Commissioner of Income Tax, Madras vs Rathinasabapathy Mudaliar (Deceased)

Srinivasan, J.—This reference has been brought before us at the instance of the Commissioner of Income Tax on his application u/s 66(1) of

the Income Tax Act. The assessee was the karta of a Hindu undivided family. The family was partitioned on April 4, 1947. Following this partition,

which was accepted by an order u/s 25A, the assessee and his four major sons constituted themselves into a partnership, and to the benefits of this

partnership a minor son was admitted. This partnership was also registered u/s 26A of the Act. The partnership, it may be stated, was in respect of

the managing agency of Pankaja Mills Limited, Coimbatore. For the assessment years 1948-49 to 1951-52, individual assessment were made in

respect of the share income of the minor on returns filed by his mother, Mrs. Komalavallithayar Ammal, as his guardian. The assessee,

Rathinasabhapathy Mudaliar, the erstwhile karta of the family, was also assessed individually in respect of his income. In or about 1952, the

Income Tax Officer realised that u/s 16(3)(a) of the Act, the income of the minor son from the partnership should have been included in the total

income of the father and that had not been done in the assessment of the assessee, the father. In that view, therefore, that the income of the father

had escaped assessment, proceedings were started u/s 34 of the Act after obtaining the prior sanction of the Commissioner. To a notice issued in

this regard, the assessee while submitting a revised return of his income, including the share income of the minor son, objected to the validity of the

proceedings, contending that it was not a case where any income had escaped assessment and that at best it could only be stated that his own

income had been under-assessed. The Income Tax Officer however made fresh assessments u/s 23(1) read with section 34. Against these orders

of reassessment, appeals were taken to the Appellate Assistant Commissioner. It was contended before the appellate authority that the attempted

inclusion of the share income of the minor in the assessment of the assessee amounted only to a change of opinion of the officer, that the officer

who originally made the assessments both on the minor son and the assessee in their individual capacities had the entire matter before him and that,

therefore, it was not correct to say that any income had escaped assessment. The Appellate Assistant Commissioner however took the view that

since the minor son had been admitted to the benefits of the partnership in which the father was a partner, section 16(3)(a)(ii) applied, and that, in

computing the total income of the minor from the partnership had to be included. He thought that, since under the provisions of the Act the

assessee is under a duty to disclose his total income, which total income by reason of section 16(3)(a)(ii) would take in the income of the minor son

admitted to the benefits of the partnership, the assessee had failed to disclose that part of the income for the purpose of assessment. He held that

the case came within the scope of section 34(1)(a) of the Act and that since all the conditions requisite to its application had been fulfilled, the

proceedings were validly launched and completed.

Further appeals were taken to the Appellate Tribunal. In dealing with the contention of the assessee, the Appellate Tribunal observed :

It cannot be disputed that the Income Tax Officer should have had full knowledge of the fact that there was actually a minor in the firm of which the

assessee was a partner, on the 29th February, 1952, when he dealt with section 25A and 26A matters in the cognate case. It is a fact that

overlooked it when he completed the assessees assessments u/s 23(1) on 31st May, 1952. The under-assessments arising as a consequence

thereof cannot be traced to any omission on the part of the assessee to have furnished all the material particulars in the manner required by section

34(1)(a) as a condition precedent to its application. There is nothing to read in the wording of section 34(1)(a) that the full and true disclosure of all

material facts necessary for the assessment must be on the return forms themselves; it can very well be in the proceedings too. To entail the

application of the section, it is necessary for the Income Tax Officer to establish that the omission was in the proceedings too. No doubt in the

return forms filed by the assessee for all the years presently under a consideration, certain relevant pages have been left blank. But the officer

accepted these forms as sufficiently complete for the purposes of his assessments u/s 23(1). He cannot thereafter be heard to complain that they

did not contain the impugned data. It was up to him to have asked the assessee to have all the pages therein properly filled up and if on such

completion, the minors name had still not been properly disclosed therein, the departments case can be understood.

On this reasoning, the Tribunal held that :

There are no materials in the case for invoking section 34(1) for all the four years presently under appeal. All the supplementary assessments are

consequently cancelled.

