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Judgment
BISHAN NARAIN, J. - This is an application u/s 66(2) of the Income Tax Act asking us to direct the Income Tax Appellate Tribunal to state the case raising questions of law and to refer the same to this court for decision.
The petitioners are a partnership firm and are carrying on business as contractors for the construction of Government buildings, etc. The firm during the assessment year 1943-44 executed the contract work of the Survey of India Buildings at Dehra Dun. For the purposes of execution of this work the firm had received materials from the Government at controlled or concessional rates. The assessment for this year was completed on 30th July, 1947. In making the assessment of the firms income and profits the Income Tax Officer added Rs. 1,00,000 as profits on the ground that stores or quite a large portion of them had found their way to black-market where they were disposed of at fabulously high profits. The commodities, which according to the Income Tax Officer had been sold in black-market, are not mentioned in the assessment order except nuts and bolts of comparatively low value. In 1952 the Income Tax Officer initiated proceedings u/s 34 of the Income Tax Act and reopened the assessment of 1943-44 assessment year. The Income Tax Officer added a further sum of Rs. 1,52,750 as profits obtained by selling in black-market part of the iron and cement received from Government. On appeal the Income Tax Tribunal held that section 34(1)(a) applied to the case, but the quantum of addition was reduced to Rs. 50,000. The application u/s 66(1) of the Income Tax Act was rejected. Hence this application u/s 66(2) of the Income Tax Act.
The petitioner raises the following questions of law on the facts mentioned above :
"(1) Whether the reopening of the present assessment is not contrary to the provisions of section 34 of the Income Tax Act ?
(2) Whether there was material evidence on the file to justify the sustaining of the addition of Rs. 50,000 to the assessable income ?"
Now, there can be no doubt that section 34 comes into operation only when the Income Tax Officer has reason to believe that certain income, profits or gains have escaped assessment. The words "reason to believe" suggest something more than the satisfaction of the Income Tax Officer. The expression suggests reasonable grounds on which the Income Tax Officer may take action. Power under this section cannot be exercised on mere rumours or suspicions. It is argued on behalf of the firm that there is no material on the record on which the Income Tax Officer could be said to have had reason to believe that certain profits had escaped assessment. This is a question of law on which the case should be stated by the Income Tax Appellate Tribunal. It was, however, suggested that after the assessment the Income Tax Officer came to be in possession of additional material to justify him to take action u/s 34 of the Act but no such material has been adverted to by the Income Tax Officer in his order, nor has any such material been pointed out to us.
As regards the second question, the petitioners case is that black-marketing in Government stores had been taken into consideration when assessment was originally made and that the present action u/s 34 and the subsequent assessment amount to review of the previous order on the same material which was available at the time of the original assessment, and, therefore, it does not amount to taxing the escaped profits. It is also urged that there is no material on the record to justify the addition of Rs. 50,000 over and above Rs. 1,00,000 already added under this head. This, in our opinion, also raises a question of law on which the Tribunal should state the case and refer the same to this court for decision.
Accordingly, this petition is accepted with costs and the Income Tax Appellate Tribunal is directed to state the case and refer the two questions of law mentioned above for decision by this court. Counsels fee Rs. 150.
BHANDARI, C.J. - I agree.
Petition allowed.