# CALCUTTA DISCOUNT COMPANY LIMITED v. INCOME-TAX OFFICER, COMPANIES DISTRICT, I AND ANOTHER

- **Citation:** [1961] 2 S.C.R. 241
- **Court:** Supreme Court of India
- **Decided:** 1961
- **Case number:** Civil Appeal No. 197 of 1954
- **Bench:** S. K. Das, M. HrnAYATULLAH, K. C. DAs GUPTA, J.C. Shah, N. Rajagopala Ayyangar
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/calcutta-discount-company-limited-v-income-tax-officer-companies-district-i-and-2221
- **Pages:** 35

## Headnote

Income-tax-Income escaping assessment-Non-disclosure of
material facts by assessee-" Material facts", meaning of-Indian
Income Tax Act, z922 (II of z922), as amended in z948, s. 34(1)(a),
Explanation-Constitution of India, Art. 226.
The appellant, a private limited company, was assessed to
income tax for the assessment years 1942-43, 1943-44 and 1944-45
by three separate orders dated January 26, 1944, February 12,
1944, and February 15, 1945, under s. 23(3) of the Indian Income
Tax Act on returns filed by it with statements of account. On
March 28, 1951, three notices under s. 34 of the Act were issued
calling upon it to s.ubmit fresh returns for the said assessment
years. The appellant filed the returns but thereafter applied to
the High Court under Art. 226 of the Constitution for writs
restraining the Income-tax Officer from initiating assessment
proceedings on the basis of the said notices on the ground, inter
alia, that he had no jurisdiction to issue the said notices. In'
his report to the Commissioner of Income-tax for obtaining
sanction to initiate the said proceedings the Income-tax Officer
had stated as follows:-
"Profit of Rs. 5.46,002 on sale of shares and securities
escaped assessment altogether. At the time of the original
assessment the then I. T. 0. merely accepted the company's
version that the sale of shares were casual transactions and were
in the nature of mere change of investments. Now the results
of the company's trading from year to year show that the company has really been systematically carrying out a trade in the
sale of .investments. As such the company had failed to disclose
the true in~ention behind the sale of the shares as such s. 34(1)(a)
may be attracted".
The question for determination was whether in the circumstance the Income-tax Officer was right in issuing notices on ,l;e
assessee under s. 34(1)(a) of the Act.
Held, (per S. K. Das, K. C. Das Gupta and N. R. Ayyangar, JJ.), that before the Income-tax Officer could issue a notice
under s. 34(!)(a) of the Indian Income-tax Act, two conditions
precedent must co-exist, namely, that he must have reason to
believe (1) that income, profits or gains had been under-assessed
and (2) that such under-assessment was due to non-disclosure of
material facts by the assessee.
31
November r.
242
SUPREME COURT REPORTS
[1961]
r960
Although what facts would be necessary and material for
the assessment in a particular case must depend on the facts of
Calcutta Discou11t that case, there could be no doubt that the burden of disclosing
Company Limit'd all the primary facts must invariably be on the assessee.
v.
The Explanation to s. 34(1) made it clear that that burden
Income-tax Office" could not be fully discharged by simply producing the account
Coinpanies
books and other documents, but the assessee must also disclose
Disfrict, I
such specific items or portions thereof as are relevant to the
0-- Another
assessment.
But once he has done so, it is for the Income-tax
Officer to draw the proper inferences of fact and law therefrom
and the assessee cannot further be called upon to do so for him.
The Explanation does not enlarge the scope of the section so as
to include "the disclosure" of such inferences.
The question whether by the sale of shares the assessee in
the instant case intended to change the form of investment or
to make a business profit was one of an inferential fact and the
failure to disclose such intention could not by itself amount to
a failure or omission to disclose a material fact within the meaning of s. 34(1)(a) of the Act.
