Aishabi vs Commissioner of Income Tax

Sethuraman, J.—This is a reference u/s 256(1) of the I.T. Act, 1961, made by the Income Tax Appellate Tribunal, Madras Bench, referring

the following questions for the opinion of this court:

Whether, on the facts and circumstances of the case, the reopening of the assessment is justified u/s 147(a) of the Income Tax Act ?

Whether, on the facts and circumstances of the case, the Tribunal was justified in holding that a sum of Rs. 1,75,000 is not a windfall which is

not liable to tax ?

Whether, on the facts and circumstances of the case, the Tribunal was justified in holding that the route value, if any, is not goodwill and

therefore liable to tax ?

Whether, on the facts and circumstances of the case, the Tribunal was justified in allowing a deduction of only Rs. 90,000 instead of Rs.

1,20,000 claimed by the assessee?

Out of the four questions mentioned above, the learned counsel for the assessee did not press for an answer to questions Nos. 2 to 4 and,

therefore, we decline to answer those questions and return the reference unanswered in respect of those questions. This leaves for consideration

only question No. 1 and we shall state the facts relevant thereto.

One Sabulal Sahib who died on October 8, 1964, and who will hereafter be referred to as the assessee, was carrying on the business of running

motor transport buses in Salem. On 27th December, 1958, he entered into an agreement with one Kalaran to sell three of his buses with their

route permits and accessories to him. The agreement itself is not an annexure to the staterneat of the case, bat in the order of the Tribunal dated

19th November, 1968, calling for a report from the AAC, there is an extract which is apparently a translation of the relevant terms of the

agreement between the assessee and the said Kalaran. Kalaran is referred to as party No. 1 in the said extract and the assessee as party No. 2.

The relevant passage runs as follows :

Both the parties herein determined the value of the 3 buses to be Rs. 60,000 No. 1 (Kalaran) having agreed to pay to No. 2 (the assessee) Rs.

60,000, No. 1 has this day paid Rs. 15,000 as advance. The balance of Rs. 45,000 will be paid by No. 1 to No, 2 or towards No. 2''s Income

Tax arrears in 2 months time.

There is provision for what is to happen in case there was default in performing the agreement. It is unnecessary to refer to these terms. The

extract relevant to this case runs further as follows:

For discharging the debt of No, 2, No. 1 had agreed to advance loan covering Rs. 1,75,000 to No. 2 on promissory notes to be executed by

No. 2. No. 1 also had agreed that he will pay the creditors as per the directions of No. 2 and obtain receipt on return of document evidencing the

debt. In view of the advance received by No. 2 and No. 1''s agreement to discharge the debts by mutual trust the following 3 buses have been

delivered to No. 1.

Kalaran paid the balance of Rs. 45,000 and also the sum of Rs. 1,75,000 mentioned above. The assessee executed promissory notes in favour

of Kalaran for the sum of Rs. 1,75,000. On 9th February, 1959, a further agreement was entered into between the assessee and the said Kalaran.

This agreement also is not before us, but from what the ITO and the AAC have stated, it is clear that according to this agreement the purchaser,

i.e,, Kalaran, agreed to waive the said advance of Rs. 1,75,000 in view of the transfer of the buses and the routes to him. On 20th April 1959,

there was a meeting of the Regional Transport Authority and the said authority transferred the route permits relating to the three buses from the

assessee to Kalaran. It had earlier been arranged that the promissory notes executed by the assessee and those discharged by Kalaran out of the

sum of Rs. 1,75,000 would be in the custody of one Sri Soumb.rarajan, a chartered accountant of Salem, who was the assessee''s Income Tax

adviser. After the meeting of the Regional Transport Authority and the transfer of the permits in favour of Kalaran, Sri Soundara-rajan returned the

documents to the assessee including the promissory notes for the sum of Rs. 1,75,000.

We are concerned in this reference with the assessment for the assessment year 1960-61, the relevant previous year ending on 31st March,

1960. The assessee filed the return of income for this year on 29th March, 1961. His chartered accountant appended to the return a note which

runs as follows :

In the course of the year 1958 and 1959 one V. Kalaran who purchased for Rs. 60,000 (as per adjusted statement) 3 of the buses (MDS 5091,

MDC 5415 and MDC 3613) from the assessee, advanced to the assessee on pronotes sums to the extent of Rs. 1,75,000 to clear off earlier

debts and also paymet of Income Tax arrears. On the passing of the order of transfer of these buses by the R.T.A. the said Kalaran waived the

amount of Rs. 1,75,000.

The assessee feels that this is a casual receipt and windfall.