On the application of the Commissioner of Income Tax, the following question stands referred to us :

Whether the reassessments u/s 34 of the assessment years 1948-49 to 1951-52 are valid ?

It would be noticed that the Tribunal has confined its attention only to section 34(1)(a) of the Act and has not specifically dealt with the question,

whether the reopening of the assessment is justified u/s 34(1)(b) of the Act. In its final conclusion, however, the Tribunal holds that section 34(1)(a)

is inapplicable. It presumably holds that section 34(1)(b) also is inapplicable.

In the statement of the case, the Tribunal observed in paragraph 10 that the assessee appealed to the Appellate Assistant Commissioner that

neither part of section 34(1) applied to the facts of the case. The Appellate Assistant Commissioner again dealt with only one aspect of the matter

and having reached the conclusion that there was a failure on the part of the assessee to disclose fully and truly all material facts for the purpose of

his assessment, he did not canvass the application of section 34(1)(b) of the Act. It is however ground that the notice issued to the assessee only

specified that the proceedings were to be reopened u/s 34 of the Act and did not further mention whether the case fell u/s 34(1)(a) or section

34(1)(b). We are, however, of the opinion that since the question had been mooted before the department and the Tribunal, despite the fact that

the Tribunal had not given any finding as to whether clause (b) applies, the question is fully open before us and it is on that basis that the matter has

been argued on both sides.

The principal ground upon which the Tribunal has relied is that, side by side, with these assessment proceedings of the assessee, the individual

assessment of the minor had also been undertaken. The Tribunal also thought that the Income Tax Officer, having made an order u/s 25A relevant

to the partition of the Hindu undivided family and a further order relating to the registration of the firm u/s 26A, must have been fully aware of all the

incidents relating to this family. If that is so, the Tribunal says, the Income Tax Officer should have known that the minor had been admitted to the

benefits of a partnership in which the father was a partner; that the Income Tax Officer could have insisted that the assessee should bring out this

circumstance in his return, and that his failure to have asked for a clarification of the position amounted to his having concluded that that part of the

income of the minor was not includible in the total income of the father, the assessee. Either, therefore, the subsequent proceedings u/s 34

constituted a mere change of opinion on the part of the assessing authority, in which event resort to section 34 would not, in the opinion of the

Tribunal, be justified or the assessee had furnished all the relevant materials in one or the other of the connected proceedings, though not in his

return, which led to the conclusion that there had been no failure on the part of the assessee, as required u/s 34(1)(a). The question, therefore,

resolves itself into examining the validity of the reasoning which led to the cancellation of the assessments.

Both parts of section 34(1) deal with income, profits and gains chargeable to Income Tax which have escaped assessment. Clause (a) deals

with a case where the failure of the assessee to disclose fully and truly all material facts necessary for his assessment led to such escapement.

Clause (b) deals with a case where there has been no such failure, but the Income Tax Officer has in consequence of information in his possession,

reason to believe that there has been such escapement. The distinguishing feature between the two clauses is that, in the one case there had been

what may be called a conscious suppression by the assessee while in the other there has been no such suppression by the assessee but the

escapement of assessment comes to the knowledge of the Income Tax Officer as a consequence of information, Mr. Ranganathan, learned counsel

for the department, refers to Maharaj Kumar Kamal Singh v. Commissioner of Income Tax, where their Lordships of Supreme Court dealt with

the requirements of section 34(1)(b). It was held therein that even in a case where a return has been submitted, if the Income Tax Officer has

erroneously failed to tax a part of the assessable income, it would be a case where part of the income has escaped assessment. This decision

would support the proposition that, even assuming that there was a part of the income received by the minor from the partnership which was

includible in the assessment of the father to the knowledge of the Income Tax Officer, but the Income Tax Officer, had erroneously failed to assess

it as part of the fathers income, it would nevertheless be a case where such income had escaped assessment. The assessment is the assessment of

the father and not of the minor son. The fact that the minor son had been assessed on the share income from the partnership does not negative the

fact that the father who was liable to be assessed on the share of the minor son had not been assessed as required by the law and that therefore

that income had escaped assessment in his hands. Mr. Swaminathan, learned counsel for the assessee, argues however that the information which