Where, however, the Income-tax Officer has prima facie
reasonable grounds for believing that there has been a nondisclosure of a primary material fact, that by itself gives him
the jurisdiction to issue a notice under s. 34 of the Act, and the
adequacy or otherwise of the grounds of such belief is not open
to investigation by the Court. It is for the assessee who wants
to challenge such jurisdiction to establish that the I

## Text

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2 S.C.R. SUPREME COURT REPORTS
241
CALCUTTA DISCOUNT COMPANY LIMITED
v.
INCOME-TAX OFFICER, COMPANIES
DISTRICT, I AND ANOTHER.
(S. K. Das, M. HrnAYATULLAH, K. C. DAs GUPTA,
J.C. SHAH and N. RAJAGOPALA AYYANGAR, JJ.)
Income-tax-Income escaping assessment-Non-disclosure of
material facts by assessee-" Material facts", meaning of-Indian
Income Tax Act, z922 (II of z922), as amended in z948, s. 34(1)(a),
Explanation-Constitution of India, Art. 226.
The appellant, a private limited company, was assessed to
income tax for the assessment years 1942-43, 1943-44 and 1944-45
by three separate orders dated January 26, 1944, February 12,
1944, and February 15, 1945, under s. 23(3) of the Indian Income
Tax Act on returns filed by it with statements of account. On
March 28, 1951, three notices under s. 34 of the Act were issued
calling upon it to s.ubmit fresh returns for the said assessment
years. The appellant filed the returns but thereafter applied to
the High Court under Art. 226 of the Constitution for writs
restraining the Income-tax Officer from initiating assessment
proceedings on the basis of the said notices on the ground, inter
alia, that he had no jurisdiction to issue the said notices. In'
his report to the Commissioner of Income-tax for obtaining
sanction to initiate the said proceedings the Income-tax Officer
had stated as follows:-
"Profit of Rs. 5.46,002 on sale of shares and securities
escaped assessment altogether. At the time of the original
assessment the then I. T. 0. merely accepted the company's
version that the sale of shares were casual transactions and were
in the nature of mere change of investments. Now the results
of the company's trading from year to year show that the company has really been systematically carrying out a trade in the
sale of .investments. As such the company had failed to disclose
the true in~ention behind the sale of the shares as such s. 34(1)(a)
may be attracted".
The question for determination was whether in the circumstance the Income-tax Officer was right in issuing notices on ,l;e
assessee under s. 34(1)(a) of the Act.
Held, (per S. K. Das, K. C. Das Gupta and N. R. Ayyangar, JJ.), that before the Income-tax Officer could issue a notice
under s. 34(!)(a) of the Indian Income-tax Act, two conditions
precedent must co-exist, namely, that he must have reason to
believe (1) that income, profits or gains had been under-assessed
and (2) that such under-assessment was due to non-disclosure of
material facts by the assessee.
31
November r.
242
SUPREME COURT REPORTS
[1961]
r960
Although what facts would be necessary and material for
the assessment in a particular case must depend on the facts of
Calcutta Discou11t that case, there could be no doubt that the burden of disclosing
Company Limit'd all the primary facts must invariably be on the assessee.
v.
The Explanation to s. 34(1) made it clear that that burden
Income-tax Office" could not be fully discharged by simply producing the account
Coinpanies
books and other documents, but the assessee must also disclose
Disfrict, I
such specific items or portions thereof as are relevant to the
0-- Another
assessment.
But once he has done so, it is for the Income-tax
Officer to draw the proper inferences of fact and law therefrom
and the assessee cannot further be called upon to do so for him.
The Explanation does not enlarge the scope of the section so as
to include "the disclosure" of such inferences.
The question whether by the sale of shares the assessee in
the instant case intended to change the form of investment or
to make a business profit was one of an inferential fact and the
failure to disclose such intention could not by itself amount to
a failure or omission to disclose a material fact within the meaning of s. 34(1)(a) of the Act.
Where, however, the Income-tax Officer has prima facie
reasonable grounds for believing that there has been a nondisclosure of a primary material fact, that by itself gives him
the jurisdiction to issue a notice under s. 34 of the Act, and the
adequacy or otherwise of the grounds of such belief is not open
to investigation by the Court. It is for the assessee who wants
to challenge such jurisdiction to establish that the Income-tax
Officer had no material for such belief.