The assessment proceedings were taken up in 1962. On 12th October, 1962, the ITO wrote to the assessee asking for information on certain

points relating to the transaction of the transfer of the buses. Sri Soundararajan, the chartered accountant replied to the ITO''s queries by his letter

dated 20th November, 1962. The ITO was of the view that the reply was not satisfactory and he, therefore, wrote a further letter on 23rd

November, 1962, to the assessee. On this occasion, the assessee replied to the queries of the ITO as follows :

Three of my buses MDS 3613, MDC 5091 and MDC 5415 were sold to Sri Kalaran of Namakkal for Rs. 60,000 as per the agreement

executed on December 27, 1958, a copy of which has already been filed with you. During the period of negotiation he helped me to clear off my

earlier debt to C. T. Transports, Income Tax department, decree debt, etc. The total amount helped by him over and above the sale price of the

three buses, namely, Rs. 60,000 come to about Rs. 1,75,000. For some of these advances the pronotes returned by him and receipts are filed.

One pronote for Rs. 90,000 of P. L. C. T. P. L. Palaniappa Chettiar has been filed in the Sub-court, Salem, in Civil Suit in O.S. No. 13 of 1962.

The ITO made enquiries with Kalaran also. On 23rd November, 1962, the ITO wrote a letter to Kalaran stating that the assessee''s version

was that the 3 buses had been sold for Rs. 60,000 on April 20, 1959, and that the balance of Rs. 1,75,000 had been waived by Kalaran in favour

of the assessee and that the receipt was in the nature of a windfall. The ITO pointed out also that in his own assessment proceedings Kalaran had

claimed that the 3 buses had been purchased by him for a total consideration of Rs. 2,41,741. The ITO requested Kakran to explain the variation

between the two versions and state whether he had any evidence in support of his version. There was a letter from Kalaran on 1st December,

1962, in which the assessee''s version was denied. He stated that he had not waived or written off the entire amount of Rs. 1,75,000. In substance,

in his letter Kalaran stated that the buses had been acquired for a sum of Rs. 2,35,000. The contents of this letter were put to the assessee and

there was no reply from him.

The ITO completed the assessment on 24th December, 1962, and placed on record a note which to the extent relevant runs as follows :

After considering all the materials obtained and placed on record, it is my finding that Sri Kalaran cannot claim this payment to the assessee as

part of the purchase cost of the buses, as the documents reveal the sale price of the three buses had been agreed upon at Rs. 60,000 only.

Whatever sums over and above were paid on pronotes and waived would rightly constitute gifts. Sri Kalaran himself has admitted that he has more

or less foregone the right of collecting the debts due from the assessee. There is no evidence in the sale transaction which obviously is a collusion

between the two parties that there was an element of route value embedded in the sale of buses. At any rate, no mention of it has been made in the

document of agreement of sale filed. Even at this stage both these parties do not admit that there was any route value attached to the buses. This

position has been intimated to the Second Income Tax Officer, assessing Sri V. Kalaran for suitable action in his hands...

If after scrutiny by the Second Income Tax Officer, any material comes to notice that the excess amount received by the assessee constituted only

consideration of route valued then suitable action will be taken to reopen this assessment and include appropriate capital gains. For the present, the

admitted capital gain of Rs. 3,032 does not come up for capital gains tax....

The sum of Rs, 3,032 described as capital gain represents the difference between Rs. 60,000 taken as the sale price of the buses and Rs.

56,968 the original cost of the buses to the assessee. The buses were shown in the books at their written down value and the depreciation that had

been allowed on the buses come to Rs. 18,740. This sum was brought to tax u/s 10(2)(vii) of the Indian I.T. Act, 1922, which governs the

relevant assessment.

It is extraordinary and even unimaginable that any ITO discharging his functions bona fide in the administration of the Act should have passed

an order of the nature which has been done in the present case. The ITO had before him the following facts :

(1) The admission that the assessee had received a sum of Rs. 1,75,000 from Kalaran, the purchaser of the buses, though the assessee chose to

call it as a casual receipt and windfall,

(2) Kalaran, the person who purchased the buses and paid the amount has stated that the said sum of Rs. 1,75,000 formed part of the purchase

price.

(3) This statement of Kalaran was put to the assessee, and the assessee did not send any reply. Except for the fact that there was no express

admission by the assessee that he received the said sum of Rs. 1,75,000 as part of purchase price of the three buses along with the route rights,

there were all the materials before the ITO to enable him to treat the said sum of Rs. 1,75,000 as the amount received by the assessee as part of

the purchase price of the three buses. In fact, the AAC himself in his remand report dated March 15, 1969, has taken the same view of the action

of the ITO, though he has put it very mildly. He stated :

It is rather strange that the Income Tax Officer has not given any weight or consideration to the remarks of Sri Kalaran regarding the explanation

offered by the appellant. I would say that even with the materials in his possession, the Income Tax Officer has given a wrong finding that the

amount of loan forgone rightly constituted gifts. The Income Tax Officer has not bothered to investigate how such a huge amount could have been

waived by a prudent businessman.

Notwithstanding this situation, the position remains that the assessee had not disclosed that he received the sum of Rs. 1,75,000 as part of the

consideration for the sale of the three buses.

