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PETITIONER: MALEGAON ELECTRICITY CO. (P) LTD.

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME-TAX, BOMBAY

DATE OF JUDGMENT: 11/08/1970

BENCH: HEGDE, K.S. BENCH: HEGDE, K.S. SHAH, J.C. GROVER, A.N.

CITATION:  1970 AIR 1982  CITATOR INFO :  R          1986 SC1857  (7)  F          1987 SC1768  (3,5)

ACT: Indian  Income-tax Act, 1922, s. 10(2)(vii) and  s.  34-Full disclosure  of material facts to Income-tax  Officer  within meaning  of  s. 34(1)(a), what amounts  to-Failure  to  show excess of price for which assets sold in return and  further failure  to  show written down value amounts to  failure  to disclose  facts-Tribunal must determine whether any  profits are made under section 10(2) (vii)-Without this being  first determined  the High Court in reference under section  66(1) cannot  decide  whether there has been failure  to  disclose material facts.

HEADNOTE: The  appellant was a private limited company.  The  business and  assets  of  the appellant  were  purchased  by  another company  under  agreement dated September 9, 1951.   In  the original  proceedings for assessment to income-tax  for  the assessment   year   1952-53  the   appellant   brought   the transactions of sale to the notice of the Income-tax Officer and  placed before him certain relevant documents  and  also furnished  the  information  asked  for.   Setting  off  the unabsorbed  depreciation brought forward against the  income as found by him the Income-tax office determined the  income of  the  appellant for the said assessment  year  at  ’NIL’. Sometime  later the successor-in-office of the said  Income- tax Officer issued a notice under s. 34(1) (a) of the Indian Income-tax  Act,  1922  to  the  appellant  after  obtaining sanction from the Commissioner of Income-tax.  He hold  that the  appellant had not disclosed its profit under  s.  10(2) (vii)  of the Act resulting from the sale of its assets  and determining the said profits at Rs. 4,88,386, he made a  re- assessment.  The Appellate Assistant Commissioner  confirmed the  order.  The Tribunal, however, held that  the  material facts  were all disclosed to the Income-tax Officer  at  the time of the original assessment and a mere change of opinion did  not  justify  proceedings under s.  34(1)(a).   At  the request  of  the  Commissioner of  Income-tax  the  Tribunal referred to the High Court the questions (i) whether in  the

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circumstances  of  the  case it could be held  that  in  the original assessment proceedings the assessee had made a full disclosure of material particulars; and (ii) whether  having initiated  proceedings  under s. 34(1)  (a)  the  Income-tax Officer could have later relied on s. 34(1)(b). HELD  :  The law casts a duty on the assessee  to  ’disclose fully  and  truly  all  material  facts  necessary  for  his assessment’ for the relevant year. ,Further the  explanation to  section  34(1)  says that  mere  production  before  the Income-tax  Officer of account books or other evidence  from which  material  facts with due diligence  could  have  been discovered  by  the Income-tax Officer will  not  amount  to disclosure  within  the  meaning of  the  section.   In  the present case the price realised at the sale in excess of the written down value of the assets sold, had not been included as profits in the return submitted by the assessee.  It  had also  not  shown the same in section ’D’ of Part  I  of  the return.  The assessee had not shown either in its return  or in any of the documents submitted to the Income-tax Officer. the  written  down value of the assets sold.   This  failure amounted  to  a  failure  on the part  of  the  assessee  to disclose fully and truly the material 762 facts  necessary  for  its  assessment.   From  the  cryptic statement   of  the  Income-tax  Officer  in  the   original assessment  order  that  ’no adjustment  is  necessary’  the Tribunal was not justified in drawing the interence that the Income-tax Officer had considered all the facts. [766 F-G] V.D.M.RM.M.RM.  Muthiah Chettiar v. Commissioner of  Income- tax, Madras, 74 I.T.R. 183, held inapplicable. Calcutta Discount Co. Ltd. v. Income-tax Officer,  Companies Distt 1, Calcutta, 41 I.T.R. 191, distinguished. The  High  Court should not have and this  Court  would  not answer  the  questions referred under s. 66(1)  of  the  Act because those questions ,could not be answered without first deciding  whether a part of the sale price received  by  the assessee amounted to profits under s. 10(2)(vii). [768 C-D] [Tribunal directed to decide first whether the assessee  had any  profits  failing within s.  10(2)(vii)  and  thereafter decide the appeal]

