Shree Bajrang Commercial Co. (P.) Ltd. vs Income Tax Officer

Suhas Chandra Sen, J.—This is a case of reopening of assessment u/s 147 of the income tax Act, 1961 (''the Act''), Shree Bajrang Commercial Co. (P.) Ltd. furnished returns of its income for the assessment years 1972-73 and 1973-74. Along with the returns it furnished copies of the balance sheets and profit and loss accounts of the relevant accounting years. In the two returns, the assessee claimed to have obtained loans from various parties. The amounts of interest payable on these loans were allowed as deductions in course of the assessment for the aforesaid two assessment years 1972-73 and 1973-74. The case of the ITO now is that the loan transactions were not genuine. The assessee had not only obtained relief by way of deduction of interest paid on the aforesaid bogus loans but also introduced his own money in business in the guise of loans obtained from the said money-lenders. The case of the assessee is that he had made full and true disclosures in the assessment proceedings. The ITO after being satisfied with all materials placed before him and after examining the balance sheet and the profit and loss account of the assessee for the relevant two accounting years came to the conclusion that the loan transactions were genuine and the interests were allowable. The ITO now cannot turn round and reopen the two assessments on the allegation that the loan transactions were not genuine.

It was also suggested in the course of the argument that the ITO is really harassing the assessee. There was an earlier attempt to reopen the assessment on account of certain transactions in case of purchase of ordinary equity shares of Century Metels Ltd. That attempt, however, ultimately failed. The ITO has now decided to reopen the assessment of the assessee for the aforesaid two years on a non-existing ground. It is to be noted that the petitioner alleged that he had made full and true disclosures of his income in the course of the assessment proceedings. It was stated that there was no suppression of material facts and no concealment of the income on the part of assessee. It has also been alleged that the ITO did not have any material in his possession on the basis of which he could form the requisite opinion that the income of the assessee had escaped assessment due to omission or failure on the part of the assessee to disclose fully and truly all primary facts.

Curiously enough the affidavit in opposition carefully conceals all the grounds and/or materials on the basis of which the reopening has been done. There is no suggestion in the affidavit in opposition that reopening was done on the ground of false representation and/or suppression of material facts in respect of any loan transaction. The material on the basis of which reopening was done was not even mentioned in the affidavit in opposition.

3A. However, in course of hearing of the case the reasons for reopening of the assessment for the assessment year 1973-74 have been handed up in Court. It has been stated that the reopening for the assessment year 1972-73 had been done on identical grounds. The recorded reasons are as under:

Reasons for reopening assessment u/s 147(a) - Assessment year: 1973-74 Shree Bajrang Commercial Co. (P.) Ltd.

Information has been received that Shri Manick Chand Jain alias Manick Chand Baid, son of Chhotilal Baid, has made a deposition u/s 131 of the Act before the IAC Range-XIII on 30-7-1976 that he was a name-lender and that he was carrying on business in the name of Gulab Chand Jainarayan, Mahindra Steel Corpn. and Aruna Engg. Stores. It is noticed from the examination of the assessment record that during the previous year ended 30-6-1972 relevant to the assessment year 1973-74 the assessee had account with Aruna Engg. Stores and Gulab Chand Jainarayan which showed total credit of Rs. 45,000 and Rs. 47,000, respectively. I have, therefore, reason to believe that by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for this year that income chargeable to tax has escaped assessment. It is, therefore, proposed to reopen the assessment u/s 147(a) for the assessment year 1973-74.

The question in this case is whether the ITO was justified in reopening the assessment on the basis of the aforesaid recorded reasons. The ITO had an opportunity to explain the background facts or refer to the deposition made by Manick Chand Jain in the affidavit in opposition. The affidavit in opposition, however, is singularly devoid of any particulars. That the reopening was done because there was doubt about the genuineness of the loan transactions was not even mentioned in the affidavit. The affidavit is totally void of any data as to the ground for reopening. Therefore, the case will have to be decided on the strength of the recorded reasons only.

On behalf of the assessee several legal contentions have been raised. I am unable to accept any of these legal propositions. The first proposition is that it was the duty of the ITO to investigate the loan transaction and find out the truth if there was any doubt as to the genuineness of the transaction. This should have been done at the assessment stage. Since this was not done, the ITO cannot reopen the assessment. The law is well-settled that it is the duty of the assessee to disclose fully and truly all the material facts. The jurisdiction of the ITO u/s 147 is acquired when the ITO has material in his possession to believe that the assessee has not disclosed truly or fully all primary facts. No question of further investigation by the ITO arises at this stage. Assuming that the ITO might have found out the truth by summoning the alleged money-lender, the fact that he did not do so will not prevent him from reopening the assessment. This proposition is well-settled by a number of decisions of the Supreme Court including the case of Calcutta Discount Company Limited Vs. Income Tax Officer, Companies District, I and Another, where it was observed that the assessee will not be able to contend successfully that by disclosing certain evidence, he should be deemed to have disclosed other evidence, which might have been discovered by the assessing authority, had he pursued investigation on the basis of what has been disclosed.

