   & Another(1)  that  the High Court in  appropriate  cases  has power  to issue an order prohibiting the Income-tax  Officer from  proceeding to reassess the income when the  conditions precedent  do  not exist.  At p. 207, K. C. Das  Gupta,  J.,

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delivering the majority judgment of the Court observed:               "It  is well-settled however that  though  the               writ  of  prohibition or certiorari  will  not               issue against an executive               13               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  exe-               cutive  authority acting without  jurisdiction               subjects  or is likely to subject a person  to               lengthy     proceedings    and     unnecessary               harassment, the High Courts, it is well settl-               ed,   will   issue   appropriate   orders   or               directions to prevent such consequences". The High Court may, therefore, issue a high prerogative writ prohibiting the Income-tax Officer from proceeding with  re- assessment  when it appears that the Income-tax Officer  had no jurisdiction to commence proceeding. The  condition  which invests the  Income-tax  Officer  with jurisdiction  has  two  branches: (i)  that  the  Income-tax Officer has reason to believe that income chargeable to  tax has  escaped assessment; and (ii) that it is in  consequence of  information which he has in his possession and  that  he has  reason so to believe.  Since the learned Judges of  the High Court have concentrated their attention upon the second branch of the condition and have reached their conclusion in favour  of  the  assessees  on  that  branch,  it  would  be appropriate  to deal with the correctness of that  approach. The  expression  "information" in the context  in  which  it occurs must, in our judgment, mean instruction or  knowledge derived   from  an  external  source  concerning  facts   or particulars,  or as to law relating to a matter  bearing  on the  assessment.   If  as a result  of  information  in  his possession,  the  Income-tax Officer has reason  to  believe that  income chargeable to tax had escaped  assessment,  the Income-tax  Officer has jurisdiction to assess  or  reassess income  under  s.  147(1)(b) of the  Income-tax  Act,  1961. Information in his possession that income chargeable to  tax has  escaped  assessment  furnishes  a  starting  point  for assessing   or   reassessing  income.   If   he   has   that information, the Income-tax Officer may commence proceedings for assessment or reassessment.  To commence the  proceeding for  reassessment it is not necessary that on the  materials which came to the notice of the Income-tax Officer, the pre- vious order of assessment was vitiated by some error of fact or law. The High Court exercising jurisdiction under Art. 226 of the Constitution  has power to set aside a, notice issued  under s.  147  of  the  Income-tax Act,  1961,  if  the  condition precedent  to  the  exercise of the  jurisdiction  does  not exist.  The Court may, in exercise of its powers,  ascertain whether  the  Income-tax Officer had in his  possession  any information: the Court may also determine whether from  that information  the  Income-tax  Officer  may  have  reason  to believe   that   income  chargeable  to  tax   had   escaped assessment.   But the jurisdiction of the Court  extends  no further.   Whether on the information in his  possession  he should commence 14 a  proceeding,  for  assessment  or  reassessment,  must  be decided by the Income-tax Officer and not by the High Court. The  Incometax Officer alone is entrusted with the power  to administer the Act: if he has information from which it  may be  said, prima facie, that lie had reason to  believe  that

