Commissioner of Income Tax, Madras vs T.R. Rajakumari.

Ramanujam, J.—The assessee is a cine actress. During the accounting year relevant to the assessment year 1952-53, the assessee received

a sum of Rs. 36,000 from Messrs. Jupiter Pictures. The assessee has not included this amount in her return of income for that year and, therefor,

the original assessment for that year had been completed on June 30, 1955, without including the said amount in her income. After the completion

of the original assessment, the Income Tax Officer had received information that the said amount represented her income and, therefore, he issued

a notice dated October 9, 1957, proposing to reopen the assessment u/s 34 of the Indian Income Tax Act, 1922. In answer to the said notice the

assessee contended that the amount in question was only a loan taken by her from Jupiter Pictures and that it had to repaid by adjustment when

her work with Jupiter Pictures was completed. The Income Tax Officer did not accept the said contention and, therefore, included the said amount

in her assessment. The assessee therefore, filed a revision petition before the Commissioner of Income Tax against the said reassessment order. In

those revision proceedings it came to light that the said sum of Rs. 36,000 received by the assessee in the accounting year relevant for the

assessment year 1952-53, was in fact adjusted by the successors of Jupiter Pictures, namely, Manohara Pictures, on August 31, 1955, that is,

during the accounting year relevant to the assessment year 1955-56. The Commissioner issued a notice dated February 8, 1963, to the assessee

asking the assessee whether she was agreeable to the inclusion of the sum of Rs. 36,000 in her assessment for the year 1955-56. In reply to the

said notice the assessee expressed willingness to have the said sum included in her assessment for 1955-56, subject to the condition that the said

amount was deleted form the assessment for the year 1952-53 and that there should be no levy of penalty on her. The Commissioner thereupon

passed an order dated March 30, 1963, u/s 33A(2) of the Act directly the Income Tax Officer to delete the sum of Rs. 36,000 from her

assessment for the year 1952-53, and to include the same in her assessment for 1955-56.

However, the original assessment for 1955-56 had been completed on March 29, 1956. In the return submitted by the assessee for that year

the assessee had not included the said sum of Rs. 36,000 even though the adjustment of the same towards her remuneration came to be made on

August 31, 1954. Therefore, in pursuance of the direction of the Commissioner of Income Tax, the Income Tax Officer reopened the assessment

for the year 1955-56 by issuing a notice u/s 148 of the Act calling upon her to file a revised return. The assessee thereupon filed a revised return

including the sum of Rs. 36,000 in her income for the said year. The Income Tax Officer accepted the said return and completed the reassessment

including the said amount in her assessable income for the year.

Though the assessee had stipulated that no penalty should be levied on her, the Income Tax Officer levied penal interest on the assessed tax for

the year 1955-56, and also instituted penalty proceedings on her u/s 271(1)(c) of the Income Tax Act, 1962. Presumably, aggrieved against the

institution of penalty proceedings and the levy of penal interest, the assessee chose to challenge the reassessment order for the year 1955-56, by

filing an appeal before the Appellate Assistant Commissioner on the ground that the reopening of the original assessment for 1955-56 u/s 147 of

the Act was not legal. The Appellate Assistant Commissioner accepted the contention and held that, as the original assessment has been reopened

u/s 147(a) only in compliance with the order of the Commissioner of Income Tax, dated March 30, 1963, and not because the Income Tax

Officer had reason to believe that by reason of the assessees failure to disclose fully or truly all material facts the income had escaped assessment,

the reassessment was bad in law. He, therefore held that the Income Tax Officer had no jurisdiction to act u/s 147(a) of the Act. In that view he

cancelled the reassessment order,

The revenue took the matter in appeal to the Appellate Tribunal. It was contended before the Tribunal that the Income Tax Officer having given

the Commissioners direction as a reason for reopening the assessment u/s 147(a) in his notice u/s 148(2), it is not open to the Appellate Assistant

