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PETITIONER:

UNION OF INDIA AND OTHERS

Vs.

RESPONDENT:

M/S. RAI SINGH DEB SINGH BIST & ANR.

DATE OF JUDGMENT15/12/1972

BENCH:

HEGDE, K.S.

BENCH:

HEGDE, K.S.

REDDY, P. JAGANMOHAN

CITATION:

1974 AIR 478 1973 SCR (3) 102

1973 SCC (3) 581

ACT:

Indian Income Tax Act, 1922-s. 34(1)(a)-To confer

jurisdiction to issue notice, 2 conditions have to be

satisfied (i) I.T.O. must have reason to believe that income

had been 'under assessed : (ii) He-must have reason to

believe that either assessee has failed to make a return

under s. 22 or he has omitted to disclose fully all material

facts.

HEADNOTE:

The assessee in these appeals is an Hindu Undivided Family

The assessment years in question are ranged from 1942-43 to

1953-54. The assessee filed its returns for these years in

time. The assessee's account books showed considerable cash

credits in the name of some relations of the second

respondent, the Karta of the H.U.F. The I.T.O. went into the

genuineness of these cash credit entries. The contention of

the assessee was substantially accepted either by the

Appellate Assistant Commissioner or by the Revenue Appellate

Tribunal. With regard to the, assessment for the assessment

years 1943-44 to 1949-50, the final assessment was made in

pursuance of an agreement or settlement arrived between the

assessee and the Deputy Director of Inspection (Investiga-

tion). Long after the assessments in question were

finalised, the I.T.O. issued notices to the appellants under

s. 34(1) (a) of the Indian Income Tax Act 1922, seeking to

reopen the assessments already finalised. The assessee

challenged the validity of these notices of the I.T.O. The

High Court allowed the writ petitions and quashed the

impugned notices.

The assessee alleged that there was no relevant material

before the I.T.O. before he issued the notices under s-31(a)

on the basis of which he could have reason to believe that

any income had escaped assessment. In the writ petitions,

the assessee called upon the I.T.O. to produce the report

made by him to the Central Board of Revenue, as well as the

order of the Central Board of Revenue thereon. Despite this

prayer, neither the Union of India, nor the I.T.O produced

the report made by the I.T.O. to the Central Board of

Revenue under s.34(1)(a) nor the order of the Central Board

of Revenue.

Dismissing the appeal,

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HELD : (i) Before an I.T.O. can issue a statutory notice

under s.34(1)(a), he must have reason to believe that by

reason of omission ,or failure on the part of an assessee to

disclose fully and truly all material facts necessary for

his assessment for the years in question, income, profits or

gains chargeable to Income Tax have escaped assessment

during those years. Further, before doing so, he must have

recorded his reasons for acting under s. 34(1) (a) and the

Central Board of Revenue must have been satisfied on those

reasons that it is a fit case for the issue of the notice.

The recording of the reasons in support of the belief formed

by the I.T.O. and the satisfaction of the Central Board of

Revenue on the basis of the reasons recorded by the I.T.O.

that it is a fit case for issue of notice under s. 34(1) (a)

are extremely important circumstances to find out whether

the I.T.O. has jurisdiction to proceed under s.34(1)(a).

[104D]

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Calcutta Discount Co. Ltd. v. I.T.O. Company District 1

Calcutta and Others, 41 I.T.R 191; Chhugamal Rajpat v. S. P.

Chalia & Ors. 79 I.T.P- 603; Sheonath Singh v. Appellate

Assistant Commissioner of Income Tax, Central, Calcutta &

Ors., 82 I.T.R. 1447 referred to.

(ii)In the present case, an affidavit was filed before the

Court stating that the relevant records could not be traced

from the file of the Central Board of Revenue. Assuming

that the concerned records were missing from the file of the

Central Board of Revenue, the copy of the report made by the

I.T.O. and the Order received by him, must have been in the

file of the I.T.O. and reason was given for not producing

those records. These circumstances give rise to an adverse

inference that the records in question were not produced

because they did not assist the department's case. Under

the circumstances, it is not possible to come to the

conclusion that the facts necessary to confer jurisdiction

on the I.T.O. to proceed under s.34(1)(a) had been

established. There is nothing to show on record that there

was any relevant material before the I.T.O. before he issued

the notices under s.34(1) (a). [105F]

JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 23 92 to

2403 of 1969.

Appeals by certificate from the judgment and order dated

September 9, 1968 of the Delhi High Court at New Delhi in

Civil Writs Nos. 67 to 78 of 1968.

S. C. Manchanda, B. B. Ahuja, S. P. Nayar and R. N. Sachthey

for the appellants.

N. D. Karkhanis, Rameshwar Nath and Seita Vaidialingam

for the respondents.

The Judgment of the Court was delivered by

HEGDE, J. These appeals by certificate arise from several

writ petitions filed by the H.U.F. M/s. Rai Singh Deb Singh

Bist and its Karta Thakur Mohan Singh Bist, challenging the

validity of certain notices issued under s. 34(1) (a) of the

Indian Income-tax Act, 1922 (in short the Act) by the

Income-tax Officer, Central Circle 1, Delhi. The High Court

of Delhi allowed those writ petitions and quashed the

impugned notices. Hence these appeals.

The assessee in these cases is an H.U.F. The assessment

years with which we are concerned in these appeals range

from 1942-43 to 1953-54. The assessee filed its returns for

these years in due time. The assessee's account-books

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showed considerable cash credits in the name of the

brothers-in-law of the 2nd respondent, the Karta of the

H.U.F. Those alleged creditors were living in Nepal. The

account books also showed certain credit entries in the name

of Rana Anand Nar Singh, alleged to be in connection' with

expenses incurred by him for getting trees cut on behalf of

the assessee. The assessee was a forest contractor. He had

taken large tracts of forests for felling trees in Nepal.

