Case: Commissioner Of Income-Tax, Madras Vs. T.S.P.L.P. Chidamebaram Chettiar (Dead) Throughl. Rs

The facts as found by the Tribunal and set out in the statement of the case, relevant for the purpose of these appeals are as follows:(2) The relevant assesment year is 1944-45, corresponding to the accounting year ended on 12/04/1944. The assessee is one Chidambaram Chettiar (since deceased). The father of the assessee Palaniappa Chettiar was a money lender. He had made various advances to one Nallathambi Sakkarai Manradiar, who will hereinafter be referred to as the Pattayagar, a prominent landlord in Coimbatore District, on promissory notes. The total principal advanced by the father of the assessee upto 6/07/1932 amounted to Rs. 1,38,535.00. The interest on the same came to Rs. 1,34,965,.00. On 6/07/1932, a further advance of Rs. 2500/- was made to the Pattayagar and for the amounts due from him, the Pattayagar executed a mortgage of some of his properties in favour of the assessees father for a sum of Rupees 2,76,000/-. Till 1938, only a sum of Rs. 13,620.00 was paid by the mortgagor in part payment of the debt due from him. On 14/12/1940 the mortgagee instituted a suit on the foot of the mortgage bond claiming a sum of Rs. 5,50,573.00 inclusive of principal and interest. On 19/09/1943, the claim was compromised and on 5/10/1943, a compromise decree was passed for a sum of Rs. 3,50,500.00 in full satisfaction of the mortgagees claim. The decree amount was made payable on cr before 1/10/1944. The debt under the compromise decree was subsequently discharged(3) For the assessment year 1944-45, the assessee Chidambaram Chettiar, as karta of his Undivided Hindu Family was assessed under Section 23 (3) of the Income Tax Act, 1922 (to be hereinafter referred to as the Act), on 12/02/1946, on a total income of Rs. 78,556.00 which, on appeal was reduced to Rs. 53,153.00. When the assessment proceedings of the assessee were pending before the Income-tax Officer, Trichy, that Income-tax Officer received information from the Income-tax Officer, Erode that the mortgagor had paid secretly to the mortgagee a sum of Rupees 1,50,000/- during the year ended on 1/04/1944 and that the same was not included in the compromise decree. When the Income-tax Officer asked the assessee about the same, he denied having received any amounts secretly. Apart from the information conveyed by the Income-tax Officer, Erode, the Assessing Officer had no other material before him to show that any amount had been paid secretly by the mortgagor to the mortgagee. Hence on 27/05/1945, the Income-tax Officer made the following note in the order sheet:It is denied that there was any secret understanding not to show the payment of Rs. 1,50,000.00. The receipt of this amount is entirely denied... . The Income-tax Officer, Erode should be asked to give further details and to ask the Pattayagar to produce evidence of the payment. In any event, this should come up for consideration only in the assessment year 1944-45 as only the excess over Rs. 2,76,000.00 plus legal expenses can be treated as interest income in the hands of the assessee and so, the assessment for 1944-45 should not be held up pending further investigation(4) After sometime the Assessing Officer made further enquiry into the information given by the Incometax Officer, Erode and thereafter he came to believe that a sum of Rupees 1,50,000/- had escaped assessment by reason of the omission of the assessee to disclose fully and truly all material facts necessary for his assessment for the assessment year 1944-45. He accordingly issued a notice under Section 34 (1) (a) on 9/03/1953. In reply to that notice, the assessee filed a return similar to the one filed by him earlier. He denied having received Rs. 1,50,000.00 secretly from the mortgagor. The Income-tax Officer did not accept the plea of the assessee. He accordingly included an additional sum of Rs. 1,50,000.00 to the income of the assessee earlier determined for the assessment year 1944-45 and taxed him on that basis. In appeal, the Appellate Assistant Commissioner set aside the order of the Income-tax Officer and directed the Income-tax Officer to re-do the assessment after giving the assessee an opportunity to cross-examine the parties examined by the Income-tax Officer on the basis of whose statements he had come to the conclusion that a sum of Rs. 1,50,000.00had been secretly paid to the mortgagee by the mortgagor. Thereafter the Income-tax Officer further inquired into the matter; Pattayagars books of account were got produced to prove that an additional sum of Rs. 1,50,000.00had been paid to the assessee. Some witnesses were also examined in the presence of the assessee to prove that fact. After doing so, a fresh order of assessment was made on the assessee under Section 23 (3) read with Sec. 34. His order was affirmed by the Appellate Assistant Commissioner as well as by the Tribunal. At the instance of the assessee, the following three questions were submitted to the High Court under Section 66 (1) of the Act(1). Whether assessment under Section 34 was valid and proper?(2). Whether the Income-tax Officer rightly acted in giving effect to the order of the Appellate Assistant Commissioner setting aside the assessment to re-do the same according to law after giving an opportunity to the appellant to place all his cards before the Department?(3). Whether Rs. 1,50,000.00 is taxable as income of the year of account?(5) The High Court answered the first two questions against the assessee and the third question against the Department. The legal representative of the assessee are challenging the High Courts decision on the first two questions and the Commissioner is challenging the High Courts decision on the third question.

