Ishverlal and Bros. vs N.N. Seth, Income Tax Officer, Surat

Mehta, J.—The petitioner, M/s. Ishverlal & Brothers, a partnership firm, has filed this application for obtaining a writ to quash and set aside

the notices served upon it u/s 148 of the Indian Income Tax Act, 1922, for the reassessment of its income for the assessment years 1959-60,

1960-61 and 1961-62.

Short facts of the case are that the petitioner is a partnership firm consisting of four partners, who are inter-related as brothers. The firm is

conducting its business at Surat. It is an admitted position that all the four partners of the petitioner-firm have equal shares in profit and loss of the

business done by the firm. The petitioner-firm is constituted under the partnership deed dated 20th December, 1948.

It is an admitted position that up to the year of S. Y. 2013, which is equivalent to 23rd October, 1957, the petitioner had a branch at Bangalore

and that the income earned by that branch at Bangalore was included in the income of the petitioner-firm up to the end of S. Y. 2013. However,

on 24th October, 1957, the business of the petitioner at Bangalore is said to have been taken over by a separate and independent firm under the

firm name of M/s. Ishwarlal & Co. This firm is constituted under a partnership deed dated 24th October, 1957. It is an admitted position that the

partners of this newly constituted firm at Bangalore are two major sons of Nagindas Mulchanddas, who is one of the partners of the petitioner-

firm. Over and above these two major partners, one minor son of each of the remaining partners of the petitioner-firm is admitted to the benefits of

the partnership. Thus, the newly constituted firm is admitted to the benefits of the M/s. Ishwarlal & Co. consists of two major partners and there

minor partner, who are admitted to the benefits of the partnership. For the sakes of convenience, both the parties have referred to this newly

constituted firm at Bangalore as ""Bangalore firm"".

Now the case of the petitioner-firm is that from the date of the formation of Bangalore firm, the business done by this firm has ceased to be the

business of its branch and, therefore, the income earned by the Bangalore firm cannot be clubbed with the income earned by the petitioner-firm at

Surat. As against this, the case of the department is that the Bangalore firm still continued to be a branch of the petitioner-firm and, therefore,

whatever income is earned by the Bangalore firm should be clubbed with the income earned by the petitioner-firm.

Facts of the case further show that the above referred Bangalore firm applied for its registration under the Indian Income Tax Act on June 7,

1958. This application was rejected by the Income Tax Officer mainly on two grounds, namely, (i) that the capital of the firm was contributed only

by the minor partners of the firm who are admitted to the benefits of the partnership, and (2) that in a letter to the Central Bank of India, Jamnadas

Mulchanddas and Ramanlal Nagindas were described as the two partners of the Bangalore firm, while as a matter of fact, the deed of partnership

of the Bangalore firm revealed that Jamnadas Mulchanddas was not a partner of that firm. Principally relying upon these two grounds the Income

Tax Officer refused to register the Bangalore firm under the Income Tax Act. So far as the assessment of the income of the Bangalore firm for the

assessment year 1959-60 was concerned, what the Income Tax Officer did was to apportion the profits earned by the firm amongst the persons

shown as its partners as per the deed of partnership dated 24th October, 1957. This decision was given by the Income Tax Officer on 30th

March, 1963.

Thereafter, an appeal was preferred to the Appellate Assistant Commissioner both against the quantum order as well as against the refusal to

register the firm. As a result of that appeal, the Appellate Assistant Commissioners directed the Income Tax Officer to make fresh assessment after

finding our who were the real partners of the Bangalore firm. But the Appellate Assistant Commissioner also confirmed the order of the Income

Tax Officer refusing the registration of the firm. Both these decision were given by the Appellate Assistant Commissioner on 2nd September,

1963.

Against this order of the Appellate Assistant Commissioner, an appeal was preferred to the Tribunal but even the Tribunal rejected the prayer of

the Bangalore firm to obtain the registration under the Indian Income Tax Act. While rejecting this prayer, the Tribunal observed that the Bangalore

firm was not an independent firm and that it has continued as a branch of the petitioner-firm. This decision of the Tribunal is dated 10th September,

1963.