The assessee filed a suit in 1963 for accounts against Kalaran placing his claim on the agreement dated February 9, 1959. As the buses had

been handed over on 24th December, 1958, and the transfer was effected only on 20th April 1959, the assessee claimed the profit earned by the

buses during the intervening period as his and also certain amount as interest. This suit (O.S. No. 122 of 1963) in the court of the subordinate

judge of Salem was resisted by Kalaran. In the said suit, Kalaran as well as Soundararajan, the chartered accountant were examined as witnesses.

In the course of the cross-examination, Soundararajan as D.W. 7 stated that the plaintiff had told him that the sum of Rs. 2,35,000 was the price

of the 3 buses. In his own evidence Kalaran accepted that there was a package deal for transferring the buses together with the route permits and

accessories for a sum of Rs. 2,35,000. The ITO looked into the records of Kalaran also in January, 1965 and thereafter initiated action u/s 147(a)

of the I.T. Act of 1961. In the office note left by him, he stated that the plaint filed by the assessee and also the judgment of the court clearly

showed that the assessee received the said sum of Rs. 1,75,000 as consideration for the transfer of the route permit, etc. He was of the view that

the sum of Rs. 1,75,000 would have to be treated as capital gains. He pointed out also that the assessee had not shown to the department the

agreement dated 9th February, 1959, entered into with Kalaran on the basis of which the suit had been filed. He accordingly issued notice u/s 148

read with Section 147(a) of the Act of 1961. As by that time the assessee had died, his widow filed the return admitting the income as originally

assessed. The assessment was made on her as the legal representative of the assessee. The ITO held that the buses together with the route rights

had been transferred for a sum of Rs. 2,35,000, that the original cost of the buses was Rs. 56,968, that there was a capital gain of Rs. 1,78,038

and that the capital gain should be reduced by Rs. 22,000 being the estimated value of the route permits as on January 1, 1954. He, thus, brought

to tax the net sum of Rs. 1,56,032 as capital gains.

The assessee filed an appeal before the AAC, who confirmed the assessment. Thereafter there was an appeal to the Tribunal. It was

contended before the Tribunal that all the relevant materials necessary for making a proper assessment were furnished to the ITO and that there

was no justification for reopening the assessment. The Tribunal felt that it was necessary to have a clear finding from the AAC as to the reasons

and the basis for reopening the assessment u/s 147(a). It directed the AAC to submit his report giving the reasons and justification for reopening

the assessment u/s 147(a). The AAC submitted a report and thereafter the appeal was heard finally. By its order dated 15th November, 1969, the

Tribunal held that the assessee had not placed before the ITO in the course of the original assessment proceedings all the material facts and that

when the ITO initiated action u/s 147(a), he had materials before him to believe that as a result of the failure on the part of the assessee to disclose

fully and truly the material facts, income had escaped assessment. The I ribunal, therefore, dismissed the assessee''s appeal. It is as against this

order of the Tribunal that the present reference has been made to this court.

At this stage, we may point out as to what happened before the Tribunal at the time when the appeal was heard. In setting out the assessee''s

contention the following statements are found in the Tribunal''s order :

(1) Shri Abdul Karim pointed out that though a copy of the agreement of February 9, 1959, had not been filed by the assessee in the course of

the original assessment proceedings, since its contents were essentially in line with the contents of the agreement dated December 27, 1958, which

had been disclosed to the Income Tax Officer, it cannot be said that the Income Tax Officer who initiated action u/s 147 had gathered any fresh

facts by seeing the agreement of February 9, 1959, which had not been disclosed by the assessee to the Income Tax Officer at the stage of the

original assessment.

(2) Shri Abdul Karim made it clear that it was not the stand that because Kalaran had disclosed his version to the Income Tax Officer before the

original assessment was made, the action u/s 147(a) ceased to be without jurisdiction. Sri Abdul Karim''s clear stand is that he accepts that what is

to be seen is whether the assessee himself had disclosed all the facts which he was bound to disclose and his case is that the assessee had done so

as he had placed before the Income Tax Officer all the primary facts.

The Tribunal''s finding was that the assessee was aware that the buses were sold for Rs. 2,35,000 but that he did not disclose this to the ITO.

In the light of these contentions and the findings, the first question has to be considered.

The learned counsel for the assessee sought to argue that the provisions of Section 147(a) were not applicable to the present case, because all

the relevant facts were before the ITO and that if the ITO failed to draw proper inferences from the facts in his possession, he could not take

action u/s 147(a).

Section 147(a) in so far as it is material runs as follows :

Income escaping assessment.--If-

(a) the Income Tax Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return u/s 139 for

any assessment year to the Income Tax Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income

chargeable to tax has escaped assessment for that year or...

he may, subject to the provisions of Sections 148 to 133, assess or reassess such income or recompute the loss..., for the assessment year

concerned......

