Delhi Glass Works P. Ltd. vs Commissioner Of Income-Tax
1970 Latest Caselaw 262 Del

JUDGMENT

Ansari, J.

1. Delhi Glass Works Private Ltd., Delhi (hereinafter referred to as "the assessed"), is a private limited company. Under a scheme of amalgamation it had taken over the assets and liabilities of two concerns M/s. D. C. & P. M. Co. Ltd. and M/s. Gwalior Bank Ltd., and as a result of this amalgamation, the balance-sheet of the assessed as on October 31, 1953 disclosed a capital reserve of Rs. 5,61,397. This amount was originally treated by the Income-tax Officer as the income of the assessed for the assessment year 1954-55 and was included in its assessment for that year. The assessed thereupon filed an appeal before the Appellate Assistant Commissioner and contested the inclusion of the said amount in the assessment on the ground that the amount was not actually realised by the assessed during the relevant accounting year. The Appellate Assistant Commissioner accepted the contention of the assessed and held that the said amount did not represent the profits of the assessed for the assessment year 1954-55 The Income-tax Officer thereupon started making enquiries regarding the said amount of Rs. 5,61,397. According to the revenue, these enquiries could not be completed before the assessment for the year 1957-58 was made on July 31, 1961. These enquiries again, according to the revenue were completed some time in November, 1961, and,, as a result of these enquiries, the Income-tax Officer was of the view that the series of transactions concerned in the amalgamation had resulted in a net surplus of Rs. 2,62,276-10-8 and that this amount had been realized by the assessed during the accounting year relevant to the assessment year 1957-58. The Income-tax Officer, therefore, re-opened the assessment for the year 1957-58 under Section 34(1)(b) of the Income-tax Act, 1922 (hereinafter referred to as "the Act"), and after issuing a notice to the assessed and after hearing its. objections, he included this amount in the assessment for the year 1957-58

2. The assessed again took up the matter in appeal before the Appellate Assistant Commissioner and contended that the reopening of the assessment for 1957-58 under Section 34(1)(b) of the Act was illegal because all the relevant facts were available to the Income-tax Officer at the time of the original assessment and they were also considered by him, that after such consideration the Income-tax Officer had deliberately omitted to include the amount of Rs. 2,62,276-10-8 in the assessment for the year 1957-58, and that therefore, the Income-tax Officer had no information in his possession subsequent to the completion of the assessment for the year 1957-58 which would justify the reopening of the assessment under Section 34(1)(b). The Appellate Assistant Commissioner upheld this contention of the assessed and, without going into the merits of the case and without deciding the question whether the said amount of Rs. 2,62,276-10-8 did constitute the income of the assessed for the assessment year 1957-58, he set aside the reassessment.

3. Against this order of the Appellate Assistant Commissioner, the department preferred an appeal before the Income-tax Appellate Tribunal, Delhi Bench (hereinafter referred to as "the Tribunal"), and contended, firstly, that the enquiries concerning the amount of Rs. 5,61,397 had not been completed before the date of the original assessment for the year 1957-58 and that, therefore, all the relevant information was not available to the Income-tax Officer on the date of the original assessment, and, secondly, that even if all the relevant information was available to the Income-tax Officer on the date of the original assessment, he was not in a position to fully comprehend the significance of this information and that it was only after the completion of the original assessment that he realised that an amount of Rs. 2,62,276 was assessable in the year 1957-58 itself and that it was open to the Income-tax Officer under the circumstances to reopen the original assessment under Section 34(1)(b). The Tribunal held that the assessed on its part had furnished complete information necessary to come to a complete finding of fact on 22nd June, 1961, itself, that the Income-tax Officer did not comprehend the significance of that information furnished and was somehow under the impression that the amount should be assessed in the year 1955-56 and was, therefore, making further enquiries to find out when the profits were realised. The Tribunal further held that, even assuming that all the relevant information was available on record prior to the date of the original assessment for 1957-58, it was still open to the Income-tax Officer to reopen the assessment under Section 34(1)(b) of the Act. The Tribunal, therefore, allowed the departmental appeal and directed the Appellate Assistant Commissioner to pass a fresh order according to law on the merits of the case. But, at the instance of the assessed, the Tribunal has referred the following question to this court under Section 66(1) of the Act:

"Whether, on the facts and in the circumstances of the case, the reassessment under Section 34(1)(b) on August 30, 1962, for the assessment year 1957-58 is valid in law ?"