The ITO at the assessment stage might have made further enquiry about the loan transaction. If he made further enquiry and found certain other facts, he cannot reopen the assessment on the basis of those facts. But if he did not make any enquiry at all but accepted the statement made by the assessee about the loan transaction, he is not precluded from re opening the case of the assessee. The language of this section is quite clear. If there is any reason to believe that there is any omission or failure on the part of the assessee to disclose all material facts, the ITO can reopen the assessment. The duty to disclose fully and truly all material facts is not discharged by creating the fiction of loan transaction when such transaction did not at all take place. If the fiction is made plausible by producing manufactured evidence like a hundi, the case of the assessee does not improve thereby.

Next, it has been contended on behalf of the assessee that the assessee disclosed all the evidences in support of the loan transaction at the time of the assessment proceeding. The hundies were examined by the ITO. Whether the hundies were genuine or not was an inference to be drawn at the stage of the assessment proceeding. There was full disclosure of all primary facts. The ITO having accepted the hundies as genuine at the time of original assessment proceeding cannot later on turn around and say that the hundies are not genuine. Even if any information as to the non-genuineness of the hundi come in the possession of the ITO subsequent to the assessment proceeding, the ITO will not be entitled to reopen the assessment as all the facts were before him at the assessment stage. The assessee had discharged its obligation of producing all primary facts. It was for the ITO to draw proper inference from these facts. The ITO could have made further enquiries to determine the genuineness of the document and of the transaction embodied in the document. Therefore, there is no question of reopening a case on the basis of the allegation that the loan transactions were not genuine and the hundies produced were fabricated documents. Reliance has been placed on the judgment of the Supreme Court in the case of Calcutta Discount Co. Ltd. (supra) where the Supreme Court laid down:

... Once all the primary facts are before the assessing authority, he requires no further assistance by way of disclosure. It is for him to decide what inferences of facts can be reasonably drawn and what legal inferences have ultimately to be drawn. It is not for somebody else-far less the assessee-to tell the assessing authority what inferences, whether of facts or law, should be drawn. Indeed, when it is remembered that people often differ as regards what inferences should be drawn from given facts, it will be meaningless to demand that the assessee must disclose what inferences-whether of facts or law-he would draw from the primary facts. (p. 201)

I am unable to uphold this contention of the assessee. The principle laid down in Calcutta Discount Co. Ltd.''s case (supra) cannot apply to the facts of this case. In Calcutta Discount Co. Ltd.''s case (supra) there was no allegation of any suppression of fact or of misrepresentation of fact. The only reason on the basis of which the reopening was done was that the assessee had not disclosed his true intention behind the sale of shares. The sale-proceeds which were treated to be of capital nature at the assessment stage were sought to be treated as revenue receipts by reopening the assessment.

There was no allegation in the recorded reasons or in the affidavit of the ITO that the assessee had not disclosed full particulars about the sale of the shares or the assessee had made any false representation about the sale of the shares. It was recorded in the judgment of Das Gupta, J. "In these circumstances, it is reasonable to believe that as regards sales of shares full details were, in fact, disclosed". There was no suggestion that false particulars were given. The only question before the ITO was whether the sales were of the nature of trade or of the nature of change of investment. This clearly is a case of inference to be drawn, inter alia, from the frequency of sales and purchases of shares made by the assessee and the nature of the business of the assessee. Das Gupta, J. held "the law does not require the assessee to state the conclusion that could be reasonably drawn from the primary facts. The question of the assessee''s intention is an inferential fact and so the assessee''s omission to state his ''true intentions behind the sale of the shares'' cannot by itself be considered to be a failure or omission to disclose material fact within the meaning of section 34."

But the facts of the instant case are entirely different. The case of the ITO is that, the assessee has made false entries in his books of account and produced fake hundies to prove the book entries.