Commissioner to go into the sufficiency or otherwise of the said reason, that even otherwise there is material to show that the assessee has failed to

disclose the said sum of Rs. 36,000 as her income at the time of the original assessment and that has resulted in an escapement of income and,

therefore, the proceedings initiated u/s 147 were valid and sufficient to give the Income Tax Officer jurisdiction to reopen the original assessment

for 1955-56. The Tribunal however, held that it was open to the Appellate Assistant Commissioner to consider whether the reasons recorded by

the Income Tax Officer initiating proceedings u/s 147(a) were valid and sufficient, that the reasons recorded by the Income Tax Officers in his

letter to the Commissioner seeking sanction did not disclose any belief on his part that the income has escaped assessment due to the assessees

failure to disclose any portion of the same at the time of the original assessment, and that as such the only reason recorded does not satisfy the

requirements of section 147(a). The Tribunal also considered the question whether or not the assessee was guilty of suppression of material facts

which were necessary for the completion of the assessment for 1955-56 and observed that the amount of Rs. 36,000 had already been included in

the assessment for 1952-53 and that this assessment was cancelled by the order of the Commissioner dated March 30, 1963, only and that the

assessee was not bound to again include the said sum in her income for the assessment year 1956-56 while the assessment for 1952-53 was still in

force. The Tribunal ultimately held that the proceedings u/s 147(a) were invalid and that the order of reassessment passed by the Income Tax

Officer including the sum of Rs. 36,000 in the assessable income of the assessee for 1955-56 was bad in law. Aggrieved against the said decision

of the Tribunal the revenue has sought a reference to this court and the following question has been referred :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the reopening of the assessment

for 1955-56 u/s 147(a) of the Act was illegal, invalid and without jurisdiction and that the reassessment made by the Income Tax Officer including

the sum of Rs. 36,000 in the assessable income of the assessee was bad in law ?

As already stated, the Tribunal has given two reasons for holding that the proceedings u/s 147(a) are invalid, (1) that there is no nondisclosure of

income by the assessee for the year in question so as to attract section 147(a), and (2) that the assessing authority had no reasonable belief that the

income has escaped assessment as a result of non-disclosure by the assessee and that the proceedings had been initiated only on the direction of

the Commissioner of Income Tax.

As regards the first reason set out above, we are of the view that the Tribunal is not right in holding that there was no non-disclosure of income

by the assessee for the assessment year 1955-56. The reasoning of the Tribunal for taking that view can be set our in its own words :

No doubt the adjustment of the amount had been made in the books of the Manonhara Pictures on August 31, 1954, itself and, in the normal

course, the assessee should have been aware of this adjustment; but the amount of Rs. 36,000 had already been included in her assessment for

1952-53; and the assessee was not bound to again include this amount in her income for the assessment year 1955-56 and it was also not

necessary for her to disclose to the Income Tax Officer, who was making the assessment for 1955-56, the fact of the adjustment on August 31,

1954... The assessee cannot be expected to disclose the fact of the adjustment during the assessment proceedings for 1956-56, thereby inviting an

assessment of this amount in 1955-56, while the assessment of this amount in 1952-53 was still in force. The assessee cannot be expected to invite

double assessment on the same income. It cannot, therefore, be said that there was any failure on the part of the assessee to fully and truly disclose

all the material facts at the time of the original assessment for 1955-56.

The Tribunal has proceeded on the basis that the assessment for the year 1952-53 including the sum of Rs. 36,000 as the income accrued in

that year was before the assessee submitted the return for the assessment years 1955-56 during which year the said sum of Rs. 36,000 has

actually been adjusted and hence accrued to the assessee. In making this assumption the Tribunal has overlooked the dates when the assessee filed

the return and when the reassessment was made for the assessment year 1956-56. Though the Tribunal has referred to the relevant dates in its

order with reference to some other point, their impact on the question of non-disclosure had not been kept in mind. In this case the original

assessment was made for the assessment year 1952-53 on June 30, 1955, and in that original assessment admittedly the sum of Rs. 36,000 was

not included as the assessees income. This was presumably on the basis that the said sum was treated as loan and not as an income that has

accrued to the assessee as loan and not as an income that has accrued to the assessee in that assessment year. The assessee filed her return on

November 5, 1955, for the assessment year 1955-56. In that return the sum of Rs. 36,000 which has admittedly been adjusted on August 31,

1954, in the books of the Manohar Pictures towards her remuneration had not been included. Based on the said return there was an assessment

on March 29, 1957. Later, the Income Tax Officer invoked his powers u/s 34 and issue a notice dated October 9, 1957, proposing to reassess

the assessee by including a sum of Rs. 36,000 in the assessment year 1952-53 and an order of reassessment dated December 30, 1957, followed.

