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PETITIONER: S. NARAYANAPPA & ORS.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, BANGALORE

DATE OF JUDGMENT: 27/09/1966

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

CITATION:  1967 AIR  523            1967 SCR  (1) 590  CITATOR INFO :  F          1967 SC 587  (5)  F          1970 SC1011  (13)  RF         1972 SC 689  (13)  R          1972 SC2617  (9)  R          1973 SC 370  (11)  RF         1975 SC 703  (11)  D          1976 SC 437  (16)  RF         1976 SC1753  (8)  F          1985 SC 989  (9)  RF         1986 SC1853  (20)  RF         1987 SC1897  (27)

ACT: Income-tax Act (11 of 1922), s. 34-Scope of.

HEADNOTE: For the assessment year 1951-52, the appellant did not  file a  return of his income under s. 22 of the  Income-tax  Act, 1922  but  the Incometax Officer assessed the  income  at  a certain  figure.   When  examining  the  material  for   the assessment year 1955-56, it was discovered that the assessee made  large  investments  and  suppressed  items  of   house property   acquired   by  him.   The   Income-tax   Officer, therefore,  issued  a  notice  under  s.  34(1)  and   after examining the return assessed the income for the  assessment year  1951-52 at a much higher figure.  In the reference  to the High Court, the appellant questioned the jurisdiction of the Officer to initiate proceedings under s. 34(1), but  the High Court held against him. In appeal to this Court, HELD : (i) The Income-tax Officer had reasonable grounds for thinking that there was non-disclosure of material facts  on the  part  of  the  appellant  and  that  there  was  under- assessment  for the assessment year 1951-52, caused  by  the assessee’s failure to submit his return. [593 C] Two  conditions  must  be  satisfied  in  order  to   confer jurisdiction on the Income-tax Officer to issue notice under s.  34, namely, (i) the Officer must have reason to  believe that  the income, profits or gains chargeable to  income-tax had been under-assessed; (ii) he must have reason to believe that  such  under-assessment had occurred by reason  of  the

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omission  or  failure on the part of No assessee to  make  a return  or disclose fully all material facts  necessary  for assessment.   The existence of the belief, and  whether  the reasons  for -the belief have a rational connection with  or relevant  bearing on, the formation of the belief, are  open to examination by the court.  But if there are in fact  some reasonable grounds for the Officer to believe that there had been a non-disclosure as regards any fact, which could  have a material bearing on the question of under-assessment, that would  be sufficient to give him jurisdiction to  issue  the notice   under  s.34,  and  their  sufficiency   cannot   be challenged by the assessee. [592 C-H] (ii)  The scheme of s. 34 is that if the conditions  of  the main section are satisfied a notice has to be issued to  the assessee.   But  before  issuing  the  notice  the   proviso requires  that  the officer should -record his  reasons  and obtain  the  sanction of the  -Commissioner  for  initiating action  under the section.  But there is no  requirement  in the  Act that the reasons which induced the Commissioner  to accord sanction should also be communicated to the assessee. [593 F-G]

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal No. 562 of 1965. Appeal  by special leave from the judgment and  order  dated July 24, 1963 of the Mysore High Court in I.T.R.C. No. 3  of 1963. 591 R. Gopalakrishnan, for the appellants. S.  V. Gupte, Solicitor-General, N. D.  Karkhanis  Sachthey, for the respondent. The Judgment of the Court was delivered by Ramaswami  J.  The  appellant was carrying  on  business  in jewellery,  copper-wire  and money lending.   The  books  of accounts  of the appellant were closed on the 30th  of  June every year.  For the assessment year 1951-52 (for which  the previous  year ended on 30th June, 1950) the  appellant  did not comply with the notice issued under s. 22(2) or  section 22(4)  of  the Income-tax Act.  No return was filed  by  the appellant.   The assessment was completed by the  Income-tax Officer  on  such  material as was  available  on  the  23rd February, 1955 and the income was assessed at Rs.  36,068/-. Subsequently,  while  making assessment for  the  assessment year  1955-56, the appellant was asked to furnish  a  wealth statement  which was actually filed on the 30th June,  1954. From  the wealth statement it was found that  the  appellant had made investments for Rs. 39,000/during the previous year which  ended  on the 30th June, 1950, though in  respect  of that previous year, the appellant’s income was assessed only at Rs. 36,068/-.  A scrutiny of the wealth statement and the Bank  account  and  the extensive  nature  of  the  business carried  on by the appellant led the Income-tax  Officer  to entertain  a belief that the income of the year 1951-52  had been  under-assessed.  He accordingly issued a notice  under s. 34(1) and after examining the return made,  he   assessed the income of the  appellant  at  Rs.  89,002/-by his  order dated  the 31st March, 1960.  The appellant filed an  appeal against  the  assessment order to  the  Appellate  Assistant Commissioner  but  the appeal was dismissed,  the  appellant preferred  a  further  appeal to  the  Income-tax  Appellate Tribunal,  Madras Bench.  The appellant did not dispute  the quantum  of the assessment but only the jurisdiction of  the Income-tax  Officer to initiate proceedings under s.  34(1).