Since, in the instant case, there was no non-disclosure of a
primary material fact which the assessee was bound to disclose
under s. 34(1)(a) of the Act, the Income-tax Officer had no jurisdiction to issue the notices in question.
It is incorrect to say that the question of under-assessment
by reason of non-disclosure of a material fact was relevant only
for the purpose of applying either the longer or the shorter
period of limitation prescribed by the section and not for jurisdiction and, therefore, not a proper matter for investigation
under Art. 226 of the Constitution.
The High Courts have ample powers under Art. 226 of the
Constitution, and are in duty bound thereunder, to issue such
appropriate orders or directions as are necessary in order to
prevent persons from being subjected to lengthy proceedings
and unnecessary harassments by an executive authority acting
without jurisdiction. Alternative remedies such as are provided
by the Income-tax Act cannot always be a sufficient reason for
refusing quick relief in a fit and proper case.
Per Hidayatullah, J.-The Explanation to s. 24(1) of the
Indian Income-tax Act clearly indicates that the duty of the
assessee thereunder does not end by merely producing evidence
or disclosing the primary facts, but also extends to the disclosure
•
t •
' ,,
2 S.C.R. SUPREME COURT REPORTS
243
of such other facts relating to status, agency, benami nature of
i960
the transaction, the nature of the trading and the like, which
he knows but do not appear from the evidence, and which may Calcutta Discount
be necessar:• for interpreting the evideni:e.. If the evidence Company Limited
produced hides nothing and discloses everything, the assessee
v.
cannot be subjected to s. 34 merely because the Income-tax Income-ta" Officer,
Officer misinterprets such evidence. But it is otherwise if the
Companies
assessee raises a contention that is contrary to fact and·, requires
District, I
the Income-tax Officer to discover the truth for himself for that
& Another
would be to suppress a material fact that would attract the
section.
Since, in the present case, an investment company dealing
in stocks and shares, not only knowingly suppressed that fact
but contended otherwise, there was non-disclosure of a material
fact necessary for its assessment, and sufficient to attracts. 34(1)
(a) of the Act.
Per Shah, ].-The expression "has reason to believe " in
s. 34(1)(a) of the Indian Income-tax Act does not mean a purely
subjective satisfaction of the Income-tax Officer but predicates
the existence of reasons on which such belief has to be founded.
That belief, therefore, cannot be founded-on mere suspicion and
must be based on evidence and any question as to the adequacy
of such evidence is wholly immaterial at that stage.
Whether all the material facts necessary for the assessment
had or had not been fully and truly disclosed in a particular
case has to be examined, in the light of the Explanation to
s. 34(1)(a).
If there is disclosure of some facts but not all, a tax payer
cannot resist reassessment on the plea that such non-disclosure
was due to the negligence or inadvertence on the part of the
Income-tax Officer to scrutinise the materials before him.
Where the existence of reasonable 'belief that there had
been under-assessment due to non-disclosure by the assessee,
which is a condition precedent to exerci~ of the power under
s. 34(1)(a) is asserted by the assessing authority and the record
prima Jacie supports its existence, any enquiry as to whether
the authority could reasonably hold the belief that the underassessment was due to non-di5closure by the assessee of
material facts necessary for the assesment must, be barre~.
CIVIL
APPELLATE
JURISDICTION: Civil Appeal
No. 197 of 1954.
Appeal from the Judgment and Order dated the
25th March, 1953, of the Calcutta High Court in
Appeal from Original Order No. 54 of 1953.
Sachin Chaudhury, Sukumar Mitter, 8. N. Mukherjee and D. N. Ghosh, for the appellant.
244
SUPREME COURT REPORTS
[1961]
I96o
K. N. Rajagopal Sastri and D. Gupta, for the res-
-.
pond en ts.
Calcutta Disco1t11t
Company Limited
1960. November I. The Judgment of S. K. Das,
v.
