CALCUTTA DISCOUNT COMPANY LIMITED versus INCOME-TAX OFFICER, COMPANIES DISTRICT, I AND ANOTHER.

2 S.C.R. SUPREME COURT REPORTS

CALCUTTA DISCOUNT COMPANY LIMITED v. INCOME-TAX OFFICER, COMPANIES DISTRICT, I AND ANOTHER.

(S. K. Das, M. HrnAYATULLAH, K. C. DAs GUPTA, J.C. SHAH and N. RAJAGOPALA AYYANGAR, JJ.)

Income-tax-Income escaping assessment-Non-disclosure of material facts by assessee-" Material facts", meaning of-Indian Income Tax Act, z922 (II of z922), as amended in z948, s. 34(1)(a), Explanation-Constitution of India, Art. 226.

The appellant, private limited company, was assessed to income tax for the assessment years 1942-43, 1943-44 and 1944-45 by three separate orders dated January 26, 1944, February 12, 1944, and February 15, 1945, under s. 23(3) of the Indian Income Tax Act on returns filed by it with statements of account. On March 28, 1951, three notices under s. 34 of the Act were issued calling upon it to s.ubmit fresh returns for the said assessment years. The appellant filed the returns but thereafter applied to the High Court under Art. 226 of the Constitution for writs restraining the Income-tax Officer from initiating assessment proceedings on the basis of the said notices on the ground, inter alia, that he had no jurisdiction to issue the said notices. In' his report to the Commissioner of Income-tax for obtaining sanction to initiate the said proceedings the Income-tax Officer had stated as follows:-

"Profit of Rs. 5.46,002 on sale of shares and securities escaped assessment altogether. At the time of the original assessment the then I. T. 0. merely accepted the company's version that the sale of shares were casual transactions and were in the nature of mere change of investments. Now the results of the company's trading from year to year show that the com-pany has really been systematically carrying out trade in the sale of .investments. As such the company had failed to disclose the true in~ention behind the sale of the shares as such s. 34(1)(a) may be attracted".

The question for determination was whether in the circum-stance the Income-tax Officer was right in issuing notices on ,l;e assessee under s. 34(1)(a) of the Act.

Held, (per S. K. Das, K. C. Das Gupta and N. R. Ayyan-gar, JJ.), that before the Income-tax Officer could issue notice under s. 34(!)(a) of the Indian Income-tax Act, two conditions precedent must co-exist, namely, that he must have reason to believe (1) that income, profits or gains had been under-assessed and (2) that such under-assessment was due to non-disclosure of material facts by the assessee.

November r.

r960 Although what facts would be necessary and material for the assessment in particular case must depend on the facts of Calcutta Discou11t that case, there could be no doubt that the burden of disclosing Company Limit'd all the primary facts must invariably be on the assessee. v. The Explanation to s. 34(1) made it clear that that burden Income-tax Office" could not be fully discharged by simply producing the account Coinpanies books and other documents, but the assessee must also disclose Disfrict, I such specific items or portions thereof as are relevant to the 0-- Another assessment. But once he has done so, it is for the Income-tax Officer to draw the proper inferences of fact and law therefrom and the assessee cannot further be called upon to do so for him. The Explanation does not enlarge the scope of the section so as to include "the disclosure" of such inferences.

The question whether by the sale of shares the assessee in the instant case intended to change the form of investment or to make business profit was one of an inferential fact and the failure to disclose such intention could not by itself amount to failure or omission to disclose material fact within the mean-ing of s. 34(1)(a) of the Act.

Where, however, the Income-tax Officer has prima facie reasonable grounds for believing that there has been non-disclosure of primary material fact, that by itself gives him the jurisdiction to issue notice under s. 34 of the Act, and the adequacy or otherwise of the grounds of such belief is not open to investigation by the Court. It is for the assessee who wants to challenge such jurisdiction to establish that the Income-tax Officer had no material for such belief.

Since, in the instant case, there was no non-disclosure of primary material fact which the assessee was bound to disclose under s. 34(1)(a) of the Act, the Income-tax Officer had no juris-diction to issue the notices in question.

It is incorrect to say that the question of under-assessment

by reason of non-disclosure of material fact was relevant only for the purpose of applying either the longer or the shorter period of limitation prescribed by the section and not for juris-diction and, therefore, not proper matter for investigation under Art. 226 of the Constitution.

The High Courts have ample powers under Art. 226 of the

Constitution, and are in duty bound thereunder, to issue such appropriate orders or directions as are necessary in order to prevent persons from being subjected to lengthy proceedings and unnecessary harassments by an executive authority acting without jurisdiction. Alternative remedies such as are provided by the Income-tax Act cannot always be sufficient reason for refusing quick relief in fit and proper case.

Per Hidayatullah, J.-The Explanation to s. 24(1) of the Indian Income-tax Act clearly indicates that the duty of the assessee thereunder does not end by merely producing evidence or disclosing the primary facts, but also extends to the disclosure

of such other facts relating to status, agency, benami nature of i960 the transaction, the nature of the trading and the like, which he knows but do not appear from the evidence, and which may Calcutta Discount be necessar:• for interpreting the evideni:e.. If the evidence Company Limited produced hides nothing and discloses everything, the assessee v. cannot be subjected to s. 34 merely because the Income-tax Income-ta" Officer, Officer misinterprets such evidence. But it is otherwise if the Companies assessee raises contention that is contrary to fact and·, requires District, I the Income-tax Officer to discover the truth for himself for that & Another would be to suppress material fact that would attract the section.

Since, in the present case, an investment company dealing in stocks and shares, not only knowingly suppressed that fact but contended otherwise, there was non-disclosure of material fact necessary for its assessment, and sufficient to attracts. 34(1) (a) of the Act.

Per Shah, ].-The expression "has reason to believe " in s. 34(1)(a) of the Indian Income-tax Act does not mean purely subjective satisfaction of the Income-tax Officer but predicates the existence of reasons on which such belief has to be founded. That belief, therefore, cannot be founded-on mere suspicion and must be based on evidence and any question as to the adequacy of such evidence is wholly immaterial at that stage.

Whether all the material facts necessary for the assessment had or had not been fully and truly disclosed in particular case has to be examined, in the light of the Explanation to s. 34(1)(a).

If there is disclosure of some facts but not all, tax payer cannot resist reassessment on the plea that such non-disclosure was due to the negligence or inadvertence on the part of the Income-tax Officer to scrutinise the materials before him.

Where the existence of reasonable 'belief that there had been under-assessment due to non-disclosure by the assessee, which is condition precedent to exerci~ of the power under s. 34(1)(a) is asserted by the assessing authority and the record prima Jacie supports its existence, any enquiry as to whether the authority could reasonably hold the belief that the under-assessment was due to non-di5closure by the assessee of material facts necessary for the assesment must, be barre~.

JURISDICTION: Civil Appeal

CIVIL APPELLATE No. 197 of 1954.

Appeal from the Judgment and Order dated the 25th March, 1953, of the Calcutta High Court in Appeal from Original Order No. 54 of 1953.

Sachin Chaudhury, Sukumar Mitter, 8. N. Mukher-jee and D. N. Ghosh, for the appellant.

K. N. Rajagopal Sastri and D. Gupta, for the res-pond en ts.

Calcutta Disco1t11t Company Limited 1960. November I. The Judgment of S. K. Das, v. K. C. Das. Gupta and N. Rajagopala Ayyangar, JJ., Income-tax Officer, was delivered by K. C. Das Gupta,. J. M. Hidaya-Co111panies District, 1 tullah, J. an J . . Sh , ., 1vered separate J udg-J ) ' & Anotltet ments.