The onus of proving the nature and source of cash credit entries made in the books of account of the assessee lay upon the assessee. The assessee had shown the amounts as loans taken from two money lenders. Therefore, the assessee had stated two primary facts. The first was that the cash credit amounts were received by way of loan. Secondly, the source of the money was the money lenders, Aruna Engg. Stores and Gulab Chand Jainarayan. Both the statements are statements of primary facts. It is ridiculous to suggest that when the assessee stated that he had received the money from Aruna Engg. Stores and Gulab Chand Jainarayan, he drew an inference of fact. It is equally ridiculous to suggest that when the assessee stated that the money was received by way of loan, he was drawing an inference from certain facts. The assessee in course of assessment proceeding had a duty to state and prove the nature and source of the cash credits appearing in his books of account. When he said the amount was taken by way of loan, he stated a primary fact. Similarly, when he stated the amount was taken from money lenders named Aruna Engg. Stores and Gulab Chand Jainarayan, he stated another primary fact. If the ITO has any material in his possession to suggest that the amount was received not by way of loan or that the amount was not actually received from the alleged money lenders at all, then the ITO is entitled to infer that the assessee had not disclosed fully or truly all material facts. If the alleged money lender confesses after the assessment was completed that he did not lend any money at all to the assessee, but merely acted as name lender for a fictitious loan transaction, the ITO is entitled to come to the conclusion that the disputed cash credit entry which was treated as a loan given by the said money lender at the assessment stage was false and the assessee had failed to disclose fully and truly all material facts.

In a case like this if the ITO''s allegation is true, the assessee is not only guilty of omission but also of commission. He has failed to disclose the correct facts as to the cash credit entry, but has made false entries in the name of the alleged money lender and has given untrue explanation as to the said entry in the books of account. If the ITO has any reason to believe that the assessee has suppressed the material facts as to the nature and source of the cash credit entry or has made false entry, then the ITO will be entitled to reopen the assessment under the provision of section 147.

That the assessee had produced a hundi or bill of exchange to prove the nature and course of the cash credit entry will not make any difference to the position. The assessee may produce documentary or oral evidence to prove that the amount received and recorded in the books of account was received by way of loan from an alleged money lender. The oral or documentary evidence may be true or false. According to the assessee, the cash credit entry as well as the documentary evidence produced with regard to the entry amount to full and true disclosure as to the loan transaction. According to the ITO, the confessions made by the alleged money lender go to show that the alleged loan was fictitious. The documentary evidence, therefore, was false. In such a situation the Court has to examine the material on the basis of which the ITO has formed the reasonable belief on the basis of which he has issued the notice u/s 148. If the material that has now been acquired by the ITO goes to show that the assessee had made a false entry in his books of account and produced fake documents in support of that false entry, the assessee cannot be heard to say that all the primary facts were disclosed fully and truly at the time of the assessment proceeding and the ITO cannot reopen the assessment after accepting the assessee''s case at the assessment stage.

A contention was made on behalf of the assessee that the confession of the money lender was made long after the assessment was completed. The assessee could not have possibly disclosed the confession at the time of the assessment proceeding. This contention again is entirely misconceived. The confession of the money lender has now come into possession of the ITO. According to the ITO, this confession goes to show that the money lender had not actually advanced any money to the assessee. He was a mere name lender. If that be so, then the assessee is guilty of suppressing material facts and a false entry in his books of account by fabricated evidence.

The only question in this case, therefore, is the content of the information received by the ITO on the basis of which he seeks to reopen the assessment. If the information is vague and uncertain, then the ITO cannot act upon it without further enquiry. If the information, however, goes to show that the assessee had not disclosed the cash credit entry correctly and that the nature and source of the entry was falsely given, then the ITO will have a jurisdiction to reopen the assessment. It is well-settled that the Court cannot examine and reappraise the material to find out whether the ITO should have acted on that material. But the material must have some nexus to the formation of the requisite belief.

It was observed in the case of Calcutta Discount Co. Ltd. (supra):

Before we proceed to consider the materials on record to see whether the appellant has succeeded in showing that the income tax Officer could have no reason, on the materials before him, to believe that there had been any omission to disclose material facts, as mentioned in the section, it is necessary to examine the precise scope of disclosure which the section demands. The words used are ''omission or failure to disclose fully and truly all material facts necessary for his assessment for that year''. It postulates a duty on every assessee to disclose fully and truly all materials facts necessary for his assessment. What facts are material and necessary for assessment will differ from case to case. In every assessment proceeding, the assessing authority will, for the purpose of computing or determining the proper tax due from an assessee, require to know all the facts which help him in coming to the correct conclusion. From the primary facts in his possession, whether on disclosure by the assessee, or discovered by him on the basis of the facts disclosed, or otherwise, the assessing authority has to draw inferences as regards certain other facts; and ultimately, from the primary facts and the further facts inferred from them, the authority has to draw the proper legal inferences, and ascertain on a correct interpretation of the taxing enactment, the proper tax leviable.... (p. 199)