K. C. Das. Gupta and N. Rajagopala Ayyangar, JJ.,
Income-tax Officer, was delivered by K. C. Das Gupta,. J. M. HidayaCo111panies
d J C Sh h J d ) '
District, 1
tullah, J. an
. .
a , ., e 1vered separate J udg-
& Anotltet
ments.
Das Gupta].
DAS GUPTA J.-This appeal is against an appellate
decision of a Bench of the Calcutta High Court by
which in reversal of the order made by the Trial
Judge the Bench rejected the present appellant's
application under Art. 226 of the Constitution. The
appellant is a private limited company incorporated
under the Indian Company's Act and has its registered
office in Calcutta. It was assessed to income-tax for
the assessment years, 1942 43, 1943.44 and 1944-45
by three separate orders dated January 26, 1944,
February 12, 1944, and February 15, 1945, respectively.
These assessments were made under s. 23(3)
of the Indian Income-tax Act upon returns filed by it
accompanied by statements of account. The first two
assessments were made by Mr. L. D. Rozario the then
Income-tax Officer and t.he last one by Mr. K. D. Banerjee. The taxes assessed were duly paid up. On March
28, 1951, three notices purporting to be under s. 34 of
the Indian Income-tax Act, 1922, were issued by the
Income-tax Officer calling upon the company to submit fresh returns of its total income and the total
world income assessable for the three accounting years
relating to the three assessment years, 1942-43 1943-44
and 1944-45. The appellant company furnished returns in compliance with the notices but on September
18, 1951, applied to the High Court of Calcutta for
issue under Art. 226 of the Constitution of appropriate
writs or orders directing the Income-tax Officer not to
proceed to assess it on the basis of these notices. The
first ground on which this prayer was based watt
mentioned in the petition in these terms:-" The said
pretended notice was issued without the existence of
the necessary conditions precedent which confers
jurisdiction under section 34 aforementioned, whether
2 S.O.R. SUPREME COURT REPORTS
245
before or after the amendment in 1948 ". The other
1960
ground urged was that the amendment to s. 34 of the c 1
--D.
•
.
a. culta
tscount
Income-tax Act m 1948 was not retrospective and Company Limited
that the assessment for the years 1942-43, 1943-44
v.
and 1944-45 became barred long before March 1951. Income-tax Officer,
The Trial Judge held that the first ground was not
Comp~nies
made out but being of opinion that the amending Act
District, r
of 1948 wa;.; not retrospective, he held that the notices
& Another
issued were without jurisdiction. Accordingly be
Das Gupta J.
made an order prohibiting the Income-tax Officer from
continuing the assessment proceedings on the basis of
the impugned notices.
The learned Judges who heard the appeal agreed
V'ith the Trial Judge that the first ground had not
been made out. They held however that in consequence of the amendment of s. 34 in 1948 the objection
on the ground of limitation must also fail.
A point
of constitutional law which appears to have been
raised before the appeal court was also rejected. The
appeal was allowed and the company's application
under Art. 226 was dismissed with costs.
The Company has preferred the present appeal on
the strength of a certificate issued by the High Court
under Art. 133(l)(a) of the Constitution.
The only point raised before us is that the courts
below were wr9ng in holding that the first ground
that the notices were issued without the existence of
the necessary conditions precedent which confers
jurisdiction under s. 34 bad not ·been made out.
As it
is no longer disputed that s. 34 as amended in 1948
applies to the present case we have to consider the
section as it stood after the amendment in 1948, in
deciding this question of jurisdiction. The relevant
portion of the section was in these words :-
" 34. Income escaping assessment.-( 1) If-
(a) the Income-tax Officer has reason to believe
that by reason of the omission or failure on the part
of an assessee to make a return of his income under
s. 22 for any year or to disclose fully and truly all
material facts necessary for bis assessment for that
year, income, profits or gain chargeable to income-tax
have escaped assessment for that year, or have been
246
·SUPREME COURT REPORTS
[1961)
1960
under-assessed, or assessed at too low a rate, or have
Colrnll;Discount been made the subject of excessive relief under the
company Limited Act, or excessive loss or depreciation allowance has
v.
been computed, or
Income-tax Offiw,
(b) notwithstanding that there has been no omisCo1npanics
District, I
& Another
Das Gupta ].
sion or failure as mentioned in clause (a) on the part
of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe
that income, profits or gains chargeable to income tax
have escaped assessment for any year, or have been
under-assessed, or assessed at too low a rate or have
been made the subject of excessive relief under this
Act, or that excessive loss or depreciation allowance
has been computed.