DAS GUPTA J.-This appeal is against an appellate decision of Bench of the Calcutta High Court by which in reversal of the order made by the Trial Judge the Bench rejected the present appellant's application under Art. 226 of the Constitution. The appellant is private limited company incorporated under the Indian Company's Act and has its registered office in Calcutta. It was assessed to income-tax for the assessment years, 1942 43, 1943.44 and 1944-45 by three separate orders dated January 26, 1944, February 12, 1944, and February 15, 1945, respec-tively. These assessments were made under s. 23(3) of the Indian Income-tax Act upon returns filed by it accompanied by statements of account. The first two assessments were made by Mr. L. D. Rozario the then Income-tax Officer and t.he last one by Mr. K. D. Baner-jee. The taxes assessed were duly paid up. On March 28, 1951, three notices purporting to be under s. 34 of the Indian Income-tax Act, 1922, were issued by the Income-tax Officer calling upon the company to sub-mit fresh returns of its total income and the total world income assessable for the three accounting years relating to the three assessment years, 1942-43 1943-44 and 1944-45. The appellant company furnished re-turns in compliance with the notices but on September 18, 1951, applied to the High Court of Calcutta for issue under Art. 226 of the Constitution of appropriate writs or orders directing the Income-tax Officer not to proceed to assess it on the basis of these notices. The first ground on which this prayer was based watt mentioned in the petition in these terms:-" The said pretended notice was issued without the existence of the necessary conditions precedent which confers jurisdiction under section 34 aforementioned, whether

Das Gupta].

before or after the amendment in 1948 ". The other 1960 ground urged was • that the amendment to s. 34 of . the a. 1 culta --D. tscount Income-tax Act m 1948 was not retrospective and Company Limited that the assessment for the years 1942-43, 1943-44 v. and 1944-45 became barred long before March 1951. Income-tax Officer, The Trial Judge held that the first ground was not Comp~nies made out but being of opinion that the amending Act District, r of 1948 wa;.; not retrospective, he held that the notices & Another issued were without jurisdiction. Accordingly be Das Gupta J. made an order prohibiting the Income-tax Officer from continuing the assessment proceedings on the basis of the impugned notices.

--D. tscount

The learned Judges who heard the appeal agreed V'ith the Trial Judge that the first ground had not been made out. They held however that in consequ-ence of the amendment of s. 34 in 1948 the objection on the ground of limitation must also fail. point of constitutional law which appears to have been raised before the appeal court was also rejected. The appeal was allowed and the company's application under Art. 226 was dismissed with costs.

The Company has preferred the present appeal on the strength of certificate issued by the High Court under Art. 133(l)(a) of the Constitution.

The only point raised before us is that the courts below were wr9ng in holding that the first ground that the notices were issued without the existence of the necessary conditions precedent which confers jurisdiction under s. 34 bad not ·been made out. As it is no longer disputed that s. 34 as amended in 1948 applies to the present case we have to consider the section as it stood after the amendment in 1948, in deciding this question of jurisdiction. The relevant portion of the section was in these words :-

" 34. Income escaping assessment.-( 1) If-

(a) the Income-tax Officer has reason to believe that by reason of the omission or failure on the part of an assessee to make return of his income under s. 22 for any year or to disclose fully and truly all material facts necessary for bis assessment for that year, income, profits or gain chargeable to income-tax have escaped assessment for that year, or have been

under-assessed, or assessed at too low rate, or have

Colrnll;Discount been made the subject of excessive relief under the company Limited Act, or excessive loss or depreciation allowance has

been computed, or

v. Co1npanics District, I & Another

(b) notwithstanding that there has been no omis-

Income-tax Offiw,

sion or failure as mentioned in clause (a) on the part of the assessee, the Income-tax Officer has in consequ-ence 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, or assessed at too low rate or have been made the subject of excessive relief under this Act, or that excessive loss or depreciation allowance has been computed.

Das Gupta ].

He may in cases falling under clause (a) at any time

within eight years and in cases falling under clause (b) at any t.ime within four years of the end of that year, serve on the assessee, or, if the assessee is company, on the principal officer thereof, notice containing all or any of the requirements which may be included in notice under sub-section (2) of section 22 and may proceed to assess or reassess such income, profits or gains or recompute the loss or depreciation allowance; and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were notice issued under that sub-section :-

Provided that-

(i) the Income-tax Officer shall not issue notice

under this sub-section, unless he has recorded his reasons for doing so and the Commissioner is satisfied on such reasons recorded that it is fit case for the issue of such notice ;

(ii) the tax shall be chargeable at the rate at

which it would have been charged had the income, profits or gains not escaped assessment or full assess-ment, as the case m_ay be ; and

(iii) where the assessment made or to be made is

an assessment made or to be made on person deemed to be the agent of non-resident person under sec-tion 43, this sub-section shall have effect as if for the periods of eight yea.rs and four yea.rs period of one year was substitUted.

Explanation-Production before the Income-tax

Officer of account-books or other evidence from which -. · 1 ld • ·1· 1 . culta Discount materia acts cou wit ue I 1gence ave een Companv Limited discovered by the Income-tax Officer will not neces-~-sarily amount to disclosure within the meaning of Income-tax Offim, this section." Companies

Companies District, I & Another -

To confer jurisdiction under this section to issue . t t . no t we [. ]111 respec o assessmen s eyon t peno o four years, but within period of eight years, from the end of the relevant year two conditions have therefore to be satisfied. The first is that the Income-tax Officer must have reason to believe that income, profits or gains chargeable to income-tax have been under-assessed. The second is that he must have also reason to believe that such " under assessment " has occurred by reason of either (i) omission or failure on the part of an assessee to make return of his income under s. 22, or (ii) 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 notice for the asse_ssment or re-assessment beyond the period of four years but within the period of eight years, from the end of the year in question.

Das Gupta J.

No dispute appears to have been raised at any stage in this case as regards the first condition not having been satisfied and we proceed on the basis that the Income-tax Officer had in fact reason to believe that there had been an under-assessment in each of the assessment years, 1942-43, 1943-44 and 1944-45. The appellant•s·case has all along been that the second condition was not satisfied. As admittedly the appel-lant had filed its return of income under s. 22, the · Income-tax Officer could have no reason to believe that under-assessment had resulted from the failure to make return of income. The only question is whether the Income-tax Officer had reason to believe that " there had been some omission or failure to disclose . fully and truly all material facts necessary

for the assessment " for any of these years in conse-

'9[60 ]

cu I 11[-D. ]iscount quence of which the under-assessment took place. . • company Limited Before we proceed to consider the materials on v. record to see whether the appellant has succeeded Income-tax Officer, in showing that the Income-tax Officer could have Companies no reason, on the materials before him, to believe that ;iisAtricth, I there had been any omission to disclose material ~ not " iacts,-as men -" t' 10ne ' m th sec t' 10n, 1 "t · 1s necessary to ex -Das Gupta J. amine the precise scope of disclosure which the section demands. The words used are " omission or failure to disclose fully and truly all material facts necessary for his assessment for that year". It postulates duty on every assessee to disclose fully and truly all material facts necessary for his assessment. What facts are. material, and necessary for assesment will differ from case to case. In every assessment pro-ceeding, 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 pri-mary facts in his possession, whether on disclosure by the assessee, or discovered by him on the basis of the facts disclosed, 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 correct interpretation of the taxing enactment, the proper tax leviable. Thus, when question arises whether certain income received by an assessee is capital receipt, or revenue . receipt, the assessing authority has to find out what primary facts have been proved, what other facts can be inferred from them, and taking all these together, to decide what the legal inference should be.

There can be no doubt that the duty of disclosing all the primary facts relevant to the decision of the question before the assessing authority lies on the assessee. To meet possible contention that when some account books or other evidence has been pro-duced, there is no duty on the assessee to. disclose further facts, which on due diligence, the Income-tax

Officer might have discovered, the Legislature has put I9[60 ]I in n view o t xp anat10n, the , Explanation, which has been set l . it . Wl 'll not open to t out above. Company Limited Company Limited 1 cu ,,-D. iscoun assessee to say, for example-" I have produced the v. account books and the documents: You, the . assess- Income.tax Officer, ing officer examine them, and find out the facts neces-C~mp~nies sary for your purpose : My duty is done with disclos-~·~'":i. [[1 ]]ing these account-books and the documents". His no er omission to bring to the assessing authority's attention Das Gupta J. these particular items in the account books, or the particular portions of the documents, which are rele-vant, amount to " omission to disclose fully and truly all material facts necessary for his assessment." Nor will he be able t9 contend. successfully that by dis-closing certain evidence, he should be deemed to have disclosed other evidence, which might have been dis-covered by the assessing authority if he had pursued investigation on the basis of what has been disclosed.. The E,xplanation to the section, gives quietus to all such contentions ; and the position remains that so far as primary facts are concerned, it is the assessee's duty to disclose all of them-including particular entries in account books, particular portions of docu-ments and documents, and other evidence, which could have been discovered by the assessing autho-rity, from the documents and other evidence dis-closed.

