Case: Kalyanji Mavji and Co Vs. Commissioner of Income Tax, West Bengal-II

The assessee-appellant, M/s. Kalyanji Mavji & Company, is a registered partnership firm dealing in various commercial activities. The said firm filed its return for the year 1956-57 corresponding to the accounting Gujarati Diwali year 2001 showing a total income of Rs. 7, 44, 551 after claiming a deduction of a sum of Rs. 43, 116 being the amount of interest paid by the assessee on the debts incurred for the partnership business. The Income-tax Officer accepted the return but on appeal to the Appellate Assistant Commissioner the assessment was reduced by a sum of Rs. 9, 200 by his order dated July 3, 1958. For the assessment year 1957-58, the assessee showed the same income and the deduction claimed was allowed. The next year 1958-59, however, presented quite a different complexion. While the assessee filed its return in the year 1958-59, the Income-tax Officer concerned suspected the correctness of the return particularly the deduction of interest and found that as the amount of the deduction claimed was utilised for giving interest-free loans to the partners for clearing up their income-tax dues it could not be said to be a loan incurred for the expenses of the partnership business and lie accordingly disallowed the deduction claimed by the appellant. This discovery led the Income-tax Officer to issue notice to the appellant under section 34(1)(b) of the Indian Income-tax Act, 1922--hereinafter referred to as "the Act"--for reopening the assessment of the year 1956-57--hereafter to be referred to as "the original assessment"--on the ground that the deduction having been wrongly allowed, taxable income had escaped assessment. After hearing the appellant the Income-tax Officer completed the assessment and included the sum of Rs. 43, 116 to the total income shown by the assessee. Thereafter, the appellant filed an appeal before the Appellate Assistant Commissioner against the order of the Income-tax Officer but the appeal was dismissed by the appellate authority which confirmed the order of the Income-tax Officer. It may be pertinent to note here that in his order the Appellate Assistant Commissioner pointed out that in the assessment years 1958-59 and 1959-60, the Income-tax Officer found that the appellant had no evidence with it to show that the funds borrowed on which the interest was paid were utilised for the purpose of the business and not diverted to the partners. Thereafter, the appellant filed a second appeal to the Income-tax Appellate Tribunal, "B" Bench, Calcutta. The Tribunal, after having accepted the facts culminating in the order of the Appellate Assistant Commissioner, was of the opinion that the information of the Income-tax Officer resulting in the notice under section 34(1)(b) of the Act to the assessee was not based on any fresh facts but was derived from the materials on the record of the original assessment. The Tribunal further found that if the Income-tax Officer while completing the original assessment would have been careful enough to scrutinise the balance-sheet he would have at once detected the infirmity on the basis of which the subsequent Income-tax Officer issued the notice under section 34(1)(b) of the Act to the appellant. The Tribunal further was of the opinion that the subsequent Income-tax Officer merely changed his opinion on the basis of the very materials that were before him when the original assessment was made and that was not sufficient to attract the provisions of section 34(1)(b) of the Act. The Tribunal, accordingly, allowed the appeal and set aside the order of the Income-tax Officer issuing notice to the asscssee under section 34(1)(b) for reopening the original assessment. Thereafter, the respondent, namely, the Commissioner of Income-tax, approached the Tribunal for making a reference to the High Court under section 66(1) of the Act as a result of which the Tribunal referred the case to the High Court at Calcutta after framing the following question"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the reassessment made by the Income-tax Officer under section 34(1)(b) of the Indian Income-tax Act, 1922, was incompetentHigh Court, after hearing the parties, differed from the view taken by the Tribunal and held that the present case squarely fell within the ambit of section 34(1)(b) of the Act inasmuch as the information on the basis of which the Income-tax Officer sought to reopen the original assessment was based on subsequent facts as also on the materials of the original assessment revealed by more careful and closer circumspection of those materials. The High Court referred to a number of decisions of this court as also to the decisions of the Calcutta High Court. The appellant sought leave to appeal to this court against the order of the High Court, which having been refused, the appellant obtained special leave from this court, and hence thisthe instant case it would appear that three additional facts had come into existence after the original assessment for the year 1956-57 was made by the Income-tax Officer. These were: (1) that for the assessment year 1958-59 the Income-tax Officer did not accept the assessees plea that he should be allowed deduction for a sum of Rs. 43, 116; (2) that the Income-tax Officer came to a finding that the assessee had not proved that the amount of deduction claimed was really in connection with the partnership business but held that this was on account of interest-free advance to the partners to pay their income-tax dues; and (3) the conduct of the appellant in not clearing the doubts of the Income-tax Officer when the appellant was given the notice to contest the assessment merely on the question of law also spoke volumes against the assessee and was also an additional factor which weighed with the Income-taxin view of the findings given by the income-tax authorities, the following facts emerge.(1) that at the time of the original assessment the appellant had filed his return claiming a deduction of Rs. 43, 116 and filed the balance-sheet in support of his plea;(2) that the balance-sheet showed that the capital of the firm was Rs. 8, 70, 000, total drawings by the partners stood at Rs. 29, 31, 998 and the loans were Rs. 6, 63, 292. The Income-tax Officer who completed the original assessment appears to have accepted the claim of the appellant because the balance-sheet without any further scrutiny and a close calculation would not have revealed that the amount of deduction claimed was really in the nature of interest-free loans given to the partners to meet their income-tax liabilities;(3) that in 1958-59, the Income-tax Officer discovered that the deduction claimed by the appellant was not correct and he accordingly called upon it to prove its plea but the appellant led no evidence before the Income-tax Officer. From this the Income-tax Officer concluded that the amount sought to be claimed as deduction was not incurred for the purpose of the partnershiptherefore, the subsequent information was(i) the discovery by the Income-tax Officer that the deduction was wrongly claimed and his disallowance of that deduction; and (ii) the conduct of the appellant itself in not adducing any evidence or materials to prove its stand that the deduction was validly claimed.

