Indian Jncome·tax A<·t v. Commissioner of Income-tax

Indian Jncome·tax A<·t, 1922, s. 10(2) (vii) a11d s. 34-Full disclosure of material facts to Income-tax Officer within meaning of s. 34(1) (a), what amounts to-Failure to show excess of price for which assets sold in return and further failure to show written down value amounts to failure to disclose fucts--Tribunal must determine whether any profits are made under section l 0( 2 )( rii)-Without this being first determined the High Court in reference under section 66( 1) cannot decide whether there has heen failure to disclo.1e material facts, The appellant was a private limited company. The business and assets of the appellant 1,.vere purchased by another company under agreement l n the original proceedings for assessment to dated September 9, 1951. income-tax. for the assessment year 1952-53 the appellant brought transactions of sale to the notice of the Inco1ne-tax. Officer and placed be fore hin1 certain relevant documents and also furnished the information forward asked for. Setting off the unabsorbed depreciation brought against tht: income as found by him the Incomi.:-tax office determined the income of the appellant for the said assessment year at 'NIL'. Sometime later the successor-in-.office of the said Income-tax Officer issued a notice under s. 34(1 l(a) of the Indian Income-tax Act, 1912 to the appellant a'fter obtaining sanction from the Commissioner of Income-tax. He held that the appellant had not disclosed its profit under s. 10(2) (vii) of the Act resulting from the sale of its assets and detern1ining the said profits at Rs. 4,88.386, he made a re-assessment. The Appellate Assistant Commis sioner confirn1ed the order. The Tribunal. ho~·ever, held that the mate rial facts were all disclosed to the Income-tax Officer at the time of origirial assessment and a mere change of opinion did not justify proceed ings under s. 34(1 )(a). At the request of the Commissioner of Income tax the Tribunal referred to the High Court the questions (i) whether in the circumstances of the case it could be held that in the original assess ment proceedings the assessee had made a full disclosure of material parti culars; and (ii) whether having initiated prooeedings Wlder s. 34( I) (a) the Income-tax Officer could have later relied on s. 34(1) (b). HELD : The law casts a duty on the assessee to 'disclose fullv and truly all material facts necessary for his assessment' for the relevarlt year. Further t.he explanation to section 34(1) says that mere production before the Income-tax Officer of account books .or other evidence from which material facts with due diligence could hav'e been discovered bv the In come-tax Officer will not amount to disclosure within the meaning of the section. In the present case the price realised at the sale in excess of the written down value of the assets sold, had not been included as profits in the return submitted bv the assessee. It had also not shown the same in •ection 'D' of Part I of the return. The assessee had not shown either in its return or in any of the documents submitted to the Income-tax Officer, the written down value of the assets sold. This failure amounted to a failure on the part of the assessee to disclose fully and truly the materiaf ... 762 SUPREME COURT REPORTS [I 971] I S.C.R. facts necessary for its assessment. From the cryptic Income-tax Officer in the original assessment order that 'no adjustment is necessary• the Tribunal was not justified in drawing the interence that the Income-tax Officer had considered all the facts. [766 F-G] statement ot V.D.M.RM.M.RM. Muthiah Chettiar v. Commissioner of Income-tax, Madras, 74 l.T.R. 183, held inapplicable. CalcuHa Discount Co. Ltd. v. lncome-t<x Officer, Companies Distt I, Calcutta, 41 J.T.R. 191. distinguished. The High Court should not have and this Court would not answer the questions referred under s. 66(1) of the Act because those questions could not be answered without first deciding whether a part of the sale price received by the assessee amounted to profits under s. 10(2) (vii). [768 C-DJ . [Tribunal directed to decide first whether the assessee had any pro fits falling within s. 10(2) (vii) and thereafter decide the appeal] Ci'''L APPELLATE JURISDICTION: Civil Appeal No. 1345 of

#1967. Appeal from the judgment and order dated February 10, 1966 in Income-tax Reference No. 19 of of the Bombay High Court 1962. A. K. Sen, Vasant Mehta.. and Ravinder Narain, appellant. Jagadish Swm•up, SoUcitor-General, S. Mitra, S. K. Aiyar and B. D. Sharma, for the respondent. The Judgment of the Court was delivered by Hegde, J. This is an appeal by certificate under s. 66A(2) of the Indian Income-tax Act, 1922 (to be hereinafter referred to as the 'Act'). The assessee is a Private Limited Co. The a,:;cs:; ment year with which we are concerned in this C<»e is 1952-53, the relevant accounting year ending on :March 31, 1952. The assessment for that year was completed by the Jncome-tax Officer on August 4, 1953. He determined the asses~ee's business profits of the year ended on March 31, 1952 at Rs. 33,096/- subjectto the assessee's claim of unabsor]?