In the meanwhile, the assessment of the petitioner''s income for the assessment year 1959-60 was undertaken by the concerned Income Tax

Officer. During the course of these assessment proceedings, a question arose whether the income earned by the Bangalore firm should be included

in the income of the petitioner-firm on the ground that the Bangalore firm was not an independent entity. During the same assessment proceedings,

the petitioner made on attempt to show that even during the course of the assessment of the income of the Bangalore firm, that firm was treated as

an independent entity. It is further found from the record of the case that the copies of the orders recorded by the Income Tax Officer as well as

the Appellate Assistant Commissioner with regard to the assessment of the Bangalore firm for the assessment year 1959-60 were produced before

the Income Tax Officer, who was to assess the petitioner''s income for the assessment year 1959-60. Further, by reference to the exhibits A to C

appended to the main petition, it is found that some correspondence took place between the petitioner-firm on the one hand and the Income Tax

Officer on the other on the question whether the Bangalore firm continued to be a branch of the petitioner-firm and whether on that ground the

income earned by the Bangalore firm for the relevant period should be clubbed with the income earned by the petitioner during that period. It

appears that finally on 18th February, 1964,the matter in controversy was discussed by the petitioner''s representa the Commissioner of Income

Tax wrote to the petitioner-firm that tives with the Commissioner and thereupon necessary instructions were issued by the Commissioner to the

concerned Income Tax Officer. It is an admitted fact that the thereafter the assessment of the petitioner''s income for the assessment year 1959-60

was competed on March 23, 1964, on the basis that the income earned by the Bangalore firm was an income earned by a separate and

independent entity and should, therefore, not be clubbed with the income earned by the assessee - the petitioner. Subsequent assessments of the

income earned by the petitioner-firm for the assessment years 1960-61 and 1961-62 were also made on the same basis.

Some months after the Tribunal recorded its order on 10th September, 1965, regarding the registration of the Bangalore firm, the Income Tax

Officer, Bangalore, addressed one letter to the Income Tax Officer, Surat, on 17th February, 1966. By this letter, the Income Tax Officer,

Bangalore, drew the attention of the Income Tax Officer, Surat, to the decision of the Tribunal with regard to the registration of the Bangalore firm

and also to some notes made by the Appellate Assistant Commissioner, Bangalore, under the quantum assessment of the Bangalore firm for the

assessment year 1959-60 to 1962-63. The Income Tax Officer, Bangalore, also enclosed along with this letter a copy of the assessment order

passed by the Income Tax Officer, Bangalore, with regard to the income of the Bangalore by the Appellate Assistant Commissioner and the

Tribunal in appeals preferred before them. The copy of the assessment order passed by the Income Tax Officer, Bangalore, regarding the

assessment of the income of the Bangalore firm for the assessment year 1959-60 is found to be containing a note that the assessment of the

Bangalore firm for that year was made only as a protective measure because it was apprehended that the newly constituted Bangalore firm

continued to remain as a branch of the petitioner-firm at Surat.

On receipt of these materials, the department found that there was a case for reassessment of the petitioner''s income for the assessment years

1959-60 to 1961-62 because the petitioner had omitted to mention during the course of the relevant assessments that the Bangalore firm was

merely its branch and as a result of this omission the income earned by the Bangalore branch for the period mentioned above was not clubbed with

the income earned by the petitioner-assessee. In view of this, the Income Tax Officer, Surat, addressed one letter to the petitioner on 28th

February, 1967, and conveyed to him that it was proposed to reopen its assessment order in question ""in view of appellate order dated September

10, 1965 of Income Tax Appellate Tribunal, Madras, of M/s. Ishwarlal & Co., Jumma Masjid Road, Bangalore."" The petitioner resisted the

proposal in question but ultimately on 11th March, 1968, notices u/s 148 of the Act were addressed to the petitioner.