4. There is divergence of opinion among the High Courts on the question as to what constitutes information for the purpose of Section 34(1)(b) of the Act and it is interesting to note that these divergent views seek support from the same decision of the Supreme Court, viz., in Maharaj Kumar Kamal Singh v. Commissioner of Income-tax, [1959] 35 I.T.R. 1, [1959] Supp. 1 S.C.R. 10 (S.C.), which is the leading case on the subject. In that case the interest on arrears of rent from agricultural lands due to the assessed was excluded from the assessment in view of the decision of the Patna High Court in Kamakshya Narain Singh v. Commissioner of Income-tax, [1946] 14 I.T.R. 673 (Pat.). Subsequently, that decision was reversed by the (1) [1959] 35 I.T.R. 1; [1959] Supp. 1 S.C.R. 10 (S.C.). (2) [1946] 14 I.T.R. 673 (Pat.).

5. Privy Council and it was held that interest on arrears of rent payable in respect of agricultural land was not agricultural income. As a result of this decision, the original assessment was reopened under Section 34(1)(b) and the interest on arrears of rent was included in the assessment. That assessment was challenged by the assessed before the Supreme Court. The primary question, no doubt, before the Supreme Court was whether the decision of the Privy Council in Kamakshya Narain Singh's case, [1948] 16 I.T.R. 325 (P.C.) constituted information within the meaning of Section 34(1)(b) of the Act. But, while holding that the decision of the Privy Council, which was rendered subsequent to the completion of the original assessment, did constitute information within the meaning of Section 34(1)(b), the Supreme Court explained the scope of Section 34(1)(b) in the following terms:

"It is clear that two conditions must be satisfied before the Income-tax Officer can act under Section 34(1)(b). He must have information in his possession, which, in the context, means that the relevant information must have come into his possession subsequent to the making of the assessment order in question and this information must lead to his belief that income chargeable to income-tax has escaped assessment for any year, or that it has been under-assessed or assessed at too low a rate or has been made the subject of excessive relief under the Act."

6. The Supreme Court was further invited to express its opinion on the question whether it would be open to the Income-tax Officer to take action under Section 34 on the ground that he thinks that his original decision in making the order of assessment was wrong, without any fresh information from an external source or whether the successor to the Income-tax Officer can act under Section 34 on the ground that the order of assessment passed by his predecessor was erroneous. The Supreme Court, however, declined to express any opinion on this point.

7. This decision of the Supreme Court has been interpreted by the High Courts in different ways. The Madras High Court appears to have construed the word "information" appearing in Section 34(1)(b) in very wide terms. We may refer only to three judgments of that court: (1) In Salem Provident Fund Society Ltd. v. Commissioner of Income-tax, [1961] 42 I.T.R. 547 (Mad.), it was held that:

"' Information' for the purposes of Section 34 need not be wholly extraneous to the record of the original assessment. A mistake apparent on the face of the order of assessment would itself constitute 'information'; whether some one else gave that information to the Income-tax Officer or whether he informed himself was immaterial."

(2) In Family of V.A.M. Sankaralinga Nadar v. Commissioner of Income-tax, [1963] 48 I.T.R. 314 (Mad.), it was held that:

"income which escapes assessment as a result of the lack of vigilance of the Income-tax Officer or due to inadvertence or negligence or to the perfunctory performance of his duties without due care and caution, can well be within the ambit of Section 34(1)(b), provided the requirements of that section are satisfied."

(3) In Commissioner of Income-tax v. Rathinasabapathy Mudaliar, [1964] 51 I.T.R. 204 (Mad.) the High Court went a step further and held that:

"Even inadvertence or error in the making of assessment would bring a case within Section 34(1)(b) and if an error is discovered after the assessment was made that is information subsequent to the original assessment."

