Tadikonda Ramulu vs Income Tax Officer

An interesting and oft-repeated question arises for consideration in these writ petitions-what is the extent of the jurisdiction of courts under article 226 of the Constitution of India to review the action of the Income Tax Officer proposing assessment of escaped income in exercise of his powers under sections 147 and 148 of the Income Tax Act ?

The petitioner submits that some of its ramifications are yet virgin ground and hence these petitions.

The facts are only few and are common in all the cases. The petitioner-firm is a wholesale distributor of various brands of cigarettes manufactured by the Imperial Tobacco Co., Ltd., Bombay. It has its head office at Guntur and branch offices at Vijayawada, Tenali and Chirala. The manufacture, hereinafter referred to as "ITC Ltd.", had extended interestfree credit up to rupees fifty lakhs to the petitioner to purchase stocks from it. The petitioner had also obtained an irrevocable revolving letter of credit from the Corporation Bank, Guntur, in favour of ITC Ltd., subject to the condition that the draft shall be drawn at sight without recourse to the drawee, to a limit of rupees fifty lakhs if the drafts were to be accompanied by commercial invoices and an undertaking that the goods mentioned in the invoices were despatched to the drawee. In addition to the above letter of credit facility, the Corporation Bank had allowed cash credit facility for rupees forty-five lakhs to the petitioner. The petitioner''s case is that there was an understanding between the petitioner-firm and the bank that the bills drawn under the letter of credit facility would be promptly cleared before the expiry of the period of 20 days from the date of presentation of the individual bills. It is also the petitioner''s case that this period of 20 days would take in the period for transit of supplies as well. The petitioner submits that ITC Ltd., was drawing on this account at the rate of rupees four lakhs per working day from the bank, irrespective of whether the goods mentioned in the bills had actually been received by the petitioner or even despatched by the manufacture.

The petitioner filed its returns of income under the Income Tax Act, 1961 ("the Act" for short) for the assessment years 1978-79 to 1984-85. After scrutiny of these returns, which were accompanied by the books of account, stock statements, etc., the Income Tax Officer finalised the assessments for the years 1978-79 to 1983-84, effecting marginal variations in the taxable income. In respect of the assessment for the assessment year 1984-85, the assessment was made on the income which was returned.

The Income Tax Department undertook a survey operation of the petitioner''s business u/s 133A of the Income Tax Act, 1961. That was on May 15, 1986. The stock registers of the petitioner and stock statements filed by it in the Corporation Bank, Guntur, were verified. On such verification, substantial variations of stock were found out. The Income Tax Officer, in his letters dated May 23, 1986 and June 4, 1986, put these divergencies in stock to the petitioner and informed him about his proposal to initiate action u/s 147 of the Income Tax Act to reopen the assessment. He afforded an opportunity to the petitioner of file his objections to that proposal. The petitioner submitted his detailed objections on June 15, 1986. After hearing the petitioner, the Income Tax Officer found that there was reason to believe that the petitioner had not disclosed the stock held by him during the respective assessment year and that the value of the difference between the actual stock disclosed to the bank and the stock accounts produced for the assessment would represent income from undisclosed sources which could be assessed under the head "Other sources". He, therefore, stated that :

"I have, therefore, reasons to believe that, by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment for the assessment year income chargeable to tax has escaped assessment for that year. Hence, action u/s 147(a) is necessary and a notice u/s 148 has to be issued for the assessment year with the previous approval of the Commissioner of Income Tax, A. P. III, Hyderabad."

The Commissioner of Income Tax approved the proposal on August 21, 1986. On August 25, 1986, the Income Tax Officer issued notices to the petitioner u/s 148 of the Income Tax Act in respect of each of the assessment years. The petitioner received those notices on September 25, 1986. It challenges the notice so received u/s 148 of the Act and seeks issue of a writ of certiorari to quash those notices.