To confer jurisdiction under this section to issue notice in respect of assessments beyond the period of four years, but within a period of eight

years, from the end of the relevant year two conditions have to be satisfied. The first is that the ITO must have reason to believe that income,

profits or gains chargeable to Income Tax have been underassessed. The second is that he must have also reason to believe that such

underassessment "" has occurred by reason of either, (i) omission or failure on the part of an assessee to make a return of his income, or (ii)

omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment for that year. Both these

conditions are conditions precedent to be satisfied before the ITO could assume jurisdiction to issue a notice for the assessment or reassessment

beyond the period of four years but within the period of eight years. See Calcutta Discount Company Limited Vs. Income Tax Officer, Companies

District, I and Another, . In the present case, the assessee had submitted a return and, therefore, the only points that have to be considered are

whether the ITO could have had reason to believe that the income, profits or gains chargeable to tax had been underassessed or had escaped

assessment and whether the escapement of the income to tax has occurred by reason of omission or failure on the part of the assessee to disclose

fully and truly all material facts necessary for his assessment for that year.

Though it is conceded before us by the learned counsel for the assessee that there was an escapement of income from assessment, that does

not appear to be the stand taken by the assessee before the Tribunal. That will be clear from the fact that the assessee asked for reference of the

second question. That will also indicate that even before the Tribunal the assessee took up the stand that he received the sum of Rs. 1,75,000 but

that it was only a windfall and not liable to tax. Therefore, it was not the case of the assessee before the Tribunal that there was an escapement of

income from tax, and that that escapement was not the result of his omission or failure to disclose fully and truly all the material facts, but was the

result of the negligence or oversight or mistake on the part of the ITO to draw the necessary inference from the primary facts placed by the

assessee before him. Thus, in view of the concession referred to above, the only point is to see whether the escape is due to the assessee''s failure

to disclose fully and truly all material facts.

The Supreme Court had occasion to consider the question as to whether any question of law arose in a case where by reason of any omission

or failure on the part of the assessee to disclose fully and truly all material facts, income had escaped assessment, in Commissioner of Income Tax

Bombay North Vs. Lakhiram Ramdas, . In that case, at the time of the original assessment for the assessment year 1945-46, the assessee had

produced his account books and balance-sheets of all his branch offices. The ITO had examined the account books and had also noticed that the

assessee had accounts with the Exchange Bank of India and Africa and other banks. The assessment was made on 13th September, 1946. Later

the ITO came to know that the assessee had taken a draft for Rs. 1,10,000 from the Bombay branch of the aforesaid bank and deposited it on

17th July, 1944, in the Ahmeda-bad branch of the said bank. The ITO took action u/s 34(1)(a) and brought to tax the sum of Rs. 1,10,000 on

15th October, 1954. The assessment was confirmed by the AAC. But the Tribunal on further appeal held that it could not be said in the facts and

circumstances of the case, that there was any omission or failure on the part of the assessee to disclose fully and truly all material facts necessary

for his assessment for the year 1945-46. An application for reference to the High Court was rejected by the Tribunal and the High Court also,

when it was approached u/s 66(2) of the I.T. Act, 1922, summarily dismissed the said application. The matter, thereafter was taken on appeal by

special leave to the Supreme Court. It was sought, to be argued before the Supreme Court that the finding of the Tribunal that there was no

omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment was based on surmises and

conjectures. On this point, the Supreme Court observed as follows (p. 730) :

The question, now raised for the first time before us by the learned advocate for the appellant is that the Tribunal had no materials, on which to

find that there was no omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment and

that the finding of the Tribunal was based on surmises and conjectures. That, however, was not the question which was suggested for reference to

the High Court at the stage when the petitions u/s 66 were made.

The Supreme Court further held as follows (p. 731) :

Therefore, what the Tribunal had to consider was whether the assessee had fully and truly disclosed all material facts necessary for the

assessment. The Tribunal examined all the relevant materials produced by the assessee at the time of the original assessment and came to the

conclusion that there was no omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment.

The Tribunal referred to the account books produced by the assessee and particularly to the report of the examiner of accounts who submitted a

report to the ITO with regard to the bank account of the assessee in the Exchange Bank of India and Africa Ltd. In our opinion, in the

circumstances of this case, the question whether the assessee had or had not failed to disclose fully and truly all material facts necessary for his

assessment was a question of fact and we are unable to accept the argument of the learned advocate for the appellant to the contray.

In the result, we hold that no question of law arose in this case and the High Court of Bombay rightly rejected the petition u/s 66(2) of the I.T.

Act.