8. In Canara Industrial and Banking Syndicate v. Commissioner of Income-tax, [1964] 51 I.T.R. 479 (Mys.), the Mysore High Court held that if income had escaped assessment owing to the failure of the Income-tax Officer to understand the true implication of a notification, and the Income-tax Officer later on finds that on a correct interpretation of the notification the income was liable to be assessed, he can take proceedings under Section 34 for assessment of such income; the word "information" in Section 34 was wide enough to apply to such a case.

9. In Asghar Ali Mohammad Ali v. Commissioner of Income-tax, [1964] 52 I.T.R. 962 (All.), the Allahabad High Court held that:

"The word 'information' used in the provision covers all kinds of information received from any person whatsoever or in any manner whatsoever. All that is required is that the Income-tax Officer should learn something, i.e., he should know something which he did not know previously."

10. It was further held that:

"If there is information leading to the belief that income has escaped assessment, the mere fact that this information has resulted in a change of opinion will not make Section 34 inapplicable. A change of opinion is not sufficient for initiating proceedings under Section 34, only when such change of opinion is the result of a different method of reasoning, and not based on 'information'."

11. A Division Bench of the Punjab High Court has taken the view in Dharam Vir Virmani v. Commissioner of Income-tax, [1962] 46 I.T.R. 602 (Punj.), that where the Income-tax Officer did not accept the share income from certain firms returned by the assessed but at the same time did not postpone the completion of the assessment to await the assessment of the firm and proceeded to complete the assessment ignoring the share income with a view to carrying out necessary rectification on receipt of information about the assessed shares of profit or loss from the assessment of the firms, it was open to the Income-tax Officer to re-open the assessment under Section 34(1)(b) of the Act after receipt of information regarding the assessment of the firms.

12. A more strict interpretation has been placed upon the word "information" by the Madhya Pradesh and the Bombay High Courts. In Ram Kishan Oil Mills v. Commissioner of Income-tax, [1965] 56 I.T.R. 186 (M.P.), the Madhya Pradesh High Court, following an earlier decision of the same court in Income-tax Appellate Tribunal v. B.P. Bramji and Co., [1946] 14 I.T.R. 174 (Nag.), held that an Income-tax Officer cannot take any action under Section 34 merely because he intended to change his view or to hold an opinion different from that of his predecessor on the same set of facts and that, if the predecessor of the Income-tax Officer did not apply his mind to the question of deduction of the interest amount and his successor did, that does not mean that the successor of the Income-tax Officer came into possession of information justifying reopening of assessment under Section 34(1)(b).

13. In Arvind N. Mafatlal v. Deputy Controller of Estate Duty, [1968] 67 I.T.R; 449 (Bom.), the Bombay High Court had occasion to consider the scope of Section 59(b) of the Estate Duty (Amendment) Act, 1958, which is analogous to Section 34(1)(b) of the Act. Following the earlier decisions of the same court in K. T. Kubal & Co. Pvt. Ltd. v. Commissioner of Income-tax, and Dr. M. R. Dalai v. Commissioner of Income-tax, [1963] 49 I.T.R. 492 (Bom.), it was held that, if all the documents were placed before the assessing officer, and he had considered them, he could not upon the same documents come to a contrary conclusion and that whatever be the nature of the information it must be information obtained subsequent to the order of assessment and that a mere change of opinion is not the same thing as having information in his possession. In Commissioner of Income-tax v. Malegaon Electricity Co. Ltd., , the same High Court dissented from the decision of the Madras High Court in Commissioner of Income-tax v. Rathinasabapathy Mudaliar, .

14. There is no direct decision of this court on this point except in S. Jaswant Singh v. Commissioner of Income-tax, [1968] 67 I.T.R. 175 (Delhi.), in which it was merely held that Section 34(1)(b) was in a sense a penal provision and it has to be strictly construed.