Court's reasoning:
It would be seen that section 34(1) contemplates two categories of cases for reopening the previous assessment: (1) where there has been an omission or failure on the part of the assessee to make a return of his income under section 22 or to disclose fully and truly all material facts necessary for his assessment; and (2) where there has been no such omission on the part of the assessee but the Income-tax Officer on the basis of information in his possession finds that income chargeable to tax has escaped assessment for any year. It is, therefore, manifest that the first category deals with cases where an assessee is himself in default and the second category deals with cases where there is no fault on the part of an assessee but where the income chargeable to tax has actually escaped assessment for one reason or the other and the Income-tax Officer comes to know about the same. In the instant case, however, we are concerned with clause (b) of section 34(1) extracted supra. Before, however, proceeding to interpret the ambit and import of section 34(1)(b), it may be necessary to consider the history of section 34 of the Act which appears to have passed through different phases with amendments and additions made to the section from time towould be seen that in the section as it stood in 1922 the word "information" was not there at all and the section merely empowered the Income-tax Officer to reopen the assessment of any year where income chargeable to tax had escaped assessment. No conditions or limitations on the power of the Income-tax Officer were at all laid down under the section. It appears that the appropriate legislature in its wisdom thought that this would be too wide a power to be given to the Income-tax Officer and may not bemay be pertinent to note that by virtue of this amendment the concept of the Income-tax Officer deriving definite information was introduced for the first time. The word "information" was qualified by the word "definite" and an additional condition was incorporated, namely, that the Income-tax Officer discovers that income chargeable to tax has escaped assessment. This provision led the courts to approach the provisions of the section with greater circumspection and stricter scrutiny as a result of which many cases of escaped assessments had to be set at naught by some decisions of the courts. This led Parliament to take a fresh view of the situation. Accordingly, by the Income-tax and Business Profits Tax (Amendment) Act, 1948, the section was recast in the present form as quoted above. There were further amendments in 1954 and 1956 with which we are not concerned. Ultimately, by the Income-tax Act, 1961, the section underwent a complete transformation and even the setting of the section was changed which now forms section 147(a) and (b) of the Income-tax Act, 1961. We are now concerned in this case only with section 34(1)(b) as it stood after the amendment ofof 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 notanalysis of this case would clearly show that the information as contained in section 34(1)(b) must fulfil the following conditions.(1) the information may be derived from an external source concerning facts or particulars as to law relating to a matter bearing on the assessment;(2) that the information must come after the previous or the original assessment was made. In fact, the words "in consequence of information" as used in section 34(1)(b) clearly postulate that the information must be subsequent to the original assessment sought to be reopened; and(3) that the information may be obtained even on the basis of the record of 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 orcategories are in addition to the categories laid down by this court in Maharaj Kumar Kamal Singhs case, which has been consistently followed in several decisions of this court as showna combined review of the decisions of this court the following tests and principles would apply to determine the applicability of section 34(1)(b) to the following categories of cases:(1) where the information is as to the true and correct state of the law derived from relevant judicial decisions;(2) where in the original assessment the income liable to tax has escaped assessment due to oversight, inadvertence or a mistake committed by the Income-tax Officer. This is obviously based on the principle that the taxpayer would not be allowed to take advantage of an oversight or mistake committed by the taxing authority;(3) where the information is derived from an external source of any kind. Such external source would include discovery of new and important matters or knowledge of fresh facts which were not present at the time of the original assessment;(4) where the information may be obtained even from the record of the original 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.If these conditions are satisfied then the Income-tax Officer would have complete jurisdiction to reopen the original assessment. It is obvious that where the Income-tax Officer gets no subsequent information, but merely proceeds to reopen the original assessment without any fresh facts or materials or without any enquiry into the materials which form part of the original assessment, section 34(1)(b) would have noare, however, not concerned with this particular plea because we are given to understand by the counsel for the appellant that the appeals against the assessment orders for the years 1958-59 and 1959-60 are pending before the income-tax authorities. In these circumstances we are clearly of the opinion that the facts of the present case clearly fall within the tests and principles laid down by this court in A. Raman and Co.s case, inasmuch as the Income-tax Officer proceeded on the basis of the information which came to him after the original assessment by fresh facts revealed in the assessment for the year 1958-59 and consisted of the conduct of the appellant itself in not adducing any evidence to support its plea. We are, therefore, unable to agree with the view of the Tribunal that this was a case of a mere change of opinion by the Income-tax Officer on the materials which were already on the recordOur attention was also drawn by the learned counsel for the appellant to the decision of the Bombay High Court in Commissioner of Income-tax v. H. Holckdecision is really based on the question whether it is open to the Income-tax Officer to change his opinion subsequently on the same materials and reopen the original assessment. We are no doubt inclined to agree with the view expressed by Chandrachud J., in the aforesaid case, but as this question is not free from difficulty as there is some divergence of judicial opinion on the subject, we would refrain from giving any definite decision on this point, particularly when in the view we take in the instant case, this point does not really arise for determination in this case, which is really based on another principle, namely, that the information was derived by the Income-tax Officer from fresh facts and is clearly covered by the principles laid down in A. Raman and Co.s caseFor the reasons given above, we find ourselves in complete agreement with the view taken by the High