In a later decision reported in Commissioner of Income Tax, West Bengal III Vs. Kamal Singh Rampuria, , the Supreme Court had again to

consider a similar question. The assessee in that case was a minor at the relevant time. His mother who had passed away had bequeathed to him a

sum of Rs. 3 lakhs and her 1/6th share in a firm. This sum of Rs. 3 lakhs received from the mother under the will was invested in a firm. The father

was submitting returns of income on behalf of the minor assessee as his guardian. He disclosed in the return for the assessment year 1945-46, only

the share of income from the firm in which the minor had been admitted to the benefits of the partnership. The interest earned from the deposit of

Rs. 3 lakhs in another firm was being brought to tax in the hands of the father in his personal assessment. For the assessment year 1940-41, the

father of the assessee disputed the assessment of the interest income in his hands. This dispute ultimately reached the High Court and the High

Court held in the reference that the interest could not be assessed in the hands of the father. In spite of his raising a dispute that the income was not

assessable in his hands, the father as guardian did not include the interest income in the return submitted on behalf of his minor son. After the High

Court answered the reference for 1940-41, in favour of the father, the ITO took proceedings u/s 34(1)(a) of the Indian I.T. Act, 1922,

corresponding to Section 147(a) of the I.T. Act, 1961. He completed the reassessment by including the interest income. The conclusion of the

ITO was confirmed on appeal. On a reference of the question whether the assessment made u/s 34(1)(a) was justified in law, the High Court

answered the question in the negative on the ground that there was no evidence to support the finding of the Tribunal that the ITO had reason to

believe that there was omission on. the part of the assessee to disclose fully and truly all material facts. The Supreme Court observed at page 160

as follows :

On behalf of the appellant it was pointed out that the basis of the reasoning of the High Court was that there was no evidence to support the

finding of the Tribunal that the Income Tax Officer had reason to believe that there was any omission on the part of the assessee to disclose fully

and truly all material facts necessary for the assessment year 1945-46. It was argued that in doing so, the High Court answered a question entirely

different from the one referred to it and, therefore, exceeded the jurisdiction conferred on it by Section 66(1) of the Act. In other words, the

argument was that, in the absence of a question whether the finding of the Tribunal was based on no evidence or that it was perverse, the High

Court exceeded its jurisdiction in examining for itself the materials in support of the Tribunal''s finding and acting as a court of appeal. In our

opinion, there is justification for the argument put forward on behalf of the appellant.

The Supreme Court further pointed out at page 161 as follows :

It is well established that the High Court is not a court of appeal in a reference u/s 66 of the Act and^it is not open to the High Court in such a

reference to embark upon a reappraisal of the evidence and to arrive at findings of fact contrary to those of the Appellate Tribunal. It is the duty of

the High Court to confine itself to the facts as found by the Appellate Tribunal and answer the question of law in the setting and context of those

facts. It is true that the finding of fact will be defective in law if there is no evidence to support it or if the finding is unreasonable or perverse. But in

the hearing of a reference u/s 66 of the Act it is not open to the assessee to challenge such a finding of fact unless he has applied for a reference of

the specific question u/s 66(1). In India Cements Ltd. Vs. Commissioner of Income Tax, Madras, , it was pointed out by this court that in a

reference the High Court must accept the findings of facts reached by the Appellate Tribunal and it is for the party who applied for a reference to

challenge those findingt of facts first, by an application u/s 66(1). If the party concerned has failed to file an application u/s 66(1) expressly raising

the question about the validity of the findings of fact, he is not entitled to urge before the High Court that the finding was vitiated for any reason.

The same view has been expressed by this court in a later case in The Commissioner of Income Tax, Madras Vs. Sri Meenakshi Mills Ltd., Ors., .

We are, therefore, of the opinion that the High Court was in error in reappraising the evidence before the Appellate Tribunal and in interferring with

its finding that the Income Tax Officer had no reason to believe that there was an omission on the part of the assessee to disclose fully and truly all

the material facts necessary for the assessment.

The result of the decisions is to show that the question as to whether there was any omission or failure on the part of the assessee to disclose

fully and truly all material facts would be a question of fact, and that if any person wants to contest this conclusion he must raise a question in the

reference proceedings challenging this finding specifically.

The learned counsel for the assessee, however, sought to contend that in the present case the provisions of Section 147(a) had not been

properly applied, because the ITO had before him all the facts relating to the receipt of Rs. 1,75,000 even at the time of the original assessment

and that if he did not assess that amount as capital gains, he could not proceed u/s 147(a). For this purpose reliance was placed on a decision of

the Supreme Court in Gemini Leather Stores Vs. The Income Tax Officer B Ward, Agra and Others, . In that case, in the proceedings for the

original assessment the appellant had not disclosed certain transactions evidenced by bank drafts. The ITO himself had discovered the facts

relating thereto, but by oversight did not bring the amount represented by the drafts to tax as the income of the assessee. Subsequently, he took up

proceedings u/s 147(a) of the I.T. Act, 1961, with a view to assess the amount as the income of the assessee from undisclosed sources. On a writ