It was further observed:

There can be no doubt that the duty of disclosing all the primary facts relevant to the decision of the question before the assessing authority lies on the assessee. To meet the possible contention that when some account books or other evidence has been produced, there is no duty on the assessee to disclose further facts, which on due diligence, the income tax Officer might have discovered, the Legislature has put in the Explanation, which has been set out above. In view of the Explanation, it will not be open to the assessee to say, for example - ''I have produced the account books and the documents: You, the Assessing Officer, examine them, and find out the facts necessary for your purpose: My duty is done with disclosing these account books and the documents''. His omission to bring to the assessing authority''s attention those particular items in the account books, or the particular portions of the documents, which are relevant, will amount to ''omission to disclose fully and truly all material facts necessary for his assessment''. Nor will he be able to contend successfully that by disclosing certain evidence, he should be deemed to have disclosed other evidence, which might have been discovered by the assessing authority if he had pursued investigation on the basis of what has been disclosed. The Explanation to the section gives a quietus to all such contentions; and the position remains that so far as primary facts are concerned, it is the assessee''s duty to disclose all of them - including particular entries in account books, particular portions of documents, and documents and other evidence which could have been discovered by the assessing authority, from the documents and other evidence disclosed.

Does the duty, however, extend beyond the full and truthful disclosure of all primary facts? In our opinion, the answer to this question must be in the negative. Once all the primary facts are before the assessing authority, he requires no further assistance by way of disclosure. It is for him to decide what inferences of facts can be reasonably drawn and what legal inferences have ultimately to be drawn. It is not for somebody else-far less the assessee-to tell the assessing authority what inferences, whether of facts or law, should be drawn. Indeed, when it is remembered that people often differ as regards what inferences should be drawn from given facts, it will be meaningless to demand that the assessee must disclose what inferences-whether of facts or law-he would draw from the primary facts. (p. 200)

The above extract from the Supreme Court judgment in the case of Calcutta Discount Co. Ltd. (supra) makes it abundantly clear that it will not be open to the assessee to say he has produced his accounts book in which the cash credit entry was to be found and also other evidence in the shape of the hundi and thereafter it was the duty of the ITO to find out the truth or otherwise of the contents of the hundi and also the entry in the books of account. Had the ITO been diligent, he might have discovered the falsity of the entry or the hundi at the time of the assessment proceeding. In other words, the ITO might have found out by making enquiries at the assessment stage that the assessee had not disclosed fully and truly all primary facts. The ITO might have found out that the cash credit entries were falsely made and a fake hundi was the loan transaction. But the failure of the ITO to make further enquiries will not absolve the assessee from his duty to make full and true disclosure of all material facts. The Supreme Court has categorically overruled this argument in the aforesaid decision in the case of Calcutta Discount Co. Ltd. (supra). The ITO is clothed with the jurisdiction to reopen an assessment as soon as he gets a requisite information. If the information, which has come into possession of the ITO after completion of the assessment, goes to show that the book entry as to the loan transaction was false and the hundi was not genuine, it will be futile for the assessee to argue that the book entry was correctly made and the hundi was a genuine document. At the stage of reopening, the only question is the nature of the material or information on the basis of which the ITO proposed to reopen the assessment. Merely because some book entries were accepted as true or some documents had passed muster at the assessment stage, it cannot be said that the reopening of an assessment cannot be done on the strength of information that the entry was false and the document was fake. If that contention is accepted, an absurd situation will arise. The ITO will not be entitled to reopen the assessment in cases where he was deceived by forged document. Such an interpretation will make section 147 meaningless and will put a premium on deception and forgery.

It is true that the assessee does not have duty to disclose fully and truly anything but primary facts. But if the ITO has got any material in his possession to show that the disclosures of the assessee were not of material facts but of misleading fiction, then the ITO will have jurisdiction to issue a notice u/s 148 of the Act. In such a situation the ITO is entitled to infer that the assessee had not disclosed all primary facts fully and truly but was guilty of suppressio veri and also of suggestio falsi.

Therefore, the legal contention advanced on behalf of the assessee fails. The only question now is whether the ITO has material in his possession to reopen the assessment. The affidavit in opposition is singularly devoid of any particulars as to the reason why the assessment was being reopened. The case has to be decided on the basis of the recorded reasons. The ITO in the recorded reasons has stated that he had received information that Shri Manick Chand Jain alias Manick Chand Baid had made a deposition u/s 131 before the IAC Range-XIII on 30-7-1976. In that deposition Manick Chand Jain stated that he was a name-lender and was carrying on business in the name of Gulab Chand Jainarayan, Mahindra Steel Corpn. and Aruna Engg. Stores. The assessee in his books of account had shown cash credits in the names of Aruna Engg. Stores and Gulab Chand Jainarayan amounting to Rs. 45,000 and Rs. 47,000, respectively.