JUDGMENT: CIVIL  APPELLATE  JURISDICTION : Civil Appeal  No.  1345  of 1967. Appeal  from the judgment and order dated February 10,  1966 of  the Bombay High Court in Income-tax Reference No. 19  of 1962. A.  K.  Sen,  Vasant Mehta , and Ravinder  Narain,  for  the appellant. Jagadish  Swarup, Solicitor-General, S. Mitra,  S.-K.  Aiyar and B. D. Sharma, for the respondent. The Judgment of the Court was delivered by Hegde’ ’J.  This is an appeal by certificate under S. 66A(2) of  the  Indian  Income-tax Act,  1922  (to  be  hereinafter referred  to  as  the ’Act’).  The  assessee  is  a  Private Limited Co. The assessment year with which we are  concerned in this case is 1952-53, the relevant accounting year ending on  March  31,  1952.   The assessment  for  that  year  was completed by the Income-tax Officer ,on August 4, 1953.   He determined  the  assessee’s business profits  ,of  the  year ended  on  March  31, 1952 at Rs. 33,096/-  subject  to  the assessee’s claim of unabsorbed depreciation brought  forward to  the extent of Rs. 42,000/- and odd.  After  setting  off

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the  unabsorbed depreciation to the extent of Rs.  33,096/-, he determined the assessee’s total income for the assessment year  1952-53  at ’Nil’.  In the course  of  the  assessment proceedings,  the assessee -company informed the  Income-tax Officer by its letter of July 2, 1953 about the sale of  the assessee   company  to  the  Amalgamated   Electricity   Co. (Belgaum) Ltd. (to be hereinafter referred to as the Belgaum Co.’).  It  also  brought to the notice  of  the  Income-tax Officer, the following documents: 763               (a)  Appropriate extract from the  minutes  of               the meeting of the Board of Directors  of  the               Belgaum Company held on 16-4-1951  agreeing to               purchase the assets of the assessee company;               (b)  Resolution  passed on  19-9-1951  by  the               Board  of Directors for the  assessee  company               deciding  to sell the concern to  the  Belgaum               Company;               (C) Agreement dated 19-9-1951 between the said               two companies; Later  on in response to a letter from the Income-tax  Offi- cer,  the assessee company informed him the manner in  which the  sale  price of Rs. 9,35,24-6/15/8 was  determined.   It also submitted a statement of unabsorbed depreciation.  That statement  set out the depreciation accrued as well as  that allowed.  The entire consideration for the sale was paid  in cash  on  October  4, 1951 and the  profits  earned  by  the assessee for the period of six months ended on September 30, 1951  were paid over to the Belgaum Company.  In  completing the original assessment, the Income-tax Officer observed:               "On  going  through these  documents  and  the               copies   of  the  Resolution  passed  by   the               shareholders  of the  Amalgamated  Electricity               Co.,   it  is  seen  that  no  adjustment   is               necessary in the matter.  The position of  the               company’s   total  income  is  determined   as               under........" We may mention at this stage that the consideration received by the assessee company for the sale of- its assets was much more  than  their  written down  value.   Yet  the  assessee company  did  not show in its return any  profits  under  s. 10(2)(vii) of the Act nor did it show the price received  in excess of. the written down value of the assets sold in Part I of Section ’D’ of the Return. Sometime  later  the Income-tax Officer found out  that  the profits  deemed to have been earned by the assessee  company under  S.  10(2)(vii) had not been assessed’.   Hence  after obtaining  the  sanction of the Commissioner,  he  commenced proceedings under s. 34(1)(a).  After hearing the  assessee, the Income-tax Officer reassessed the assessee on August 26, 1957 determining its total income for the assessment year in question  at  Rs. 4,48,893/on the, basis  that  the  profits earned  by  the  assessee  under  s.  10(2)(vii)  were   Rs. 4,88,386/-.  He rejected the contention of the assessee that the  notice  issued  by him under s.  34(1)(a)  was  invalid inasmuch  as it had placed before him all the primary  facts necessary  for the assessment.  The assessee  unsuccessfully contended  that there was no basis for his  conclusion  that there  was  any failure on its part to  disclose  fully  and truly all material facts necessary for its assessment.   The Income-tax Officer opined 764 that  the  failure of the assessee to disclose  its  profits under S. 10(2)(vii) brought the case within the, scope of S. 34(1)(a).   In appeal the Appellate  Assistant  Commissioner