Counsel for the petitioner submits that the notices are unsustainable, since the preconditions necessary for action under sections 147 and 148 did not exist nor have they been found to exist. According to him, those requirements are (1) that the Income Tax Officer should have reason to believe that income chargeable to tax has escaped assessment, (2) by reason of omission or failure of the assessee either to make a return, or (3) to disclose fully and truly all material facts necessary for the assessment for that year. He also submits that existence of and compliance with these conditions is justiciable and, therefore, the records of the Income Tax Officer should disclose such compliance. He also submitted that section 148(2) of the Income Tax Act requires the Income Tax Officer, before issuing notices under that section, to record his reasons for doing so. He submits that such record of reasons, if any, is open to scrutiny. The case of the petitioner is that there was no failure or omission on his part to disclose fully and truly all material facts necessary for assessment and there could, therefore, have been no reasonable belief that income of the petitioner had escaped assessment for the relevant years.

The Income Tax Officer had filed a detailed counter-affidavit traversing the various stages of the survey and enquiries as also the proceedings u/s 147 of 148 of the Act. He asserts that a true and full disclosure of stock by the petitioner, which is a trading concern, was necessary for finalising its assessment; but the petitioner disclosed only part of such stock. The actual stock was disclosed during the course of the survey. Having found that the stock disclosed in assessment proceedings for the respective years was less than the actual stock disclosed to the bank, there was enough material for the officer to have reason to believe that income had escaped assessment due to failure or omission to disclose all material particulars necessary for assessment. He submits that divergence in stock for each year as disclosed by the survey and the proposal to initiate proceedings u/s 147 were put squarely to the petitioner, seeking his explanation and it was only after considering the objections that the recorded his reasons to believe that income had escaped assessment. He further asserts that the Income Tax Officer complied with all the statutory requirements before issue of notices u/s 148 of the Income Tax Act. Further submission of counsel for the Revenue is that it is open to the petitioner to raise all his objections and explanations in answer to the notices u/s 148 and it is only after due enquiry and after affording all opportunities to the assessee that the Income Tax Officer will complete the reassessment. Counsel also submits that the scrutiny of this court in the proceedings u/s 147 of the Income Tax Act can, if at all, be only for the limited purpose of ascertaining -

Whether the Income Tax Officer had reason to believe that reopening of assessment is necessary ? and

Whether it was necessitated due to the failure or omission on the part of the assessee to disclose fully and truly all material facts necessary for assessment.

He submits that once it is found that the officer had formed the necessary belief on the basis of some relevant material, it is not open to this court to probe any further. The adequacy or sufficiency of the material to form the belief are all matters which are beyond the scope of judicial scrutiny in proceeding under the extraordinary jurisdiction of this court. Such matters shall be relegated to determination by the Income Tax Officer in accordance with the provisions of the statue. His submissions, in other words, is that only a limited scrutiny can be made and the merits of the matter have to be considered elsewhere in other proceedings where the assessee gets more than adequate opportunity to advance all his defences.

We have adverted to the fact that this question was considered quite often by various courts. Counsel for the petitioner referred to the decisions in Income tax Officer, Calcutta and Others Vs. Lakhmani Mewal Das, , Income Tax Officer and Others Vs. Madnani Engineering Works Ltd., Calcutta, , Commissioner of Income Tax Vs. Labala Haribandhu Sahu, , EQUITABLE INVESTMENT CO. (P.) LTD. Vs. Income Tax OFFICER, G. WARD, AND OTHERS., , T.M. Kousali Vs. Sixth Income Tax Officer, , Acchut Kumar S. Inamdar Vs. P.R. Hajarnavis and Another, , and Sirpur Paper Mills Ltd. Vs. Income Tax Officer, "A" Ward and Another, .

Counsel for the petitioner submitted that the facts disclosed by the survey were not sufficient material to justify any reason for the Income Tax Officer to believe that the income of the petitioner had escaped assessment for any of the assessment year in question or that such escape was due to any failure or omission on the part of the petitioner to disclose fully and truly material facts necessary for assessment. He rested his case on the submission that whatever material the Income Tax Officer had was vague, indefinite, far-fetched and fanciful, and such material could not support any belief in any reasonable person properly instructed in law or facts that any income had escaped assessment. He stressed that there was no obligation under any of the provisions of the Income Tax Act on the petitioner to disclose his stock statements to the bank for the purpose of assessment and, therefore, non-disclosure of those statements did not amount to failure or omission to disclose fully and truly all material facts necessary for assessment.

