M VARADARAJULU NAIDU Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) UNDER section 256(1) of the Income-tax, 1961, at the instance of the assessee the Income-tax Appellate Tribunal, Madras Bench, has referred the following question for the opinion of this court "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the action under section 147(a) of the Income-tax Act, 1961, in respect of the reassessments of the assessee for the assessment years 1957-58 and 1958-59 was valid in law ?" *The assessee is carryirg on business for which books of accounts were kept and closed at the end of 31st July. In the books of account kept for the business for the years ended July 31, 1956, and July 31, 1957, there were entries relating to certain loans said to have been borrowed from Multani bankers on the strength of hundis. Interest said to have been paid on these loans was adjusted by debit to the profit and loss account for arriving at the business income and was thus claimed as deduction in the computation of business income. The assessee filed along with the returns the profit and loss account and also a statement of affairs or a balance-sheet as on the relevant dates. With reference to the assessment year 1957-58, there was a balance-sheet as at July 31, 1956, and on the liabilities side of the balance-sheet an amount of Rs. 55, 000 was displayed as referable to certain loans taken on the strength of hundis.

(2.) THE assessee filed also particulars of the said hundi loans the total of which came to Rs. 50, 000 and they did not show a loan of Rs. 5, 000 in the name of one Madhawdas Kalyandas. For the assessment year 1958-59 also, the assessee filed a balance-sheet or statement of affairs as at July 31, 1957, wherein on the liabilities side a sum of Rs. 2, 70, 000 was shown as loans payable. THE assessee filed particulars of hundi loans which included loans of Rs. 10, 000 each from five persons, viz., Seth Tulsidas Lalchand, Seth Naraindas Jethanand, Seth Khumchand Vishumal, Seth Hariram Tiloomal and Seth Ramchand and Sons. THE assessments for 1957-58 and 1958-59 were made under section 23(3) of the Indian Income-tax Act, 1922, on December 31, 1957, and December 30, 1958, respectively. THE assessment orders did not refer to any aspect regarding the genuineness or otherwise of the aforesaid loan transactions. THE assessments were subsequently reopened by notices issued under section 148 of the Income-tax Act, 1961. THEse notices were served on March 18, 1966, and February 6, 1967, respectively, for the two years. THE action was initiated by the Income-tax Officer under section 147(a) of the Act. Before taking action under that provision the Income-tax Officer had submitted reports to the Commissioner of Income-tax and secured the sanction of the Commissioner for reopening of the said assessments. In the course of the reassessments, the Income-tax Officer came to the conclusion that hundi loans to the extent of Rs. 20, 000 were not genuine with reference to the assessment year 1957-58. He included the said sum of Rs. 20, 000 as income from undisclosed sources. Further, he added a sum of Rs. 620 being the interest referable to the said hundi loans. For the assessment year 1958-59, the Income-tax Officer added a sum of Rs. 65, 000 with reference to the hundi loans as not having been proved to be genuine. He added a sum of Rs. 8, 175 being the interest with reference to the said hundi transactions.

(3.) THE Supreme Court pointed out "It is, therefore, essential that before such action is taken the requirements of the law should be satisfied. THE live link or close nexus which should be there between the material before the Income-tax Officer in the present case and the belief which he was to form regarding the escapement of the income of the assessee from assessment because of the latter's failure or omission to disclose fully and truly all material facts was missing in the case. In any event, the link was too tenuous to provide a legally sound basis for reopening the assessment. THE majority of the learned judges in the High Court, in our opinion, were not in error in holding that the said material could not have led to the formation of the belief that the income of the assessee-respondent had escaped assessment because of his failure or omission to disclose fully and truly all material facts." *It may be of interest to reproduce here the report which was submitted by the Income-tax Officer to the Commissioner of Income-tax in that case and this report is reproduced in the judgment of the Calcutta High Court in Lakhmani Mewal Das v. Income-tax Officer which is as follows"THEre are hundi loan credits in the name of Narayansingh Nandalal, D. K. Naraindas, Bagwandas Srichand, etc., who are known name-lenders, and also hundi loan credit in the name, Mohansingh Kanayalal, who has since confessed he was doing only name-lending. In the original assessment these credits were not investigated in detail. As the Information regarding the bogus nature of these credits is since known, action under section 147(a) is called for to reopen the assessment and assess these credits as the undisclosed income of the assessee.