He may in cases falling under clause (a) at any time
within eight years and in cases falling under clause (b)
at any t.ime within four years of the end of that year,
serve on the assessee, or, if the assessee is a company,
on the principal officer thereof, a notice containing all
or any of the requirements which may be included in
a notice under sub-section (2) of section 22 and may
proceed to assess or reassess such income, profits or
gains or recompute the loss or depreciation allowance;
and the provisions of this Act shall, so far as may be,
apply accordingly as if the notice were a notice issued
under that sub-section :-
Provided that-
(i) the Income-tax Officer shall not issue a notice
under this sub-section, unless he has recorded his
reasons for doing so and the Commissioner is satisfied
on such reasons recorded that it is a fit case for the
issue of such notice ;
(ii) the tax shall be chargeable at the rate at
which it would have been charged had the income,
profits or gains not escaped assessment or full assessment, as the case m_ay be ; and
(iii) where the assessment made or to be made is
an assessment made or to be made on a person deemed
to be the agent of a non-resident person under section 43, this sub-section shall have effect as if for the
periods of eight yea.rs and four yea.rs a period of one
year was substitUted.
2 S.C.R. SUPREME COURT REPORTS
24 7
Explanation-Production before the Income-tax
I960
Officer of account-books or other evidence from which c 1 .
-
.
· 1 f
ld
• h d
d ·1·
h
b
a culta Discount
materia
acts cou
wit
ue
I 1gence
ave een Companv Limited
discovered by the Income-tax Officer will not neces-
~-
sarily amount to disclosure within the meaning of Income-tax Offim,
this section."
Companies
To confer jurisdiction under this section to issue
District, I
t .
.
t f
t b
d
h
. d f
& Another
no we 111 respec o assessmen s eyon
t e peno o
-
four years, but within a period of eight years, from
Das Gupta J.
the end of the relevant year two conditions have
therefore to be satisfied. The first is that the Incometax Officer must have reason to believe that income,
profits or gains chargeable to income-tax have been
under-assessed. The second is that he must have
also reason to believe that such " under assessment "
has occurred by reason of either (i) omission or failure
on the part of an assessee to make a return of his
income under s. 22, or (ii) omission or failure on the
part of an assessee to disclose fully and truly all
material facts necessary for his assessment for that
year.
Both these conditions are conditions precedent
to be satisfied before the Income-tax Officer could
have jurisdiction to issue a notice for the asse_ssment
or re-assessment beyond the period of four years but
within the period of eight years, from the end of the
year in question.
No dispute appears to have been raised at any
stage in this case as regards the first condition not
having been satisfied and we proceed on the basis that
the Income-tax Officer had in fact reason to believe
that there had been an under-assessment in each of
the assessment years, 1942-43, 1943-44 and 1944-45.
The appellant•s·case has all along been that the second
condition was not satisfied. As admittedly the appellant had filed its return of income under s. 22, the
· Income-tax Officer could have no reason to believe
that under-assessment had resulted from the failure
to make a return of income. The only question is
whether the Income-tax Officer had reason to believe
that " there had been some omission or failure to
disclose . fully and truly all material facts necessary
248
SUPREME COURT REPORTS
[1961]
'960
for the assessment " for any of these years in consec I
11-D.
quence of which the under-assessment took place.
a cu a
iscount
.
