Case: Calcutta Discount Company Limited Vs. Income-Tax Officer, Companies District, And Another

The appellant is a private limited company incorporated under the Indian Companys 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, respectively. 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 the last one by Mr. K. D. Banerjee. 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 submit 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 returns 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 was 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 S. 34 aforementioned, whether before or after the amendment in 1948". The other ground urged was that the amendment to S. 34 of the Income-tax Act in 1948 was not retrospective and that the assessment for the years 1942-43, 1943-44 and 1944-45 became barred long before March, 19512. The Trial Judge held that the first ground was not made out but being of opinion that the amending Act of 1948 was not retrospective, he held that the notices issued were without jurisdiction. Accordingly he made an order prohibiting the Income-tax Officer from continuing the assessment proceedings on the basis of the impugned notices3. The learned Judges who heard the appeal agreed with the Trial Judge that the first ground had not been made out. They held however that in consequence of the amendment of S. 34 in 1948 the objection on the ground of limitation must also failA point of constitutional law which appears to have been raised before the appeal court was also rejected. The appeal was allowed and the companys application under Art. 226 was dismissed with costs4. The Company has preferred the present appeal on the strength of a certificate issued by the High Court under Art. 133(1)(a) of the Constitution.

Reasoning:
8. Before we proceed to consider the materials on record to see whether the appellant has succeeded in showing that the Income-tax Officer could have no reason, on the materials before him, to believe that there had been any omission to disclose material facts, as mentioned in the section, it is necessary to examine 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 a duty on every assessee to disclose fully and truly all material facts necessary for his assessment. What facts are material, and necessary for assessment will differ from case to case. In every assessment proceeding, 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 primary 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 a correct interpretation of the taxing enactment, the proper tax leviable. Thus, when a 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 beIn 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 remembered that people often differ as regards what inferences 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 draw from the primary facts14. 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 a 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 a non-disclosure of material facts would not be open for the courts 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 facts15. Clearly it is the duty of the assessee who wants the court to hold that jurisdiction was lacking, to establish that the Income-tax Officer had no material at all before him for believing that there had been such non-disclosure. To establish this the company has relied on the statements in the assessment orders for the three years in question and on the statement of Kanakendra Narayana Banerjee in the report made by him to the Commissioner of Income-tax for the purposes of obtaining sanction to initiate proceedings under S. 34 and also on his statement in the affidavit on oath in reply to the writ petitionThe question whether sales of certain shares were by way of changing the investments or by way of trading in shares has to be decided on a 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 a bearing on the question; but whether the assessee had the intention to make a business profit as distinguished from the intention to change the form of the investments is really an inference to be drawn by the assessing authority 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 question of the assessees intention is an inferential fact and so the assessees omission to state his "true intentions behind the sale of shares" cannot by itself be considered to be a failure or omission to disclose any material fact within the meaning of S. 34.Indeed, an assessee whose contention is that the shares were sold to change the form of investment and not with the intention of making a business profit cannot be expected to say that his true intention was other than what he contended it to be17. The learned Chief Justice seems to have proceeded on the basis that when from certain facts inferences are to be drawn there is a duty on the assessee to state what the correct inference should be and if he has made a wrong statement as regards the inferences to be drawn that also is an "omission or failure to disclose a material fact". For the reasons given earlier we do not think that this is the correct position in law18. It is clear therefore that if one looked at this report only it would not be possible to say that Income-tax Officer had any non-disclosure of material facts by the assessee in mind when he assumed jurisdiction. It has to be remembered however that in sending a report to the Commissioner, the Income-tax Officer might not fully set out what he though amounted to a non-disclosure, because it is conceivable that the report may not be drawn up carefully and may not contain a reference to all the non-disclosures that 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. Banerjees statements in this matter are contained in paras. 