Appeal No 768 of 1966
Appeal by special leave from the judgment and order dated December 18 1964 of the Gujarat High Court in Special Civil Application No 332 of 1964
BSen section K A Iyar R N Sachthey and section P Nayar for the appellant
section T Desai and 0
C Mathur for the respondent
The Judgment of the Court was delivered by Shah J
The assessees Ms A Raman  Company are dealers in mill stores in the course of their business they sell  mill stores to other dealers including two concerns trading in the names of Ms A M Shah  Co and Ms R Ambalal  Co which are owned by the Hindu undivided families managers of which are the only partners of the assessees
For the assessment years 1959 60 1960 61 and 1961 62 the assessees were originally assessed by the Income tax Officer Circle 1 Ward A Ahmedabad while the partners of the assessees 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 Income tax Officers in other Circles
The cases of assessees of the partners of the assessees 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 assessees that he was convinced from a perusal of the assessment records of the assessees their partners and their individual Hindu undivided families that the partners of the assessees had contrived to divert profits of the assessees to their respective Hindu undivided families and had tried to evade proper taxation and on that ground he called upon the assessees to submit their objections if any to the reopening of the assessments for the years 1959 60 1960 61 and 1961 62
The assessees 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 assessees had submitted effect and complete returns of income supported by their books of account quantity details of purchases sales and expenses and had given all material facts and relevant information necessary for assessment at the time of each assessment
The Income tax Officer issued three separate notices under section 147 of the Income tax Act 1961 requiring the assessees to show cause why the assessments for the years 1959 60 1960 61 12 and 1961 62 should not be reopened
The High Court of Gujarat in a petition for a writ under article 226 of the Constitution quashed those notices and restrained the Income tax Officer from taking proceedings in pursuance thereof
With special leave granted by this Court the Commissioner of Income tax has appealed to this Court
In support of the claim of the Income tax Officer to reopen the assessments reliance was placed in the High Court on cl
b of section 147 1 of the Income tax Act 1961
The material part of section 1471b may be read If a bnotwithstanding that there has been no omission or failure as mentioned in clause a on the part of the assessee the Income tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year he may subject to the provisions of sections 148 to 153 assess or reassess such income or recompute the loss or the depreciation allowance as the case may be for the assessment year concerned
Explanation 1 For the purposes of this section the following shall also be deemed to be cases where income chargeable to tax has escaped assessment namely a where income chargeable to tax has been underassessed or      Under section 1471b reason to believe that income chargeable to tax has escaped assessment in consequence of information in the possession of the Income tax Officer is a condition precedent to the exercise of his jurisdiction to assess or reassess the income of the assessee
If that condition does not exist steps taken by the Income tax Officer to assess or reassess the income will be without jurisdiction
It was held by this Court in Calcutta Discount Co Ltd vs Income tax Officer Companies District I Calcutta  Another1 that the High Court in appropriate cases has power to issue an order prohibiting the Income tax Officer from proceeding to reassess the income when the conditions precedent do not exist
At p 207 K C Das Gupta J delivering the majority judgment of the Court observed It is well settled however that though the writ of prohibition or certiorari will not issue against an executive 13 authority the High Courts have power to issue in a fit case an order prohibiting an executive authority from acting without jurisdiction
Where such action of an exe cutive authority acting without jurisdiction subjects or is likely to subject a person to lengthy proceedings and unnecessary harassment the High Courts it is well settl ed will issue appropriate orders or directions to prevent such consequences
The High Court may therefore issue a high prerogative writ prohibiting the Income tax Officer from proceeding with re assessment when it appears that the Income tax Officer had no jurisdiction to commence proceeding
The condition which invests the Income tax Officer with jurisdiction has two branches i that the Income tax Officer has reason to believe that income chargeable to tax has escaped assessment and ii that it is in consequence of information which he has in his possession and that he has reason so to believe
Since the learned Judges of the High Court have concentrated their attention upon the second branch of the condition and have reached their conclusion in favour of the assessees on that branch it would be appropriate to deal with the correctness of that approach
The expression information in the context in which it occurs must in our judgment 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
If as a result of information in his possession the Income tax Officer has reason to believe that income chargeable to tax had escaped assessment the Income tax Officer has jurisdiction to assess or reassess income under section 1471b of the Income tax Act 1961
Information in his possession that income chargeable to tax has escaped assessment furnishes a starting point for assessing or reassessing income
If he has that information the Income tax Officer may commence proceedings for assessment or reassessment
To commence the proceeding for reassessment it is not necessary that on the materials which came to the notice of the Income tax Officer the pre vious order of assessment was vitiated by some error of fact or law
The High Court exercising jurisdiction under article 226 of the Constitution has power to set aside a notice issued under section 147 of the Income tax Act 1961 if the condition precedent to the exercise of the jurisdiction does not exist
The Court may in exercise of its powers ascertain whether the Income tax Officer had in his possession any information the Court may also determine whether from that information the Income tax Officer may have reason to believe that income chargeable to tax had escaped assessment
But the jurisdiction of the Court extends no further
Whether on the information in his possession he should commence 14 a proceeding for assessment or reassessment must be decided by the Income tax Officer and not by the High Court
The Incometax Officer alone is entrusted with the power to administer the Act if he has information from which it may be said prima facie that lie had reason to believe that income chargeable to tax had escaped assessment it is not open to the High Court exercising powers under article 226 of the Constitution to set aside or vacate the notice for reassessment on a re appraisal of the evidence
The High Court in this case was apparently of the view that the information in consequence of which proceedings for reassessment were intended to be started could have been gathered by the Income tax Officer in charge of the assessment in the previous years from the disclosures made by the two Hindu undivided families
