Civil Appeal No 1970NT of 1975  855NT1975
From the Judgment and Order dated 2241974 of the Allahabad High Court in Civil Miscellaneous Writ No 152 of 1974 Dr V Gauri Shankar Miss A Subhashini and KC Dua for the Appellants
SC Manchanda Ms section Janani Mrs Urmila Kapoor and Ms Meenakshi for the Respondent
The Judgment of the Court was delivered by MISRA J
Civil Appeal No 1970 of 1975 is by the Reve nue by certificate of the High Court while the other is an appeal by the assessee by special leave
Both arise out of the same judgment of the Allahabad High Court dated 2241974 in an application under article 226 of the Constitu tion by the assessee challenging the notices issued under section 148 read with sections 1421 and 1432 of the Income Tax Act of 1981 all dated 7th of March 1973 relating to the assess ment year 1965 66
The notice under section 148 was on the basis of three cash credit entries dated 22nd of August 1964 from Messrs Meghraj Dulichand Messrs Associated Commercial Organisation Private Limited and Messrs Laxminarain Atmaram the first two being for a sum of Rs 30000 each and the last one for a sum of Rs40000
The High Court ultimately found The result is that the notice dated 7th March 1973 was within jurisdiction only in regard to the cash credit entry from the firm Meghraj Dulichand of Calcutta
In regard to the other two transactions the case did not fall within the purview of clause a of section 147
607 As seen above the Income Tax Offi cer had no material in his possession on the basis of which he could have reason to believe mere suspicion apart that income had escaped assessment
For this reason the case was not covered by clause b of section 147 either
In regard to those two items the notice was totally without jurisdiction
The Income Tax Officer had no jurisdiction to re open the assessment in respect of these two cash credit entries
In this view it is unnecessary to decide whether the notice was barred by time on the footing that it was covered by clause b to section 147
In the result the petition succeeds and is allowed in part
The respondent Income Tax Officer is directed not to re open the assessment of the petitioner firm for the assessment year 1965 66 in relation to the cash credit entries of Rs30000 from Ms Associated Commercial Organisation Private Ltd and of Rs40000 in respect of Ms Laxminarain Atmaram
 The appeal by the Revenue is in relation to the two transactions totaling Rs70000 and the appeal by the asses see is in regard to the remaining one in respect of a sum of Rs30000
Dr Gouri Shankar appearing for the Revenue has contended that it was not for the High Court to go into the question as to whether the notice under section 148 of the Act was partly valid and partly not because if the Income Tax Officer proceeded to issue notice under section 148 of the Act for reopening the assessment he would require the assessee to furnish a fresh return and the entire assessment proceed ing has to be re done after the assessee furnishes the return
In the present case along with the notice under section 148 of the Act the Income Tax Officer did call upon the assessee to furnish a return as required under section 142 of the Act
That notice casts an obligation on the assessee to make a fresh return and therein it was obliged to make a complete disclosure of its income in accordance with law and it was open to the Income Tax Officer to examine not only the three items referred to in the notice but also whatever came within the legitimate ambit of an assessment proceeding
This being the legal position Dr Gouri Shankar for the Revenue contends once the High Court sustained the notice in respect of a sum of Rs30000 that gave full jurisdiction to the Income Tax Officer to reopen the assessment and take to a fresh assessment proceeding
The High Court should not have examined the tenability of the assessee s 608 contenton in regard to the two transactions of Rs30000 and Rs40000 and that aspect should have been left to be con sidered by the Income Tax Officer while making the reassess ment
A Division Bench of the Punjab High Court in Commission er of Income Tax Punjab Himachal Pradesh  Bilaspur Simla vs Jagan Nath Maheshwary examined this aspect of the matter with reference to a proceeding for reassessment under section 34 of the earlier Act of 1922 and came to hold When a notice is issued under section 34 based on a certain item of income that had escaped assessment it is permissible for the Income tax authorities to include other items in the assessment in addition to the item which had initiated and resulted in the notice under section 34 A Division Bench of the Andhra Pradesh High Court in Pulavarthi Viswanadham vs Commissioner of Income Tax Andhra Pradesh considered the same position with refer ence to section 34 of the earlier Act
After extracting the two clauses in sub section
1 of section 34 the Court held It is immediately plain that when once the Income tax Officer reaches the conclusion on the material that is before him that there has been a non disclosure as regards part of the income profits or gains chargeable to income tax by the assessee he is entitled to issue a notice either under clause a or b as the case may be under section 222 of the In come tax Act After extracting section 222 the High Court proceeded to say What emerges from sub section 2 of section 22 is that when once an assessee is required to submit a return of his income he is obliged to disclose the totality of his in come