The only question is whether this information can be the basis for reopening of the assessment. In other words can it be said that this information was sufficient for the ITO having reason to believe that the income of the assessee had an escaped assessment due to his omission or failure to disclose fully and truly all material facts.

The recorded reasons have been set out earlier in the judgment. It will be seen that in the first part it has been recorded that Manick Chand Jain has deposed that he was a name lender. Thereafter, it has been recorded that Manick Chand was carrying on business in the name of Gulab Chand Jainarayan, Mahindra Steel Corpn. and Aruna Engg. Stores. There is no categorical statement that all the business carried on in the name of Gulab Chand Jainarayan, Mahindra Steel Corpn. and Aruna Engg. Stores was bogus and fictitious.

The Supreme Court on very similar reasons recorded in the case of Income tax Officer, Calcutta and Others Vs. Lakhmani Mewal Das, held that such reasons did not provide a live-link between the material and the belief. In view of this pronouncement of the Supreme Court it must be held that on the strength of the reasons recorded in the instant case, the ITO could not proceed to reopen the assessment.

It must, however, be noted that in an earlier case of Sheo Nath Singh Vs. Appellate Assistant Commissioner of Income Tax, Calcutta, the Supreme Court had observed : "The words ''reason to believe'' suggest that the belief must be that of an honest and reasonable person based upon reasonable grounds and that the income tax Officer may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour....." (p. 148). Therefore, the ITO can proceed even on the basis of circumstantial evidence. It appears that this point was not urged before the Supreme Court in the aforesaid case of Lakhmani Mewal Das (supra). Be that as it may, in view of the clear pronouncement of the Supreme Court on very similar facts in the case of Lakhmani Mewal Das (supra), it must be held that the reason recorded by the ITO could not be the basis for formation of the requisite belief that the assessee had concealed material particulars at the time of the assessment proceeding.

In the case of Kirpa Ram Ramji Dass Vs. Income Tax Officer, A-Ward and Another, a Division Bench of the Punjab and Haryana High Court held that a disclosure of a particular transaction which had never taken place could not be held to be disclosure of a fact. If the ITO had reason to believe that primary facts were not truly disclosed at the time of original assessment, he may reopen the assessment. This might be done either because fresh facts had come to light which were not previously disclosed or because new light thrown on facts previously disclosed expose the untruthfulness of such facts. That was also a case of loan transactions which were accepted as genuine at the time of the assessment proceeding. After getting information as to the untruthfulness of disclosures made by the assessee, the ITO had reopened the assessment. It was held that the ITO on the basis of the new material received had jurisdiction to reopen case, I respectfully agree with the views expressed by the Division Bench of the Punjab and Haryana High Court. The facts of that case, however, differ from the facts of the instant case.

On behalf of the assessee reliance was placed on a decision of the Supreme Court in the case of The Commissioner of Income Tax, Calcutta Vs. Burlop Dealers Ltd., ; in that case a reference application was made against certain points of law allegedly arising out of the order of the Tribunal. The Tribunal rejected the reference application. This Court also dismissed the assessee''s application u/s 66(2) of the Indian income tax Act, 1922. An appeal was made to the Supreme Court from the order of the High Court. The finding of fact in that case by the AAC and the Tribunal was that the assessee had produced all the relevant accounts and documents necessary for completing the assessment and the assessee was under no obligation to inform the ITO about the true nature of the transaction. The Supreme Court emphasised that the assessee was under no obligation to inform the ITO about the possible inference which might have been drawn from the disclosed facts. It was for the ITO to raise such an inference. If he did not do so, he could not reopen the assessment u/s 34(1) (a) of the 1922 Act. This decision does not come to the aid of the assessee in any way. There is no allegation in that case that the assessee had suppressed the material facts or had produced false evidence or had made false entries in the books of account. On the contrary the categorical finding of fact of the Tribunal was that the ITO had disclosed all primary facts at the time of the assessment proceeding.

In that view of the matter the writ petition succeeds. The rule is made absolute. The notice u/s 148 is in question. Any assessment made, pursuant to the impugned notice u/s 148 by virtue of the interim order passed by the Court is also quashed. There will be no order as to costs.

Petition allowed.