But that in our judgment is wholly irrelevant
Justification of the Income tax Officer to reassess income arises if he has in consequence of information in his possession reason to believe that income chargeable to tax has escaped 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 the 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
The High Court was also of the view that the inference raised by the Income tax Officer that the Hindu undivided families of the assessees had made profit by sale of articles purchased from the assessees larger than the profit which the assessees had made was not justified since there was no evidence on the record about the price at which similar goods were sold by the assessees to other merchants and about the profit which those other merchants made by sale of those goods
But in a petition under article 226 of the Constitution the taxpayer may challenge the validity of a notice under section 147 of the Income tax Act 1961 on the ground that either branch of the condition precedent does not exist but an investigation whether the inferences raised by the Income tax Officer from the information are correct or proper cannot be made
Counsel for the Commissioner is therefore right in contending that the High Court entered upon an investigation of matters which were not within their competence
But the appeal of the Commissioner must still fail
The case of the Commissioner on the materials placed before the High Court suffers from a serious infirmity on the first branch of the jurisdictional condition
The averments made in the affidavit filed by the Income tax Officer in that behalf do not establish the existence of that branch of the condition
In reply to the averment by the 15 assessees that the Income tax Officer had no reason to believe that income had escaped assessment the Income tax Officer stated In the course of the discussions I had at the several meetings hereinabove referred I also learnt that in the earlier years also the petitioners the assessees had effected such sales to the said Hindu undivided families and that over and above the margin of profits earned by the petitioners the assessees from the Hindu undivided families the Hindu undivided families had earned substantial profits on the resale of such goods
1 therefore came to the conclusion that the creation of the Hindu undivided family business was merely a subterfuge or a contrivance by the partners of the petitioner firm the assessees to divert the huge profits made by the petitioners the asses sees on imported articles
The plea raised by the Income tax Officer is that income which could have been earned by the assessees was not earned and a part of that income was earned by the Hindu undivided families
That according to the Income tax Officer was brought about by a subterfuge or contrivance
Counsel for the Commissioner contended that if by resorting to a device or contrivance income which would normally have been earned by the assessee is divided between the assessee and another person the Incometax Officer would be entitled to bring the entire income to tax as if it had been earned by him
But the law does not oblige a trader to make the maximum profit that he can out of his trading transactions
Income which accrues to a trader is taxable in his hands income which he could have but has not earned is not made taxable as income accrued to him
By adopting a device if it is made to appear that income which belonged to the assessee had been earned by some other person that income may be brought to tax in the hands of the assessee and if the income has escaped tax in a previous assessment a case for commencing a proceeding for reassessment under section 1471b may be made out
Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited
A taxpayer may resort to a device to divert the income before it accrues or arises to him
Effectiveness of the device depends not upon considerations of morality but on the operation of the Income tax Act
Legislative injunction in taxing statutes may not
except on peril of penalty be violated but it may lawfully be circumvented
If the goods were nominally transferred to the Hindu undivided families the latter acting merely as benamdars for the assessees and the profits were earning in truth by the assessees income earned by sale of the goods by the Hindu undivided families may be held chargeable to tax as income which has escaped assessment to tax in 16 the hands of the assessees
In the present case no such case was attempted to be made out in the affidavit filed by the Income tax Officer
We hold therefore that on the materials on the record the Income tax Officer
had no reason to believe that income chargeable to tax had escaped assessment for the three years in question
The order passed by the High Court is therefore confirmed
There will however be no order as to costs in this Court and the High Court
GC Appeal dismissed


Summary:
The assessee firm consisted of two partners who were managers of their respective Hindu Undivided Families
The firm sold its goods to the aforesaid families and the families again sold the goods on their own account
In income tax proceedings for the years 1959 60 1960 61 and 1961 62 the firm and the Hindu Undivided Families were separately assessed in respect of their incomes
Subsequently the Income tax Authorities took view that the sale of goods by the firm to the families was only a device to divert the profits of the firm and on this view issued notices under section 147 of the Incometax Act 1961 requiring the assessee to show cause why the assessments for the years 1959 60 1960 61 and 1961 62 should not be reopened
The High Court of Gujarat in a petition for a writ under article 226 of the Constitution quashed those notices and restrained the Income tax Officer from taking proceedings in pursuance thereof
With special leave granted by this Court the Revenue appealed
Heldi The High Court may issue a high prerogative writ prohibiting the Income tax Officer from proceeding with reassessment when it appears that the Income tax Officer had no jurisdiction to commence proceedings because the conditions precedent do not exist
12G H 13B C Calcutta Discount Co Ltd vs Income tax Officer Companies District 1 Calcutta  Anr  followed
It is however not open to the High Court exercising powers under article 226 to set aside or vacate the notice for reassessment by itself re appraising the evidence
15B iiThe condition which invests the Income tax Officer with jurisdiction has two branches i that the Income tax Officer has reason to believe that income chargeable to tax has escaped assessment and ii that it is in consequence of information which he has in his possession and that he has reason so to believe
The expression information  in the context of 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
If he has such information the Income tax Officer may commence proceedings under section 1471b
But to commence such a proceeding it is not necessary that on the materials which came to the notice of the Income tax Officer the previous order of assessment was vitiated by some error of fact or law
13C G iiiIn the present case however the pre conditions for the issue of a notice of re assessment did not exist
The law does not oblige a trader to make the maximum profit that he can out of his 11 trading transactions
Income which accrues to a trader is taxable in his hands income which he could have but has not earned is not made taxable as income accrued to him
Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited
15D G