BHANJI LAVJI Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS reference relates to assessments made on the assessee for three assessment years, namely, 1947 -48, 1948 -49 and 1949 -50, the corresponding account years being Samvat years 2002, 2003 and 2004. During the relevant account years the assessee carried on business in ghee at Porbandar which was at the material time an Indian State outside the taxable territories. The Income -tax Officer, C -III Ward, Bombay, initiated proceedings against the assessee as a non -resident for the assessment years 1946 -47, 1947 -48, 1948 -49 and 1949 -50. It appears that the assessee had a current account with the Bank of India Ltd., Bombay, and sale proceeds in respect of sales of large quantities of ghee made by the assessee to merchants in the taxable territories were credited in this current account and then transferred to Porbandar. The assessee had also a current account with a firm called Messrs. Shamji Kalidas and Company, Bombay, and in this account Messrs. Shamji Kalidas and Company paid interest to the assessee. The assessee being a non -resident, tax at the maximum rate was deducted by Messrs. Shamji Kalidas and Company in respect of interest paid to the assessee under section 18(3A). These facts were pointed out by the assessee to the Income -tax Officer and the assessee contended that since the assessee had no business in the taxable territories and there were certificates showing deduction of tax at the maximum rate on interest received by the assessee in the account of Messrs. Shamji Kalidas and Company, the assessment proceedings initiated by the Income -tax Officer should be discharged. The Income -tax Officer accepted this contention of the assessee and made an order dated 30th December, 1948, for the assessment years 1946 -47, 1947 -48 and 1948 -49 observin : 'As there is no source of income taxable in British India, I drop the proceedings already started.' So far as the assessment for the assessment year 1949 -50 was concerned, the order made by the Income -tax Officer was dated 16th August, 1949, and, in that order too, he made a similar observation, namel : 'Assessment proceedings in the previous years were also dropped after inquiries. I, therefore, cancel the return of income issued for the assessment year 1949 -50.' Nothing transpired thereafter for several years until the Income -tax Officer, Porbandar, issued notices for reopening the assessment of the assessee for the assessment years 1947 -48, 1948 -49 and 1949 -50 under section 34(1)(a). The respective notices were issued by the Income -tax Officer, Porbandar, on 19th March, 1956, 28th March, 1957, and 8th March, 1958. So far as notice for the assessment year 1947 -48 was concerned, the assessee addressed a letter dated 18th April, 1956, to the Income -tax Officer, Porbandar, objecting to his jurisdiction and requesting him to refer the question of jurisdiction to the Commissioner of Income -tax for decision under section 64. Similar letters dated 25th April, 1957, and 12th April, 1958, raising the same objections and making the same request were also addressed by the assessee to the Income -tax Officer, Porbandar, in reply to the notices for the assessment years 1948 -49 and 1949 -50. The question of jurisdiction in respect of each year was accordingly referred by the Income -tax Officer, Porbandar, to the Commissioner of Income -tax. The claim of the revenue that the jurisdiction to assess the assessee under section 34(1)(a) was with the Income -tax Officer, Porbandar, was based on entry 78 -C in the notification dated 1st July, 1952, issued by the Central Board of revenue under section 5(6) whereas the assessee contended that his case was governed by entry 77 and not by entry 78 -C and that under entry 77, the Income -tax Officer competent to assess the assessee was the Income -tax Officer, Circle -I, Ward A, Ahmedabad. The contention of the revenue prevailed with the Commissioner of Income -tax who held that the Income -tax Officer, Porbandar, was the proper officer competent to initiate proceedings against the assessee under section 34(1)(a). The Income -tax Officer, Porbandar, thereafter, proceeded to make an assessment on the assessee and completed the assessment of the assessee for the assessment year 1947 -48 on 18th March, 1957 and for the assessment year 1948 -49 on 27th February, 1958. The assessment for the assessment year 1949 -50 was similarly completed on 28th February, 1959. The total income in each of these assessment years was computed at a large figure and was assessed on the basis that the sale proceeds of ghee credited in the current accounts of the assessee with the Bank of India Ltd., Bombay, and Messrs. Shamji Kalidas and Company were received by the assessee in the taxable territories and the profit embedded in these sale proceeds was, therefore, liable to tax under section 4(1)(a) of the Indian Income -tax Act. The assessee was also charged penal interest under section 18A(8) in the assessment for the assessment year 1948 -49, on the view that the assessee had failed to make payment of advance tax under section 18A(3). Now the assessment in respect of the assessment years 1947 -48 and 1948 -49 was made by the Income -tax Officer, Porbandar, under section 23(4) and the assessee, therefore, applied to the Income -tax Officer, Porbandar, under section 27 to cancel the assessment and to make fresh assessments in accordance with the provisions of section 23. There were two applications, one in respect of each assessment year, and both the applications were rejected by the Income -tax Officer, Porbandar. The assessee thereupon preferred appeals to the Appellate Assistant Commissioner against the orders rejecting the applications under section 27 and also against the original orders of assessment under section 34(1)(a). There was a common order made by the Appellate Assistant Commissioner in these appeals and by that common order, the Appellate Assistant Commissioner held that the Income -tax Officer had no reason to believe that by reason of any omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment, the income of assessee had escaped assessment and the condition precedent to the initiation of proceedings under