1 1 cu iscoun Company Limited Company Limited v. Income.tax Officer, C~mp~nies ~·~'":i. [[1 ]]no er

Does the duty however extend beyond the full and truthful disclosure of all primary facts ? In our opinion, the answer to this question must be in the negative. Once all the primary facts are before the assessing authority, he requires 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 have ultimately to be drawn. It is not for somebody else-far less the assessee-to tell the assessing authority what inferences-whether of facts or law should be drawn. Indeed, when it is remem-bered that people often differ as regards what infer-ences should be drawn from given facts, it will be meaningless to demand·that the assessee must disclose

what inferences-whether of facts or law-he would

'9[60 ]

Cal"'tt~iscou"t draw from th.e primary facts. company Limited If from primary facts more inferences than one v. could be drawn, it would not be possible to say that Income-tax Officer. the assessee should have drawn any particular infer-Compa>1ies ence and communicated it to the assessing authority. & Dislricl, A>1other I ow cou Id an assessee arge wit • ailure to com-municate an inference, which he might or might not Das G1<pta J. have drawn ?

It may be pointed out that the Explanation to the sub-section has nothing to do with "inferences" and deals only with the question whether primary mate-rial facts not disclosed could still be said to be cons-tructively disclosed on the ground that ·with due diligence the Income-tax Officer could have discovered them from the facts actually disclosed. The Expla-nation has not the effect of enlarging the section, by casting duty on the assessee tq disclose " inferen-ces "-to draw the proper inferences being the duty imposed on the Income-tax Officer.

We have therefore come to the conclusion that while the duty of the assessee is to disclose fully and truly all primary relevant facts, it does not extend beyond this.

The position therefore is that if there were in fact

some reasonable grounds for thinking that there had been any non-disclosure as regards any primary fact., which could have material bearing on the question of "under assessment" that would be sufficient to give jurisdiction to the Income-tax Officer to issue the notices under s. 34. Whether these grounds were adequate or not for arriving at the conclusion that there was non-disclosure of material facts would not be open for the court's investigation. In other words, all that is necessary to give this special jurisdiction is that the Income-tax Officer had when he assumed jurisdiction some prima facie grounds for thinking that there had been some non-disclosure of material facts.

Clearly it is the duty of the assessee who wants the court to hold that jurisdiction was lacking, to estab-lish that the Income-tax Officer had no material at 11oll before him for believing that there had been suoh

non-disclosure. To establish this the company has r96o relied on the statements in the assessment orders fore -D. . . 1 cutta iscou1tl the three years m quest.ion an on t statement o Company Li 'tetl Kanakendra Narayan Banerjee in the report made v. mi by him to the Commissioner of Income-tax for theincome-tax Officer, purpose of obtaining sanction to initiate proceedings Companies under s. 34 and also on his statement in the affidavit District, I on oa th m rep y o [' ]1 t th wri pe 't t't' I ion. Th report is • & Another in these words :-Das Gupta].

-D. iscou1tl Li 'tetl v. mi

" Profit of Rs. 5,48,002 on sale of shares and securities escaped assessment altogether. At the time of the original assessment the then I.T.O. merely accepted the company's version that the sale of shares were casual transactions and were in the nature of mere change of investments. Now the results of the company's trading from year to year show that the company has really been systematic-ally carrying out trade in the sale of investments. As such the company had failed to disclose the true intention behind the sale of the shares and as such s. 34(l)(a) may be attracted."

The only non-discbsure mentioned in the report is that the company had failed to disclose "the true intention behind the sale of the shares". Mr. Chou-dhury contends that this is not an omission to disclose material fact within the meaning of s. 34. The question whether sales of certain shares were by way of changing the investments or by way of trad-ing in shares has to be decided on consideration of different circumstances, including- the frequency of the sales, the nature of the shares sold, the price received as compared with the cost price, and several other relevant facts. It is the duty of the assessee to disclose all the facts which 'have bearing on the question; but whether the assessee had the intention to make business profit as distinguished from the intention to change the form of the investments is really an inference to be drawn by the assessing autho-rity from the material facts taken in conjunction with the surrounding circumstances. The law does not require the assessee to state the conclusion that could reasonably be drawn from the primary facts. The

r96o question of the assessee's intention is an inferential -. fact and so the assessee's omission to state his " trne Calculta Discount Companv Limited mtent1~nds • • h. ed rn bt sa o s ares " cannot l by itself , ~. be cons1 ere to failure or omission to disclose Incomt-tax Officer, any material fact within the meaning of s. 34. Indeed, Companies an assessee whose contention is that the shares were District, [1 ]sold to change the form of investment and not with & Another th m en ion o · t t' ma k' mg usmess pro t ' fi cannot D~s Gupta 1. expected to say that his true intention was other than what he contended it to be. Dealing with this ques-tion the learned Chief Justice has said :-

" The expression that the Respondent had failed to disclose " the true intention behind the sale of shares " may lack directness, but that deficiency of language is not sufficient to enable the Respondent to contend, in view of the circumstances alleged, that no failure to disclose facts was being complained of. On the facts as stated by the Income-tax Officer, it is clear that there had been failure to disclose the fact that the Respondent was dealer in shares and what the Income-tax Officer meant by the language used by him was that the Respondent had not disclosed that the sale of shares had been of the nature of trading sale, made in pursuance of an intention to make business profit, and not of the nature of change of investment, made in pursuance of an inten-tion to put certain capital assets into another form. If that be so, it is equally clear that the Income-tax Officer who, by the way, was sucoessorto the officers who had made the original assessments, was not merely changing his opinion as to facts previously known, but was taking notice of new fact."

The learned Chief Justice seems to have proceeded on the basis that when from certain facts inferences are to be drawn there is duty on the assessee to state what the correct inference should be and if he has made wrong statement as regards the inferences to be drawn that also is an "omission or failure to disclose material fact ". For the reasons given earlier we do not think that this is the correct position in law.

It is clear therefore that if one looked at this report

2 S.C.R. SUPREME COURT REPORTS

ouly it would not be possible to sa.y that the Income-196° tax Officer bad. any non-disclosure of material facts by . . . . . d. t' It Calcutta Discount the assessee m mm w en assume JUns IC 10n. campanv Limited Limited bas to be remembered however that in sending ~. report to the Commissioner the Income-tax Officer Income-tax Officer, might not fully set out what he thought amounted to Comp~nies non-disclosure, because it is conceivable that the District,· [[1 ]]'f & not her report may not oe drawn up ca'16fully and may not contain reference to all the non-disclosures that Das Gupta J. operated on his mind. We have however on the record an affidavit sworn by the same Income-tax Officer who started the s. 34 proceedings. It is reasonable to expect that in this affidavit which was his opportunity to tell the court. what non-disclosure he took into consideration he would state as clearly as possible the material facts in respect of which there had not been in his view a. full and true disclosure. Mr. Banerjee's statements in this matter are contained in paras. 5, 6 and 7 of his affidavit. They are in these words :-

It Calcutta Discount . campanv Limited Limited ~. Income-tax Officer, Comp~nies District,· [[1 ]]& not her

" 5. With reference to paragraphs 2 and 3 of the said petition, I crave reference to the assessment orders therein mentioned. The assessment order dated the 15th February 1945, was made by Sri Kali Das Banerjee now Income-tax Officer Companies District II and the other two assessment orders were made by L. D. Rozario who is now in the employmen~ of M/s. Lovelock & Lewes. I find from the notes ma.de by me in the order sheet'of the assessment year 1944-45 and my order dated the 7th July 1944 that Mr. Smith of M/s. Lovelock & Lewes attended before me and stated that the profits of th& company arising out of dealings in shares were not taxable as the company was not dealer in shares and securities. Subsequently on the 18th August 1944, M/s. Lovelock & Lewes wrote letter to me setting out the contentions of their clients and inter alia stated that throughout the whole history the company bought no shares whatso-ever. Sri K. D. Banerjee was accordingly led to believe that the dealings in shares were casual trans. actions and were in the nature of mere change in investments and the profits resulting therefrom were

I960 not taxable. The assessment orders were made on -. the basis that the petitioner did not carry on any Ccalcutta DMcount business dealings in shares. copy of the said letter ompany Lim>ted v t 18th t ugust, 194 4, as I so t re I evant por-Income-ta~ Officer. tion of the note sheet are included in the schedule Companies hereto annexed and marked "A ". District. I 6. In the assessments for the assessments for 1945.~6 and and 1946-47, o. Another which were completed in April 1950, the profits on Das Gupta J. [sale of shares. were included in the total assessable ]income of the company it having been then discovered that the petitioner was in fact carrying on business in shares contrary to its representation that it was not. The company filed appeals before the Appellate Assis-tant Commissioner, which were rejected in September 1950, and the assessments were confirmed. The com-pany thereafter filed second appeal before the In-come-tax Tribunal which appeals are now pending.

