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PETITIONER: UNION OF INDIA AND OTHERS

       Vs.

RESPONDENT: M/S.  RAI SINGH DEB SINGH BIST & ANR.

DATE OF JUDGMENT15/12/1972

BENCH: HEGDE, K.S. BENCH: HEGDE, K.S. REDDY, P. JAGANMOHAN

CITATION:  1974 AIR  478            1973 SCR  (3) 102  1973 SCC  (3) 581

ACT: Indian   Income   Tax  Act,   1922-s.   34(1)(a)-To   confer jurisdiction  to  issue  notice, 2  conditions  have  to  be satisfied (i) I.T.O. must have reason to believe that income had  been  ’under  assessed : (ii) He-must  have  reason  to believe  that  either assessee has failed to make  a  return under s. 22 or he has omitted to disclose fully all material facts.

HEADNOTE: The  assessee in these appeals is an Hindu Undivided  Family The assessment years in question are ranged from 1942-43  to 1953-54.  The assessee filed its returns for these years  in time.  The assessee’s account books showed considerable cash credits  in  the  name  of  some  relations  of  the  second respondent, the Karta of the H.U.F. The I.T.O. went into the genuineness of these cash credit entries.  The contention of the  assessee  was  substantially  accepted  either  by  the Appellate Assistant Commissioner or by the Revenue Appellate Tribunal.  With regard to the, assessment for the assessment years  1943-44 to 1949-50, the final assessment was made  in pursuance of an agreement or settlement arrived between  the assessee  and the Deputy Director of Inspection  (Investiga- tion).    Long  after  the  assessments  in  question   were finalised, the I.T.O. issued notices to the appellants under s.  34(1) (a) of the Indian Income Tax Act 1922, seeking  to reopen  the  assessments already  finalised.   The  assessee challenged  the validity of these notices of the I.T.O.  The High  Court  allowed  the writ  petitions  and  quashed  the impugned notices. The  assessee  alleged that there was no  relevant  material before the I.T.O. before he issued the notices under s-31(a) on  the basis of which he could have reason to believe  that any  income had escaped assessment.  In the writ  petitions, the  assessee called upon the I.T.O. to produce  the  report made by him to the Central Board of Revenue, as well as  the order of the Central Board of Revenue thereon.  Despite this prayer,  neither the Union of India, nor the I.T.O  produced the  report  made  by the I.T.O. to  the  Central  Board  of Revenue under s.34(1)(a) nor the order of the Central  Board of Revenue. Dismissing the appeal,

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HELD  :  (i) Before an I.T.O. can issue a  statutory  notice under  s.34(1)(a),  he must have reason to believe  that  by reason of omission ,or failure on the part of an assessee to disclose  fully and truly all material facts  necessary  for his assessment for the years in question, income, profits or gains  chargeable  to  Income Tax  have  escaped  assessment during those years.  Further, before doing so, he must  have recorded  his reasons for acting under s. 34(1) (a) and  the Central  Board of Revenue must have been satisfied on  those reasons  that it is a fit case for the issue of the  notice. The recording of the reasons in support of the belief formed by  the I.T.O. and the satisfaction of the Central Board  of Revenue  on the basis of the reasons recorded by the  I.T.O. that it is a fit case for issue of notice under s. 34(1) (a) are  extremely important circumstances to find  out  whether the  I.T.O.  has jurisdiction to proceed  under  s.34(1)(a). [104D] 103 Calcutta  Discount  Co. Ltd. v. I.T.O.  Company  District  1 Calcutta and Others, 41 I.T.R 191; Chhugamal Rajpat v. S. P. Chalia  &  Ors. 79 I.T.P- 603; Sheonath Singh  v.  Appellate Assistant  Commissioner of Income Tax, Central,  Calcutta  & Ors., 82 I.T.R. 1447 referred to. (ii)In the present case, an affidavit was filed before  the Court stating that the relevant records could not be  traced from  the  file of the Central Board of  Revenue.   Assuming that the concerned records were missing from the file of the Central Board of Revenue, the copy of the report made by the I.T.O. and the Order received by him, must have been in  the file  of the I.T.O. and reason was given for  not  producing those records.  These circumstances give rise to an  adverse inference  that  the records in question were  not  produced because  they did not assist the department’s  case.   Under the  circumstances,  it  is  not possible  to  come  to  the conclusion  that the facts necessary to confer  jurisdiction on   the  I.T.O.  to  proceed  under  s.34(1)(a)  had   been established.  There is nothing to show on record that  there was any relevant material before the I.T.O. before he issued the notices under s.34(1) (a). [105F]