As we have noticed earlier, the scope of interference with proceedings for reopening assessments u/s 34 of the Indian Income Tax Act, 1922, which corresponds to sections 147 and 148 of the 1961 Act was considered by the courts in India for a fairly long time past.

Calcutta Discount Company Limited Vs. Income Tax Officer, Companies District, I and Another, , S. Narayanappa and Others Vs. Commissioner of Income Tax, Bangalore, , Kantamani Venkata Narayana and Sons Vs. First Additional Income Tax Officer, Rajahmundry, , Chhugamal Rajpal Vs. S.P. Chaliha and Others, , Commissioner of Income Tax, Gujarat Vs. Bhanji Lavji, Porbandar, , CIT v. Burlop Dealers Ltd. [1977] 91 ITR 609 and Mrs. Khorshed Shapoor Chenai and Others Vs. Assistant Controller of Estate Duty, Andhra Pradesh and Others, are a few of the decisions of the Supreme Court, which dealt with this question.

In Kantamani Venkata Narayana and Sons Vs. First Additional Income Tax Officer, Rajahmundry, , the legal position was stated to be that (at page 641) :

"...if there are in fact some reasonable grounds for the Income Tax Officer to believe that there had been any non-disclosure as regards any fact which could have a material bearing on the question of under-assessment, that would be sufficient to given jurisdiction to the Income Tax Officer to issue notice u/s 34. Whether these grounds are adequate or not is not a matter for the court to investigate. In other words, the sufficiency of the grounds which induced the Income Tax Officer to act is not a justiciable issue. It is of course open for the assessee to contend that the Income Tax Officer did not hold the belief that there had been such non-disclosure. In other words, the existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. Again, the expression ''reason to believe'' in section 34 of the Income Tax Act does not mean a purely subjective satisfaction on the part of the Income Tax Officer. The belief must be held in good faith. It cannot be merely a pretence. To put it differently, it is open to the court to examine the question whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section. To this limited extent, the action of the Income Tax Officer in starting proceedings u/s 34 of the Act is open to challenge in a court of law"

The same principles should apply to reopening of assessment u/s 147 of the Act, 1961, as well. The only two questions which we need, therefore, ask are :

"(1) Whether the Income Tax Officer did hold the belief that the assessee had failed to disclose fully and truly all the material particulars and that resulted in under underassessment, and

(2) Whether the reasons for the belief had a rational connection with each other ?"

Judicial review of the proceedings which may lead to reassessment is limited to the above extent only. This is so because, the proceedings u/s 147 and 148 enable the assessee to file a return of income and contest the proposal on merits, both on facts and law. All defences on law or facts are available to the assessee at that stage. It is true that there is an amount of finality attached to an assessment, subject of course to appeal or revision. That finality can be statutorily impaired, subject of course to very stringent tests which sections 147 and 148 of the Act have provided for. Courts have explained the extent and applicability of those limitations in various decisions which we have referred to. We are, therefore, of the opinion that judicial scrutiny of proceedings for reassessment initiated u/s 147(a) and 148 of the Act has to confine itself to a limited extent as to whether the Income Tax Officer had reasons to believe and such reasons were germane or relevant to the belief that income was underassessed due to failure of the assessee to make a true and full disclosure of material particulars. We have to apply this limited test to this case. In doing so, we have to consider the submissions made by counsel on either side on some of the relevant aspects.