is relevant to section 34(1)(b) must in the context mean that that information came into the possession of the Income Tax Officer subsequent to the

making of the assessment order in question. He claims that in the present case that information was available to the Income Tax Officer even at the

time of the making of the original assessment. It seems to us that there is a slight misapprehension as to the scope of the information that is

contemplated in section 34(1)(b). For the purpose of the argument, we are prepared to assume that the Income Tax Officer who made the original

assessment was aware that the minor had income derived from the partnership in which his father was a partner. But the information that is

contemplated by section 34(1)(b) is information that income, profits and gains chargeable to Income Tax had escaped assessment in the

assessment of the father. The information under the provision is with regard to the escapement to tax and not information as to the relationship of

the parties or the fact that the minor had been admitted to the benefits of the partnership in which his father had a share. The full effect of the

decision of the Supreme Court would be lost if the expression ""information"" is interpreted in the manner argued by the learned counsel for the

assessee. Even inadvertence and error in the making of the assessment would bring the case within the operation of section 34(1)(b) and where the

error is subsequently discovered, that amounts to information that a part of the income has escaped assessment. To emphasise the position, it is not

the information, in the sense that the assessee is a partner in a firm and his minor son had been admitted to the benefits of the partnership, that is

relevant for the purpose of section 34(1)(b), but the information that a certain part of the income which should have been assessed under the

relevant provisions of the law, in the hands of the father, had failed to be so assessed. Obviously, even within the meaning of the decision such

information regarding the escapement of tax is information subsequent to the original assessment.

In yet another case, Maharajadhiraj Sir Kameshwar Singh v. State of Bihar, the Supreme Court, when dealing with the provisions of the Bihar

Agricultural Income Tax Act, dealt with a case of reassessment. Therein, the assessing authority excluded an item from assessment in the belief that

it was exempted. Reassessment proceedings were started to include that item and the question arose whether such reassessment was permissible.

That item had been included in the return submitted by the assessee in connection with the original proceedings. Their Lordships of the Supreme

Court had to interpret section 26 of the Bihar Agricultural Income Tax Act, which is substantially the same as section 34 of the Indian Income Tax

Act prior to its amendment. That section read :

If for any reason any agricultural income chargeable to Income Tax has escaped assessment for any financial year....

They contrasted this provision with section 34 of the Indian Income Tax Act as it stood before amendment, which read :

If in consequence of any definite information which has come into his possession the Income Tax Officer discovers that income, profits or gains

chargeable to Income Tax have escaped assessment in any year...

They proceeded to consider the precise connotation of the expression ""escaped assessment"" and came to the conclusion that it was not

confined only to cases where income escaped assessment owing to reasons other than those attributable to the assessing authorities.

In a case decided by a Bench of this court, to which one of us was a party, the question arose whether whereby reason of error in the

computation of the income of the assessee by the Income Tax Officer, a part of the income had escaped assessment, section 34 would apply. That

was a case where the assessee was governed by section 10(7) read with the Schedule and the profits were computed under rule 2 (b) of the

Schedule on the basis of the actuarial valuation of the business. What happened was that instead of deducting a certain deficiency disclosed by the

actuarial report, the Income Tax Officer added the figures and computed the deficiency at a higher figure. Later, this mistake was discovered and

the Income Tax Officer started proceedings u/s 34. It was held that information for the purpose of section 34 need not be wholly extraneous to the

record of the original assessment and that even a mistake apparent on the face of the order of assessment would constitute information. Whether

the information was received from an extraneous source or the Income Tax Officer informed himself was immaterial for the purpose of section

34(1)(b). This decision is undoubtedly authority for the view that the information relevant to section 34(1)(b) may be derived from the record of

the assessment itself and on the discovery that, in the original assessment, the Income Tax Officer had inadvertently omitted to include a part of the

income.