From the facts set out above it is clear that on the date when the reassessment notice u/s 34 for the assessment year 1952-53 was issued on

October 9, 1957, there has been an assessment for the year 1955-56 based on the return filed by the assessee where the income of Rs. 36,000

admittedly accrued to her on August 31, 1954, had not been included. Hence, it cannot be disputed that the assessee has been guilty of non-

disclosure of the income of Rs. 36,000 in respect of the assessment for 1955-56. The fact that the Income Tax Officer took the view that the said

sum represented income of the assessee of her income which resulted in the escapement of income for the year 1955-56. It is true that the Income

Tax Officer took the view that there has been as escapement of this income in the year 1952-53, but that view has been held to be wrong by this

court in a decision rendered in relation to certain assessments made on the assessee for the earlier years. But whatever the view the Income Tax

Officer took, the true legal position is that there has been escapement of income in the assessment year 1955-56, which was due to the failure on

the part of the assessee to fully and truly disclose the material facts at the time of the original assessment for 1955-56 which took place long before

the reassessment for the year 1952-53. Therefore, the Tribunal is not justified in saying that the nondisclosure of the said income of Rs. 36,000 in

respect of the assessment year 1955-56 was due to the actual inclusion of the said amount in the reassessment for the year 1952-53 which took

place later. We therefore, hold that this reason given by the Tribunal for holding that Income Tax Officer had no jurisdiction to reopen the

assessment for 1955-56 u/s 147 is not tenable.

The other reason given by the Tribunal for upholding the order of the Appellate Assistant Commissioner annulling the reassessment proceedings

u/s 147(a), however, appears to us to be sound. The condition precedent for initiating proceedings under the said sub-section is the issue of a

notice u/s 148. Section 148(2) specifically provides that the Income Tax Officer shall, before issuing any notice under this section, record his

reasons for doing so. There cannot be any dispute that the provisions of section 148 is mandatory. In this case, apart from the communication

which the Income Tax Officer wrote to the Commissioner requiring sanction u/s 151, there is no separate record where the Income Tax Officer

has set out his reasons for initiating proceedings u/s 147(a). In the said communication the only reason given for inciting proceedings u/s 147(a) is

the direction of the Commissioner; and there is no indication that the Income Tax Officer had entertained any belief that by reason of omission or

failure on the part of the assessee to disclose fully and truly all material facts, the income chargeable to tax has escaped assessment. In this

communication the Income Tax Officer has only stated that he is initiating proceedings u/s 147(a) in view of the direction of the Commissioners. He

has nowhere stated that he has entertained a belief that income has escaped assessment due to the non-disclosure by the assessee of material facts

for the assessment year 1955-56. We are not inclined to agree with the contention of the learned counsel for the revenue that the recording of

reasons contemplated by section 148(2) and section 151 need not related to the matters set out in section 147(a) and that the Income Tax Officer

having given the direction of the Commissioner as a reason for initiating the proceedings it should be taken to be a sufficient compliance with the

provisions of sections 148(2) and 151. The learned counsel for the revenue is right when he says that the sufficiency of the reasons recorded by the

Income Tax Officer is not a matter for the court to consider. But whether the reasons given were relevant to sustain a belief that income has

escaped assessment as a result of the non-disclosure of income by the assessee has to be considered by the court when the jurisdiction of the

Income Tax Officer to initiate proceedings u/s 147 is questioned. The revenue wants us to construe the words ""record his reasons for doing so

occurring in section 148(2) as requiring the recording of reasons for issuing the notice as such and without reference to the matter set out in section

147(a). We are of the view that having regard to the setting in which these words occur and the significance of the opening words in section

148(1), they have to be understood only as requiring the recording of reasons for initiating the proceedings u/s 147. If it is otherwise, we cannot

contemplate as to what are the reasons which could be given by the Income Tax Officer for issuing the notice as such, without reference to the

ingredients referred to in section 147(a). Admittedly, the only reason recorded for issuing the notice is the direction of the Commissioner to reopen

the assessment. Therefore, it has to be taken that the only reason recorded by the Income Tax Officer for issuing the notice as well as for

annotating proceedings u/s 147(a) is the direction of the Commissioner and not a reasonable belief entertained by the Income Tax Officer that

income has escaped assessment as a result of the non-disclosure of material facts by the assessee.