The Income-tax

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Officer went into the genuineness of the cash credit entries

standing in the name of the alleged creditors of the

assessee as well as to the alleged amount due to one of

them. The contention of the assessee was substantially

accepted either by the Appellate Assistant Commissioner or

by the Revenue Appellate Tribunal. With regard to the

assessment for the assessment years 1943-44 to 1949-50, the

final assessments were made in pursuance of an agreement or

settlement arrived at between the assessee and the Deputy

Director of Inspection (Investigation) New Delhi on October

18, 1954: Long after the assessments in question were final-

ised, the Income-tax Officer. issued notices to the

appellants under s. 34(1) (a) of the Act seeking to reopen

the assessments already finalised. The validity of those

notices is in issue.

Before an Income-tax Officer can issue a statutory notice

under s. 34 (1 ) (a), he must have reason to believe that by

reason of omission or failure on the part of an assessee to

disclose fully and truly all material facts necessary for

his assessment for the years in question, income, profits or

gains chargeable to income-tax have escaped assessment

during those years. Further, before doing so, he must have

recorded his reasons for acting under s. 34(1) (a) and the

Central Board of Revenue must have been satisfied on those

reasons that it is a fit case for the issue of the notice.

The recording of the reasons in support of the belief formed

by the Income-tax Officer and the satisfaction of the

Central Board of Revenue on the basis of the reasons

recorded by the Income-tax Officer that it is a fit case for

issue of notice under s. 34 (1 )(a) are extremely important

circumstances to find out whether the Income-tax Officer had

jurisdiction to proceed under s. 34(1) (a).

In Calcutta Discount Co. Ltd. v. Income-tax Officer, Com-

panies District 1. Calcutta and anr.(1) this Court laid down

(1) that to confer jurisdiction under s. 34 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 had to be satisfied. The

first was that the Income-tax Officer must have reason to

believe that income, profits or gains chargeable to income-

tax had been under assessed. The second was that he must

also have reason to believe that such "under-assessment" had

occurred by reason of either (1) omission or failure on the

part of an assessee to make a return of his income under

section 22, or (2) 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' Income-tax Officer could have jurisdiction to issue a

notice for the assessment or re-assessment beyond the period

(1)41 I.T.R. 191.

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of four years but within the period of eight years from the

end of the year in question.

In Chhugamal Rajpal v. S. P. Chaliha and ors.(1) this Court

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ruled that before an Income-tax Officer can be said to have

had reason to believe that some income had escaped

assessment, he should have some relevant material before him

from which he could have drawn the inference that income has

escaped assessment. His vague feeling that there might have

been some escape of income from assessment is not

sufficient. This Court also took the view that the Central

Board of Revenue before reaching its satisfaction that the

case was a fit one to be proceeded under s. 3 4 (1 ) (a)

must have examined the reasons given by the Income-tax

Officer and arrived at its own conclusion and that it is not

permissible for it to act mechanically. The same view was

again taken by this Court in Sheo Nath Singh v. Appellate

Assistant Commissioner of Income-tax (Central) Calcutta and

ors. (2)

In the instant case, the assessee alleged in his writ

petitions that there was no relevant material before the

Income-tax Officer before he issued notices under s. 34 (1)

(a) on the basis of which he could have had reason to

believe that any income had escaped assessment. In the writ

petitions the assessee called upon the Income-tax Officer to

produce the report made by him to the Central Board of

Revenue as well as the order of the Central Board of Revenue

thereon. Despite this prayer, neither the Union of India

nor the Income-tax Officer cared to produce the report made

by the Income-tax Officer to the Central Board of Revenue

under s. 34(1) (a) or the order of the Central Board of

Revenue. Before the hearing of the writ petitions

commenced, the assessee again applied to the Court to call

upon the Union of India and the Income-tax Officer to

produce those documents. In response to that application,

an affidavit was filed before the Court stating that the

relevant records could not be traced from the file of the

Central Board of Revenue. Assuming that the concerned

records were missing from the file of the Central Board of

Revenue, the copy of the report made by the Income-tax

Officer and the order received by him must have been in the

file of the Income-tax Officer. No reason was given for not

producing those records. These circumstances give rise to

an adverse inference against the department. We are

constrained to come to the conclusion that the records in

question were not produced because they did not assist the

department's case. Under these circumstances, it is not

possible. to come to the conclusion that the facts necessary

to confer jurisdiction on the Income-tax Officer to proceed

under s. 3 4 1 ) (a) had been established.

(1) 79 I.T.R. 603.

(2) 8 2 I.T. R. 14 7.

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All that was said on behalf of the department was that some-

time in the year 1955, the assessee sold large tracts of

land to two of his brothers in-law for a sum of Rs. 47 lakhs

but in reality that property was not worth that amount. We

do not know whether there was any basis for this conclusion.

As seen earlier the cash credit entries were brought to the

notice of the Income-tax Officer before the relevant

assessment orders were passed. He had an occasion to

investigate into them. It is not necessary to go into this

question more deeply in view of the fact that there is

nothing to show that there was any relevant material before

the Incometax Officer before he issued the notices under S.

34 (1) (a) to-have reason to believe that as a result of the

assessee's failure to state in its return truly and fully

any fact, any income had escaped assessment.

In the result these appeals fail and they are dismissed with

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costs-one hearing fee.

S.C.

Appeals dismissed.

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