~d depreciation brought forward tci the extent of Rs. 42,000/- and odd. After setting off unabsorbed depreciation to the extent of Rs 33,096/-, he deter mined the assessee's total income for the assessment year 1952-53 In the course of the assessment proceedings, the assessee at 'Nil'. company informed the Income-tax Officer by its letter of July 2, 1953 about the sale of the assessee company to the Amalgamated Electricity Co. (Belgaum) Ltd. (to be hereinafter referred to as the It also brought to the notice of the Income-tax 'Belgaum Co.'). Officer, the following documents : A B· c D E G H - A B c D E F G H MALEGAON ELECTRICITY v. C.I.T. (Hegde, J.} 763 (a) Appropriate extract fro~ the minutes of the meet ing of the Board of Directors of the Belgaum Company held on 16~4-1951 agreeing.to pur chase the assets of the assessee company; (b) Resolution passed on 19-9-1951 by the Boa'.d. of Directors for the assessee company decidmg to sell the concern to the Belgaum Company; (c} Agreement dated 19-9-1951 between two companies; Later on in response to a Jetter from the Income-tax Offi cer, the assessee company informed him the .manner in which t~e It also subnut !.ale price of Rs. 9,35,246/15/8 was detenmned. ted a statement of unabsorbed depreciati;m. That statement set out the depreciation accrued as well as that allowed. The entire consideration for the sale was paid in cash on October 4, J 951 and the profits earned by the assessee for the period of six months ended on September 30, 1951 were paid over to the Belgaum Company. In completing the original assessment, the Income-tax Officer observed : "On going through these documents and the ~opies of the Resolution passed by the shareholders of Amalgamated Electricity Co., it is seen that no adjust ment is necessary in the matter. The position of company's total income is determined as under ...... " We may mention at this stage that the consideration received hy the assessee company for the sale of its assets was much more than their written down value. Yet the assessee company did not show in its return any profits under s. 10(2)(vii) of the Act nor did it show the price received in excess of the written down value of the assets sold in Part I of Section 'D' of the Return. Sometime later the Income-tax Officer found out profits de~med to have been earned by the assessee company under s. I 0(2)(•111) had not ~ee_n assessed. Hence after obtaining the sanchon of the Comm1ss10ner, he commenced proceedings under s. 34(1 )(a). After hearing the assessee, the Income-tax Officer :e-assessed the assessee on August 26, 1957 determining its total mcome for the assessment year in question at Rs. 4,48,893 /- 0n the basis that the profits earned by the assessee under s. I 0(2)(vii) were Rs. 4,88,386/-. He rejected the contention of !he ~s.se.ssee that the notice issued by him under s. 34(1)(a} was mvalto masmuch as it had placed before him all the primary facts necessary for the assessment. The assessee unsuccessfully c0ntended that there was no basis for his conclusion that there was any failure on its part to disclose fully and truly all material facts aecessary for its assessment. The Income-tax Officer opined - SUPREME COURT REPORTS (1971] l S.C.R. to disciose that the f~ilure of the assessee In s. 10(2)(vu) brought the case within the :;cope of s. 34(1)(a). appeal the Appellate Assistant Commissioner concurred with the view taken by the Income-tax Officer. He held that the assess~e had a statutory duty to submit a return showing all profits includ- rng the deemed profits under s. I 0(2)(vii). its profits under A On a further appeal to the tribunal, lhe impugned assessment It was urged before the tri· was challenged on various grounds. bunal, on behalf of the assessee that no portion of the price rea!i; ed by the sale of its assets came within the scope of s. 10(2) (viii and further even if any portion of that price can be considered as deemed profits under s. 10(2)(vii), it was impermissible for the Income-tax Officer to initiate proceedings under s. 34(1)(a) as the assessee had placed all the primary facts befor~ the Income-tax Officer and therefore it cannot be said lhat it had not fully and truly disclosed all material facts. On behalf of the Revenue, it was urged before the tribunal that the part of price realised by the sale of the assets should be deemed as profits under s. I0(2)(vii1: those profits had not beer. included in the return or the assesscc nor has the assessee placed all the material facts necessary for determining its tax liability; therefore the Income-tax Officer was justified in initiating proceedings under s. 34(1 )la) and at any rate the impugned assessment can be justified under s. 34(l)(b1. The tribunal did not go into the question whether any part of the sale proceeds can be considered as deemed profits unde~ s. I 0(2 )(vii) but it held that the assessec had placed before the Income-tax Officer, all the primary facts necessary for its assess ment and therefore it cannot be said that it had failed to disclo>e fully and truly all material facts. It observed : ''.Them can be no manner of doubt that all primary facts regarding the transaction of the sale of assessee'S assets were placed by the assessee before the Income-tax Officer at