5, 6 and 7 of his affidavit19. It appears from this that 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 a dealer in shares and securities and (ii) throughout the whole of its history the company bought no shares whatsoever. It has not been suggested before us that in fact at any time up to the conclusion of the assessment proceedings for the years 1942-43, 1943-44 and 1944-45 the company did in fact make a single purchase of shares. Clearly therefore the Income-tax Officer had no reasonable ground for thinking that anything as regards the purchase of shares had not been disclosed. The company does not dispute that the statement was made on its behalf that it was not a "dealer" in shares and securities. It appears clear that the Income-tax Officers who made the assessments 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 a profit were by way of trading in shares and not by way of changing the form of investment. Whether these sales by an investment company should in law be treated as trading transactions, and the profits made from the sales trading profits liable to tax, was the matter which it was the Income-tax Officers task to decide. No duty lay on the company to admit that these transactions were made by way of trade. The fact that on behalf of the company Mr. Smith of Lovelock and Lewes stated that the company was not a dealer in shares and securities does not therefore amount to an omission to disclose fully and truly any material factThis 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 stage - not even in the affidavit in court, but the matters mentioned by the officer that the assessee had claimed that the profits realised were of a casual nature obviously indicates that the assessee disclosed that a surplus resulted from the sales which were also disclosed21. The assessment orders it is true do not mention the details of the sales. They state however that the 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 as regards sales of shares full details were in fact disclosed22. Nor can we believe that the two Income-tax Officers L. D. Rozario and K. D. Banerjee concluded the proceedings without referring to the memorandum and articles of association of the company. These officers knew well that the company was claiming to be an investment company only. They had to consider the question whether sales were of the nature of trade or of the nature of change of investment. It is unthinkable that they would not examine the memorandum and articles of association. Besides, it is pertinent to note that in para. 4 of his affidavit Kanakendra Narayan Banerjee refers to the Memorandum 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-secs. (1) and (2) of Cl. 3 of the said memorandum of association." He does not say that the articles or the memorandum of association were not shown during the assessment proceedings for the years 1942-43, 1943-44 and 1944-45. If he had any reason to believe that these were not shown he would have certainly mentioned that fact. For that would undoubtedly amount to non-disclosure of a material fact23. It must therefore be held that the Income-tax Officer who issued the notices had not before him any non-disclosure of a material fact and so he could have no material before him for believing that there had been any material non-disclosure by reason of which an under-assessment had taken place24. We are therefore bound to hold that the conditions precedent to the exercise of jurisdiction under S. 34 of the Income-tax Act did not exist and the Income-tax Officer had therefore no jurisdiction to issue the impugned notices under S. 34 in respect of the years 1942-43, 1943-44 and 1944-45 after the expiry of four yearsIt is wholly incorrect however to suppose that this is a question of limitation only not touching the question of jurisdiction. 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 years; and where he has reason to believe that an under assessment has resulted from other causes he shall have jurisdiction to start proceedings for re-assessment within 4 years. Both the conditions, (i) the Income-tax Officer having reason to believe that there has been under assessment and (ii) his having reason to believe that such under-assessment has resulted from non-disclosure of material facts, must coexist before the Income-tax Officer has jurisdiction to start proceedings after the expiry of 4 years. 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 non-disclosure of material facts cannot therefore be acceptedIt is well settled however that though the writ of prohibition or certiorari will not issue against an executive 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 executive authority acting without jurisdiction subjects or is likely to subject a person to lengthy proceedings and unnecessary harassment, the High Courts, it is well settled, will issue appropriate orders or directions to prevent such consequencesThe existence of such alternative remedy is not however always a sufficient reason for refusing a party quick relief by a writ or order prohibiting an authority acting without jurisdiction from continuing such actionIn the present case we can find no reason for which relief should be refused29. We have therefore come to the conclusion that the company was entitled to an order directing the Income-tax Officer not to take any action on the basis of the three impugned notices30. We are informed that assessment orders were in fact made on March 25, 1952, by the Income-tax Officer in the proceedings started on the basis of these impugned notices. This was done with the permission of the learned Judge before whom the petition under Art. 226 was pending, on the distinct understanding that these 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 many ultimately be passed by the Court. The fact that the assessment orders have already been made does not therefore affect the companys 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 in addition to an order directing the Income-tax Officer not to take any action on the basis of the impugned notices a further order quashing the assessment may be also issued.