•
company Limited
Before we proceed to consider the materials on
v.
record to see whether the appellant has succeeded
Income-tax Officer, in showing that the Income-tax Officer could have
Companies
no reason, on the materials before him, to believe that
;iisAtricth, I
there had been any omission to disclose material
~ not "
-"
t'
d ' th
t'
"t ·
iacts,-as men 10ne m
e sec 10n, 1 1s necessary to ex -
Das Gupta J. amine 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
material facts necessary for his assessment. What
facts are. material, and necessary for assesment 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. Thus, when a question arises
whether certain income received by an assessee is
capital receipt, or revenue . receipt, the assessing
authority has to find out what primary facts have
been proved, what other facts can be inferred from
them, and taking all these together, to decide what
the legal inference should be.
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 a 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
'
(
••
......
'·
2 s.c.R. SUPREME COURT REPORTS
249
Officer might have discovered, the Legislature has put
I960
in the Explanation, which has been set out above. c 1 ,,-D.
1
I
,
f h E
l
.
.
'll
b
h
a cu a
iscoun
n view o t e xp anat10n, it Wl not e open to t e Company Limited
assessee to say, for example-" I have produced the
v.
account books and the documents: You, the . assess- Income.tax Officer,
ing officer examine them, and find out the facts necesC~mp~nies
sary for your purpose : My duty is done with disclos-
~·~'":i. 1
ing these account-books and the documents". His
no er
omission to bring to the assessing authority's attention
Das Gupta J.
these particular items in the account books, or the
particular portions of the documents, which are relevant, amount to " omission to disclose fully and truly
all material facts necessary for his assessment." Nor
will he be able t9 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 E,xplanation 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
32
250
SUPREME COURT REPORTS
[1961]
'960
what inferences-whether of facts or law-he would
Cal"'tt~iscou"t draw from th.e primary facts.
company Limited
If from primary facts more inferences than one
v.
could be drawn, it would not be possible to say that
Income-tax Officer. the assessee should have drawn any particular inferCompa>1ies
ence and communicated it to the assessing authority.
Dislricl, I
H
Id
b
h
d • h f
& A>1other
ow cou
an assessee e c arge wit
ailure to communicate an inference, which he might or might not
Das G1<pta J. have drawn ?
It may be pointed out that the Explanation to the
sub-section has nothing to do with "inferences" and
deals only with the question whether primary material facts not disclosed could still be said to be constructively disclosed on the ground that ·with due
diligence the Income-tax Officer could have discovered
them from the facts actually disclosed.
The Explanation has not the effect of enlarging the section, by
casting a duty on the assessee tq disclose " inferences "-to draw the proper inferences being the duty
imposed on the Income-tax Officer.
We have therefore come to the conclusion that
while the duty of the assessee is to disclose fully and
truly all primary relevant facts, it does not extend
beyond this.
The position therefore is that if there were in fact
some reasonable grounds for thinking that there had
been any non-disclosure as regards any primary fact.,
which could have a material bearing on the question
of "under assessment" that would be sufficient to give
jurisdiction to the Income-tax Officer to issue the
notices under s. 34.
Whether these grounds were
adequate or not for arriving at the conclusion that
there was a non-disclosure of material facts would not
be open for the court's investigation. In other words,
all that is necessary to give this special jurisdiction
is that the Income-tax Officer had when he assumed
jurisdiction some prima facie grounds for thinking
that there had been some non-disclosure of material
facts.
Clearly it is the duty of the assessee who wants the
court to hold that jurisdiction was lacking, to establish that the Income-tax Officer had no material at
11oll before him for believing that there had been suoh
2 S.C.R. SUPREME COURT REPORTS
251
non-disclosure. To establish this the company has
r96o
relied on the statements in the assessment orders fore 1
-D.
.
.
d
h
f a cutta
iscou1tl
the three years m quest.ion an on t e statement o Company Li 'tetl
Kanakendra Narayan Banerjee in the report made
v.
mi
by him to the Commissioner of Income-tax for theincome-tax Officer,
purpose of obtaining sanction to initiate proceedings
Companies
under s. 34 and also on his statement in the affidavit
District, I
th '
1 t th
't
t't'
Th
•
& Another
on oa
m rep y o
e wri pe I ion.
e report is
in these words :-
Das Gupta].
" Profit of Rs. 5,48,002 on sale of shares and
securities escaped assessment altogether.
