INCOME TAX OFFICER vs PURUSHOTTAM DAS BANGUR and Another

BY THE COURT :

Civil Appeals Nos. 3041-3043 of 1983

These appeals are directed against the judgment of the Rajasthan High Court dt. 29th Nov., 1979 [reported as Purushottam Das Bangur Vs. Income Tax Officer, C-Ward and Others, whereby the Writ Petitions filed by the respondents have been allowed and the notices issued under s. 147(b) of the IT Act, 1961 (hereinafter referred to as "the Act") have been quashed.

C. A. No. 3041 of 1983 arises out of Writ Petition No. 1177 of 1974 filed by Purushottam Das Bangur, respondent No. 1. It relates to the assessment of the said respondent for the asst. yr. 1969-70. During the accounting year relevant to the said assessment year the assessee claimed that he had suffered long-term capital loss on sale of shares of Maharaja Shree Umaid Mills Ltd. during the period 5th March, 1969 and 30th March, 1969 at the price quoted in the official report and quotations of the Calcutta Stock Exchange Association. According to the assessee, he had incurred a loss of Rs. 1,57,792. The said claim of the assessee was accepted by the ITO, C Ward, Jodhpur while making the assessment and the same was affirmed in appeal by the AAC. Subsequently, the ITO received a letter dt. 21st March, 1974 from Shri S. M. Bagai, Deputy Director, Directorate of Inspection (Investigation), Special Cell, New Delhi, wherein it was stated that on information obtained from the Bombay Stock Exchange Directory the book value per equity share of Maharaja Shree Umaid Mills Ltd. rose from Rs. 318.55 for the year ending 21st (sic) 31st Dec., 1965 to Rs. 401 for the year ending 31st Dec., 1970 and the earning per share rose from Rs. 8.37 per share to Rs. 44 per share during the abovementioned period and that the dividend percentage also rose from 2 per cent to 10 per cent for the same period, but the quotations of the shares in Calcutta Stock Exchange fell from Rs. 168 to Rs. 85 per share during this period. In the said letter of Shri Bagai it was stated that it was clear from these facts that the quotations appearing are as a result of certain manipulated transactions between the group and it cannot be said that to reflect the fair market value of the company. Along with the said letter Shri Bagai had annexed the information which was gathered by him on the basis of the Bombay Stock Exchange Directory and other information. The said letter of Shri Bagai was received by the ITO on 26th March, 1974. On 27th March, 1974, he issued a notice under s. 147(b) of the Act whereby the assessee was informed that the ITO had the reason to believe that assessees income chargeable to tax for the asst. yr. 1969-70 had escaped assessment and, therefore, the assessing authority proposed to reassess the income for the said assessment year and the assessee was required to deliver to him a return in the prescribed form of his income for the said year. Feeling aggrieved by the said notice, the assessee filed Writ Petition No. 1177 of 1974 in the Rajasthan High Court.

Similar notices under s. 147(b) of the Act were issued to respondent No. 2, Rang Lal Bangur, in respect of the asst. yr. 1969-70 and 1971-72 which were challenged by him by filing Writ Petition Nos. 1182 of 1974 and 57 of 1975 before the Rajasthan High Court.

All the three Writ Petitions have been decided by the High Court by a common judgment dt. 26th Oct., 1979 whereby the High Court has held that in the facts and in the circumstances of the case, it could not be said that the ITO had in his possession information in consequence of which he could have reason to believe that income chargeable to tax had escaped assessment for the relevant assessment years. The said decision of the High Court has been assailed by the ITO by filing these appeals.

Sec. 147(b) of the Act, as it stood at the relevant time, provided as follows :

"147. If -

(a) (omitted)

(b) notwithstanding that there has been no omission or failure as mentioned in cl. (a) on the part of the assessee, the ITO has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year,

he may subject to the provisions of ss. 148 - 153, assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereinafter in ss. 148 to 153 referred to as the relevant assessment year)."

A perusal of cl. (b) of s. 147 shows that for taking action under the said provision what was required was that (i) the ITO has received information and (ii) in consequence of such information he has reason to believe that income chargeable to tax has escaped assessment for any assessment year. The question is whether in the present case after he had completed the original assessment the ITO had received information on the basis of which he could have reason to believe that the income chargeable to tax had escaped assessment.