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concurred with the view taken by the Income-tax Officer. lie held  that  the assessee had a statutory duty  to  submit  a return  showing  all profits  including  the-deemed  profits under S. 10(2)(vii). On a further appeal to the tribunal, the impugned assessment was challenged on various grounds.  It was urged before  the tribunal,  on behalf of the assessee that no portion of  the price  realised  by the sale of its assets came  within  the scope  of s. 10(2) (vii) and further even if any portion  of that  price  can be considered as deemed  profits  under  s. 10(2)(vii), it was impermissible for the Income-tax  Officer to  initiate proceedings under S. 34(1)(a) as  the  assessee had  placed  all  the primary facts  before  the  Income-tax Officer  and  therefore it cannot be said that  it  had  not fully and truly disclosed all material facts.  On behalf  of the Revenue, it was urged before the tribunal that the  part of price realised by the sale of the assets should be deemed as profits under s. 10(2)(vii); those profits had ’not  been included in the return of the assessee nor has the  assessee placed all the material facts necessary for determining  its tax  liability;  therefore,,  the  income-tax  Officer   was justified in initiating proceedings under s. 34(1)(a) and at any  rate the impugned assessment can be justified under  s. 34(1)(b).  The tribunal did not go into the question whether any  part of the sale proceeds can be considered  as  deemed profits  under s. 10(2)(vii) but it held that  the  assessee had  placed before the Income-tax Officer, all  the  primary facts  necessary for its assessment and therefore it  cannot be  said that it had failed to disclose fully and truly  all material facts.  It observed               "There  can  be no manner of  doubt  that  all               primary facts regarding the transaction of the               sale  of assessee’s assets were placed by  the               assessee before the Income-tax Officer at  the               time  of  the original assessment.   The  then               Income-tax Officer appears to have applied his               mind to the facts of the case and after  doing               so   he  arrived  at  the  finding   that   no               adjustment  in regard to the  surplus  arising               out  of the sale of the assets was  necessary.               Whether  or not there was any profit under  s.               10(2)(vii), and, if so, whether it was taxable               was  an inference to be drawn from  the  facts               which were fully placed before the  Income-tax               Officer.   The  mere  omission  of  the   sale               transaction  from section D of Part I  of  the               return   of  income  would  not   enable   the               Departmental  authorities  to  hold  that  the               assessee  had  failed to  disclose  fully  and               truly  all  material facts necessary  for  its               assessment.   In’ -;dew of the fact  that  all               the relevant facts were available 765               to   the  Income-tax  Officer  who  made   the               original Assessment, the present assessment on               those very facts amounts to merely a change of               opinion  by the Income-tax Officer.  There  has               been   no   suppression   of   any    material               information  at  the  time  of  the   original               assessment  and  as  such  the  action   under               section 34(1)(a) cannot be sustained." It rejected the contention of the Revenue that the  impugned assessment  can be justified under s. 34(1)(b) as  according to  it  the facts proved in the case do not bring  the  case within that Provision and further the Income-tax Officer did