At the time of the original assessment the then
I.T.O. merely accepted the company's version that the
sale of shares were casual transactions and were in
the nature of mere change of investments. Now the
results of the company's trading from year to year
show that the company has really been systematically carrying out a trade in the sale of investments.
As such the company had failed to disclose the true
intention behind the sale of the shares and as such
s. 34(l)(a) may be attracted."
The only non-discbsure mentioned in the report is
that the company had failed to disclose "the true
intention behind the sale of the shares". Mr. Choudhury contends that this is not an omission to
disclose a material fact within the meaning of s. 34.
The question whether sales of certain shares were by
way of changing the investments or by way of trading in shares has to be decided on a consideration of
different circumstances, including- the frequency of
the sales, the nature of the shares sold, the price
received as compared with the cost price, and several
other relevant facts. It is the duty of the assessee
to disclose all the facts which 'have a bearing on the
question; but whether the assessee had the intention
to make a business profit as distinguished from the
intention to change the form of the investments is
really an inference to be drawn by the assessing authority from the material facts taken in conjunction with
the surrounding circumstances. The law does not
require the assessee to state the conclusion that could
reasonably be drawn from the primary facts. The
252
SUPREME COURT REPORTS
[1961]
r96o
question of the assessee's intention is an inferential
-
.
fact and so the assessee's omission to state his " trne
Calculta Discount •
•
b h. d h
l
f h
,
Companv Limited mtent1~nds ed rn bt e sa e o s ares " cannot by itself
~.
be cons1 ere
to e a failure or omission to disclose
Incomt-tax Officer, any material fact within the meaning of s. 34. Indeed,
Companies
an assessee whose contention is that the shares were
District, 1
sold to change the form of investment and not with
& Another
th · t
t'
f
k'
b '
fi
b
e m en ion o ma mg a usmess pro t cannot e
D~s Gupta 1. expected to say that his true intention was other than
what he contended it to be. Dealing with this question the learned Chief Justice has said :-
" The expression that the Respondent had failed
to disclose " the true intention behind the sale of
shares " may lack directness, but that deficiency of
language is not sufficient to enable the Respondent to
contend, in view of the circumstances alleged, that no
failure to disclose facts was being complained of. On
the facts as stated by the Income-tax Officer, it is
clear that there had been a failure to disclose the fact
that the Respondent was a dealer in shares and what
the Income-tax Officer meant by the language used
by him was that the Respondent had not disclosed
that the sale of shares had been of the nature of a
trading sale, made in pursuance of an intention to
make a business profit, and not of the nature of a
change of investment, made in pursuance of an intention to put certain capital assets into another form.
If that be so, it is equally clear that the Income-tax
Officer who, by the way, was a sucoessorto the officers
who had made the original assessments, was not
merely changing his opinion as to facts previously
known, but was taking notice of a new fact."
The learned Chief Justice seems to have proceeded
on the basis that when from certain facts inferences
are to be drawn there is a duty on the assessee to
state what the correct inference should be and if he
has made a wrong statement as regards the inferences
to be drawn that also is an "omission or failure to
disclose a material fact ". For the reasons given
earlier we do not think that this is the correct position
in law.
It is clear therefore that if one looked at this report
2 S.C.R. SUPREME COURT REPORTS
253
ouly it would not be possible to sa.y that the Income196°
tax Officer bad. any non-disclosure of material facts by
.
.
. d b
b
d . . d. t'
It Calcutta Discount
the assessee m mm w en e assume JUns IC 10n.
campanv Limited
bas to be remembered however that in sending a
~.
report to the Commissioner the Income-tax Officer Income-tax Officer,
might not fully set out what he thought amounted to
Comp~nies
a non-disclosure, because it is conceivable that the
District,· 1
'f
& A not her
report may not oe drawn up ca'16fully and may not
contain a reference to all the non-disclosures that
Das Gupta J.
operated on his mind. We have however on the
record an affidavit sworn by the same Income-tax
Officer who started the s. 34 proceedings.