JUDGMENT: CIVIL  APPELLATE JURISDICTION: Civil Appeals Nos. 23  92  to 2403 of 1969. Appeals  by  certificate from the judgment and  order  dated September  9, 1968 of the Delhi High Court at New  Delhi  in Civil Writs Nos. 67 to 78 of 1968. S. C. Manchanda, B. B. Ahuja, S. P. Nayar and R. N. Sachthey for  the appellants. N. D. Karkhanis, Rameshwar Nath and Seita Vaidialingam for  the respondents. The Judgment of the Court was delivered by HEGDE,  J. These appeals by certificate arise  from  several writ petitions filed by the H.U.F. M/s.  Rai Singh Deb Singh Bist and its Karta Thakur Mohan Singh Bist, challenging  the validity of certain notices issued under s. 34(1) (a) of the Indian  Income-tax  Act,  1922 (in short  the  Act)  by  the Income-tax Officer, Central Circle 1, Delhi.  The High Court of  Delhi  allowed  those writ  petitions  and  quashed  the impugned notices.  Hence these appeals. The  assessee  in these cases is an  H.U.F.  The  assessment years  with  which we are concerned in these  appeals  range from 1942-43 to 1953-54.  The assessee filed its returns for these  years  in  due time.   The  assessee’s  account-books

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showed  considerable  cash  credits  in  the  name  of   the brothers-in-law  of  the 2nd respondent, the  Karta  of  the H.U.F.  Those alleged creditors were living in  Nepal.   The account books also showed certain credit entries in the name of  Rana Anand Nar Singh, alleged to be in connection’  with expenses incurred by him for getting trees cut on behalf  of the assessee.  The assessee was a forest contractor.  He had taken  large tracts of forests for felling trees  in  Nepal. The Income-tax 104 Officer went into the genuineness of the cash credit entries standing  in  the  name  of the  alleged  creditors  of  the assessee  as  well as to the alleged amount due  to  one  of them.   The  contention of the  assessee  was  substantially accepted  either by the Appellate Assistant Commissioner  or by  the  Revenue  Appellate Tribunal.  With  regard  to  the assessment for the assessment years 1943-44 to 1949-50,  the final assessments were made in pursuance of an agreement  or settlement  arrived at between the assessee and  the  Deputy Director of Inspection (Investigation) New Delhi on  October 18, 1954: Long after the assessments in question were final- ised,   the  Income-tax  Officer.  issued  notices  to   the appellants  under s. 34(1) (a) of the Act seeking to  reopen the  assessments already finalised.  The validity  of  those notices is in issue. Before  an Income-tax Officer can issue a  statutory  notice under s. 34 (1 ) (a), he must have reason to believe that by reason of omission or failure on the part of an assessee  to disclose  fully and truly all material facts  necessary  for his assessment for the years in question, income, profits or gains  chargeable  to  income-tax  have  escaped  assessment during those years.  Further, before doing so, he must  have recorded  his reasons for acting under s. 34(1) (a) and  the Central  Board of Revenue must have been satisfied on  those reasons  that it is a fit case for the issue of the  notice. The recording of the reasons in support of the belief formed by  the  Income-tax  Officer and  the  satisfaction  of  the Central  Board  of  Revenue  on the  basis  of  the  reasons recorded by the Income-tax Officer that it is a fit case for issue of notice under s. 34 (1 )(a) are extremely  important circumstances to find out whether the Income-tax Officer had jurisdiction to proceed under s. 34(1) (a). In  Calcutta Discount Co. Ltd. v. Income-tax  Officer,  Com- panies District 1. Calcutta and anr.(1) this Court laid down (1) that to confer jurisdiction under s. 34 to issue  notice in  respect of assessments beyond the period of four  years, but  within  a period of eight years, from the  end  of  the relevant  year,  two conditions had to  be  satisfied.   The first  was that the Income-tax Officer must have  reason  to believe that income, profits or gains chargeable to  income- tax  had been under assessed.  The second was that  he  must also have reason to believe that such "under-assessment" had occurred by reason of either (1) omission or failure on  the part  of  an assessee to make a return of his  income  under section  22,  or (2) omission or failure on the part  of  an assessee  to  disclose fully and truly  all  material  facts necessary  for  his assessment for that  year.   Both  these conditions  are conditions precedent to be satisfied  before the’  Income-tax Officer could have jurisdiction to issue  a notice for the assessment or re-assessment beyond the period (1)41 I.T.R. 191. 105 of four years but within the period of eight years from  the end of the year in question. In Chhugamal Rajpal v. S. P. Chaliha and ors.(1) this  Court

