Chunnilal Surajmal vs Commissioner of Income Tax

Uday Sinha, J.—In this reference u/s 258(1) of the income tax Act, 1961 (''the Act'') we are concerned only with assessment year 1949-50. The accounting period- of the assessee was from Diwali to Diwali, i.e., year commencing from October 1948. The assessee is a HUF. The questions referred to us for our opinion are:

Whether, on the facts and in the circumstances of the case the Tribunal was justified in holding that reopening of the assessment for the assessment year 1949-50 u/s 147(a) was valid in law?

Whether, on the facts and in the circumstances of the case the Tribunal was justified in setting aside the order of the Appellate Assistant Commissioner and directing him to reconsider the sources of the repayment of loan to the extent of Rs. 1,52,500?

The assessee was assessed for the assessment years 1948-49, 1949-50 and 1950-51. Assessment orders were passed on 25-12-1948, 31-10-1951 and 31-10-1951, respectively. Several years later on 21-2-1965, the ITO sent a proposal to the Central Board of Direct Taxes (CBDT) seeking their approval to reopen the assessment for the aforesaid three years. In the view of the ITO the assessee was possessed of a house at Deoghar which ostensibly stood in the name of Smt. Lakshmi Devi wife of Hanuman Prasad Sharoff. The income represented by the unexplained investment, in the house property escaped assessment. The unexplained investment according to the ITO was to the tune of Rs. 1,45,600. With the approval of the Board the assessments were reopened. In answer to the notice u/s 148 of the Act, the assessee filed return declaring nil income. After hearing the assessee''s representative, the ITO allocated the unexplained investment over house as follows:

Rs.

1948-49

60,000

1949-50

25,000

1950-51

60,000

On scrutiny of the accounts the ITO found that in the pass book of Lakshmi Devi there was a deposit of Rs. 1,52,500 on 11-12-1948. The ITO called upon the assessee but not Lakshmi Devi to explain the source of this deposit in the account of Lakshmi Devi. The explanation of the assessee was that this sum of Rs. 1,52,000 was not the asset of the HUF and that it had been taxed earlier in 1946-47 in the hands of Lakshmi Devi and, therefore, it could not be taxed again. The ITO formed the opinion that the said sum was really income of the HUF which had been entered in the bank account of Lakshmi Devi. The ITO observed as follows:

Thus, a sum of Rs, 1,52,500 could not be satisfactorily explained either by Lakshmi Devi or by Shri Hanuman Prasad Sharoff, the karta of the HUF.

He, therefore, treated this deposit as a concealed income of the assessee and added it to its income.

The assessee appealed against the order of the ITO against the assessments for all the three years. The submissions urged before the AAC on behalf of the assessee, leaving aside the submissions not relevant to this present case were, firstly, that the initiation of the reassessment proceeding was invalid, as there had been no failure on the part of the assessee to disclose fully and truly all material facts for the original assessment; and secondly, that the reassessment proceeding having been initiated only to consider the unexplained investment in the house property at Deoghar, the ITO had no jurisdiction to hold that Rs. 1,52,500 appearing in the pass book of Lakshmi Devi was property of the HUF and reassess, accordingly.

In regard to the first contention the AAC held that there was evidence to show that the assessee had disclosed that he had constructed a house property. The AAC also noticed that in the order sheet of the ITO dated 23-6-1951 it was recorded as follows:

Plan of the house, municipal certificate and valuation made by overseer also produced. For orders.

Upon those facts, the concluded finding of the AAC was as follows:

What the ITO has done in this case amounts to remedying infirmities in the original assessment and these infirmities were not the result of the appellant''s failure to disclose any fact. I, therefore, hold that the ITO has no reason to believe that any income has escaped assessment and even if he has any such reasons, it is not based on any objective fact which was material for assessment and which the appellant did not disclose at the time of original assessment.

The AAC, thus, held that the inclusion of the investment in the house property as unexplained income was unwarranted.