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not proceed under that provision. At  the  instance  of the  Commissioner  of  Income-tax  the tribunal  submitted the following questions-for the  opinion of the High Court of Bombay:               "(1) Whether in the circumstances of this case               it can be held that in the course of  original               assessment proceedings for the assessment year               1952-53,  the  assessee  company  omitted   or               failed  to  disclose fully and truly  all  the               material  facts necessary for  its  assessment               for that assessment year ?               (2)   Whether,  where  as a  matter  of  fact,               action  for reassessment proceedings had  been               initiated on the belief that the provisions of               s.  34(1) (a) were properly applicable to  the               facts  of  the case Department  was  precluded               from   sustaining   the   validity   of    the               reassessment  made  on the  grounds  that  the               reassessment fell as well within the scope  of               s. 3 4(1 ) (b) ?" The  High Court answered both these questions in ‘favour  of the Revenue., Hence this appeal. In  our judgment the tribunal erred in declining  to  decide the  question  whether any portion of the  sale  price  came within  the scope of s. 10(2) (vii).  That  question  should have  been examined. at the very outset for the  purpose  of considering  whether  the  assessee had  placed  before  the Income-tax  Officer  truly  and  fully  all  material  facts necessary  for  -the purpose of its assessment.  If  it   is found  that any portion of that sale price are profits  then in our opinion the High Court was right in holding that  the assessee  had failed to place before the Income-tax  Officer during the original assessment truly and fully all  material facts necessary for the ’purpose of assessment.   Admittedly the  price  realised at the sale ’in excess of  the  written down value of the assets sold, had not 766 been  included  as profits in the return  submitted  by  the assessee.  It had also not shown the same in section ’D’  of Part  I  of  the  return.  It may also  be  noted  that  the assessee had not shown either in its return or in any of the documents  submitted to the Income-tax Officer, the  written down  value of the assets sold.  Hence not only the  Income- tax  Officer was not told that the assessee had  earned  any profit under s. 10(2)(vii) nor even the essential fact  viz. the  written down value of the assets sold was  supplied  to him so as to enable him to -find out the price in excess  of the written down value realised by the assesee.  It is  true that  if the Income-tax Officer had made some  investigation particularly  if he had looked into the previous  assessment records,  he  would  have been able to  find  out  what  the written  down value of the assets sold was and  consequently he  would have been able to find out the price in excess  of their  written down value realised by the assessee.  It  can be said that the Income-tax Officer; if he had been diligent could  have  got  all the  necessary  information  from  his records.  But that is not the same thing as saying that  the assessee had placed before the Income-tax Officer truly  and fully  all  material  facts necessary  for  the  purpose  of assessment.   The  law  casts a duty  oil  the  assessee  to ’disclose  fully and truly all material facts necessary  for his  assessment  for that year’.   Further,  Explanation  to Section 344(1) says :               "Production  before the Income-tax Officer  of               account-books  or  other evidence  from  which