Counsel for the petitioner submitted that only the records of the Income Tax Officer and not the affidavit which he has filed may be taken into account nor shall the latter be determinative in the process of judicial scrutiny. We have our own doubts as to whether this proposition is correct. That is because, on more occasions than one, the Supreme Court had referred to the affidavits filed by the Income Tax Officer in support of his submissions that he had formed a bona fide belief on the basis of relevant reasons. We may usefully refer to Kantamani Venkata Narayana and Sons Vs. First Additional Income Tax Officer, Rajahmundry, wherein reference was made to the affidavit of the Income Tax Officer. In this case, it is not necessary for us to go that far, since the record of the proceedings commencing from the report of the survey operations u/s 133A of the Income Tax Act and consisting of letters dated May 15, 1986, May 28,1986 and July 2, 1986, and the petitioner''s replies dated June 15, 1986 and July 10, 1986, seems to us to bear out the case of the respondent. Those materials which are produced by the Revenue are sufficient to make out that the Income Tax Officer had reason to believe that, by reason of non-disclosure, fully and truly, of all material facts relating to the actual stock position in respect of the assessment years in question, the income of the petitioner must have escaped assessment. We hasten to add that what the Income Tax Officer was required by the provisions of section 147 of the Act to do was to form a bona fide belief and record his reasons indicating that income assessable to tax had escaped assessment by reason of the failure or omission on the part of the assessee to disclose material facts fully and truly. That belief is only tentative, and does not amount to a final finding of fact adverse to the assessee. Though tentative, the belief must be reasonable, and it must be based on relevant and cogent material having nexus with the assessable income of the assessee. On a scrutiny of the material referred to above, we are satisfied about the existence of the belief and also that there were reasons justifying such belief.

Counsel for the petitioner urges before us that there was no obligation on the part of the petitioner to disclose the bank statements as the assessee had produced all the books including the stock registers which were relevant for assessment, and, if necessary, the Income Tax Officer could have required him to produce further or additional material including the stock statements filed in the bank. Only if the assessee failed to do so, would there be omission or failure to disclose on his part. The Officer had scrutinised the accounts and had made additions to the assessable income. He had obviously applied his mind at that stage. Counsel, therefore, submits that omission or failure on the part of the Income Tax Officer to notice a relevant fact or to draw a necessary inference would not be converted into failure or omission of the assessee to disclose material facts. Counsel lays considerable stress on the fact that the assessments were not mechanical or automatic. He submits further that it is true that it is for the Income Tax Officer to scrutinise in detail all the documents filed before him at the time of scrutiny; but, if there was any default on the part of the assessee, the Income Tax Officer could have summoned the bank statement. This broad proposition is beyond reproach. But, if the fact which the assessee had in his possession was material to the assessment, he had a duty to disclose that. May be, the officer could have discovered or unearthed that fact on closer scrutiny. That by itself would not absolve the assessee of his duty of true and full disclosure of material facts.

The petitioner submits that bank statements regarding stock were not material relevant or necessary for the assessment and, therefore, non-disclosure of the same would not amount to failure or omission to disclose material facts. It is, therefore, necessary for us to decide whether the stock-in-trade of a trading concern is a fact material to the assessment of that concern.

In The Commissioner of Income Tax, Madras Vs. A. Krishnaswami Mudaliar and Others, , the Supreme Court dealt with that very question and observed (headnote) :

Whichever method of book-keeping is adopted, in the case of a trading venture, for computing the true profits of the year, the stock-in-trade must be taken into account. If the value of the stock-in-trade is not taken into account, in the ultimate result the profit or loss resulting from trading is bound to get absorbed or reflected in the stock-in-trade unless the value of the stock-in-trade remains unchanged at the commencement of the year and the end of the year."

We have, therfore, no doubt that the statements regarding stock were very material for assessment of the petitioner. We also note that the petitioner had, as a matter of fact, produced one set of statements of stocks and bank statements for assessment. But they did not, according to the Assessing Officer, amount to true and full disclosure of the actual stock held by it.

Counsel for the petitioner submitted that the only duty of the assessee is to disclose material facts necessary for the purpose of assessment. Once they are disclosed, there is no further obligation to inform the Assessing Officer of any inference which he could drawn from such facts. He relied on the decision of this court in Sirpur Paper Mills Ltd. Vs. Income Tax Officer, "A" Ward and Another, as also the decision of the Supreme Court in Mrs. Khorshed Shapoor Chenai and Others Vs. Assistant Controller of Estate Duty, Andhra Pradesh and Others, and of the Madhya Pradesh High Court in Commissioner of Income Tax Vs. Late Lt. Col. B.A. Deodhar (through L/H Smt. Leela Bai), .