Reasoning: We are unable to accept this contention.On the facts found by the Tribunal, it is established that the assessees father had clearly suppressed the receipt of Rs. 1,50,000.00 from the mortgagor. The assessee had a duty to disclose fully and truly all material facts necessary for his assessment. Herein we are not dealing with a case coming under Section 34 (1) (b)In our opinion the requirements of Section 34 (1) (a) are fully satisfied. The fact that there was some vague information before the Income-tax Officer that the assessees father had secretly received a sum of Rs. 1,50,000.00 from the mortgagor was by itself not sufficient to bring to tax that amount particularly in view of the fact that the assessee had stoutly denied that fact and the court records did not support that information. It is true that the Income-tax Officer could have made further enquiry into the matter but the fact that he did not make any further enquiry does not take the case out of Section 34 (1) (a) particularly when the assessee had failed to place truly and fully all the material facts before him(7) We see no substance in the contention that the Income-tax Officer did not give effect to the order of the Appellate Assistant Commissioner when the latter asked him to reassess income of the assessee. The only ground on which the assessment order was set aside by the Appellate Assistant Commissioner was that the assessee had not been given a proper opportunity to put forward his case. The Appellate Assistant Commissioner did not hold that the notice issued by the Income-tax Officer under S. 34 (1) (a) was an invalid notice. Therefore there was no need for the Income Tax Officer Trichy to issue a fresh notice to the assessee under S.34 (1) (a) as contended on behalf of the assessees representatives. All that the Tax Officer had to do was to afford proper opportunity to the assessee to show, that in fact he had not received the aforementioned sum of Rs. 1,50,000.00. That opportunity had been given(10) From the facts noted above, it is clear that what presumption should be drawn in regard to appropriation of an open payment depends on the circumstances of a case(13) In our opinion the High Court was in error in thinking that the decision of the Judicial Committee in Kameshwar Singhs case (supra) has laid down a firm rule that whenever an assessee receives a payment and does not appropriate the same either towards the principal or interest, he must be deemed to have appropriated the same towards the principal. The decision in question, in our opinion, does not lay down the rule that whenever any amount is received by a creditor which he has not specifically appropriated either towards the principal or the interest due to him, the taxing authorities should proceed on the basis of the presumption that it has been appropriated towards the principal. On the facts of that arise it was clear that it was advantageous to the creditor to appropriate the receipt towards the principal. But turning to the facts of the present case the total amount due to the assessee was over 6 lakhs. Out of that the principal amount was less than 3 lakhs. The compromise decree was for Rs. 3,50,500.00. The creditor secretly received Rs. 1,50,000.00. He does not enter the same in his account books. Evidently he did not enter the same in his account-books with a view to evade tax. If he intended to appropriate that amount towards the principal, there was no need for him not to enter that receipt in his accounts. Obviously he appropriated the amount towards the interest due to him and that is why he did not enter that receipt in the accounts so as to facilitate evading payment of tax on that amount. The fact that the assessee was maintain Chetty system of accounts is immaterial on the facts of the case. The system of maintaining accounts is wholly irrelevant because the receipt in question had not been entered in the account at all. Hence, in our opinion the High Court erred in answering the third question against the Department.