7. With reference to para. 5 of the said petition, I deny that I pretended to act under s. 34 of the In-come-tax Act as alleged. I have· reasons to believe that by reason of the omission or failure of the company to disclose fully and truly all material facts necessary for its assessments, the income, pro-fits and gains chargeable to income-tax had been under assessed. I recorded my reasons and made three reports (one for each year) in the prescribed form and submitted them before the Commissioner of Income-tax and the latter was satisfied that it was fit case for issue of notice under s. 34 of the Income-tax Act. Thereafter I issued the prescribed notices under s. 34 of the Income-tax Act. The said reports were made and notices issued in respect of all the three years mentioned in the petition and copies of the report and notice for one of such years are includ-ed in the schedule hereto annexed and marked "A". The report and notices for the two other years are exactly similar."

It appears from this that the statements made by or on behalf of the company which the assessing authority considered to amount to non-disclosure of material facts were these :-(i) the company was not dealer in shares and securities and (ii) throught the

whole of its history the company bought no s1'ares 1960 whatsoever. It. has not been suggebted before us that Calcutt;-;iscount in fact a.t any time up to the conclusion of the assess- company Limited ment proceedings for the years 1942-43, 1943-44 and "· 1944-45 the company did in fact make single Income-tax Officer, purchase of shares. Clearly therefore the Income-tax Companies Officer had no reasonable ground for thinking that Dist<ict, [1 ]& Anotl"r anything as regards the purchase of shares had not been disclosed. The company does not dispute that Da• Gupta J. the statement was ma.de on its behalf tha.' it was not " dealer" in shares and securities. It appears clear that the Income-tax Officers who made the assess-ments for the years 1942-43, 1943-44 and 1944-45 proceeded on the basis that this was an investment company and considered the question whether in spite of its being an investment company certain sales of shares wherefrom the company made profit were by way of trading in shares and not by way of changing the form of investment. Whether t.hese sales by an investment company should in law be treated as trad-ing transactions, and the profits made from the sales trading profits liable to tax, was the matter which it was the Income-tax Officer's task to decide. No duty lay on the company to admit that these transactions were by way of trade. The fact that on behalf of the company Mr. Smith of Lovelock & Lewes stated that the company was not dealer in shares and securities does not therefore amount to an omission to disclose fully and truly any material fact.To ascertain whether the Income-tax Officer could have had in mind any non-disclosure a.s a. ground for thinking that by reason of such non-disclosure an under assessment had occurred-apart from what was mentioned in the affidavit-we enquired from respon-dent's counsel whether he could suggest any other non-disclosure that might have taken place. Mr. Sa.stri suggested two. One is that the sales had not been disclosed; the other that the memorandum and arti-cles of association of the company had not been shown. This suggestion is against the record and we have no hesitation in repelling it. Not only is it not the ground set out by the Income-tax Officer at any

160 9stage-not even in the affidavit in court, but the Calcutta Discount matters mentioned by the officer that the assessee had Company Limited claimed that the profits realised were of casual v. nature obviously indicate that the assessee disclosed Jucome-tax Officer, that surplus resulted from the sales which were Coinpauies also disclosed. c;. District, I Another Another Th assessmen or ers t assessmen or ers t 1 1 •t · 1s t rue o no ment10n t t ·

t •t · t t · c;. District, I Another Another Th assessmen or ers t assessmen or ers t 1 1s rue o no ment10n t details of the sales. They state however that the Das Gupta J. audited accounts of the company were furnished. The sales of shares were expressly mentioned in the report. In these circumstances it is reasonable to believe that a.s regards sale of shares full details were in fact disclosed.

Nor can we believe tha.t the two Income-tax Officers L. D. Roza.rio a.nd K. D. Banerjee concluded the pro-ceedings without referring to the memorandum a.nd articles of association of the company. These officers known well tha.t the company was claiming to be an investment company only. They ha.d to consider the question whether sales were of the nature of trade or of the nature of change of investment. It is unthink-able that they would not examine the memorandum of association. Besides, it is pertinent to note that in para.. 4 of his affidavit Ka.na.kendra Narayan Banerjee refers to the Memorandum and articles of Association and states that " by its memorandum of association the company has been authorised to carry on the various kinds of business which have been specified in sub-section (1) a.n(j (2) of cl. 3 of the sa.id memorandum of a.ssocia.tion." He does not say that the articles or the memorandum of association were not shown dur-ing the assessment proceedings for the yea.rs 1942-43, 1943-44 a.nd 1944-45. If he ha.d a.ny reason to believe that these were not shown he would have certainly mentioned that fa.ct. For that would undoubtedly a.mount to non.disclosure of a. ma.teria.l fact.

It must tnerefore be held that the Income-tax Offi-cer who issued the notices ha.d not before him any non-disclosure of a. material fa.ct and so he could have no material before him for believing that there ha.d been any material non-disclosure by reason of which an under-assessment had ta.ken place.

We a.re therefore bound to hold tha.t the conditions

P[recedent to the exercise ]• [of ][jurisdiction under s. 34 ]• [ofc ]a 1 cu 11a [[-D. ]]SSCOUtl the Income-tax Act did not exist a.nd the Income-tax Company Limited Officer had therefore no jurisdiction to issue the im-v. pugned notices under s. 34 in respect of the years Income-tax Officer, 1942-43, 1943-44 and 1944-45 a.fter the expiry of four Companies rs District, I yea. • . . . & not her

1 cu 11a [[-D. ]]SSCOUtl 1

Mr. • Sastn . argued that the question whether the . .

Income-tax Officer ha.d reason to believe tha.t under Das Gupta J. assessment ha.d occurred" by reason of non-disclosure of material facts" should not be investigated by the courts in a.n application under Art. 226. Learned Counsel seems to suggest that as soon as the Income-tax Officer has reason to believe that there has been under assessment in any yea.r he ha.a jurisdiction to start proceedings under s. 34 by issuing notice provided 8 years ha.ve not elapsed from the end of the yea.r in question, but whether the notices should have been issued within period of 4 years or not is only a. question of limitation which could and should properly be raised in assessment proceedings. It is wholly incorrect however to suppose thitt this is question of limitation only not touching the question of jurisdic-tion. The scheme of the law clearly is that where the Income-tax Officer has reason to believe that an under assessment has .resulted from non-disclosure he shall have jurisdiction to start proceedings for re-assessment within a. period of 8 yea.rs; and where he has reason to believe tha.t an under assessment has resulted from other causes he shall have jurisdiction to start pro-ceedings for re-assessment within 4 years. Both the conditions, (i)•the Income-tax Officer having reason to believe that there ha.a been under assessment a.nd (ii) his having reason to believe that such under-assessment ha.a resulted from non-disclosure of ma.teria.l facts, must co-exist before the Income-tax Officer ha.s jurisdiction to eta.rt proceedings after the expiry of 4 yea.rs. The argument that. the Court ought .not to investigate the existence of one of these conditions, viz., that the Income-tax Officer has reason to believe that under assessment has resulted from

.?58 SUPREME COURT REPORTS

r96o non-disclosure of material facts cannot therefore be -. Jcepted. Cal. ·1tta Discount M S . . Company Limited r. astn next pomted out that at the stage when v. the Income-tax Officer issued the notices he was not not

v. the Income-tax Officer issued the notices he was not not Income-tax Offioer, acting judiciall:,- or quasi- judicially and so writ of Companies certiorari or p.·ohibition can not issue. It is well settl-c;. Dishict, Another [1 ]ed however tiorary w1 •11 that not issue against an executive tho;mgh the writ of prohibition or oer-authority, Das Gupta J. the High Courts have power to issue in fit case an order prohibiting an executive authority from acting without jurisdiction. Where such action of an execu-tive authority acting witheut jurisdiction subjects or is likely to subje~t person to lengthy proceedings 11nd unnecessary harassment, the High Courts, it is well settled, will issue appropriate orders or directions to prevent such consequences.