In regard to the inclusion of Rs. 1,52,500 mentioned in the pass book of Lakshmi Devi as unexplained income of the assessee, the AAC observed that the reassessment proceeding had been initiated only for considering the unexplained investment in the house and not in regard to the sum of Rs. 1,52,500 mentioned in the pass book of Lakshmi Devi. The initiation of the reassessment proceeding, therefore, could not be initiated for inclusion of the sum of Rs. 1,52,500. Besides this technical objection to the initiation of the reassessment proceeding, the AAC also applied himself to the stand of the department on merit. He found that Lakshmi Devi had an overdraft account with the United Commercial Bank Ltd., Calcutta. On the security of a call deposit of Rs. 1,50,000 she took a loan of the said amount in two equal installments of Rs. 75,000 each on 28-9-1945 and 29-9-1945. The source of deposit as shown in the pass book of the aforesaid amount not having been explained to the satisfaction of the ITO, the sum was assessed as income of the firm for 1946-47. The said loan was repaid on 11-12-1948. The loan from the bank was a source of repayment to the bank. Thus, the AAC held that the ITO had no justification to include the sum of Rs. 1,52,500 as unexplained income of the assessee.

The revenue being aggrieved by the order of the AAC filed appeals to the Tribunal. The Tribunal affirmed the finding of the AAC in regard to the house property in the following terms:

In view of the above facts, we hold that the action u/s 147(a) could not have been taken for reassessing any part of the investment in this house property and, therefore, the assessment by the ITO for 1948-49 and 1950-51 had been rightly annulled by the AAC.

The matter relating to the investment in the house property is thus a closed chapter.

In regard to the other matter, namely, the escapement of the sum of Rs. 1,52,500, both the parties pressed their respective contentions. The Tribunal took a queer view of the matter. It did not reverse the finding of the AAC that there had been no failure by the assessee to disclose fully and truly all relevant materials yet it observed that the AAC could have investigated the fact in greater detail. Surprisingly, the Tribunal based its decision upon some supposed admission of the assessee. The Tribunal observed in paragraph 15 that ''though the amount in question was in the name of Lakshmi Devi, it was admitted before us that these transactions pertained to the Hindu undivided family''. The Tribunal in the statements of facts had also stated at paragraph 8 that ''it was admitted before him that though the amount stood in the name of Smt. Lakshmi Devi, it belonged to the HUF (i.e., the assessee)''. Mr. B.P. Rajgarhia, the Learned Counsel for the assessee, vehemently contested the statement of the Tribunal that the assessee had admitted that the transactions in regard to Rs. 1,52,500 pertained to the HUF. We have been somewhat at a loss to appreciate how the assessee could have made such an admission. This matter had been contested by the assessee before the ITO as well as before the AAC tooth and nail. Having succeeded before the AAC there appears to be no earthly reasons for the assessee to have conceded that this sum belonged to the HUF. In paragraph 10 of the application u/s 256(1) of the Act the assessee disputed the alleged admission in the following words:

That the Tribunal has also erred in assuming facts as admission was not there and which has also vitiated the judgment.

The Tribunal instead of stating that the assertion of the assessee in paragraph 10, quoted above, was not correct again reiterated in paragraph 8 in statements of facts that it had been admitted before the Tribunal that the amount though stood in the name of Lakshmi Devi, it really belonged to the HUF. It passes my comprehension that the assessee could have made such an admission. Yet we are bound by the fact statement of the case. The question referred to us must be answered on the basis of the facts stated. The question, therefore, remains whether the Tribunal was justified in holding that reopening of the assessment was valid in law. That question must still be considered by this Court.

The Learned Counsel for the assessee submitted that the initiation of the reassessment proceeding was without jurisdiction, as there was no failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment. It was submitted that the sum of Rs. 1,52,500 having been found in the pass book of Lakshmi Devi, it was her property and, therefore, there was no obligation on the assessee to inform the department about the existence of such amount in the pass book of somebody other than the assessee. In my view, this submission is justified.