In the above three decisions, the assessee had disclosed all the basic facts necessary for the assessment. Had the Officer looked a little further or probed a little deeper or drawn the correct inferences from the facts in evidence he would have brought a larger amount to tax. The Assessing Officer initially failed to do so. Later, on realising his mistake, he proceeded against the assessees for "failure or omission to disclose fully and truly all material facts necessary for assessment." The courts held that failure on the part of the Assessing Officer to probe the facts disclosed by the assessee to the fullest extent or to draw obvious inferences would not justify proceedings for reassessment. We are of the opinion that the present is not a case involving failure of the officer to draw obvious inferences from facts which were disclosed. It prima facie involves failure or omission of the assessee to disclose fully and truly facts material to the assessment. On an examination of the relevant files, we are satisfied that the Assessing Officer had reason to believe that the stock disclosed at the time of assessment was only a portion of the actual stock which was reflected in the statements to the bank for the relevant assessment years. We are not foreclosing any explanation which the assessee may have for this divergence in stock. Perhaps, the petitioner may have a valid explanation for the same. The Assessing Officer may, perhaps, accept his explanation in the course of reassessment proceedings. We are concerned only with a very limited question whether the Assessing Officer had come to a bona fide belief that the assessee had failed or omitted to disclose truly and fully facts material for assessment. Our answer to that question, to the limited extent of the scrutiny which we are expected to undertake, is an emphatic affirmative.

One other aspect of the matter which counsel for the petitioner urged before us is that the real stock was what he disclosed to the Income Tax Officer and the stock as per statements filed in the bank had to be inflated to satisfy the requirements of ITC Ltd., for uninterrupted supply of money every week. We do not propose to go into the merits of this contention, except to note that the Income Tax Officer had adverted to this explanation with reference to the survey report and the replies received from the bank with specific reference to this contention. That may be an aspect of the matter which may require closer scrutiny during the course of the re-assessment proceedings. We need only state that the availability of the explanations to the assessee does not preclude the Income Tax Officer from adverting to the obvious in arriving at a bona fide belief that the divergence of the stock between the two statements of the assessee for the relevant period indicated omission or failure to make a true and full disclosure of facts material for assessment. We find force in the contention of counsel for the respondent that we may not accept any submission which may give legitimacy to the duplicity of the assessee in maintaining books of account and statements of stock. He brought to our notice the decisions in Coimbatore Spinning and Weaving Co. Ltd. Vs. Commissioner of Income Tax, and V. Rajan Vs. Commissioner of Income Tax, in support of his submission that we shall not accept the proposition that stocks were inflated in the statements to the bankers to avail of higher credit facilities. As we have indicated above, we do not propose of finally pronounce on this aspect of the case, since the parties may have to canvass these very aspects in the course of further proceedings in this matter.

We may incidentally note that when a person is said to have disclosed a fact, it means that he has disclosed a true fact. Similarly, when a document is said to have been disclosed, it implies that the document is a genuine one. Where facts which are untrue or documents which are not genuine are placed before the Income Tax Officer, there is no disclosure of primary facts, vide Income Tax Officer, "I" Ward and Others Vs. Mahadeo Lal Tulsyan, .

