S.C : Civil Appeal No. 1970 of 1975 is by the Revenue by certificate of the High Court while the other is an appeal by the assessee by special leave.

Supreme Court Of India

ITO vs. Mewalal Dwarka Prasad

Sections 147(a), 148, 149

Asst. Year 1965-66

R.S. Pathak, C.J. & Ranganath Misra, J.

Civil Appeal No. 1070 of 1975

10th February, 1989

Counsel Appeared

Dr. V. Gauri Shankar with Ms. A Subhashini & K.C. Dua, for the Revenue : S.C. Manchanda with S. Janani, Mrs. Urmila Kapoor & Ms. Meenakshi, for the Assessee


Civil Appeal No. 1970 of 1975 is by the Revenue by certificate of the High Court while the other is an appeal by the assessee by special leave. Both arise out of the same judgment of the Allahabad High Court dt. 22nd April, 1974 in an application under Art. 226 of the Constitution by the assessee challenging the notices issued under s. 148 r/w ss. 142(1) and 143(2) of the IT Act of 1961, all dt. 7th March, 1973 relating to the asst. yr. 1965-66. The notice under s. 148 was on the basis of three cash credit entries dt. 22nd Aug., 1964 from M/s Meghraj Dulichand, M/s Associated Commercial Organisation (P) Ltd. and M/s Laxminarain Atmaram, the first two being for a sum of Rs. 30,000 each and the last one for a sum of Rs. 40,000. The High Court ultimately found: “The result is that the notice dt. 7th March, 1973, was within jurisdiction only in regard to the cash credit entry from the firm Meghraj Dulichand of Calcutta. In regard to the other two transactions, the case did not fall within the purview of cl. (a) of s. 147.

As seen above, the ITO had no material in his possession on the basis of which he could have reason to believe (mere suspicion apart) that income had escaped assessment. For this reason the case was not covered by cl. (b) of s. 147 either. In regard to those two items the notice was totally without jurisdiction. The ITO had no jurisdiction to reopen the assessment in respect of these two cash credit entries.

In this view it is unnecessary to decide whether the notice was barred by time on the footing that it was covered by cl. (b) to s. 147.

In the result, the petition succeeds and is allowed in part. The respondent ITO is directed not to reopen the assessment of the petitioner firm for the asst. yr. 1965-66 in relation to the cash credit entries of Rs. 30,000 from M/s. Associated Commercial Organisation (P) Ltd. and of Rs. 40,000 in respect of M/s. Laxminarain Atmaram.” The appeal by the Revenue is in relation to the two transactions totalling Rs. 70,000 and the appeal by the assessee is in regard to the remaining one in respect of a sum of Rs. 30,000.

Dr. Gauri Shankar appearing for the Revenue has contended that it was not for the High Court to go into the question as to whether the notice under s. 148 was partly valid and partly not because if the ITO proceeded to issue notice under s. 148 for reopening the assessment, he would require the assessee to furnish a fresh return and the entire assessment proceeding has to be redone after the assessee furnishes the return. In the present case, along with the notice under s. 148 the ITO did call upon the assessee to furnish a return as required under s. 142. That notice casts an obligation on the assessee to make a fresh return and therein it was obliged to make a complete disclosure of its income in accordance with law and it was open to the ITO to examine not only the three items referred to in the notice but also whatever came within the legitimate ambit of a an assessment proceeding. This being the legal position, Dr. Gauri Shankar, for the Revenue, contends, once the High Court sustained the notice in respect of sum of Rs. 30,000, that gave full jurisdiction to the ITO to reopen the assessment and take to a fresh assessment proceeding. The High Court should not have examined the tenability of the assessee’s contention in regard to the two transactions of Rs. 30,000 and Rs. 40,000 and that aspect should have been left to be considered by the ITO while making the reassessment. A Division Bench of the Punjab High Court in CIT vs. Jagan Nath Maheshwary (1957) 32 ITR 418 (Punj) : TC51R.1604 examined this aspect of the matter with reference to a proceeding for reassessment under s. 34 of the earlier Act of 1922 and came to hold: “When a notice is issued under s. 34 based on a certain item of income that had escaped assessment, it is permissible for the IT authorities to include other items in the assessment, in addition to the item which had initiated and resulted in the notice under s. 34.” A division Bench of the Andhra Pradesh High Court in Pulavarthi Viswanadham vs. CIT Andhra Pradesh (1963) 50 ITR 463 (AP) : TC51R.1622 considered the same position with reference to s. 34 of the earlier Act. After extracting the two clauses in sub-s. (1) of s. 34, the Court held: “It is immediately plain that when once the ITO reaches the conclusion on the material that is before him that there has been a non-disclosure as regards part of the income, profits or gains chargeable to income-tax by the assessee, he is entitled to issue a notice either under cl. (a) or (b), as the case may be, under s. 22(2) of the IT Act.”