An assessee is required under the Act to declare or file a return in regard to his income alone and not of others. It is true that a person/assessee may corner his income and although an income stands in the name of a third person, it may really be the income of the assessee. In that situation, revenue can very well assess that income as income of the assessee although it stands in the name of some other person. But in that situation, it is incumbent on the revenue to call upon the ostensible owner to explain whether an item of income standing in his name really belonged to him or it belonged to some other person. If the person in whose account the income exists fails to show that it was his income, and if there is any material on record to show that that income may be the income of an assessee, the department may well proceed to assess that income as income of an assessee. But until the person in whose name the property or income ostensibly stands has been asked to explain the source of his or her income and until it has been rejected, the revenue cannot treat that sum as income of the assessee. Till then, there is no obligation upon an assessee to include in his return the sums standing in other''s name. In the instant case, the revenue was in possession of the pass book of Lakshmi Devi. The sum of Rs. 1,52,500 existed in her pass book. It was, therefore, incumbent upon the ITO to call upon Lakshmi Devi to explain the source of her income. If she failed in that behalf, the revenue would presume that it may have been the income of the assessee Hanuman Prasad Sharoff. Just because Lakshmi Devi was wife of Hanuman Parsad Sharoff, the karta of the HUF, it did not necessarily follow that the sum shown in her pass book was the sum of the HUF and not the personal income of Lakshmi Devi. The parties are Marwaris by origin. Small dealings by females of the house are not unknown. She could have her own income apart from the income of the HUF. Lakshmi Devi, therefore, not having been called upon by the ITO to explain the source of the deposit of Rs. 1,52,500 in her pass book. The second question of calling upon the assessee to explain it did not arise. The department, therefore, had no material before it to indicate that the said sum was the income of the assessee. In the absence of such material, it is difficult to hold that income liable to tax had escaped assessment. Merely because the assessee happens to be the husband of Lakshmi Devi, there was no obligation upon him to indicate in his return the income of his wife Lakshmi Devi. The law requiring an assessee to mention in his return income of his wife or minor children was enacted in 1971. In my view, therefore, there was no failure on the part of the assessee in not returning the said sum of Rs. 1,52,500 in his income during the assessment year 1949-50. In my concluded view, therefore, the very initiation of the proceeding u/s 147(a) of the Act was invalid and without jurisdiction. There was no material before the revenue to come to the conclusion that income of the assessee had escaped assessment. The conclusion of the revenue that the assessee had failed.

The learned additional standing counsel submitted that the Tribunal had not held that income of the assessee had escaped assessment, but only observed that the AAC should have investigated the matter further. He submitted that no exception should be taken for probing the matter deeper. I regret, I am unable to find force in this submission. The question of investigation should have arisen before the initiation of the reassessment proceeding. The department cannot be allowed to initiate a proceeding which is not in conformity with law and then start a fishing enquiry. Before initiation, the revenue authorities should have called upon Lakshmi Devi to explain the suspicious entry in the pass book. That investigation cannot follow initiation of a reassessment proceeding. It could have preceded. All steps subsequent thereto must therefore be held to be without jurisdiction. The investigation directed by the Tribunal, therefore, cannot be sustained. Even after the proceedings had been dropped or brought to a close, it would be open to the revenue to investigate whether the impugned sum was income of Lakshmi Devi or was the income of HUF. But the greater difficulty now in pursuing that investigation is that Lakshmi Devi is dead. She being no more alive, no body else can be called upon to explain if that sum belonged to Lakshmi Devi. There was no obligation upon the present assessee to try to show that it was the income of Lakshmi Devi. In that view of the matter, the direction to investigate the matter was absolutely unwarranted. Besides, it is obvious that the initiation of the reassessment proceeding was without jurisdiction. It was in contravention of the provisions of section 147.

The learned additional standing counsel submitted that the finding of the Tribunal that the sum of Rs. 1,52,500 belonged to the assessee was a finding of fact and this Court cannot interfere with the findings of fact. He submitted that the assessee had admitted before the Tribunal that the said sum belonged to the assessee and, therefore, the conclusion was inescapable that an item of income belonging to the assessee had escaped assessment. He submitted that the Tribunal not only in the judgment, but also in the statement of the case had stated that the fact of the impugned sum belonging to the HUF had been admitted before it and this Court was precluded from probing whether the assessee had admitted or not.