Counsel for the petitioner relied on the decision of the Calcutta High Court in Equitable Investment Co., (P.) Ltd. v. ITO [1988] 174, to contend that we shall not look into the counter-affidavit of the respondent to decide whether he had reason to believe that income had escaped assessment due to omission or failure of the assessee to disclose fully and truly all facts material for the assessment. On a reading of the decision, what we find is that it rested on the proposition that the Income Tax Officer shall not add to or supplement his reasons and not that he shall not answer the allegations which the assessee had chosen to make in the writ petition. It shall not be as if we shall look into the allegations of the petitioner but close our eyes and ears to the replies of the respondent. In deciding the question of the existence or otherwise of reasons for the respondent to from the belief necessary under sections 147 and 148 of the Income Tax Act, we have confined ourselves to the record as it was at the time of issue of the notice u/s 148 of the Act. Counsel referred to the decision in Acchut Kumar S. Inamdar Vs. P.R. Hajarnavis and Another, wherein it was held that there was no failure or omission on the part of the assessee in not furnishing a balance-sheet of the land development firm of which the assessee therein was a partner and that conduct did not justify issue of notice to reopen the assessment. We cannot accept this proposition in view of the specific terms of section 147(a) of the Income Tax Act which lays down that the assessee has to disclose fully and truly all material particulars relating to the assessment; and that failure or omission to do so would attract reassessment. One other decision which he cited is T.M. Kousali Vs. Sixth Income Tax Officer, wherein Puttaswamy J., held that non-disclosure of the pendency of the claim for enhancement of compensation under the Land Acquisition Act is not failure to disclose material facts necessary for assessment. The principle of that decision is the same as in Mrs. Khorshed Shapoor Chenai and Others Vs. Assistant Controller of Estate Duty, Andhra Pradesh and Others, and does not, therefore, Render any further assistance to the petitioner.

The point in question is concluded against the petitioner in Kantamani Venkata Narayana and Sons Vs. First Additional Income Tax Officer, Rajahmundry, . Dealing with the same question, the Supreme Court adverted to the fact that (at page 643) :

"The Income Tax Officer has said that no attempt was made by the assessee to furnish some reasonable proof of the source of the additional wealth; the partition deed was not produced; the books of account prior to 1948-49 were withheld on the plea that all the books were lost; no evidence was tendered to show that the father-in-law of the manager was possessed of sufficient means to give and did give any large cash amounts to him; and there was also no explanation why a large amount exceeding a lakh of rupees was not invested in the money-lending or other business.

The Income Tax Officer had, therefore, prima facie, reason to believe that information material to the assessment had been withheld and that, on account of withholding of that information, income liable to tax had escaped assessment."

The court also observed that (at page 643) :

"From the mere production of the books of account, it cannot be inferred that there had been full disclosure of the material facts necessary for the purpose of assessment. The terms of the explanation are too plain to permit an argument being reasonably advanced, that the duty of the assessee to disclose fully and truly all material facts is discharged when the produces the books of account or other evidence which was a material bearing on the assessment. It is clearly implicit in the terms of sections 23 and 34 of the Income Tax Act that the assessee is under a duty to disclose fully and truly material facts necessary for the assessment for the year, and that the duty is not discharged merely by the production of the books of account or other evidence. It is the duty of the assessee to bring to the notice of the Income Tax Officer particular items in the books of account or portions of documents which are relevant. Even if it be assumed that, from the books produced, the Income Tax Officer, if he had been circumspect, could have found out the truth, the Income Tax Officer may not, on that account, be precluded from exercising the power to assess income which had escaped assessment."

We are, therefore, of the opinion that the Income Tax Officer had reasons to believe that there was no true and full disclosure of material particulars necessary for assessment, since the petitioner had not disclosed the actual stock-in-trade and his actual assessable income, but he disclosed only portions thereof.

The last aspect which falls for consideration is whether this court need exercise the extraordinary and discretionary jurisdiction under article 226 of the Constitution of India to interfere with the proceedings at this stage. We feel we have to answer in the negative and that too on high authority.

In Kantamani Venkata Narayana and Sons Vs. First Additional Income Tax Officer, Rajahmundry, , the Supreme Court observed that there could be no final decision on the question of reassessment or the quantum when notices were issued u/s 148 of the Act. All defences are open to the assessee before the respondents. In addition, he may have recourse to appellate and other statutory remedies. The only question which we need and can consider is whether the requirements of sections 147(a) and 148 of the Income Tax Act were satisfied in issuing the notice. Our answer in the affirmative is confined only to this limited aspect. We are of the opinion that there is no need nor any justification for interference at this stage.

The writ petitions are, therefore, dismissed. No costs.