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income  chargeable to tax had escaped assessment, it is  not open to the High Court, exercising powers under Art. 226  of the  Constitution,  to set aside or vacate  the  notice  for reassessment on a re-appraisal of the evidence. The High Court in this case was apparently of the view  that the  information  in consequence of  which  proceedings  for reassessment  were intended to be started, could  have  been gathered  by  the  Income-tax  Officer  in  charge  of   the assessment  in the previous years from the disclosures  made by  the  two  Hindu undivided families.  But  that,  in  our judgment,  is  wholly  irrelevant.   Justification  of   the Income-tax  Officer to reassess income arises if he  has  in consequence  of  information  in his  possession  reason  to believe   that   income  chargeable  to  tax   has   escaped assessment.   That information, must, it is true, have  come into  the  possession of the Income-tax  Officer  after  the previous  assessment,  but even if the information  be  such that  it  could  have  been  obtained  during  the  previous assessment  from  an investigation of the materials  on  the record, or the facts disclosed thereby or from other enquiry or research into facts or law, but was not in fact obtained, the jurisdiction of the Income-tax Officer is not affected. The  High  Court  was also of the view  that  the  inference raised  by the Income-tax Officer that the  Hindu  undivided families  of  the  assessees  had made  profit  by  sale  of articles purchased from the assessees larger than the profit which the assessees had made, was not justified, since there was  no  evidence  on the record about the  price  at  which similar goods were sold by the assessees to other  merchants and  about  the profit which those other merchants  made  by sale  of those goods.  But in a petition under Art.  226  of the Constitution the taxpayer may challenge the validity  of a  notice under s. 147 of the Income-tax Act, 1961,  on  the ground  that either branch of the condition  precedent  does not  exist,  but  an investigation  whether  the  inferences raised  by the Income-tax Officer from the  information  are "correct  or  proper"  cannot  be  made.   Counsel  for  the Commissioner  is,  therefore, right in contending  that  the High  Court entered upon an investigation of  matters  which were not within their competence. But  the  appeal of the Commissioner must still  fail.   The case of the Commissioner on the materials placed before  the High  Court, suffers from a serious infirmity on  the  first branch of the jurisdictional condition.  The averments  made in  the  affidavit filed by the Income-tax Officer  in  that behalf do not establish the existence of that branch of  the condition.  In reply to the averment by the 15 assessees  that  the  Income-tax Officer had  no  reason  to believe  that income had escaped assessment, the  Income-tax Officer stated:               "In the course of the discussions I had at the               several meetings hereinabove referred, I  also               learnt  that  in the earlier  years  also  the               petitioners (the assessees) had effected  such               sales  to the said Hindu  undivided  families,               and that over and above the margin of  profits               earned by the petitioners (the assessees) from               the   Hindu  undivided  families,  the   Hindu               undivided  families  had  earned   substantial               profits  on  the  resale  of  such  goods.  1,               therefore,  came  to the conclusion  that  the               creation   of  the  Hindu   undivided   family               business   was  merely  a  subterfuge   or   a               contrivance by the partners of the  petitioner

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             firm  (the  assessees)  to  divert  the   huge               profits  made by the petitioners  (the  asses-               sees) on imported articles". The  plea  raised by the Income-tax Officer is  that  income which  could  have  been earned by  the  assessees  was  not earned,  and a part of that income was earned by  the  Hindu undivided  families.   That  according  to  the   Income-tax Officer was brought about by "a subterfuge or  contrivance". Counsel for the Commissioner contended that if by  resorting to  a "device or contrivance", income which  would  normally have  been  earned by the assessee is  divided  between  the assessee and another person, the Incometax Officer would  be entitled to bring the entire income to tax as if it had been earned by him.  But the law does not oblige a trader to make the   maximum  profit  that  he  can  out  of  his   trading transactions.   Income which accrues to a trader is  taxable in  his  hands:  income which he could  have,  but  has  not earned,  is not made taxable as income accrued to  him.   By adopting a device, if it is made to appear that income which belonged  to  the  assessee had been earned  by  some  other person,  that income may be brought to tax in the  hands  of the  assessee,  and  if  the income has  escaped  tax  in  a previous  assessment a case for commencing a proceeding  for reassessment under s. 147(1)(b) may be made out.   Avoidance of  tax  liability by so arranging commercial  affairs  that charge of tax is distributed is not prohibited.  A  taxpayer may  resort  to  a device to divert  the  income  before  it accrues  or  arises  to him.  Effectiveness  of  the  device depends  not  upon considerations of morality,  but  on  the operation of the Income-tax Act.  Legislative injunction  in taxing  statutes  may not. except on peril  of  penalty,  be violated, but it may lawfully be circumvented. If  the  goods  were  nominally  transferred  to  the  Hindu undivided families the latter acting merely as benamdars for the assessees, and the profits were earning in truth by  the assessees,  income earned by sale of the goods by the  Hindu undivided  families may be held chargeable to tax as  income which has escaped assessment to tax in 16 the  hands of the assessees.  In the present case,, no  such case was attempted to be made out in the affidavit filed  by the  Income-tax  Officer.  We hold, therefore, that  on  the materials  on  the record, the Income-tax  Officer.  had  no reason to believe that income chargeable to tax had  escaped assessment for the three years in question. The  order passed by the High Court is therefore  confirmed. There  will, however, be no order as to costs in this  Court and the High Court. G.C. Appeal dismissed. 17