15. The decisions referred to above show the divergence of opinion among the several High Courts on the interpretation of the word "information" under Section 34(1)(b) and the existence of this divergence of opinion has also been noticed by the Supreme Court in Commissioner of Wealth-tax v. Imperial Tobacco Co. of India Ltd., [1966] 611.T.R. 461, [1966] Supp. S.C.R. 174 (S.C.) The narration of the case law on the subject may be concluded by reference to the judgment of the Supreme Court in Commissioner of Income-tax v. A. Raman and Company, . In that case the assessed, M/s. A. Raman and Company, carried on business in mill stores. In the course of that business they sold mill stores to two concerns trading in the names of M/s. A. M. Shah & Co. and M/s. R. Ambalal & Co., which were owned by the Hindu undivided families, managers of which were the only partners of the assessed-firms. For the assessment years 1959-60, 1960-61 and 1961-62 the assesseds were originally assessed by the Income-tax Officer, Circle I, Ward-A, while the partners of the assesseds and the Hindu undivided families which traded in the names of M/s. A.M. Shah & Co. and M/s. R. Ambalal & Co. were assessed by the Income-tax Officers in other circles. The cases of the assesseds, of the partners of the assesseds and of the two Hindu undivided families trading in the names of A.M. Shah & Co. and R. Ambalal & Co. were later transferred to the Income-tax Officer, Group Circle J. Ahmedabad. That officer by letter dated March 20, 1964, informed the assesseds that he was convinced from a perusal of the assessment records of the assesseds, their partners and their individual Hindu undivided families that the partners of the assesseds had contrived to divert profits of the assesseds to their respective Hindu undivided families and had tried to "evade proper taxation" and on that ground he called upon the assesseds to submit their objections, if any, to the reopening of the assessments for the years 1959-60, 1960-61 and 1961-62. The assesseds in reply contended that the Income-tax Officer had no jurisdiction to reopen the assessments since the Hindu undivided families of the two partners and the assesseds had submitted "correct and complete returns of income supported by their books of accounts, etc., and had given all material facts and relevant information necessary for assessment at the time of each assessment". The reopening of the assessment was challenged before the High Court by a petition under Article 226 of the Constitution and the High Court quashed the reassessment proceedings. The matter was taken before the Supreme Court by the revenue. The Supreme Court, while holding that the reopening of the assessment under Section 34(1)(b) of the Act was valid, made the following observations:

"The expression 'information' in the context in which it occurs must mean instruction or knowledge derived from an external source concerning facts or particulars, or as to law relating to a matter bearing, on the assessment..... That information, must, it is true, have come into the possession of the Income-tax Officer after the previous assessment, but even if the information be such that it could have been obtained during the previous assessment from an investigation of the materials on record, or the facts disclosed thereby or from other enquiry or research into facts or law, but was not in fact obtained, the jurisdiction of the Income-tax Officer is not affected."

16. We may now apply the principles laid down by the Supreme Court in the two cases referred to above, namely, Maharaj Kumar Kamal Singh's case and A. Raman & Co.'s case to the present case. The crucial question would be whether at the time of the original assessment for 1957-58 the Income-tax Officer had not only considered all the relevant facts which were available before him but had also come to the conclusion that the amount of Rs. 2,62,277 was not assessable in that year. This is essentially a question of fact and the finding of the Tribunal on this question would be binding on us. Unfortunately, the Tribunal has not given a clear finding on this question either in the statement of the case or in its order in the appeal. The Tribunal, no doubt, negatived the contention of the revenue that all the relevant facts were not available to the Income-tax Officer at the time of making the original assessment for 1957-58 and that some of the relevant facts came into his possession only subsequent to the date of the original assessment. The Tribunal has given a finding in paragraph 13 of its appellate order that "the assessed on his part furnished complete information necessary to come to a complete finding of fact on 22nd June, 1961", and also in paragraph 14 of its order that "all relevant information was available with the Income-tax Officer on July 31, 1961, the date of original assessment". But, on the question whether the Income-tax Officer had taken into consideration this information before making the assessment for 1957-58 and whether he had come to any conclusion on the basis of this information, this Tribunal has given the following findings. This is what is stated in paragraph 7 of the appellate order :

"We find that what actually happened was that the relevant letters which were issued by the Income-tax Officer to the assessed and his replies thereon were placed in the records of the assessment year 1955-56. The reason apparently was that the Income-tax Officer who was proceeding with the assessment did not see the relevance of the reply dated June 22, 1961, for the simple reason that this reply was in a different assessment record, viz., assessment year 1955-56, as stated above."