The question that falls to be decided on the language of these two sections is whether after notice is issued under section 341a the assessment should be limited to items which escaped assessment by reason of the failure on the part of the assessee to dis close all his income profits or gains which are subject to tax
The contention of learned counsel for the assessee is that having regard to the terms of clause b it was not within the powers of the Income tax 609 Officer to bring to charge such of the items as have escaped from being taxed without any remissness on his part
It is only items that escaped assessment due to omission or failure of the assessee that come within the range and sweep of section 34 continues learned counsel for the assessee
We do not think that we can accede to this proposition
When once the assessment is reopened no distinction could be made between items falling under clause a and those coming within the pale of clause b
As pointed out by a Division Bench of this Court in RC No 12 of 1960 Parimisetti Seetharamamma vs Commissioner of Incometax  to which one of us was a party    when once an assessment is reopened under section 34 the Income tax Officer proceeds de novo under the relevant sections of the Income tax Act ie he issues notice under section 222 and proceeds to assess the assessee
He has to follow the same procedure as in the case of the first assessment as is clear from the clause in section 34 and the provisions of this Act shall so far as may be apply accordingly as if the notice were a notice issued under that subsection
The proceedings under section 34 must be deemed to relate to proceedings which commence with publication of notice under section 221
 The view taken by the two High Courts has been supported by this Court in V Jaganmohan Rao  Ors
vs Commissioner of Incometax  Excess Profits Tax Andhra Pradesh There repelling the same argument on behalf of the assessee this Court said This argument is not of much avail to the appellant because once proceedings under section 34 are taken to be validly initiated with regard to two thirds share of the income the jurisdiction of the Income tax Officer cannot be confined only to that portion of the income
Section 34 in terms states that once the Income tax Officer decides to reopen the assessment he could do so within the period prescribed by serving on the person liable to pay tax a notice containing all or any of the requirements which may be included in a notice under section 222 and may proceed to assess or reassess such income profits or gains
It is therefore manifest that once assessment is reopened 610 by issuing a notice under sub section 2 of section 22 the previous under assessment is set aside and the whole assessment proceedings start afresh
When once valid proceedings are started under section 341b the Income tax Officer had not only the jurisdiction but it was his duty to levy tax on the entire income that had escaped assessment during that year
 No serious effort however was made by Mr Manchanda appearing for the assessee respondent to counter this sub mission advanced on behalf of the Revenue
Accepting the legal position indicated in these cases we come to the conclusion that it was not for the High Court to examine the validity of the notice under section 148 in regard to the two items if the High Court came to the conclusion that the notice was valid at least in respect of the remaining item
Whether the Income Tax Officer while making his reassessment would take into account the other two items should have been left to be considered by the Income Tax Officer in the fresh assessment proceeding
With this conclusion the decision of the High Court would ordinarily have been reversed
As we have already stated the assessee has also appealed against that part of the judgment of the High Court which was adverse to it
Mr Manchanda contended that in this case the regular assessment had been made for the assessment year 1965 66 on 2211966
Notice under section 147 of the Act was issued on 7th of March 1973 ie more than seven years after the assessment had been completed
The three amounts mentioned in the notice under section 148 of the Act were found in the assessee s accounts by the Income Tax Officer when he exam ined the same in course of the assessment proceedings
We had called upon the assessee to substantiate the genuineness of the transactions and the assessee had produced material to support the same
The Income Tax Officer accepted the documents produced and treated all the three transactions to be genuine and on that footing completed the assessment
The primary facts were before the Income Tax Officer at the time of the regular assessment and he called upon the assessee to explain to his satisfaction that the entries were genuine and on the basis of materials provided by the assessee satisfaction was reached
It was then open to the Income Tax Officer to make further probe before completing the assess ment if he was of the view that the material provided by the assessee was not sufficient for him to be satisfied that the assessee s contention was correct
This Court in Calcutta Discount Company Limited vs I T 0 held that the expression Material facts  used in el
a 611 referred only to primary facts and the duty of the assessee was confined to disclosure of primary facts and he had not to indicate what factual or legal inferences should properly be drawn from the primary facts
In the facts appearing on the record we are in agreement with Mr Manchanda that cl