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             material  facts could with due diligence  have               been discovered by the Income-tax Officer will               not  necessarily amount to  disclosure  within               the meaning of this section". If the assessee had disclosed to the Income-tax Officer, the surplus price realised by it over and above the written down value  of  the assets sold or in the alternative if  it  had informed  the Income-tax Officer the price realised as  well ’as  the  written down value of the assets  sold,  then  it, could  have been said that the assessee, had done  its  duty and it was for the Income-tax officer to draw any  inference on  the  facts placed before him.  But the  failure  of  the assessee to disclose to the Income-tax Officer the fact that the price realised by it by sale of its assets was more than the  written  down  value of those assets or  at  least  the written down value of those assets amounts, in our  opinion, to  a  failure on its part to disclose fully and  truly  the material  facts  necessary  for its  assessment.   From  the cryptic statement of the Income-tax Officer in the  original assessment  order  that  "no adjustment  is  necessary"  the tribunal was not justified in drawing the inference that the Income-tax Officer had considered all the relevant facts. In Support of his contention that the disclosure made by the assessee  was true and full in all material  particular  and hence 767 no   proceedings  could have been taken under  s.  34(1)(a). Mr.A. K. Sen, learned Counsel for the assessee relied on the decision of    this   Court  in  V.D.M.   RM.M.RM.   Muthiah Chettiar v. Commissioner of Income-tax, Madras(’).  In  that case  the question that arose for decision was  whether  the assessee’s  failure to include in his return the  income  of his  wife and his minor sons admitted to the partnership  of which  he was a partner assessable in his hands under s.  16 (3)  (a)  (ii) can be considered as a failure  to  disclose. truly  -and  fully all facts material  for  the  assessment. This  Court  came  to the conclusion that  the  omission  in question  did not come within the scope of s. 3 4 (1 )  (a). Therein  this  Court  observed that in the  form  of  return prescribed  under rule 19, of the Indian  Income-tax  Rules, 1922,  framed  under s. 59 of the Act, there was  no  clause which required disclosure of the income of any person  other than  the  income of the assessee, which was liable  to,  be included in his total income.  Nor was the assessee required under  s.22(5) of the Act, in making a return,  to  disclose that  any  income was received by his wife  or  minor  child admitted to, the benefits of partnership in a firm of  which he  was a partner.  Hence by not showing the income  of  his wife  and minor children, the assessee cannot be  deemed  to have  failed to disclose fully and truly all material  facts necessary  for  his  assessment within  the  meaning  of  s. 34(1)(a)  of the Act.  Therein this Court  further  observed that  s.  16(3) of the Act imposes an obligation  upon  the. Income-tax  Officer  to  compute  the  total  income  of  an individual  for the purposes of assessment by including  the items  of  income  set out in cls.(i) to (iv)  and  (b)  but thereby  no  obligation  is imposed  upon  the  taxpayer  to disclose the income liable to be included in. his assessment under  s. 16(3).  For failing or omitting to  disclose  that income  proceedings  for reassessment cannot  "therefore  be commenced  under  s.  34(1)(a).   The  ratio  of  the  above decision  is inapplicable to the facts of the present  case. If  any part of -the. price with which we are  concerned  in this  case  can  be considered as deemed  profits  under  s. 10(2)(vii),  then the assessee had a duty to include  it  in

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his return.  His failure to do so brings his case within the scope  of s. 34(1)(a).  Mr. Sen next relied on the  decision of  this Court in Calcutta Discount Co. Ltd. v.  Income  tax Officer,  Companies  Distt.  I Calcutta and  anr.(2).  There this Court had observed :               "Once  all  the primary facts are  before  the               assessing  .authority, he requires no  further               assistance  by way of disclosure.  It  is  for               him to decide what inferences of facts can  be               reasonably  drawn  and what  legal  inferences               have  ultimately to be drawn.  It is  not  for               somebody  else-far less the  assessee-to  tell               the   assessing  authority   what   inferences               whether of facts or law, should be (1) 74 I. T. R. 183. (2) 41 I. T. R. 191 at 201. 768               drawn.   Indeed,  when it is  remembered  that               people often differ as regards what inferences               should  be drawn from given facts, it will  be               meaningless  to demand that the assessee  must               disclose what inferences-whether Of. facts  or               law-he would draw from the primary facts." In that case the question for consideration was whether  the assessee  had a duty to inform the Income-tax  Officer  with what intention the shares concerned in that case were  sold. We  do  not think that the, decision in question is  of  any assistance to the assessee. For  the  reasons mentioned above, we are  of  the  opinion, ’that the High Court should not have and we in our turn will not answer the questions referred under s. 66(1) of the  Act because  in our opinion those questions cannot  be  answered without  first deciding whether the part of the  sale  price received  by  the  assessee  amounts  to  profits  under  s. 10(2)(vii).   The tribunal must first decide  that  question and thereafter decide the other questions of law arising for decision on the basis of its decision whether there was  any profits falling within s. 10(2)(vii). In  the  result  we allow this appeal and in  place  of  the answers  given  by  the High Court we enter  a  decision  to decline  to answer those questions.  It is for the  tribunal to  decide  the  appeal  before it  in  the  light  of  this decision.   In  the circumstances of ’the case  we  make  no order as to costs. G.C.                                 Appeal allowed. 769