the time of the original assessment. The then Income-tax Officer appears to have applied his mind to the facts of the ca.se and after doiag so he arrived at the finding that no adjustment in regard to the surplus the assets was necessary. arising out of the sale of Whether or not there wa.s any profit under s. 10(2)(vii), and, if so, whether it was taxable was an inference to be drawn from the facts which were fully placed before .the Income-tax Officer. The mere omission of the sale transaction from section D of Part I of the return of income would not enable the Departmental authorities to hold that the assessee had failed to disclose fully <md In truly all material facts necessary for its assessmeni. ·iicw of the fact that all the relevant facts were available B c D E F G H ... ~1 A B c D E F G H MALEGAON ELECTRICITY v. C.J.T. (Hegde, J.) 765 to the Income-tax Officer who made the original assess ment, the present assessment on . those very amounts to merely a change of opimon b~ the Income tax Officer. There has been no suppression of any material information at the time of the original assess ment and as such the action under sertion 34(l)lll) can not be sustained ... It rejected the contention of the Revenue that the impugne? JSSessment can be justified under s. 34(l}(b) as accordmg to 11 the facts proved in the case do not bring' the case within that provision and further the Income-tax OITtcer did not proceed under that provision. At the instance of the Commissioner of Income-tax the tribunal submitted the following questions for the orinion of the High Court of Bombay: "(!) Whether in the circumstances of this case it can be held th~t in the course of original 11ssessment proceedings for the assessment year 1952-53, the assessee company omitted or failed to disclose fully and truly all the material facts necessary for its assessment for that assessment year ? q) Whether, where as a matter of fact, action for re assessment proceedings had been initiated on the belief that the provisions of s. 34(1) (a) were properly applicable to the facts of the case De partment was precluded from validity of the grounds that the reassessment fell as well within the scope of s. 34(l)(b) ?" sustaining re-assesslneut made on The High Court answered both these questions in favour of the Revenue. Hence this appeal. In our judgment the tribunal erred in declining to decide the question whether any portion of the sale price came within the scope of s. 10(2) (vii). That question should have been examined at the very outset for the purpose of considering whether assessee had placed before the Income-tax Officer truly and fully If all material facts necessary for the purpose of its assessment. it is found that any wrtion of that sale price are profits then in our opinion the High Court was right in holding that the assessee had failed to place before the Income-tax Officer during the origi nal assessment truly and fully all. material facts necessary for the purpose of assessment. Admittedly the price realised at the sale in excess of the written down value of the assets sold, had not 766 SIJPREME COURT REPORTS [1971] l S.C.R. been included as profits in the return submitted by the assessee. It had also not shown the same in section 'D' of Part I of the It may also be noted that the assessee had not shown return. either in its return or in any of the documents submitted Income-tax Officer, the written dowr. vaiue of the assets sold. Hence not only the Income-tax Officer was not assessee had earned any profit under s. l 0(2)(vii) nor even the es se.ntial fact viz. the written down value of the assets sold was supplied to him so as to enable him to find out the price in excess It is true that of the written down value realised by the asses~ee. if the Income-tax Officer had made some investigation particularly if he had looked into the previous assessment rewrds, he would have been able to fine! out what the written down value of the assets sold was and consequently he wculd have been able to find out the price in excess of their written down value realised by the assessee. It can be said that the Income-tax Officer; if he had been diligent could have got Jl)l the necessary information from his records. But that is not t~ same thing as saying assessee had placed before the Income-tax Officer truly and fully all material facts necessary for the purpose of assessment. The law casts a duty on the assessee to 'disclose fully and truly all material facts necessary for his assessment for that year'. Further, .Explanation to Section 344(1) says-: • • A B c D "Production before the Income-tax Offictr of ac count-books or other evidence from which material facts could with due diligence have been discovered by the Income-tax Officer will not necessarily amount disclosure within the meaning of this section". If the assessee had disclosed to the Income-tax Ollicer, the surplus price realised by it over and above the written down value of the assets sold or in the alternative if it had informed the Income tax Officer the price realised as well as the written down value of the assets sold, then it could have been said that the assessc.: had done its duty and it was for the