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The Tribunal by its order dated the 31st January, 1962 over- ruled  the  objection  and dismissed  the  appeal.   At  the instance  of  the  appellant,  the  Tribunal  referred   the following question of law for the opinion of the High Court:               "Whether    the   Income-tax    Officer    had               jurisdiction  to initiate proceedings for  the               assessment  year 1951-52 under the  provisions               of  s. 34(1) (a) of the Indian Income-tax  Act               of 1922". The  High Court answered the question against the  appellant holding  that  the Income-tax Officer  had  jurisdiction  to initiate  proceedings against the appellant under  s.  34(1) (a) of the Act for the assessment year 1951-52.  This appeal is brought by special leave against the judgment of the High Court dated the 24th July, 1963. 592 On  behalf of the appellant Mr. Gopalakrishnan contended  in the  first place that the reasons which induced the  Income- tax  Officer  to initiate the proceedings under s.  34  were justiciable.   It  was submitted that those  reasons  should have  been  communicated by the Income-tax  Officer  to  the assessee   before   the  assessment  was  made.    In   this connection,  the further argument of the appellant was  that those reasons "must be sufficient for a prudent man to ,come to  the conclusion that the income had escaped  assessment". In  our opinion, there is no substance in any one  of  these arguments.  It is true that two conditions must be satisfied in order to confer jurisdiction on the Income-tax Officer to issue  the  notice  under s. 34 in  respect  of  assessments beyond  the  period of four years, but within  a  period  of eight  years, from the end of the relevant year.  The  first condition is that the Income-tax Officer must have reason to believe  that  the income, profits or  gains  chargeable  to income-tax had been under-assessed.  The second condition is that  he  must  have reason to  believe  that  such  "under- assessment" had occurred by reason of either (i) omission or failure  on the part of an assessee to make a return of  his income under s. 22, or (ii) omission or failure on the  part of the assessee to disclose fully and truly all the material facts  necessary  for his assessment for  that  year.   Both these  conditions are conditions precedent to  be  satisfied before the Income-tax Officer acquires jurisdiction to issue a notice under the section.  But 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 Income-tax Officer did not hold the  belief that there had been such nondisclosure.  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  "reason 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 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

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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 593 of  law.  [See  Calcutta Discount Co.  Ltd.,  v.  Income-tax Officer Companies District 1, Calcutta and Anr.(1)] In the present case the High Court has pointed out that  the Income-tax  Officer when examining the relevant material  in the  proceeding for the assessment year 1955-56  found  that the  appellant  had made investments to the  extent  of  Rs. 39,000/-  in  the  account 1 year under  question  when  the income   assessed  was  only  Rs,  36,068/-.    On   further examination  it was discovered that items of house  property acquired  long before the relevant accounting year had  been suppressed.   The  High  Court,  therefore,  held  that  the Income-tax Officer had reasonable grounds for thinking  that there  was non-disclosure on the part of the  appellant  and that  there  was under-assessment for  the  assessment  year 1951-52. It was _also contended for the appellant that the Income-tax Officer  should have communicated to him the  reasons  which led him to initiate the proceedings under s. 34 of the  Act. It was stated that a request to this effect was made by  the appellant  to  the Income-tax Officer,  but  the  Income-tax Officer  declined to disclose the reasons.  In our  opinion, the argument of the appellant on this point is misconceived. The  proceedings  for assessment or  reassessment  under  s. 34(1)  (a) of the Income-tax Act start with the issue  of  a notice  and it is only after the service of the notice  that the  assessee, whose income is sought to be assessed or  re- assessed, becomes a party to those proceedings.  The earlier stage  of  the proceeding for recording the reasons  of  the Income-tax  Officer  and for obtaining the sanction  of  the Commissioner  are  administrative in character and  are  not quasi-judicial.  The scheme of s. 34 of the Act is that,  if the  conditions of the main section are satisfied  a  notice has  to be issued to the assessee containing all or  any  of the  requirements which may be included in a notice under  s sub-section  (2)  of  section 22.  But  before  issuing  the notice, the proviso requires that the officer should  record his  reasons  for  initiating action under  section  34  and obtain  the-  sanction  of  the  Commissioner  who  must  be satisfied that the action under s. 34 was justified.   There is no requirement in any of the provisions of the Act or any section laying down as a condition for the initiation of the proceedings that the reasons which induced the  Commissioner to accord sanction to proceed under section 34 must also  be communicated to the assessee. In  The Presidency Talkies Ltd. v. First Additional  Income- tax  Officer,  City Circle II, Madras,(2)  the  Madras  High Court has expressed a similar view and we consider that that view is correct.  We accordingly reject the argument of  the appellant on this aspect of the case. (1)  41 I.T.R. 191. (2)   25 I. T. R. 447. 594 Lastly,   it  was  submitted  by  the  appellant  that   the proceedings under s. 34 were invalid because the  Income-tax Officer  did  not  entertain  the  belief  that  the  under- assessment was made by reason of the omission or failure  on the part of the assessee to make a return under s. 22 or  to disclose  fully and truly all material facts  necessary  for the  first  assessment.   There  is  no  substance  in   the argument.   The  Tribunal has found that  there  was  direct

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connection  or  nexus  between the  assessee’s  omission  or failure  to make a return and the under-assessment  made  by the Income-tax Officer for the year 1951-52.  The High Court has affirmed this finding and concluded that the proceedings under s. 34(1)(a) of the Act were not defective in law. For these reasons we dismiss this appeal with costs. V.P.S.                              Appeal dismissed 595