As a bald proposition, it must be conceded that findings of fact recorded by the Tribunal is binding on the High Court acting in its advisory jurisdiction. It is not open to test the findings of fact unless that is the question referred to the High Court. Further, the narration of facts in the statement of case must be accepted as correct. Therefore, I would not like to state that the assessee had not admitted before the Tribunal, but I am somewhat astonished at the statement of the Tribunal that the assessee had made such an admission. The real controversy between the assessee and the revenue was in regard to this very item of money belonging to Lakshmi Devi or the assessee. It was being fought by the assessee tooth and nail. It had succeeded before the AAC and all of a sudden we are called upon to believe that the assessee conceded before the Tribunal that the impugned sum was his income and not of somebody else. The admission was recorded in the judgment of the Tribunal. That admission was protested too by the assessee in the application for reference u/s 256(1) in paragraph 10. It was stated there ''that the Tribunal had also erred in assuming facts as admission was not there and which has also vitiated the judgment''. The assessee succeeded on the primal question before the AAC and we are asked to believe that he conceded against himself on this primal question. He protested to the statement of any admission having been made. If he had admitted, I do not see why the assessee would move heaven and earth to raise the same very contest. The sequence of events are rather glaring. I have considerable difficulty in accepting that the assessee made that admission, but I am bound by the statement of the case. I shall, therefore, proceed upon the footing that the assessee did make the admission. Even so, if the very initiation of the reassessment proceeding was illegal and without jurisdiction, the question of admission did not arise. The proceeding before the ITO having been without jurisdiction, the order of the Tribunal for further investigation must also be held to suffer from the said vice. In my view, therefore, despite the admission of the assessee, the order for further investigation was not justified.

As I stated earlier, the submission of learned additional standing counsel was that the assessee had admitted before the Tribunal that the amount belonged to the HUF, i.e., the assessee. The conclusion was inescapable that that income had escaped assessment. If the Tribunal was convinced of the situation that the assessee had admitted about the sum being HUF property, where was the question of any further investigation. The ITO had held that this sum was liable to be assessed as income of the assessee. The assessee had admitted before the Tribunal that it belonged to the HUF. If the fact of admission is correct, the Tribunal should have straightway allowed the appeal of the department. There was nothing further to be investigated. That is an additional ground for me to doubt the statement in the judgment and the statement of the case regarding the odmission.

The AAC had held that there was no failure on the part of the assessee to disclose his income fully and truly. If the Tribunal felt that that finding of the AAC was not correct, it should have set it aside, but curiously without setting aside that finding, the Tribunal directed the AAC to reconsider the matter. Without upsetting the finding of the AAC in this regard, the Tribunal had no jurisdiction to direct the AAC to consider the matter further.

The learned additional standing counsel for the revenue brought to our notice the case of Karnani Properties Ltd. Vs. The Commissioner of Income Tax, West Bengal, and contended that the assessee having made the admission before the Tribunal could not be permitted to turn round and put up another stand. Besides, the fact that the Supreme Court case deals with another aspect of the matter, I have conceded for the sake of argument that the assessee did make the admission. In my view, therefore, the said case cannot be of much assistance to the revenue. The reliance placed by learned additional standing counsel on Aishabi Vs. Commissioner of Income Tax, is also of no avail to the revenue.

There is yet another aspect of the matter. The core question is whether the ITO was in possession of materials pointing to escapement of income liable to tax. The Tribunal has proceeded upon the assumption that the assessee had admitted before it that the impugned sum of Rs. 1,52,500 was asset of the HUF. This admission was not before the ITO when he asked for sanction of the Board to reopen the matter. On that day, therefore, the ITO had no material indicating that the said sum belonged to the HUF. When the question is regarding the validity of an initiation of a proceeding, it must be tested on materials available on that day. Materials or events becoming available long after initiation cannot sustain the initiation of the proceeding. I am, therefore, of the view that the very initiation of the reassessment proceeding was illegal and without jurisdiction. The Tribunal, therefore, had no jurisdiction to order deeper investigation into the matter.