Shri D. R. Gupta, ITO, B Ward, Jodhpur, who was the assessing authority and who had issued the impugned notice, filed his counter-affidavit in reply to the Writ Petition wherein he stated that during the assessment proceedings it was represented to him on behalf of the assessee that the shares of Maharaja Shree Umaid Mills Ltd. were regularly quoted in the stock exchange and that the sale was affected by the assessee at the prevalent market rate. A share quotation list was also shown to him and in these circumstances, he accepted the version given by the assessee without making any further inquiry regarding the market rates of the shares, as, at that time, there was no material before him to suspect that the fair market value of the shares was higher than the sale price given out by the assessee. He has further stated that on 26th March, 1974, he received a letter through Shri C. S. Jain, IAC, Jodhpur Range, Jodhpur from Shri S. M. Bagai, Dy. Director, Directorate of Inspection (Investigation), Special Cell, New Delhi, dt. 21st March, 1974, along with some annexures and also a telegram by Shri Bagai from Calcutta giving certain information regarding the shares of Maharaja Shree Umaid Mills Ltd. Pali, which had been collected by the said Director, Shri S. M. Bagai. The telegram by Shri Bagai from Calcutta indicated that on inquiries he had found that the shares of the said company were not regularly quoted in the Stock Exchange. Shri Gupta further stated that he applied his mind to the aforesaid information and it appeared to him that the quotation of the shares of the Mills at Calcutta Stock Exchange was a result of certain manipulated transactions between the Bangur Group itself, and he, therefore, calculated the fair market value of the share at Rs. 250, per share on the relevant dates as against Rs. 84, and Rs. 85, per share. His case was that it was in consequence of the aforesaid information received by him on 26th March, 1974, that he formed the reasonable belief that the fair market value of the shares was far more than the sale price and the so-called market quotations shown by the assessee at the time of the original assessment, were manipulated ones, as a result of which the income chargeable to tax had escaped assessment.

It would thus appear that the impugned notice was issued by the ITO, on the basis of the letter dt. 21st March, 1974 from Shri S. M. Bagai to Shri C. S. Jain. The said letter was as under :

"Mr. dear Jain,

Sub : Maharaja Shree Umaid Mills Ltd., Pali

I have received your D. O. No. C-Misc. (56)/73-74/229 dt. 19th March, 1974 today through a special messenger enclosing a statement regarding transfer of shares of the captioned company and also statement regarding shareholding of that company on various dates. You have just confirmed to me on telephone that you have retained a copy of the statements for your own record.

I am enclosing herewith a statement containing certain financial information regarding the captioned company which has been extracted from this statement. The paid-up equity capital of the company is Rs. 72,00,000 divided into 72,000 shares of Rs. 100 each; the equity share data at page 2 of the enclosed statement indicates that the book value per equity share rose from Rs. 318.55 for the year ending 21st Dec., 1970 [sic - 31st Dec., 1965] to Rs. 401, for the year ending 31st Dec., 1970. The earning per share rose from Rs. 8.37 per share to Rs. 44 per share during the above mentioned period. The dividend percentage also rose from 2 per cent to 10 per cent for the same period. In spite of all these facts, the quotation of the shares in the Calcutta Stock Exchange fall from Rs. 168 per share to Rs. 85 per share during this period.

It is clear from these facts that the quotations appearing are as a result of certain manipulated transactions between the group itself and cannot be said to reflect the fair market value of the company, the extract of which you have given, shows transfer of a very small number of shares compared to 72,000 equity shares of the company.

The statements sent by you contain the names of several shareholders both corporate as well as non-corporate of Didwana and Pali, who appear to have been transferring the shares of this company at values far below the market value of the share. It would be worthwhile examining the assessment record of their cases in order to consider the feasibility of action under s. 52(2) of the IT Act/of the GT Act.

The equity shareholders list sent by you also gives the names of certain shareholders of Didwana, Pali and Jodhpur. The WT assessment records of these persons will have to be examined to consider whether the value of shares returned by them for the purpose of their WT assessment is really the open market value of the shares at the relevant time. I shall be grateful if the information sent by me is passed on to the concerned WTOS, ITO and GTOs, so that they may apply their mind to the facts of each individual case and take such appropriate action under the WT Act, IT Act and GT Act as they may deem fit.

I am also enclosing herewith a copy of D. O addressed to IAC Bikaner, who I believe has jurisdiction over Didwana. This may kindly be sent by special messenger to him. I am also sending one copy to him direct by post.

I am proceeding to Calcutta on the evening of 22nd and in case I got some more relevant information, I shall send the same to you and IAC, Bikaner directly. Meanwhile I would request you to kindly obtain the value of the shares of the company as on 31st March, 1969 by the break-up method and by the maintainable profit method. These two values may be worked out on the basis of Circular No. 2 (WT) of 1967 and communicated to me telegraphically C/o Shri Subramanyam, IAC Range XXI, Aayakar Bhawan, P-7 Chowringhee Square, Calcutta. You may also convey this information to the CIT, Rajasthan and IAC, Bikaner so that the information reaches the concerned WTOs, ITO and GTOs, who would be concerned with the case of the other shareholders in Rajasthan.