a of section 147 did not apply to the facts of the case as the alleged escapement of income for assessment had not resulted from failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment for that year
The notice in the instant case did not indi cate whether it was a case covered by cl
a or clb
On our finding that cl
a was not invokable the power under cl
b could be called in aid under section 1491b of the Act within four years from the end of the relevant assessment year
Admittedly the notice has been issued beyond a period of four years and therefore the notice itself was beyond the time provided under the law
On the facts appearing in the case the High Court overlooked to consider this aspect of the matter
Since the proceedings before the High Court were under article 226 of the Constitution and not by way of reference under the Act the jurisdiction of this Court is not advisory and confined to the questions referred for opinion
On the facts we are satisfied that ends of justice require our intervention and we would accordingly allow the appeal of the assessee by holding that the notice under section 148 of the Act cannot be sustained in law for the reasons indicated above
The appeal by the assessee is allowed and the appeal by the Revenue is dismissed
The notice under section 148 of the Act is quashed
Both parties are directed to bear their respec tive costs throughout
GN Appeal by the assessee is allowed and Appeal by the revenue is dismissed


Summary:
Clause iii of Section 143 of the Income Tax Act 1922 exempts interest and dividends derived by a cooperative society from its investments with any other cooperative society from payment of tax
The respondent assessee an apex body having as its members various District Co operative Societies District Co operative Banks and some Government and other co opera tive Societies within the State of UP was appointed as one of the wholesale dealers under clause 1 of the agency agreement entered into with a co operative sugar factory for distribution of sugar produced by the latter during the crushing seasons 1958 59 and 1959 60
Simultaneously with the execution of the agreement it furnished a cash security of Rs Two lakhs to the manufacturer under clause 20 of the said agreement for the period of two years which was to carry interest at the rate of 4 12 per cent per annum
In pursuance of a separate agreement entered into be tween it and the State Government the assessee undertook to arrange for lifting handling storing and distributing to the retailers the stock of sugar released by the Government of India
In an yet another agreement entered into between the assessee and member societies the latter undertook to work as agents for the wholesale distribution of sugar in their districts
Since they were not in a position to ar range the entire finance for the business the assessee agreed to arrange for the same
The money thus invested in the business was to earn interest at the rate of 6 per cent per annum
587 In the accounting year in question the Income Tax Offi cer rejected the claim of the assessee for deduction on ground of statutory exemption under section 143 of the Act of the amounts of interest received respectively from the cooperative Sugar factory on the cash security deposit and from member societies on temporary loans advanced for fi nancing business
The Assistant Appellate Commissioner rejected assessee s contention
The Appellate Tribunal rejecting the former claim took the view that the amount of interest received on cash security furnished by the assessee for carrying on the sugar agency business could not be said to be interest from securities or investments as understood under section 143iii of the Act
Rejecting the latter claim it held that the amount on which interest had been earned did not constitute investment and therefore was not cov ered by section 143iii of the Act
But the High Court accept ed the claim in regard to both the amounts
Disposing of the appeal by the Revenue the Court HELD 11 The Tribunal did not err in holding that the amount received as interest on the cash security from the cooperative sugar factory was not covered under section 143iii of the Income Tax Act 1922
591B 12 The High Court failed to take note of the fact that the sum of Rs Two lakhs had been given a security and the arrangement entered into between the assessee and the coop erative sugar factory stipulated payment of interest of 4 12 per cent per annum
This sum was repayable to him on the expiry of the period fixed in the agreement after adjustment of accounts
It could not therefore be said to be an investment
The amount of interest earned thereon thus represented only interest on the security deposit and could not be mixed up with the other sums received by the assessee in course of carrying on its business
It was not available to be exempted
589G 590F 21 The amount of interest received by the assessee on advances to its members was income from sugar business and was therefore exempt under section 143iii of the Act
595B 22 The money provided by the assessee was by way of investment with other cooperative societies
If this money had not been made available the business as stipulated under the scheme could not have been carried out and perhaps there would have been no business
This funding to other coopera tive societies was necessary to generate profits and under the agreement interest has been earned
The High Court was 588 therefore right in its conclusion that no tax was payable on this income from sugar business
594F G