petition before the High Court filed by the assessee, the High Court held that the ITO did not apply his mind to the question whether the amount

could be treated as part of the total income of the assessee and that as the assessee did not disclose the source of those amounts which were not

recorded in the account books, all the conditions for invoking the jurisdiction u/s 147(a) were present. On appeal to the Supreme Court, it was

held, reversing the decision of the High Court, that after discovery of the primary facts relating to the transactions evidenced by the bank drafts it

was for the officer to make the necessary enquiries and draw proper inference as to whether the amounts represented by the drafts could be

treated as part of the total income of the assessee. As this had not been done by the ITO, it was plainly a case of oversight and it could not be

said, it was held, that income chargeable to tax had escaped assessment by reason of the omission or failure on the part of the assessee to disclose

fully and truly all material facts. To a similar effect was another decision decided earlier by the Supreme Court in Commissioner of Income Tax,

West Bengal, and Another Vs. Hemchandra Kar and Others, . In that case, a HUF consisting of six members had encashed high denominational

notes of the value of Rs. 1,29,000. Out of it a sum of Rs. 19,000 was brought to tax in the hands of the family. The balance of Rs. 1,10,000 was

assessed in the hands of the members of the family who had encashed the notes. Subsequently, the ITO issued a notice u/s 34(1)(a) of the Indian

I.T. Act, 1922, seeking to include the sum of Rs. 1,10,000 in the hands of the family. The assessee disputed this assessment and this dispute

ultimately reached the Supreme Court. The Supreme Court held that, because the primary facts were within the knowledge of the ITO when he

completed the first assessment, the escapement of income took place by reason of the failure of the ITO to include the sum of Rs. 1,10,000 in the

assessment of the HUF and that in such a situation the requirements of Section 34(1)(a) were not satisfied.

These two decisions of the Supreme Court show that even though the assessee had not disclosed fully and truly all material facts, still Section

147(a) or its predecessor would not apply unless it is established that the escapement of income was the consequence of the omission on the part

of the assessee to disclose fully and truly all the material facts. The attempt of the learned counsel for the assessee is to show that the sum of Rs.

1,75,000 escaped assessment in the present case by reason of the omission on the part of the ITO to draw the proper inferences from the facts

that were before him. It may be pointed out that this contention is not sound. It is clear from the passage in the Tribunal''s order extracted earlier

relating to the contention taken on behalf of the assessee that there was an admission on the part of the learned counsel that the assessee had not

produced the agreement of February 9, 1959. In the course of the original assessment the representation on behalf of the assessee was that the

sum of Rs. 1,75,000 advanced by Kalaran had been waived. The attempt was to show that the sale of buses and the waiver of Rs. 1,75,000 were

independent transactions. The claim that it was a casual receipt and a windfall was made on the footing that it had no connection with the

transaction relating to the sale of the buses and the route right. The fact that the sum of Rs. 1,75,000 was also part of the sale consideration for the

buses became evident from the stand taken by the assessee in the civil suit filed against Kalaran for accounts referred to already. It is in the course

of that suit that the assessee had in his deposition stated that he sold the buses and the route permit to Kalaran for Rs. 2,35,000, The suit itself had

been filed on the basis of the agreement of February 9, 1959. When these facts came into the possession of the ITO, he came to the conclusion

that the income had escaped assessment by reason of the omission or failure on the part of the assessee to disclose fully and truly all the material

facts. It is this conclusion of the ITO that has been confirmed by the Tribunal. This would be a question of fact. Even assuming that the materials

already in possession of the ITO were enough for him to draw the conclusion that the sum of Rs. 1,75,000 was part of the sale prices of the buses,

still the only point taken before the Tribunal was that the assessee had placed before the ITO all material facts. This contention was rejected by the

Tribunal.

In the absence of a proper question contesting the validity of the finding of fact by the Tribunal the finding will not be open to challenge at this

stage. This legal position is clearly brought out in the decision of Commissioner of Income Tax, West Bengal III Vs. Kamal Singh Rampuria,

noticed already.

It was strongly urged on behalf of the assessee that it was not open to the ITO to ignore the materials which were in his possession and to omit

to draw the inferences therefrom and thereafter, to lay the blame at the doors of the assessee, as if the assessee had failed to disclose fully and truly

all the material facts. The question as to whether any materials were ignored or not is not at all relevant for our present purpose. As we have

already pointed out, the Tribunal has found that the assessee was aware that the buses were sold for Rs. 2,35,000 and that he did not disclose this

to the ITO. So long as this finding of fact is not challenged by raising a question regarding the validity thereof, it would not be open to the assessee

now to contend that the ITO should have drawn the inferences from the materials already in his possession.

Further, before the Tribunal itself the learned counsel for the assessee had conceded that it was not his stand, that because Kalaran had

disclosed his version to the ITO before the original assessment was made, the action u/s 147(a) was without jurisdiction. Having conceded this

position before the Tribunal, it is certainly not open to the assessee now to reverse his stand and to contend at this stage that because Kalaran had

disclosed his version to the ITO before the original assessment, the action u/s 147(a) was not proper.