Mr. Swaminathan has referred us to Commissioner of Income Tax v. Mahomed Yusuf Ismail. In that case, certain part of the income which

was includible by reason of section 16(3)(b) had been omitted on a misconstruction of that section by the Income Tax Officer. Subsequently, the

superior officer discovered the error and the Income Tax Officer proceeded to reopen the assessment u/s 34. The view was taken that there was

no definite information which came into the possession of the Income Tax Officer which resulted in his discovering that income had escaped

assessment. One of the learned judges observed that the word ""discover"" in section 34 does not mean a mere change of opinion on the same facts

or on the question of law. We are not satisfied that this decision gives any help for the determination of the present question. That was a case

where section 34, as it then stood, came in for examination and on a comparison with the wording of the section after its amendment, the learned

judges observed that the information must be one which was not in his possession at the time of the original assessment and that the section was

not intended to correct a mistaken view or to give effect to a changed view.

In Raghavalu Naidu and Sons v. Commissioner of Income Tax section 34 in its old form came in for examination and it was held that that

section could not be invoked merely because the Income Tax Officer changes his mind on the question of law.

Commissioner of Income Tax v. K. M. S. Lakshmana Iyer dealt with the case of a share of the profits falling to a minor who had been

admitted to the benefits of a partnership in which his father was partner. The Income Tax Officer under a wrong conception of the law did not

include this income in the fathers assessment for the year 1938-39. For the following year 1939-40 it was included and it was held by the High

Court to have been properly included. In connection, however, with the assessment for the year 1938-39, the Income Tax Officer purported to

invoke section 34 in respect of the sons share of the profits. This he did in March, 1940, before the High Court had dealt with the case for the

succeeding year, the decision of the High Court being in September, 1941. The section that had to be interpreted was the one before its

amendment. The learned judges took the view that there was no definite information in the possession of the Income Tax Officer when he served

the notice and, therefore, the assessment could not be reopened. The learned Chief Justice further observed that if the notice had followed upon

the result of the High Courts decision in September, 1941, that would have amounted to definite information as to the state of the law. We are

unable to derive any support from these two decisions which would help the decision in the present case. The facts of the case in the decision last

referred to showed clearly that the Income Tax Officer examined includibility of the sons share in the fathers assessment and held against it. That

was the reason why the learned judges took the view that there was no definite information and that a mere change of opinion as to the correct

legal position would not be definite information within the meaning of the section.

In the present case, there is no doubt whatsoever that while the Income Tax Officer was dealing with the original assessment of this assessee,

the income derived by the minor son from the partnership was not before him. That there were other connected proceedings u/s 25A or section

26A or individual assessment proceedings of the minor before him cannot be taken to establish that this part of the income of the minor son was

considered by the Income Tax Officer in making the assessment upon the father. Factually, he did not so consider this income. It is not in dispute

that the return of the father did not display this income. It cannot be therefore said that the Income Tax Officer had come to a conclusion that the

income of the son was not includible and for that reason he left it out. It is impossible therefore on the facts to equate the present case with those of

the decisions referred to where a change of opinion has been held not to justify reopening of the assessment.

In our opinion, the reopening of the assessment in the present case can be clearly brought within the scope of clause (b) of section 34(1). Even

assuming that there was no omission or failure on the part of the assessee, the information that any part of the income had escaped assessment was

clearly received subsequent to the assessment. That information was gathered from the records of the original assessment itself does not make it

any the less information which led the Income Tax Officer to believe that the income had escaped assessment.

Learned Counsel for the assessee has invited our attention to decision of the Bombay High Court in Dhanwate v. Commissioner of Income

Tax. The learned judges in that case had occasion to consider section 16(3) of the Act and held that that provision casts no statutory obligation on

the assessee in filing a return of his total income to include therein the income of his minor child from a partnership in which the assessee is a

partner. They went on further to hold that even assuming that such an obligation was cast upon the assessee, the failure on his part to so include it

would not amount to failure to disclose fully and truly all material facts necessary for the assessment for that year. This decision has been relied

upon by the learned counsel for the assessee to support his contention that in any event section 34(1)(a) does not apply. We do not think it

necessary to canvass the correctness of this decision or the applicability of the observations of the learned judges to the case presently before us,

for the reason that we are of opinion that the reopening of the assessment is justified by section 34(1)(b) of the Act. In the view that we have

taken, the question is answered in the affirmative and against the assessee. The assessee will pay the costs of the department. Counsels fee Rs.

250.