Mr. Sastri mentioned mere than once the fact that

the company would have sufficient opportunity to raise this question, viz., whether the Income-tax Offi. cer had reason to believe that under assessment had resulted from non-disclosure of material facts, before the Income-tax Officer himself in the assessment pro-ceedings and, if unsuccessful there, before the appel-late officer or the appellate tribunal or in the High Court under section 66(2) of the Indian Income-tax Act. The existence of such alternative remedy is not however always sufficient reason for refusing party quick relief by writ or order prohibiting an autho-rity acting without jurisdiction from continuing such action.

In the present case the company contends that the

conditions precedent for the assumption of jurisdiction under s. 34 were not satisfied and come to the court at the earliest op;iortunity. There is nothing in its con-duct which would justify the refusal of proper relief under Art. 226. When the Constitution confers on the High Courts the power to give relief it becomes· the duty of the courts to give such relief in fit oases and the courts would be failing to perform their duty if relief is refused without adequate reasons. In the present case we can find no reason for which relief should be refused.

2 S.C.R. SUPREME COURT REPORTS

We have therefore come to the conclusion that the company was entitled to an order directing . thee st st 1 Income-tax Officer not to take any action on t s of the three impugned notices.

thee st st cu 1 11[-D. ]iscoun 1 s Company Limited v. Income-tax Officer, Companies District, [[1 ]]& Another

We are informed that assessment orders were in Income-tax Officer, fact made on ~arch 25, 1952, by the Incom3-tax Companies Officer in the proceedings started on the basis of these District, [[1 ]]& Another impugned notices. This was done with the permission of the learned Judge before whom the petition under Das Gupta J. Art. 226 was pending, on the distinct understanding t~M thes~ orders would be without prejudice to the contentions of the parties on the several questions raised in the petition and without prejudice to the orders that may ultimately be pas!led by the Court. The fact that the assessment orders have already been made does not therefore affect the company's right to obtain relief under Art. 226. In view however of the fact that the assessment orders have already been made we think it proper that m addition to an order directing the Income-tax Officer not to take any action on the basis of the impugned notices further order quashing the assessment made be also issued.

In the result, we allow the appeal, set aside the order made by the appellate Bench of the Calcutta High Court and restore the order made by the Trial Judge, Bose, J. The assessment orders made in the · proceedings started under s. 34 of the Income Tax Act are also quashed. The appellant will get its costs here and below.

HIDAYATULLAH J.-I have had the advantage of Hidayatullah J.

reading the judgments prepared by my brethren, Das Gupta and Shah, JJ. The point involved in the case is very short one, and the answer, as it appears to me, equally so. The appellant Company's income, profits and gains for the assessment years, 1942-43, 1943-44 and 1944-45, were duly assessed and taxed . The orders were respectively passed on January 26, 1944, February 12, 1944, and February 15, 1945 . On March 28, 1951, three notices under s. 34 of the Indian Income-tax Act were issued calling upon the appellant Company to submit fresh returns in respect

r96o of the previous years relative to each of the assess-c I rufta -D. 1scott11t ment years above mentioned. Since this action was Compa"v Limit'd taken ter more t an four years, the matter fell to be ;;. gov!lrned bys. 34(l)(a) of the Indian Income-tax Act, Income-tax Officer, as amended in 1948. The clause provided an extend-Companics ed period for sending notice calling for return for District, [1 ]the purpose of assessing or reassessing income, profits 6- Another and gains w ic escaped assessment or had been Hidayatullah ;. under-assessed for any year within eight years, if the Income-tax Officer "has reason to believe that by reason of the omission or failure on the part of an assessee to make return of his income under section 22 for any year or to disclose fully and truly all mate-rial facts necessary for his assessment for that year ", the income, profits or gains chargeable to income-tax have escaped assessment etc.In the present case, the appellant Company, which iR an investment Company, had produced in the back years list of the shares sold by it, the statements of profit and loss account, and, I am prepared to assume, also the Memorandum and Articles of Association. But the appellant Company gave out that the sales of shares .. were casual transactions of change of invest-ments. This statement was accepted, though it was found that in later years the Company was dealing in stocks and shares as business venture, and its state-ment which was accepted, was not perhaps true.

The Income-tax Officer reported the matter to the Commissioner, and stated as follows:

"Profits of Rs. 5,48,002/- on sale of shares and securities escaped assessment altogether.

At the time of the original assessment the then I.T.O. merely accepted the company's version that the sales of shares were casual transactions and were in t.he nature of mere change of investments. Now the results of the company's trading from year to year show that the company has really been systematically carrying out trade in tho sale of investments. As such, the company has failed to disclose the true intention behind the sale of the shares and as such section 34(l)(a) may be attracted."

The appellant Company applied to the Calcutta

High Court for writ under Art. 226 which was 1960 grnnt,ed by learne? single.~ udg,e; but the order was Calcutt~-;iscount reYersed on appeal m the High Co11rt. The appellant companv Limited Limited Compan:, has now appealed on certificate under ~. Art. 133(l)(c} of the Constitution. Income-tax Office,.,

The appellant companv Limited Limited ~. Income-tax Office,., that C~mp~nies District, Another [[1 ]]&· Another to concede _

The contention of the appellant Company is that C~mp~nies all the facts necessary to be disclosed were, in fact, &· District, Another [[1 ]]disclosed, that it was not required further to concede _ that it was trading in shares, which was matter of Hidayatullah J. inference, from the proved facts, for the Income-tax Officer to draw, and that there was thus no question of any non-disclosure. This e,rgument overlooks the addition of the Explanation to the section, which explains cl. (a.) of the first sub-section. It reads:

"Explanation.-Production before the Income-tax Officer of account-books or other evidence from which material facts could with due diligence ha.Ye been discovered by the Income-tax.Officer will not neces-sarily amount to disclosure within the meaning of this section."

This means quite clearly that the mere production of evidence is not enough, and tha.t there may be an omission or failure to make a. full and true disclosure, if some material fact necessary for the assessment lies embedded in that evidence which the assessee can uncover but does not. If there is such fact, it is the duty of the assessee to disclose it. The eYidence which is produced by the assessee discloses only primary facts, but to interpret the eYidence, certain other facts may be necessary. Thus, questions of status, agency, benami nature of transactions, the nature of trading and like matters may not appear from the evidence produced, unless disclosed. If it be merely question of interpretation of eYidence by an Income-tax Officer from whom nothing has been hidden and to whom everything has been fully disclosed, then the assessec cannot be subjected to s. 34, merely because the Income-tax Officer miscarried in his interpretation of evidence. But it is otherwise, if conteution which is contrai·y to fact, is raised and the Income-tax Officer is set to discover the hidden truth for himself. In the latter case, there is suppression of material fact, or, in

i96o other words, that lack of full and true disclosure -D. which woulJ entitle action under s. 34 of the Act. I cutfa iscount T ]] . ] , . . Company Limited • he o owmg examp exp1ams the meanmg. Tak. v. mg the present case, I set below two statements, one Income-ta., Officer. involving full disclosure and contention, and the Companies other, only contention with material fact suppres. District, I sed :

I cutfa iscount Company Limited •

& Anoth" " (l) . \" ·ve are tra d' mg company and our bus1-. Hidayatullah J. ness is according to our memorandum of association 'to acquire, hold, exchange, sell and deal in shares, stocks, etc.' These sales, however, were not business sales but only change of investments into trustee securities as decided by the trustees.

(2) We changed industrial shareB into trustee securities because' in or about 1934, the trustees deci. ded to convert the Indian Industrial Shares held by the appellant into trustee securities'."

If the first is decided in favour of the assessee, there is an inference or decision by the Income-tax Officer from full and true disclosure. If the second is deci-ded in favour of the assessee, the question would arise if there was full and true disclosure.