Income-tax officer t'l dr~w any inference on the facts placed before him. But the failure of the assessee to disclose to the Income-tax Officer the fact that the pdce realised by it by sale of its assets was more than the written down value of those asse!s or at least the written down value of those assets amounts, in our opinion, to a failure on its part to disclose fully and truly the material facts necessary for its assess ment. From the cryptic statement of the..lncome-tax Officer h the original assessment order trat "no adjustment is necessary" the tribunal was not justified in drawing the inference Income-tax Officer haci considered all the relevant facts. In support of his contention that the disclosure made ty the assc; see \\dS true and full in all material particulars and hence E F G H A B c D E F G H MALEGAON ELECTRICITY v. C.J.T. ( Hegde, J.) 767 no proceedings could have been taken under s. 34(l)(a). Mr. A. K. Sen, learr; ed Counsel for the assessee reiied on the decision of this Court in V.D.M. RM.M.RM. Muthiah Chettiar v. Commis sioner of Jncome·tax, Madras('). In that case the que~tion that arose for decision was whether the assessee's failure to include in his return the income of his wife and his minor sons adnutted to the partnership of which he was a partner assessable in his hands under s. 16 ( 3 )(a)( ii) ca11 be considered as a failure to disclose truly and fully all facts material for the assessment. This Court came to the conclusion that the omission in question did not \>Orne within the scope of s. 34 ( 1 )(a). Therein this Court observed that in the form of return prescribed under rule 19, of the Indian lncome·tax Rules, 1922, framed under s. 59 of the Act, there was no clause which required disclosure of the income of any person other than the income of the assessee, which was liable to be included in his total income. Nor was the assessee required under s.22(5) of the Act, in making a return, any income was received by his wife or minor child admitted to \hP. benefits of partnership in a firm of which he was a partner. Hence by not showing the income of his wife and minor childr~n. the assessee cannot be deemed to have failed to disclose fullv and truly all material facts necessary for his assessment within the meaning of s. 34(l)(a) of the Act. Therein this Court further observed :hat s. 16(3) of the Act imposes an obligation upon the Income-tax Officer to compute the total income of an individual for the purposes of assessment by including the items of income set out in cls.(i) to (iv) and (b) but thereby no obligation is imposed upon lhe taxpayer to disclose the income liable to be included in his assessment under s. 16(3). For failing or omitting to disclos~ that income proceedings for reassessment cannot therefore be commenced under s. 34(1 )(a). The ratio of the above Jccision is inapplicable to the facts of the present case. If any part of the price with which we are concerned ;n this case can be considered· as deemed profits under s. 10(2)(vii), then the assessee had a dutv to. i~clude it in his return. His failure to do so brings h;s case w1thm the scope of s. 34(l)(a). Mr. Sen next relied on the deci s:on of this Court in Calcutta Discount Co. Ltd. v. Income tax Officer, Companies Distt. I Calc•Atta and anr. (2 ). There this. Court ltad observed : to disclose "Once all the primary facts are before the assessing authority, he reqajres no further assistance by way of disclosure. It is for him to decide what inferences of facts can be reasonably drawn and what legal inferences It is not for somebody have ultimately to be drawn. else-far less the assessee-to tell the assessing authuiity should be what inferences whether of facts or law, (1) 74 I. T. R. 183. (2) 41 T. T. R. 191 at 201.. 768 SUPREME COURT REPORTS [1971] I S.C.R. drawn. Inde~d, when it is remembered that people often differ as regards what inferences should be drav.n from given facts, it will be meaningless to demand that the assessee must disclose what inferences-whether of facts or law-he would draw from the primary facts." A ln that case the question for consideration was whether the assessee had a duty to inform the Income-tax Officer with what intention the shares concerned in that case were sold. We do not thmk that the decision in question is of any assistance 1ssessee. For the reasons mentioned above, we are of the opinion, that the High Court should not have and we in our turn will not answer the questions referred under s. 66(1) of the Act because in our opinioh those questions cannot be answered without first deciding whether the part of the sale price receiveci by the assessee amounts to profits under s. I 0(2)(vii). The tribunal must first decide that question and thereafter decide the other questions of law arising for decision on the basis of its decision whether there was any profits falling within s. 10(2)(vii). In the result we allow this appeal and in place of th0 answers given by the High Cbutt we enter a decision to decline tu auswer It is for the tribunal to decide the appeal before those questions. it in the light of this decision. In the circumstances of the case we make no order as to costs. c D E G.C. Appeal allowed. I'