The petitioner now contends that the department has no cause for initiating any action of reassessment u/s 147 of the Indian Income Tax Act. It

is an admitted position that the action in question is sought to be taken against the petitioner under clause (a) of section 147 of the Act on the

ground that the Income Tax Officer concerned had reason to believe that income of the petitioner-assessee has escaped for the relevant period on

account of the failure of the assessee-petitioner to disclose fully and truly all material facts necessary for assessment for the relevant period. It is

also an admitted fact that the reassessment, which was proposed to be made, was time-barred so far as clause (b) of section 147 is concerned.

Therefore, the only question which is involved in this matter is whether the Income Tax Officer, who served the petitioner with notices u/s 148 of

the Act, has jurisdiction to reopen the assessments in question under clause (a) of section 147 of the Act.

On behalf of the petitioner, its learned advocate, Shri Vakil, contended that the petitioner has not failed to disclose the material facts necessary

for its assessment for the relevant period because all the primary facts relating to the Bangalore firm were already before the concerned Income

Tax Officer at the time of making the relevant assessments. In this connection he drew our attention to the admitted position that the orders as

regards the assessment of the Bangalore firm for the assessment year 1959-60 were already before the Income Tax Officer during the course of

the original assessment of the income of the petitioner-firm for the assessment year 1959-60. Of course, the office notes which are appended to

the orders of the Income Tax Officer and the Appellate Assistant Commissioner, Bangalore, were not incorporated in the copies supplied by the

petitioner-assessee during the course of the assessment of its income for the year 1959-60 but it was because of the fact that the copies of notes

were not supplied to the petitioner as they were only meant for the office purpose. Shri Vakil contended that the assessment orders passed by the

Income Tax Officer and the Appellate Assistant Commissioner as regards the assessment of the Bangalore firm contain all the necessary facts and

materials for coming to a conclusion whether the Bangalore firm was a branch of the petitioner-firm or whether it was a separate entity. Therefore,

according to Shri Vakil, so far as the petitioner-firm is concerned, it has not suppressed any of the primary facts which were required to be

disclosed during the course of its assessment.

As against this, the contention of the department as found raised in the affidavit-in-reply can be best stated from that affidavit itself. If a

reference is made to paragraph 13 of that affidavit, we find the following to be the case of the department in justification of the reopening of the

assessment in question :

I say that I have reason to believe that the income of the Bangalore firm really belonged to the petitioner. I say that the petitioner had not disclosed

in its return the income of the Bangalore firm, and had thus failed to disclose fully and truly all facts material for its assessment..... I submit that such

non-disclosure can only be established in the course of the proceedings for reassessment. I submit that if it is ultimately established that the income

of the Bangalore firm did belong to be petitioner, the non-disclosure of its income from the Bangalore firm in the original return filed by the

petitioner for the assessment year in question would amount to non-disclosure of material facts.

It is thus evident from the above quoted portion of the affidavit-in-reply that the case of the department is that the non-disclosure in question is

the non-disclosure of an admission by the petitioner-firm that the Bangalore firm was its branch and, therefore, the income earned by it should be

clubbed with its income for the relevant period. Therefore, the question is whether the non-disclosure of facts of which the department has put

reliance in the counter-affidavit is the non-disclosure of any primary fact relating to the assessment of the petitioner''s income. In this connection, it

should be recalled that it is not in dispute that the petitioner had disclosed at the time of the assessment proceedings for the assessment year 1959-

60 that the income of the business done at Bangalore was previously clubbed with its income because that business was done by its own branch

and that subsequent to the end of S. Y. 2013, that business was taken over by a newly constituted firm. The petitioner is also found to have

disclosed that a separate entity of the Bangalore firm was disputed by the department during the course of the assessment of the income earned by

the Bangalore firm for the assessment year 1959-60. In fact, even the Income Tax Officer before whom the original assessment proceedings were

undertaken, had taken up a stand that the income earned by the Bangalore firm was the income of the petitioner and, therefore, it should be

clubbed with the income which the petitioner earned at Surat. Further, the affidavit-in-reply clearly makes an admission of the fact that the copies

of the assessment orders passed by the Income Tax Officer, Bangalore, and the Appellate Assistant Commissioner at Bangalore with regard to the

assessment of the Bangalore firm and its registration were produced before the concerned Income Tax Officer without the office notes which are

found at the foots of these orders. Now, if we refer to the assessment orders made by the Income Tax Officer and the Appellate Assistant