In the present case, the question whether the tran. sactions were casual transactions of changing invest-ments or regular trading in stocks and shares involv-es not merely an inference, because the inference depends upon the fact that the appellant Company was formed to trade in stocks and shares. It was open to the appellant Company to contend that in spite of its business, particular transaction was this and not that. Bnt, if the appellant Company was an investment Company dealing in stocks and shares, and knowing this for fact, <lid not disclose the fact, the statement was neither full nor true, as it involved suppression of material fact necessary for the assessment. The Explanation is quite obviously meant to reach an identical situation. The appellant Company might have placed the evidence before the Income-tax Officer, but the Income-tax Officer had reason to believe that the disclosure was neither full nor true, because the fact that the Company was an investment Company trading in stocks and shares

2 S.C.R. SUPREME COURT REPORTS

was not disclosed. The Income-tax Officer in his 1 96o that, report meant no more prima . facie, . there was not than this. He, therefore, felt on.ly ?o~cealment o Company cu cu 1 tt_D_ Limited iscount fact but, on the contrary, mamtammg of false-v. hood, and this was sufficient to bring this matter Income-tax Officer, within the extended period. Every contention cont-Comp~nies rary to the Income-tax Officer's opinion is not neces-District, [[1 ]]. l . I i: & Another sanly concea ment o mater1a 1act, ut some con-tentions made with mental reservation as to the Hid ayatullah J. true state of affairs may amount to such concealment, if they involve non-disclosure of facts related to other facts and known to the assessee.

tt_D_ ?o~cealment o Company cu cu 1 Limited iscount of false-v. matter Income-tax Officer, contention cont-Comp~nies District, [[1 ]]b & Another

The Company still persists that the sales of shares were casual transactions, and this contention will, no doubt, be decided hereafter. But the question will be decided after taking into consideration the nature of the business of the Company, and till that is done, the Income-tax Officer believes that the contention raised before and persisted in is not mere contention but maintenance of falsehood about the nature of the transactions and the business of the Company. The existence of such belief is sufficiently established by the report of the Income-tax Officer and the satisfac-tion of the Commissioner, and this has not been gain-said.

In my opinion, the Divisional Bench of the High

Court rightly refused writ in the circumstances, and

I would dismiss this appeal with costs.

SHAH J.-I regret inability to agree with the judg. ment delivered by my learned brother Mr. Justice Das Gupta.

Shii<h f.

The facts which give rise to this appeal have been fully 'set out by my learned brother and it is not necessary to reiterate the same.

Sub-section (1) of s. 34 of the Indian Income Tax

Act, 1922 (in so far it is material) stood at the relevant date when the proceedings were commenced, as follows:

s. 34 :-(1) If-

(a) the Income-tax Officer has reason to believe that by reason of the omission or failure on the part of an assessee to make return of his income under 8. 22

'9[60 ]for any year or to disclose fully and truly all material I cutta -D. iscount facts necessary for his assessment for . . · . that year, Compimy Limited mcome, profits or gams chargeable to mcome-tax v. have escaped assessment for that year, or have been Income-ta• Offim, under-assessed or assessed at too low rate, or have c~mp~nies been made the subject of excessive relief under the Distnct. [[1 ]]Act, or excessive loss or depreciation allowance has & Anoth" b. een compute , or

v. c~mp~nies Distnct. [[1 ]]& Anoth" Shah J.

(b) notwithstanding that there has been no omis-

sion or failure as mentioned in cl. (a) on the part of the assessee, the Income-tax Officer has in con-sequence 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, or assessed at too low rate, or have been made the subject of excessive relief under this Act, or that excessive loss or depreciation allowance has been computed,

he may in cases falling under cl. (a) at any time within eight years and in oases falling under cl. (b) at any time within four years of the end of that year, serve on the assessee, or, if \he assessee is company, on the principal officer thereof, notice containing all or any of the requirements which may be included in notice under sub-s. (2) of s. 22 and may proceed to assess or re.assess such income, profits ur gains or re-compute the loss or depreciation allowance; and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were notice issued under that sub-section :

Provided that-

(i) the Income-tax Officer shall not issue notice

under this sub-section, unless he has recorded his reasons for doing so and the Commissioner is satisfied on such reasons recorded 'that it is tit case for the issue of such notice ;

(ii) the tax shall be chargeable at the rate at

which it would h~ve been charged had the income, profits or gains not escaped assessment or full assess-ment, as the case may be; and

(iii) where the assessment made or to be made is

an assessment made or to be made on person deem-

s. ed to 43, this su -section s b~ the ha.gent. of ha 1n1 ohn-resid~t ave euect pers?fn as ohn-resid~t ave euect pers?fn as ave euect pers?fn as pers?fn as as 1 .... ior t undher ior t undher periods of eight years and four years period of one year was substituted.

undher Calcutta Discount 1n1 ohn-resid~t ave euect pers?fn as ohn-resid~t ave euect pers?fn as ave euect pers?fn as pers?fn as as 1 .... ior t undher ior t undher Company Limited

Income-tax Officer,

Explanation :-Production before the Income-tax Officer of account books or other evidence from which material facts could with due diligence have been dis-covered by the Income-tax Officer will not necessarily amount to disclosure within the meaning of this section.

Companies District, I & Another

Shah J.

This section provides machinery for assessment or reassessment if it be found that income, profits or gains "have escaped assessment or have been under. assessed.or assessed at too low rate or have been made subject to excessive relief under the Act or excessive loss or depreciation allowance has been computed", which expression may for convenience of reference be compendiously referred to as are or have been under-assessed. Notice under s. 34(l)(a) may be issued if the Income Tax Officer has reason to believe that income in any year has been underassessed by reason of the failure on the part of the assessee to make return of his income, or to disclose fully and truly all material facts necessary for assessment for the year in question. The authority of the Income Tax Officer is manifestly circumscribed by certain conditions, and may be exercised only if those condi-tions exist and not otherwise.

In the case in hand, we are concerned with the operation of cl. (l)(a) of s. 34. If that clause does not apply, notices of reassessment having been served more than four years after the end of the relevant year of assessment, must fail. On an analysis of the relev-ant provisions, the material conditions prescribed for the exercise of the power to commence proceedings for reassessment under s. 34(l)(a) are these:

(1) The Income Tax Officer has reason to belieye,

(a) that income, profits or gains have been under-

assessed,

(b} that this under-assessment is by reason of

r96o omission or failure to make return under s. 22 or Cal cu t'[-n· ]iscoun ,by reason , l s: of failure to disclose fully and truly all company Limit'd iscoun materia , 1acts necessary for assessment for any year; year; v. (2) that notice containing all or any of the re-Income-tax Officer. quirements of of s. 22(2) is served on the assessee within Companies eight years from the end of the year of assessment· of the year of assessment· the year of assessment· year of assessment· of assessment· assessment· ~i~ricth 0[1 ](3) that the Income the Income Tax Officer has recorded his "' " reasons for issuing the notice notice and the Commissioner is the Commissioner is Commissioner is Shah J. satisfied on such reasons recorded that it is fit case it is fit case is fit case

company Limit'd iscoun materia , 1acts necessary for assessment for s: any year; year; v. (2) that notice containing all or any of the re-Income-tax Officer. quirements of of s. 22(2) is served on the assessee within Companies eight years from the end of the year of assessment· of the year of assessment· the year of assessment· year of assessment· of assessment· assessment·

(3) that the Income the Income Tax Officer has recorded his reasons for issuing the notice notice and the Commissioner is the Commissioner is Commissioner is satisfied on such reasons recorded that it is fit case it is fit case is fit case for issue of such notice.

The notices issued by the Income Tax Officer in the

case before us undoubtedly fulfil conditions (2) and (3). Notices of reassessment were served before the expiry of eight years of the end of the relevant years of assessment. The Income Tax Officer also recorded his reasons in the reports submitted by him to the Commissioner and the Commissioner was satisfied that they were fit cases for the issue of such notices. The dispute in the appeal relates merely to the fulfilment of the two branches of the first condition and that immediately raises the question about the true import of the expression "has reason to believe" in s. 34(l)(a). The expression " reason to believe " postulates belief and the existence of reasons for that belief. The belief must be held in good faith : it cannot be merely pretence. The expression does not mean purely subjective satisfaction of the Income Tax Officer: the forum of decision as to the existence of reasons and the belief is not in the mind of the Income Tax Officer. If it be asserted that the Income Tax Officer had reason to believe that income had been underassessed by reason of failure to disclose fully and truly the facts material for assessment, the existence of the belief and the reasons for the belief, but not the sufficiency of the reasons, will be justiciable. The expression therefore predicates that the Income Tax Officer holds the belief induced by the existence of reasons for holding such belief. It contemplates exist-ence of reasons on which the belief is founded, and not merely belief in the existence of reasons inducing the belief; in other words, the Income Tax Officer must on information at his disposal believe that

income has been underassessed by reason of failure fully and truly to disclose all material facts 'd necessary 1 or assessment. S uc IJe [. ][f ], [b . ]e it sa1 it sa1 sa1 , may not based on mere suspicion : it must be founded upon information.