The Supreme Court has elaborately examined the scope of Section 66(1) of the Indian I.T. Act, 1922, corresponding to Section 256(1) of the

I.T. Act of 1961, in Commissioner of Income Tax, Bombay Vs. Scindia Steam Navigation Co. Ltd., . In that case, the, assessee''s ship had been

requisitioned by the Government. The ship was lost by enemy action in 1944. As compensation the assessee received a sum of Rs. 20 lakhs in

July, 1944, and Rs. 23 lakhs in December, 1944, and another sum of Rs. 33,333 in 1946. The relevant previous year for the assessment year

1946-47, was the period 1st July, 1944, to 30th June, 1945. For the purpose of the E.P.T. Act, the sums received had been deemed to have

been received in April, 1944. In the I.T. assessment for the assessment year 1946-47, the contention of the assessee was that this amount would

not be available for consideration in that assessment. The I.T. authorities had applied the fourth proviso to Section 10(2)(vii). In the reference

before the High Court, the assessee raised the contention that this proviso under which the charge was made could not be taken into account in

making the assessment for the assessment year 1946-47, as the relevant proviso came into force only on May 4, 1946. The learned counsel for

the Commissioner raised a preliminary objection to this question being raised for the first time before the High Court on the ground that it did not

arise out of the order of the Tribunal, having been neither raised before it nor dealt with by it. Overruling this objection the learned judges of the

Bombay High Court held that the form in which the question was framed was sufficiently wide to take in the new contention, that even if the

particular aspect of the question had not been argued before the Tribunal, it was implicit in the question as framed, and that, therefore, the assessee

could raise it. On the merits they held that the proviso was not retrospective in its operation and that the amount in question could not be assessed

by recourse to the proviso to Section 10(2)(vii) in the assessment for 1946-47. The Commissioner thereafter appealed to the Supreme Court and

in the majority judgment the Supreme Court elaborately considered this scope of Section 66(1) and observed as follows (p. 611) :

The result of the above discussion may thus be summed up :

(1) When a question is raised before the Tribunal and is dealt with by it, it is clearly one arising out of its order.

(2) When a question of law is raised before the Tribunal but the Tribunal fails to deal with it, it must be deemed to have been dealt with by it and is,

therefore, one arising out of its order.

(3) When a question is not raised, before the Tribunal but the Tribunal deals with it, that will also be a question arising out of its order.

(4) When a question of law is neither raised before the Tribunal nor considered by it, it will not be a question arising out of its order

notwithstanding that it may arise on the findings given by it.

Stating the position compendiously, it is only a question that has been raised before or decided by the Tribunal that could be held to arise out of its

order.

At page 612, it was further observed as follows :

All that Section 66(1) requires is that the question of law which is referred to the court for decision and which the court is to decide must be the

question which was in issue before the Tribunal. Where the question itself was under issue, there is no further limitation imposed by the section that

the reference should be limited to those aspects of the question which had been argued before the Tribunal. It will be an over-refinement of the

position to hold that each aspect of a question is itself a distinct question for the purpose of Section 66(1) of the Act.

The present case would squarely fall within the fourth proposition extracted above. The question posed now as to whether the income could

be said to have escaped assessment by reason of omission on the part of the ITO to draw the inferences from the materials before him does not

arise out of the Tribunal''s order. In fact, in view of the concession, the question is not open for argument at this stage. This is brought out in the

decision of the Allahabad High Court in Commissioner of Income Tax Vs. Shiv Nath Prasad, . That was a case where the assessee had a folio

called "" Sales tax account "" in which all the receipts on account of sales tax were credited and all payments debited. In the accounting year relevant

for the assessment year 1958-59, collections made by the assessee from its customers on account of sales tax were in excess of the payments

made to the Government with the result that there was a closing credit balance. Similarly, in the next year, there was a further credit balance. The

ITO included the credit balance as income in the assessment of the assessee. The AAC confirmed the assessment. Before the Tribunal it was

conceded on behalf of the department that the amount of sales tax received by the assessee did not become its income as and when the sale was

made, but only when the assessee did not make payment thereof to the Government and retained the amount as its own. The Tribunal held that if

the amount of sales tax collected by the assessee was not initially its income, it could not become income of the assessee thereafter and, therefore,

came to the conclusion that the sales tax collected by the assessee did not constitute a trading receipt. The Commissioner thereafter obtained a

reference of the question whether the sales tax collection represented the taxable income of the assessee. The Allahabad High Court held as

follows (p. 382) :

In the present case, as already pointed out, it was conceded on behalf of the department before the Tribunal that the amount of sales tax when

collected by a dealer did not become his income immediately on the receipt thereof. The department took its stand only on the basis that the

amount of sales tax so collected by the dealer became his taxable income only when the dealer did not make payment thereof to the Government in

the relevant accounting year. It was not contended before the Tribunal on behalf of the department that the amount of sales tax when received by

the assessee at the time of the sale was liable to suffer tax. That being so, the present case comes within the purview of the item No. 4 and the

compendious summary made by the Supreme Court of its conclusion in the case of Commissioner of Income Tax, Bombay Vs. Scindia Steam

Navigation Co. Ltd., . The question as to whether or not the amount of sales tax when received by the assessee was liable to tax, was never

agitated before the Tribunal and, therefore, it cannot be deemed to be a question arising out of its order.