After extracting s. 22(2), the High Court proceeded to say: “What emerges from sub-s. (2) of s. 22 is that when once an assessee is required to submit a return of his income, he is obliged to disclose the totality of his income. The question that falls to be decided on the language of these two sections is whether after notice is issued under s. 34(1) (a) the assessment should be limited to items which escaped assessment by reason of the failure on the part of the assessee to disclose all his income, profits or gains which are subject to tax. The contention of learned counsel for the assessee is that having regard to the terms of cl. (b) it was not within the powers of the ITO to bring to charge such of the items as have escaped from being taxed without any remissness on his part. It is only items that escaped assessment due to omission or failure of the assessee that come within the range and sweep of s. 34, continues learned counsel for the assessee. We do not think that we can accede to this proposition. When once the assessment is reopened, no distinction could be made between items falling under cl. (a) and those coming within the pale of cl. (b). As pointed out by a Division Bench of this Court in R.C. No. 12 of 1860 (Parimisetti Seetharamamma vs. CIT (1963) 50 ITR 450 (AP) : TC51R.587, to which one of us was a party:

“….. when once an assessment is reopened under s. 34, the ITO proceeds de novo under the relevant sections of the IT Act, i.e., he issues notice under s. 22(2) and proceeds to assess the assessee. He has to follow the same procedure as in the case of the first assessment as is clear from the clause in s. 34 and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section. The proceedings under s. 34 must be deemed to relate to proceedings which commence with publication of notice under s. 22(1).”

The view taken by the two High Courts has been supported by this Court in V. Jaganmohan Rao vs. CIT (1970) 75 ITR 373 (SC) : TC51R.313. There, repelling the same argument on behalf of the assessee this Court said: “This argument is not of much avail to the appellant because once proceedings under s. 34 are taken to be validly initiated with regard to two-thirds share of the income, the jurisdiction of the ITO cannot be confined only to that portion of the income. Sec. 34 in terms states that once the ITO decides to reopen the assessment he could do so within the period prescribed by serving on the person liable to pay tax a notice containing all or any of the requirements which may be included in a notice under s. 22(2) and may proceed to assess or reassess such income, profits or gains. It is, therefore, manifest that once assessment is reopened by issuing a notice under sub-s. (2) of s.22 the previous under-assessment is set aside and the whole assessment proceedings start afresh. When once valid proceedings are started under s. 34(1)(b) the ITO had not only the jurisdiction but it was his duty to levy tax on the entire income that had escaped assessment during that year.” No serious effort, however, was made by Mr. Manchanda appearing for the assessee-respondent to counter this submission advanced on behalf of the Revenue. Accepting the legal position indicated in these cases we come to the conclusion that it was not for the High Court to examine the validity of the notice under s. 148 in regard to the two items if the High Court came to the conclusion that the notice was valid at least in respect of the remaining item. Whether the ITO while making his reassessment would take into account the other two items should have been left to be considered by the ITO in the fresh assessment proceeding. With this conclusion the decision of the High Court would ordinarily have been reversed. As we have already stated, the assessee has also appealed against that part of the judgment of the High Court which was adverse to it. Mr. Manchanda contended that in this case the regular assessment had been made for the asst. yr. 1965-66 on 22nd Jan., 1966. Notice under s. 147 was issued on 7th March, 1973, i.e., more than seven years after the assessment had been completed. The three amounts mentioned in the notice under s. 148 of the Act were found in the assessee’s accounts by the ITO when he examined the same in course of the assessment proceedings. He had called upon the assessee to substantiate the genuineness of the transactions and the assessee had produced material to support the same. The ITO accepted the documents produced and treated all the three transactions to be genuine and on that footing completed the assessment. The primary facts were before the ITO at the time of the regular assessment and he called upon the assessee to explain to his satisfaction that the entries were genuine and on the basis of materials provided by the assessee satisfaction was reached. It was then open to the ITO to make further probe before completing the assessment if he was of the view that the material provided by the assessee was not sufficient for him to be satisfied that the assessee’s contention was correct. This Court in Calcutta Discount Company Ltd. vs. ITO (1961) 41 ITR 191 (SC) : TC51R.779 held that the expression ‘material facts’ used in cl. (a) referred only to primary facts and the duty of the assessee was confined to disclosure of primary facts and he had not to indicate what factual or legal inferences should properly be drawn from the primary facts. In the facts appearing on the record we are in agreement with Mr. Manchanda that cl. (a) of s. 147 did not apply to the facts of the case as the alleged escapement of income for assessment had not resulted from failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that year. The notice in the instant case did not indicate whether it was a case covered by cl. (a) or cl. (b). On our finding that cl. (a) was not invokable, the power under cl. (b) could be called in aid under s. 149(1)(b) within four years from the end of the relevant assessment year. Admittedly, the notice has been issued beyond a period of four years and, therefore, the notice itself was beyond the time provided under the law. On the facts appearing in the case the High Court overlooked to consider this aspect of the matter. Since the proceedings before the High Court were under Art. 226 of the Constitution and not by way of reference under the Act, the jurisdiction of this Court is not advisory and confined to the questions referred for opinion. On the facts we are satisfied that ends of justice require our intervention and we would accordingly allow the appeal of the assessee by holding that the notice under s. 148 cannot be sustained in law for the reasons indicated above.

7. The appeal by the assessee is allowed and the appeal by the Revenue is dismissed. The notice under s. 148 is quashed. Both parties are directed to bear their respective costs throughout.

[Citation : 176 ITR 529]

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