section 4(1)(a) was, therefore, not satisfied and he accordingly allowed the appeals and set aside the orders of assessment made by the Income -tax Officer, Porbandar. The Income -tax Officer, Porbandar, being aggrieved by this decision, brought appeals before the Tribunal. The Tribunal took the view that the order of the Appellate Assistant Commissioner in so far as it allowed the appeals of the assessee against the orders of the Income -tax Officer rejecting the applications under section 27 was clearly erroneous and it accordingly set aside the whole of the order of the Appellate Assistant Commissioner and confirmed the orders of the Income -tax Officer rejecting the applications under section 27 and remanded the appeals against the original orders of assessment to the Appellate Assistant Commissioner for hearing the merits. The Appellate Assistant Commissioner thereafter heard the appeals and by a common order dated 5th October, 1962, rejected various technical objections including the objection against the validity of the initiation of proceedings under section 34(1)(a) and confirmed the orders of assessment with modification only in the quantum of the income assessed. The appeal directed against the order of assessment for the assessment year 1949 -50 also met with the same fate and the order of the Appellate Assistant Commissioner on that appeal was dated 18th October, 1962. The assessee thereupon carried the matter higher in appeal to the Tribunal. There were three main grounds urged on behalf of the assessee and they were, (1) the Income -tax Officer, Porbandar, had no jurisdiction to assess the assessee under section 34(1)(a) since the case of the assessee was governed by entry 77 in the notification of the Central Board of Revenue dated 1st July, 1952, and not by entry 78 in the said notification; (2) the proceedings under section 34(1)(a) were bad since all the basic material facts necessary for its assessment had been disclosed by the assessee at the time of the original assessments and the only ground on which the assessments were really sought to be reopened was that the Income -tax Officer, Porbandar, entertained a different opinion from his predecessor as regards the inferences to be drawn from those facts; and (3) penal interest charged by the Income -tax Officer under section 18A(3) in the assessment for the assessment year 1948 -49 was illegal and unjustified since the assessee had not committed a breach of section 18A(3). All the three grounds were rejected by the Tribunal. So far as the first ground was concerned, the Tribunal took the view that the objection, though styled as an objection to the jurisdiction of the Income -tax Officer, Porbandar, was in reality and substance an objection as to the place of assessment and was, therefore, covered by section 64(3) and since the question raised by the objection was referred by the Income -tax Officer to the Commissioner and was determined by the Commissioner under that section, the determination was binding and could not be called in question before the Tribunal and that, in any event, even if the Tribunal was entitled to examine the question, the determination of the Commissioner was correct inasmuch as the case of the assessee was governed by entry 78 -C and not by entry 77 in the notification dated 1st July, 1952. The second ground was negatived by the Tribunal on the view that though the assessee had placed the aforesaid facts before the Income -tax Officer at the time of the original assessment in regard to the assessment years 1947 -48 and 1948 -49, there was not a full and true disclosure of all the material facts necessary for its assessment and this was much more true in the case of the assessment year 1949 -50, where the assessee had n ot even produced its current accounts with the Bank of India Ltd., Bombay, and Messrs. Shamji Kalidas and Company and the provisions of section 34(1)(a) were, therefore, clearly attracted. In regard to the charge of penal interest which was attacked as improper and unjustified, the Tribunal held that no appeal lay against it to the Appellate Assistant Commissioner and consequently to the Tribunal. The Tribunal in the result dismissed the appeals of the assessee and hence the present reference.

(2.) OUT of the four questions which have been referred to us, the first two relate to the objection it jurisdiction based on entry 78 -C in the notification dated 1st July, 1952, the third raises the point as regards the validity of the proceedings under section 34(1)(a) and the last challenges the decision of the Tribunal in regard to the maintainability of an appeal against the levy of penal interest. So far as the first question is concerned, it is obvious that having regard to our decision in Dhrangadhra Trading Company Private Ltd. v. Commissioner of Income -tax, the view taken by the Tribunal is correct and this question must be answered against the assessee and in that event the second question would not arise for consideration and Mr. Palkhivala, learned advocate, appearing on behalf of the assessee, therefore, rightly did not press these questions. The only two questions which were pressed by him and which were debated before us were the third and fourth questions, though, even in regard to the fourth question, it was clear that it would arise for consideration only if the third question was decided against the assessee. We will, therefore, first proceed to examine the third question and see how it should be answered, in favour of the assessee or against it.

(3.) BEFORE we proceed to consider whether the assessee has succeeded in showing that on the material on record the Income -tax Officer could have no reason to believe that there was any omission or failure to disclose material facts necessary for its assessment resulting in income escaping assessment, it is necessary to understand what is meant by the expression 'material facts' which it is the duty of the assessee to disclose before the Income -tax Officer at the time of assessment. The Supreme Court had occasion to consider the scope and meaning of this expression in Calcutta Discount Co. Ltd. v. Income -tax Officer, Calcutta, where Das Gupta J., speaking on behalf of the majority, said :