Applying the same reasoning, we have also to hold here that the assessee having conceded before the Tribunal that it was not his stand that

because Kalaran had disclosed his version to the ITO before the original assessment, the action u/s 147(a) was without jurisdiction the question

whether the income escaped assessment by reason of the omission of the ITO to draw the proper inferences from the materials before him cannot

be said to arise out of the Tribunal''s order.

The learned counsel for the assessee relied on several decisions for the purpose of showing that it would be open to the assessee to put

forward a different aspect of the same question which was in issue before the Tribunal. In other words, the point taken was that the question as to

whether there was an omission on the part of the ITO to draw proper inferences from the materials before him, as a consequence of which income

had escaped assessment, was only another aspect of the applicability of Section 147(a), For this purpose, he relied on COMMISSIONER OF

Income Tax, WEST BENGAL I Vs. INDIAN MOLASSES CO. P. LTD., . This and other decisions dealing with the same aspect are not

relevant to the point in issue before us, because those are not cases where there was any concession on the part of the assessee as here. There

would be scope for applying those decisions if the point sought to be raised is a different aspect of the question as to whether there was failure on

the part of the assessee to disclose fully and truly all material facts. The question as to whether there was omission on the part of the reassessing

authority to draw proper inferences from the materials in his possession is so wholly different from the question as to whether there was failure on

the part of the assessee to place all material facts in his possession that it cannot be treated as an aspect of the same question.

It was sought to be contended as if the omission to draw the inference on the part of the ITO affected his jurisdiction so that it could be argued

in the reference. Even a point of jurisdiction would require consideration in a reference only if it could be said to arise out of the Tribunal''s order.

In K. Lakshminarayanan, Coimbatore Vs. The Commissioner of Income Tax, Madras, there was a levy of penalty on the assessee. The penalty

order was confirmed by the Tribunal. Though before the Tribunal no question relating to the jurisdiction of the IAC to entertain the proceedings

and to levy penalty was mooted, the assessee sought a reference on the question of jurisdiction of the IAC to levy penalty. The application was

rejected by the Tribunal and the assessee approached this court u/s 256(2) of the I.T. Act, 1961. This court held that the question relating to

jurisdiction, though going to the root of the matter, not having been raised and argued before the Tribunal for decision, could not be raised for

reference. The Supreme Court in Commissioner of Income Tax, Bihar and Orissa Vs. Kirkend Coal Co., was concerned with the levy of penalty

on a dissolved firm. The question was whether the penalty was validly imposed on the firm as constituted at the time of levy of penalty. The High

Court had held that the penalty could be legally levied only upon the original firm as constituted in the relevant year and not on the firm as

constituted in the year in which the penalty was levied, on the assumption that the source of the power of the ITO was in Section 44 of the Indian

I.T. Act of 1922.

On appeal, the Supreme Court held that Section 44 did not apply to a case where the business continued. Though the question referred was

sufficiently comprehensive, the Supreme Court did not consider the question whether u/s 26 read with Section 28 of the Act of 1922, penalty

could be imposed on the partners as constituted at the time of the levy of penalty, as successors of the firm which was in existence in the year

relating to which the penalty was levied, since that question was neither raised nor argued before the Tribunal.

To sum up our conclusions on the facts here :

(1) The question whether there was an omission or failure on the part of the assessee to disclose fully and truly all material facts would be a

question of fact.

(2) If the aesessee was dissatisfied with the finding of the Tribunal on this point, he should specifically have raised a question thereon in the

application for reference.

(3) The question whether the income chargeable to tax has escaped assessment by reason of the failure of the ITO to draw proper inferences from

the materials in his possession is not a different aspect of the question whether the income escaped assessment by reason of the failure on the part

of the assessee to disclose fully and truly all material facts necessary for the assessment.

(4) The assessee here cannot agitate the point which he conceded before the Tribunal, as if it was another aspect of the question raised, even if the

question framed was wide enough to cover the point conceded.

(5) Even the question of jurisdiction has to arise out of the Tribunal''s order for being considered in the reference and it does not so arise here.

For all these reasons mentioned above, the first question is answered in the affirmative and against the assessee. The department will have its

costs. Counsel''s fee Rs. 500.