D. cu 1 11[-]tscoun 1 Company Limited v.

'd cu 1 11tscoun it sa1 it sa1 sa1 , may not Company Limited

Income-tax Officer, Companies District, [1 ]& not her

That the Income Tax Officer has reason to believe that there was underassessment in the material ·years was not challenged by the appellant and in our opinion rightly. There are on the record the reports of the Income Tax Officer in which the belief is ex-pressly set out. It also appears from the assessment orders for the years 1945-46 and 1946-47 that tax has been assessed on the profits made by sale of shares by the company in those years.

Shah 1.

Had the Income Tax Officer reason to believe that by reason of failure to disclose fully and truly all material facts necessary for assessment for the three years in question, there had resulted underassessment? ~he learned Trial judge, after setting out the evidence, held that the Income Tax Officer had materials before him showing that the company's trading from year to year disclosed that it had been systematically carry-ing on trade in the sale of shares and securities. He observed:

" Whether the materials were sufficient or not or whether the belief or opinion is erroneous or not, cannot ......... be enquired into by the court ...... If the Income Tax Officer has ma.de wrong decision as to the existence of the conditions precedent, the remedy is by way of appeals as provided by the Income Tax Act and by stating case under s. 66 of the Act."

In appeal, the High Court confirmed the order. The High Court observed that "the use of the expression " the true intention behind the sale of shares" used in the report ma.de by the Income Tax Officer under s. 34 to the Commissioner may la.ck directness, but that deficiency of language was not sufficient to enable the company to contend in view of the circumstances alleged that there was no failure t;o disclose facts being complained of". The High Court also observed: " On the facts as stated by the Income Tax Officer, it is clear that there had been a. failure to

1 960 disclose the fact that the respondent was dealer in Cl cu t ta [--D. ]tstoioit shares and what the Income • Tax Officer meant by the t;ompa"v Limited langnage used by him was that the respondent had not ;,. disclosed that the sale of shares had been of the Income-tax Officer, nature of trading sale, made in pnrsuance of an c~mp~nies intention to put certain capital assets into another D"tnct, [1 ]form. If that be so, it is equally clear that the & Anoth" I ncome T ax Offi cer w o, y t way, was successor Shah 1. to the officers who had made the original assessments, was not merely changing his opinion as to facts pre-viously known, but was taking notice of new fact." Prima facie, the finding recorded by the Court of First Instance and confirmed by the Court of Appeal is one on question of fact and this court would not be justified in entering upon reappraisal of the evidence. .Out it is contended on behalf of the com-pany that the finding is based on no materials, and to that plea I may advert. By s. 22 of the Income Tax Act, duty is imposed upon every tax payer whose total income exceeds the maximum which is not chargeable to income-tax to make return in the prescribed form and verified in the prescribed manner, setting forth his total income during that year. If the tax payer making the return fails to disclose fully and truly all material facts necessary for the assessment of the year in question, the jurisdiction of the Income Tax Officer to reassess is invited. The company in its petition for the issue of writ contended by parag-raph 7 that the notices were ultra vires and illegal and that the Income Tax Officer was not invested with jurisdiction to proceed thereunder, inter alia, for the reason that the "pretended notice was issued without the existence of the necessary conditions precedent which confers jurisdiction un_der s. 34 aforementioned, whether before or after amendment in 1948."

The Income Tax Officer,. by his affidavit, submitted: Para 4:-" The statements made in paragraph 1 of the said petition are substantially correct. By its Memorandum of Association, the company has been authorised to carry on the various kinds of business which have been specified in sub.els. (I) to (32) of cl. (3) of the said Memorandum of Association.

Para 5 :-"With reference to paragraphs 2 and 3 of i96o or ers t erem mentione . the said petition, I . era . ve reference to Th assessment the ~r assessment er ate Company 1 culta -Discount Limited Limited . the 15th February, 1945, was made by Shr1 Kali Das v. Banerjee now Income Tax Officer Companies District Income-tax Officer, II and the other two assessment orders were made by c~mp~nies Mr. L. D. Razario who is now in the employment of District, 1 M/s. Lovelock & Lewis. I find from the notes made &- Another by me in the order sheet of the assessment year Shah. J. 1944-45 and my order dated the 7th July, 1944, that Mr. Smith of Messrs. Lovelock & Lewis attended before me and stated that the profits of the company arising out of dealings in shares were not taxable 11.s the company was not dealer in shares and securities. Subsequently on the 18th August, 1944, Messrs. Love-lock & Lewis wrote letter to me setting out the con-tentions of their clients and inter alia stated that throughout the whole of its history the company bought no shares whatsoever. Shri K. D. Banerjee was accordingly led to believe that the dealings in shares were casual transactions and were in the nature of mere change in investments and the profits result. ing therefrom were not taxable. The assessment orders were made on the basis that the petitioner did not carry on any business dealing in shares. copy of the said letter dated the 18th August, 1944, as also the relevant portion of the note sheet are included in the schedule hereto annexed and marked "A"."

i96o Company 1 culta -Discount Limited Limited . v. Income-tax Officer, c~mp~nies District, 1 &- Another Shah. J.

Para 6 :- "In the assessments for 1945-46, and 1946-47 which were completed in April, 1950; the pro-fits on sale of shares were included in the total assess-able income of the company it having been then discovered that the petitioner was in fact carrying on business in shares contrary to its representation that it was not. The company filed appeals before the Appellate Assistant Commissioner which were rejected in September, 1950, and the assessments were confirm-ed. The company thereafter filed second appeal before this Income-tax Tribunal which appeals are now pending."

Para 7 :- " With reference to paragraph 5 of the said petition, I deny that I pretended to act under

'9[60 ]s. 34 of the Income Tax Act as alleged. I have reasons coZcutt;Discount to believe that by reason of the omission or failure of Company Limited the company to disclose fully and truly all material v. facts necessary for its assessments, the income, profits Income-tax Officer. and gains chargeable to income-tax had been under-Companies assessed. I recorded my reasons and made 3 reports District, I & Another (one for each year) in the prescribed form and sub-mitted them before the Commissioner of Income Tax Shah J. and the latter was satisfied that it was fit case for issue of notice under s. 34 of the Income Tax Act. Thereafter I issued prescribed notices under s. 34 of the Income Tax Act. The said reports were made and notices issued in respect of all the three years mention-ed in the petition and copies of the report and notice for one of such years are included in the schedule hereto annexed and marked "A". The report and notices for the two other years are exactly similar.By these averments, the Income Tax Officer assert-ed (a) that he had reasons to believe that by reason of the omission or failure of the company to disclose fully and truly all material facts necessary for the assessment, income chargeable to income tax has been underassessed and that he had recorded his reasons in that behalf in the three reports submitted hy him to the Commissioner; (b) that in the course of the assess-ment proceeding for the year 1944-45, it was repre-sented on behalf of the company that the sales of shares in that year were casual transactions and were in the nature of "mere change in investments"; (c) that in the orders of assessment for the years 1945-46 and 1946-47 passed in April, 1950, profits earned by sale of shares held by the company were included in the total assessable income of the company, it having been discovered that the company was in fact carry-ing on the business of selling shares contrary to its earlier representations; and (d) that by its Memoran-dum and Articles of Association, the company was authorised to carry on the business of diverse kinds specified in sub-els. (1) to (32) of cl. (3) thereof.

Whereas by mere bald assertion made by the company in its petition it was averred that the con-ditions precedent to the exercise of jurisdiction to

reassess did not exist, the Income Tax Officer stated r960 in his rejoinder that he had reasons to believe that -. . l Calcutta Discount mcome had een un erassesse an so set out Company Limited the grounds on which that belief was founded. The v. existence of the reasons to believe that income was Income-tax Offic-er, underassessed has, as already observed, not been Companies challenged; nor is the\ court concerned with the District, I question whet er t materia 1 s may regar y & Another court before which dispute is raised, sufficient to Shah f. sustain the belief entertained by the Income Tax Officer. It is clear that the Income Tax Officer assert-ed on oath that when he issued the notice for reassess-ment, he had reasons to believe that income of the company had been underassessed and he set out the reasons in support of the belief.