With regards,

Yours sincerely,

Sd/-(S. M. Bagai)"

In the second paragraph of his letter Shri Bagai has referred to the statement containing certain financial information regarding Maharaja Shri Umaid Mills Ltd. which he had extracted from the Bombay Stock Exchange Directory and which he had forwarded as an annexure along with the said letter. The said information was to the effect that the paid up capital of the company was Rs. 72,00,000 divided into 72,000 shares of Rs. 100 each; the equity share data at page 2 of the enclosed statement indicated that the book value per equity share rose from Rs. 318.55 for the year ending 21st Dec., 1970 (sic) - 31st Dec., 1965 to Rs. 401 for the year ending 31st Dec., 1970, the earning per share rose from Rs. 8.37 per share to Rs. 44 per share during the abovementioned period and the dividend percentage also rose from 2 per cent to 10 per cent for the same period. But in spite of all these facts, the quotation of the shares in the Calcutta Stock Exchange fell from Rs. 168 per share to Rs. 85 per share during the said period. In the third paragraph of his letter Shri Bagai has, on the basis of these facts, expressed the opinion that the quotations appearing in the Calcutta Stock Exchange were as a result of certain manipulated transactions between the group itself and cannot be said to reflect the fair market value of the company. In the other paragraphs of his letter Shri Bagai had suggested steps to be taken for further investigation in the matter.

The High Court has proceeded on the basis that the said letter of Shri Bagai did not contain any information and that there was neither evidence of manipulation nor evidence of collusive transactions referred to in the letter and that no inquiries were made by the ITO after the receipt of the letter so as to constitute information. We are unable to agree with the said view of the High Court. The contents of paragraph 2 of the letter of Shri Bagai refer to the statement containing financial information regarding Maharaja Shri Umaid Mills Ltd. which was annexed to the letter of Shri Bagai. The said statement contained information derived from the Bombay Stock Exchange Directory about the financial condition of Maharaja Shri Umaid Mills Ltd. during the period 1965-70 which indicated that during this period the company has prospered and that the book value per equity share had arisen from Rs. 318.55 for the year ending 31st Dec., 1965 to Rs. 401 for the year ending 31st Dec., 1970, the earning per share rose from Rs. 8.37 per share to Rs. 44 per share and that dividend percentage had also risen from 2 per cent to 10 per cent for the same period.

On the basis of the information contained in the letter of Shri Bagai and the documents annexed to it, the ITO could have had reason to believe that the fair market value of the shares was far more than the sale price and the market quotations from Calcutta Stock Association shown by the assessee at the time of original assessment were manipulated ones and as a result income chargeable to tax had escaped assessment. It could not be said that the information that was contained in paragraph 2 of the letter of Shri Bagai was not definite information and it could not be acted upon by the ITO for taking action under s. 147(b) of the Act.

Ms. Gauri Rasgotra, the learned counsel appearing for the respondents, has urged that the letter of Shri Bagai was received by the ITO on 26th March, 1974 and on the very next day, that is, on 27th March, 1974, he issued the impugned notice under s. 147(b) of the Act and that he could not have conducted any inquiry or investigation into the information sent by Shri Bagai. Merely because the impugned notice was sent on the next day after receipt of the letter of Shri Bagai does not mean that the ITO did not apply his mind to the information contained in the said letter of Shri Bagai. On the basis of the said facts and information contained in the said letter, the ITO without any further investigation, could have formed the opinion that there was reason to believe that the income of the assessee chargeable to tax had escaped assessment. The High Court, in our opinion, was in error in proceeding on the basis that it could not be said that the ITO had in his possession information on the basis of which he could have reasons to believe that income of the assessee chargeable to tax had escaped assessment for the relevant assessment years. For the reasons aforementioned, we are unable to uphold the impugned judgment of the High Court. The appeal is, therefore, allowed, the impugned judgment of the High Court is set aside and the Writ Petitions filed by the respondents are dismissed. No order as to costs.

Civil appeal Nos. 3234-3235 of 1983

These appeals are directed against the judgment of the High Court of Rajasthan dt. 26th Nov., 1979 whereby the High Court has allowed Writ Petitions Nos. 1178 and 1181 of 1974 filed by the respondents and has quashed the notices dt. 27th March, 1974 issued under s. 17 of the WT Act, 1957. This judgment of the High Court is based on its judgment in DB Writ Petition No. 1177 of 1974 and connected Writ Petitions wherein the High Court had quashed the notices issued by the ITO under s. 147(b) of the Act. For the same reasons the High Court has quashed the notices under s. 17 of the WT Act in these cases. The said judgment of the High Court in DB CWP No. 1177 of 1974 and connected Writ Petitions, titled Purshottam Das Bangur vs. WTO & Ors., has been set aside in the judgment delivered in Civil Appeals Nos. 3041-43 of 1983. For the same reasons the impugned judgment of the High Court cannot be upheld and has to be set aside. The appeals are accordingly allowed, the impugned judgment of the High Court is set aside and the Writ Petition Nos. 1178 and 1181 of 1974 filed by the respondents are dismissed. No order as to costs.