17. Then in paragraph 11, the Tribunal proceeds to state as follows:

"All that could be said is that these transactions were beyond the comprehension of the Income-tax Officer and he did not quite know what to do with it. In any case, there was evidently some desire on his part to make it assessable in the assessment year 1955-56 and he was evidently proceeding on those lines. Perhaps, it is because of this that he completed the assessment for the year 1957-58 on July 31, 1961, even though he had the letter of June 22, 1961, with him though placed in the assessment records of the year 1955-56."

18. Again in paragraph I2(c) of the appellate order this is what is stated : "The Income-tax Officer somehow was of the opinion that the profit would be assessable in the year 1955-56. Perhaps he was led to this belief because there was a balance of Rs. 5,36,280 carried over on 31st October, 1954, in the capital reserve account. He initiated the series of enquiries and kept the letters, etc., in the records of the assessment year 1955-56."

19. The Tribunal proceeds to state thus in sub-paragraph (e) of the same paragraph:

"The Income-tax Officer who was, in the meantime, proceeding with the assessment year 1957-58 could not link this letter properly (perhaps because it was in a different part of record) and completed the assessment for the assessment year 1957-58 on July 31, 1961."

20. There is a further finding of the Tribunal in sub-paragraph (f) of the same paragraph to the effect that:

"The Income-tax Officer pursued his enquiries and presumably sought guidance from his superiors and finally decided to proceed under Section 34(1)(b) on 27th February, 1962, on which date a notice under Section 34(1)(b) was issued ..."

21. Then the following finding of the Tribunal is given in paragraph 13(b) of the appellate order :

"The Income-tax Officer who made the assessment did not quite comprehend the significance of the information furnished and somehow he was under the impression that the assessment should be made in the year 1955-56. He, therefore, was not satisfied and was making further enquiries to find out when the profits were realised."

22. Some of the findings of the Tribunal give us the impression that the Income-tax Officer who was making the original assessment for 1957-58 did not at all consider the relevant information, although such information was available to him. But from the other findings of the Tribunal it is indicated that the Income-tax Officer did consider the relevant information but could not comprehend the significance of the said information and could not make up his mind whether the amount in question was assessable in the year 1957-58 or in the year 1955-56. In any case, there is no clear finding of the Tribunal that the Income-tax Officer bad after consideration of the relevant information arrived at a definite conclusion at the time of the original assessment for 1957-58 that the amount in question was not assessable in that year.

23. The finding of the Tribunal was summarized as follows :

All the relevant facts were available to the Income-tax Officer at the time of the original assessment. He also applied his mind to these facts but on account of the complex nature of these facts he could not comprehend their significance or arrive at a definite conclusion on the question whether the amount of Rs. 2,62,277 was assessable in the year 1955-56 or in the year 1957-58. As he could not make up his mind, he completed the assessment for 1957-58 without including the said amount in the assessment of that year. Subsequently, after reconsidering the facts and consulting his superiors he was of the view that this amount was includible in the assessment for the year 1957-58. In our view, this does not amount to a change of opinion on the part of the Income-tax Officer as the assessed's counsel would have us believe. The Income-tax Officer had not formed any definite opinion at the stage of the original assessment which, it may be said, was changed by him subsequently.

24. Under these circumstances we hold that the reopening of the assessment was permissible under Section 34(1)(b) of the Act. The question referred to us is answered in the affirmative, i.e., in favor of the Revenue and against the assessed. The assessed will bear the costs of the reference proceedings. Counsel's fee is fixed at Rs. 250.