The order of the Tribunal upholding the reopening of the assessment is illegal on yet another ground. The reassessment proceeding appears to have been initiated on the footing that the assessee had constructed a big house and the construction of the house had escaped assessment and, accordingly, notice u/s 148 was issued after obtaining the approval of the Board. From this statement of the ITO in the assessment order, it is obvious that the Board had permitted initiation of the reassessment proceeding only on the question as to whether the investment in the house had been explained or not. That is what the AAC also observed. In paragraph 14 he observed as follows:

It was argued by Shri J. Sahay, Inspector of income tax who appeared for the income tax Officer that at least for 1949-50 the reassessment was valid because a sum of Rs. 1,52,500 has escaped assessment. In my opinion, this contention is not correct. Firstly, the income tax Officer as is apparent from his order of assessment initiated reassessment proceedings for considering unexplained investment only. He cannot take up a new ground to justify initiation of proceedings. The order for 1949-50 does not show that reassessment proceedings were started for taxing Rs. 1,52,500. This reason is not mentioned in the order sheet for 1949-50 either. Therefore, the income tax Officer cannot bank on it for supporting his action.

The orders of the ITO and the AAC show clearly that the sum of Rs. 1,52,000 was not the matter for which permission to initiate reassessment proceeding was asked for and accorded. If that was not the subject matter of sanction by the Board, it was not open to the ITO or the Tribunal to look into this aspect of the matter. Sanction to reinvestigate this matter could not have been asked for by the ITO because the pass book of Lakshmi Devi was in possession of the ITO at the time of hearing in the assessment matter. There was, therefore, no new material before him to come to the conclusion tentatively that income had escaped assessment.

The Learned Counsel for the assessee placed reliance upon Chhugamal Rajpal Vs. S.P. Chaliha and Others, , Income tax Officer, Calcutta and Others Vs. Lakhmani Mewal Das, , Income Tax Officer and Others Vs. Madnani Engineering Works Ltd., Calcutta, , East Coast Commercial Company Ltd. Vs. Income Tax Officer and Others, and Ganga Saran & Sons (P.) Ltd. v. ITO [1981] 130 ITR 1 (SC). In the view that I have taken up in the matter, I do not consider it necessary to refer to all those cases and make this judgment cumbrous.

For all the reasons mentioned above, my conclusions are that there was nothing to show that income liable to tax had escaped assessment. There was no failure on the part of the assessee in not making a true and full disclosure of his income. The so-called admission of the assessee before the Tribunal cannot vitiate my conclusion that the initiation of the reassessment proceeding was invalid, the said admission not being available to the ITO at the time of permission to reopen assessment was asked for and granted.

The order to investigate deeper the source of payment of Rs. 1,52,500 would now be futile. For pursuing this probe the most important person would be Lakshmi Devi. The first step in probe would be to call upon Lakshmi Devi to show the sources from which she repaid the loan. Without calling upon hear to explain that sum it cannot be imposed on any body as his income. But Lakshmi Devi is reported to be dead. The probe, therefore, cannot be effective. The order to probe is now futile. On the facts and in the circumstances of the case, for the reasons stated above, the Tribunal was not justified in upholding the reopening of the assessment for the assessment year 1949-50 u/s 147(a). The first question referred to us, therefore, must be answered in the negative, against the revenue and in favour of the assessee. The second question referred to us for our opinion is a corollary to the first question. Since, the Tribunal was not justified in upholding the reopening of the assessment, the direction of the Tribunal to the AAC to reconsider the sources of the repayment of the loan must also be decided against the revenue. Both the questions thus must be answered in the negative, against the department and in favour of the assessee. The reference is, thus, answered in favour of the assessee with costs. Hearing fee Rs. 500.

Ahmad, J.

I agree.