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ruled that before an Income-tax Officer can be said to  have had   reason  to  believe  that  some  income  had   escaped assessment, he should have some relevant material before him from which he could have drawn the inference that income has escaped assessment.  His vague feeling that there might have been   some  escape  of  income  from  assessment   is   not sufficient.  This Court also took the view that the  Central Board  of Revenue before reaching its satisfaction that  the case  was  a fit one to be proceeded under s. 3 4 (1  )  (a) must  have  examined  the reasons given  by  the  Income-tax Officer and arrived at its own conclusion and that it is not permissible  for it to act mechanically.  The same view  was again  taken by this Court in Sheo Nath Singh  v.  Appellate Assistant Commissioner of Income-tax (Central) Calcutta  and ors. (2) In  the  instant  case, the assessee  alleged  in  his  writ petitions  that  there was no relevant material  before  the Income-tax Officer before he issued notices under s. 34  (1) (a)  on  the  basis of which he could  have  had  reason  to believe that any income had escaped assessment.  In the writ petitions the assessee called upon the Income-tax Officer to produce  the  report  made by him to the  Central  Board  of Revenue as well as the order of the Central Board of Revenue thereon.   Despite this prayer, neither the Union  of  India nor the Income-tax Officer cared to produce the report  made by  the Income-tax Officer to the Central Board  of  Revenue under  s.  34(1) (a) or the order of the  Central  Board  of Revenue.    Before  the  hearing  of  the   writ   petitions commenced,  the assessee again applied to the Court to  call upon  the  Union  of India and  the  Income-tax  Officer  to produce  those documents.  In response to that  application, an  affidavit  was filed before the Court stating  that  the relevant  records could not be traced from the file  of  the Central  Board  of  Revenue.  Assuming  that  the  concerned records  were missing from the file of the Central Board  of Revenue,  the  copy  of the report made  by  the  Income-tax Officer and the order received by him must have been in  the file of the Income-tax Officer.  No reason was given for not producing  those records.  These circumstances give rise  to an  adverse  inference  against  the  department.   We   are constrained  to come to the conclusion that the  records  in question  were not produced because they did not assist  the department’s  case.   Under these circumstances, it  is  not possible. to come to the conclusion that the facts necessary to confer jurisdiction on the Income-tax Officer to  proceed under s. 3 4 1 ) (a) had been established. (1) 79 I.T.R. 603. (2) 8 2 I.T. R. 14 7. 106 All that was said on behalf of the department was that some- time  in  the year 1955, the assessee sold large  tracts  of land to two of his brothers in-law for a sum of Rs. 47 lakhs but in reality that property was not worth that amount.   We do not know whether there was any basis for this conclusion. As seen earlier the cash credit entries were brought to  the notice  of  the  Income-tax  Officer  before  the   relevant assessment  orders  were  passed.  He  had  an  occasion  to investigate into them.  It is not necessary to go into  this question  more  deeply  in view of the fact  that  there  is nothing to show that there was any relevant material  before the Incometax Officer before he issued the notices under  S. 34 (1) (a) to-have reason to believe that as a result of the assessee’s  failure to state in its return truly  and  fully any fact, any income had escaped assessment. In the result these appeals fail and they are dismissed with

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costs-one hearing fee. S.C. Appeals dismissed. 107