Commissioner at Bangalore, regarding the income of the Bangalore firm, we find that these orders contain elaborate discussion on the question

whether the Bangalore firm is genuine or not. Both these orders completely reveal all the basic facts and materials which have ultimately led the

Tribunal to a finding that the Bangalore firm is merely a branch of the petitioner-firm. Therefore if those orders were before the concerned Income

Tax Officer during the course of the original assessment, it is quite apparent that all these facts were revealed by the petitioner-assessee to the

department during the course of the original assessment. These facts are the primary facts and if they were revealed, it does not matter at all if the

petitioner did not make an admission about the inference which can be drawn from these facts. As pointed out above, a contention which is raised

by the department in affidavit-in-reply is that the default of the petitioner firm consists in not disclosing the income earned by the Bangalore firm and

not admitting that the said firm is its own branch. But the non-disclosure of this fact would not justify the department in reopening the assessment

under clause (a) of section 147 of the Act for the simple reason that it is not a primary fact but an inferential fact. What an assessee is required to

disclose the course of an assessment is the primary and basic facts relating to the assessment of his income. He is not required to disclose primary

or basic facts. Therefore, it is not open to the department so say that the inferences which the Tribunal at Madras ultimately drew from these facts

was not admitted by the petitioner during the course of the original assessment. The only thing which is necessary to be scrutinised whether, during

the course of the original assessment, the petitioner had disclosed all the material facts relating to its Bangalore firm. Since it is an admitted fact that

copies of the orders passed by the Income Tax Officer and the Appellate Assistant Commissioner at Bangalore, with regard to the Bangalore firm

were already before the Income Tax Officer who undertook the assessment of the petitioner''s income for the assessment year 1959-60, it is not

possible to contend that the petitioner had suppressed any primary or basic facts with regard to the Bangalore firm.

The learned Advocate-General contended on behalf of the department that the note which is made by the Appellate Assistant Commissioner,

Bangalore, at the foot of his assessment order relating to the income of the Bangalore firm for the assessment years 1959-60 to 1962-63 reveals

that all the facts necessary with regard to the independent entity of the Bangalore firm were not revealed in the main order of the Income Tax

Officer and Appellate Assistant Commissioner, Bangalore, on which reliance is placed by the petitioner. He particularly drew our attention to the

fact that these notes reveal three important facts, namely, (i) that the loans which were borrowed by the partners of the Bangalore firm had been

repaid on the same day on which they were taken, (2) that no consideration for good will was paid by the Bangalore firm to the petitioner-firm,

and (3) that the entire purchase of gold lace by the Bangalore firm continued to be from the petitioner-firm. It is undoubtedly true that the orders of

the Income Tax Officer and the Appellate Assistant Commissioner, Bangalore, regarding the assessment of the Bangalore firm for the assessment

year 1959-60 do not reveal these three facts. But then this aspect of the case does not help the department, because the affidavit-in-reply does not

put reliance on the non-disclosure of these three facts. Clause (a) of section 147 of the Indian Income Tax Act speaks about the belief of the

Income Tax Officer who seeks to reopen the assessment. It is not the case of the Income Tax Officer that non-disclosure of the three facts to

which the learned Advocate-General has drawn our attention has led to the formation of the belief which is contemplated by clause (a) of section

147 of the Act. Under these circumstances, we do not attach any importance to the note made by the Appellate Assistant Commissioner,

Bangalore, with regard to the three facts to which our attention is drawn by the learned Advocate-General.

Under the circumstances, we find that there is absolutely no material from which it could be said that the petitioner-firm has failed to disclose

fully and truly all the materials necessary for its assessment for the relevant period and, therefore, it cannot be said that the escapement of the

income, if any, was on account of the said non-disclosure by the petitioner-firm. If that is so, the proposed action of the Income Tax Officer would

obviously be without jurisdiction.

We, therefore, allow this writ petition and make the rule absolute by issuing a writ of mandamus quashing the notices issued by the Income Tax

Officer u/s 148 of the Indian Income Tax Act, and setting them aside. The petition is allowed with costs.