-. Calcutta Discount

Counsel for the company submitted that all the · material facts necessary for the assessment were fully and truly disclosed in the course of the assessment for the years in question, and if the Income Tax Officer did not draw the correct inference, the jurisdiction to reassess could not be invoked. He urged that it was for the Income Tax Officer, on the preliminary facts disclosed to him, to raise his inference of faot and to base his conclusions on the preliminary as well as the inferential facts, and if, in arriving at his conclusion on the preliminary and the inferential facts, the Income Tax Officer committed an error, he could not seek to commence proceedings for reassessment on being apprised of the error. It was said that the In-come Tax Officer knew that the company was an investment corporation_, that the shares held by the company were sold from time to time, and that profits were earneu by the sale of those shares, and that on these md.terials the Income Tax Officer might have held that the company was dealer in shares, but if he did not draw that inference, the underassess-ment, if any, was not by reason of failure to disclose fully and truly all material facts. Counsel submitted that the condition of the exercise of jurisdiction under s. 34 is failure to disclose fully and truly all material facts necessary for assessment and not failure to

instruct the Income Tax Officer about the legal infer-

ence to be drawn from the facts disclosed. cu ta l I [-n· ]1scount . Company Limited The duty imposed by the Act upon the tax payer v. is to make full and true disclosure of all material Income-tax Officer, facts necessary for the assessment; he is not required Companies to inform the Income Tax Officer as to what legal District, [1 ]inference should be drawn from the facts disclosed by &- Another h' 1m nor o vise t . h' 1m on quest10ns o . 1 aw. Wh' et er Shah ;. on the facts found or disclosed, the company was dealer in shares, may be regarded as conclusion on mixed question of law and fact and from the failure on the part of the company to disclose to the Income Tax Officer this legal inference, no fault may be found with the company. But on the evidence in the case, the plea raised by the company that all material facts were disclosed cannot be accepted. The Income Tax Officer has in para. 6 of his affidavit referred to the assessment of the years 1945-46 and 1946-47: he has also referred to the Memorandum and Articles of Asso-ciation of the company therein. In the assessment order for the year 1945-46, the Income Tax Officer has set out els. (1) and (2) of the Memorandum and Articles of Association of the company. They are : (1) " To acquire, hold, exchange, sell and deal in shares, stocks, debenture-stock, bonds, obligations and securities issued or guaranteed by any company, Government or public body constituted or carrying 011 busiuess iu British India or elsewhere;"

(2) " Geuerally to carry 011 busiuess as fiuanciers aud to uudertake aud carry out all such operations and transactions (except the issuing of policies of as-surances on human life) as an individual capitalist may lawfully undertake or carry out; ".

The Income Tax Officer in his order of assessment for that year observed that those clauses indicated the purposes for which the company was formed, and also that " whenever the shares were first acquired, these became the commodities which could either be held or sold according to the best interests of the company, that whenever such commodity is sold, it comes within the activities or properly speaking the profit making scheme as enumerated in the object

clauses stated above. These shares sold in course of i96o ten or twelve years whenever op.portunities occurred . cu 1 ,,-D. iscoun for earning profits on making the sales. · · · ·. · · ·. This company Limited company was not an ordinary trader investing its v. surplus funds in shares and securities quite uncon- Income-tax Officer, nected with its regular course of business so that the Companies . · District, I profit or loss so on sa o sue l l s ares or secur1t1es & Another may be treated as not arising out of its regular busi-ness ,earried on. On the other hand,· it is an Invest-Shah J. ment company of which the very first object clause is to hold and deal in shares. Profit on sale of such shares therefore arises out of its regular course of business and it must be taxable."

From that order of assessment, it is manifest that the Assessing Officer held that the company was form-ed with the object of acquiring, holding, exchanging, selling and dealing in shares, that the shares acquired became the trading assets of the company to be dispos-ed of when opportunities occurred for earning profits; and that the activities of selling shares in which sur-plus.assets of the company were invested were part of the regular business carried on by the company.

There is no evidence that the Memorandum and Articles of Association referred to in para 4 of the affidavit were produced in the course of the assess-ment of the relevant years; nor is there evidence to show that it was disclosed that the acquisition of shares was incidental to the business activities and out of the surplus assets of the company and that the same were sold at profit as opportunities arose. There is also no ground for assuming that these facts must have been known to the Income Tax Officer. Counsel for the company suggested somewhat casually that under the Income Tax Rules and the practice prevail-ing with the Income Tax Officer, the Memorandum and Articles of Association of every company which was being assessed to tax are to be filed with the Income Tax Officer. But our attention has not been invited to any rule or any material to support the existence of practice requiring private limited company to file with the Income Tax Officer the Memorandum and Articles of Association.

r96o The plea raised by counsel for the company must CI -D. be examined in the light of the Explanation to sub-company • cutta Limited iscount s. (1) O s. 34 . Th xp 1 ana t• 10n provi es "d th t "p ro-v. duction before the Income Tax Officer of account-I~come-tax Officer, books or other evidence from which material facts Compani" could with due diligence have been discovered by the District, I Income Tax Officer will not necessarily amount to & Another disclosure within the meaning of the section." If pro-duction of documents or other evidence from which Sf,ah J. material facts could with due diligence have been dis-covered does not necessarily amount to disclosure, it would be difficult to hold that presumption about the production of document at sometime in the past and its possible existence in tho files of the Income Tax .Officer relating to earlier years may be regarded as sufficient disclosure. Disclosure of some facts, but not all, though the facts not disclosed may have come to the knowledge of the Income Tax Officer, if he had carefully prosecuted an enquiry on the facts aild materials disclosed, will not amount to full and true disclosure of all material facts necessary for the p_ur-pose of assessment. tax payer cannot resist reassess-ment on the plea that non-disclosure of the true state of affairs was due to the negligence or inadvertence on the part of the Income Tax Officer, and but for such negligence or inadvertence, full and true dis-closure of all material facts necessary for the assess-ment would have been resulted.

There is no evidence on the record that the Memo-

randum and Articles of Association were ever produc-ed before the Income Tax Officer in the course of proceedings for assessment. Again, the report of the Income Tax Officer discloses that his predecessor in office was told that the sales of shares effected by the company were casual transactions and were in the nature of mere " change of investments". This was not strictly accurate. The record therefore clearly shows that the company had failed to disclose fully and truly all material facts in relation to assess-ment in two respects, (1) that it failed to produce the Memorandum and Articles of Association showing the purposes for which the company was incorporated, and(2) that the shares were acquired as part of the busi-1960 ness of financiers. ment w hIC [. . ]IS par The company also made state- t' ia y un rue 11 t w en 1 't sta t th t Companv 1 wtta -D. Limited tscount sales were mere casual transactions. There were ; .. materials before the Income Tax Officer on which he Inco•ne-tax Officer, had reason to believe that by reason of the failure of Companies the company to fully and truly disclose material facts, District, [1 ]its income was underassessed. Whether on these & Another facts, conclusion that in fact the company was Shah 1. carrying on the business of trading in shares could be founded, is at this stage entirely immaterial. If there was reason to believe, the alleged inadequacy of the materials on which the belief could be founded is of no moment. The Income Tax Officer has commenced proceedings for reassessment by issuing notices against the company and he has placed all the materials before the court on which it could be said that he had reason to believe that income of the company had been underassessed by reason of failure on the part of the company to disclose fully and truly all material facts relating to the assessment and if, ·on those materials, the Income Tax Officer could hold the belief which he says he did, the court in seeking to hold an enquiry into the question whether the Income Tax Officer, notwithstanding his affidavit and materials placed in support thereof, had reason to hold the requisite belief, would be arrogating to itself jurisdic-tion which it does not possess. If the conditions precedent do not exist, the jurisdiction of the High Court to issue high prerogative writs under Art.. 226 of the Constitution to prohibit action under the notice may be exercised. But if the existence of the condi-tions is asserted by the authority entrusted with the power and the materials on the record prima facie support the existence of such conditions, an enquiry whether the authority could not have reasonably held the belief which he says he had reason to hold and he did hold, is, in my judgment, barred.

In that view, the proper order to pass in this appeal would be one of dismissal with costs.

BY COURT.-In view of the majority opinion, the appeal is allowed with costs here and below.