The learned counsel for the revenue then contends that there is clear-cut distinction between jurisdiction and procedure, and that these of a

notice without recording reasons is only a defect in procedure and that will not affect the jurisdiction of the Income Tax Officer to act u/s 147(a)

and that even if the initiation of proceedings u/s 147(a) is taken to be defective in that no relevant reasons had been recorded u/s 148(2) and

section 151, that will only be a defect in procedure not affecting the jurisdiction of the Income Tax Officer to reopen the assessment u/s 147(a). It

is also urged by the revenue that even if there has been a procedural defect in initiating proceedings u/s 147(a), the Income Tax Officer cannot be

said to have acted without jurisdiction and that the validity of the order made u/s 147(a) could itself be tested with reference to the criteria set out

in that section. Based on the above submissions, it is pointed our that once the Income Tax Officer has passed the order u/s 147 it is not necessary

to find out whether the Income Tax Officer followed the requisite procedure in making the assessment, that the court has to find our whether the

order passed u/s 147(a) satisfies the requirements of that section. And that in this case the reassessment order dated July 31, 1964, passed by the

Income Tax officer clearly sets out the relevant reasons which impelled him to initiate proceedings, and those reasons are sufficient to sustain the

reassessment order. There cannot be any dispute that there is a clear distinction between jurisdiction and procedure, and that a defect in procedure

will not normally amount to lack of jurisdiction. Section 147(a) sets out certain conditions for invoking the power and jurisdiction under that

section. If those conditions are satisfied, there is no jurisdiction for the Income Tax Officer to reassess under that section. Even if the conditions

precedent set out in section 147(a) are treated as matters of procedure, still the contemplated procedure has to be followed for attracting the

jurisdiction under that section. Therefore, the extreme contention of the revenue that even if the statutory procedure had not been followed still the

order of reassessment has to be taken to be valid is not possible of acceptance. We cannot see the ultimate order passed u/s 147(a) to find out

whether the proper or relevant reason existed at the stage of initiation of proceedings, when admittedly no relevant reasons had been recorded

earlier as provided in the statute. It has been pointed out by the Supreme Court in Calcutta Discount Co. Ltd. v. Income Tax Officer, while

considering the scope of the jurisdiction of the Income Tax Officer u/s 34(1)(a) of the 1922 Act which corresponded to section 147(a) of the

1961 Act, that a confer jurisdiction u/s 34 to issue a notice in respect of assessments beyond the period of four years, two conditions have to be

satisfied, namely, (1) the Income Tax Officer must have reason to believe that income, profits or gains chargeable to Income Tax escaped

assessment, and (2) he must have also reason to believe that such an escapement of income had 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 in that year, and that both the above conditions are

conditioned precedent to be satisfied before the Income Tax Office could have jurisdiction to issue a notice for assessment or reassessment

beyond the period of four years. On the above reasoning the Income Tax Officer cannot be said to have acted within his jurisdiction if the reason

for his belief that the two conditions are satisfied does not exist or is not relevant and material to the belief required by that section. If either of the

above conditions is not satisfied the Income Tax Officers action would be without jurisdiction. If the contention of the revenue that the non-

recording of reasons by the Income Tax Officer is only a defect in procedure and, therefore, will not affect the jurisdiction of the Income Tax

Officer to act u/s 147(a) were correct, we cannot understand the principle laid down by the Supreme Court in Calcutta Discount Co. Ltd. v.

Income Tax Officer and S. Narayanappa v. Commissioner of Income Tax and the other decisions of the various High courts holding that section

147(a) provides for two distinct conditions precedent to be fulfilled before the Income Tax Officer can exercise the jurisdiction under clause (a)

and if the conditions are not fulfilled, the jurisdiction of the Income Tax officer cannot properly be invoked. Even assuming that the requirement as

to recording of reasons can be taken to be procedural, still the statute having fixed it as a condition limiting the exercise of the power u/s 147(a)

any order passed by the Income Tax Officer without fulfilling or satisfying the conditions limiting the exercise of the power will be invalid. We are of

the view that the principal is by now well-established that the jurisdiction of the Income Tax Officer u/s 147(a) could be invoked only when the

above two conditions procedure are satisfied. If either of the conditions is not satisfied, the Income Tax Officer would have no jurisdiction to

invoke section 147(a). In this case, though we have held that there is clearly a non-disclosure of income by the assessee, the first condition that the

Income Tax Officer should have entertained a belief that income has escaped assessment has not been satisfied. It is true that in the reassessment

order the Income Tax Officer refers to the existence of the belief. But, there are no materials to show that he entertained such a belief at the stage

of the initiation of proceedings u/s 147(a). We are, therefore, of the opinion that the reassessment in this case made u/s 147(a) has to be treated to

be one without jurisdiction and cannot, therefore, be sustained. The question is, therefore, answered in the affirmative and against the revenue. The

revenue will pay the costs of the assessee, counsels fee Rs. 250. Question answered in the affirmative.