It is
reasonable to expect that in this affidavit which was
his opportunity to tell the court. what non-disclosure
he took into consideration he would state as clearly
as possible the material facts in respect of which there
had not been in his view a. full and true disclosure.
Mr. Banerjee's statements in this matter are contained
in paras. 5, 6 and 7 of his affidavit. They are in
these words :-
" 5. With reference to paragraphs 2 and 3 of the
said petition, I crave reference to the assessment
orders therein mentioned. The assessment order dated
the 15th February 1945, was made by Sri Kali Das
Banerjee now Income-tax Officer Companies District
II and the other two assessment orders were made by
L. D. Rozario who is now in the employmen~ of M/s.
Lovelock & Lewes. I find from the notes ma.de by
me in the order sheet'of the assessment year 1944-45
and my order dated the 7th July 1944 that Mr. Smith
of M/s. Lovelock & Lewes attended before me and
stated that the profits of th& company arising out of
dealings in shares were not taxable as the company
was not a dealer in shares and securities. Subsequently
on the 18th August 1944, M/s. Lovelock & Lewes wrote
a letter to me setting out the contentions of their
clients and inter alia stated that throughout the
whole history the company bought no shares whatsoever. Sri K. D. Banerjee was accordingly led to
believe that the dealings in shares were casual trans.
actions and were in the nature of mere change in
investments and the profits resulting therefrom were
254
SUPREME COURT REPORTS
[1961]
I960
not taxable. The assessment orders were made on
-
.
the basis that the petitioner did not carry on any
Ccalcutta DMcount business dealings in shares. A copy of the said letter
ompany Lim>ted d t d h 18th A
194
I
h
I
v
a e t e
ugust,
4, as a so t e re evant porIncome-ta~ Officer. tion of the note sheet are included in the schedule
Companies
hereto annexed and marked "A ".
District. I
6. In the assessments for 1945.~6 and 1946-47,
o. Another
which were completed in April 1950, the profits on
Das Gupta J. sale of shares. were included in the total assessable
income of the company it having been then discovered
that the petitioner was in fact carrying on business in
shares contrary to its representation that it was not.
The company filed appeals before the Appellate Assistant Commissioner, which were rejected in September
1950, and the assessments were confirmed. The company thereafter filed a second appeal before the Income-tax Tribunal which appeals are now pending.
7. With reference to para. 5 of the said petition,
I deny that I pretended to act under s. 34 of the Income-tax Act as alleged. I have· reasons to believe
that by reason of the omission or failure of the
company to disclose fully and truly all material
facts necessary for its assessments, the income, profits and gains chargeable to income-tax had been
under assessed. I recorded my reasons and made
three reports (one for each year) in the prescribed
form and submitted them before the Commissioner of
Income-tax and the latter was satisfied that it was a
fit case for issue of a notice under s. 34 of the Incometax Act. Thereafter I issued the prescribed notices
under s. 34 of the Income-tax Act. The said reports
were made and notices issued in respect of all the
three years mentioned in the petition and copies of
the report and notice for one of such years are included in the schedule hereto annexed and marked "A".
The report and notices for the two other years are
exactly similar."
It appears from this that the statements made by
or on behalf of the company which the assessing
authority considered to amount to non-disclosure of
material facts were these :-(i) the company was not
a dealer in shares and securities and (ii) throught the
I
j
'
2 S.C.R. SUPREME COURT REPORTS
255
whole of its history the company bought no s1'ares
1960
whatsoever. It. has not been suggebted before us that Calcutt;-;iscount
in fact a.t any time up to the conclusion of the assess- company Limited
ment proceedings for the years 1942-43, 1943-44 and
"·
1944-45 the company did in fact make a single Income-tax Officer,
purchase of shares. Clearly therefore the Income-tax
Companies
Officer had no reasonable ground for thinking that
Dist<ict, 1
& Anotl"r
anything as regards the purchase of shares had not
been disclosed. The company does not dispute that Da• Gupta J.
the statement was ma.de on its behalf tha.' it was not
a " dealer" in shares and securities. It appears clear
that the Income-tax Officers who made the assessments for the years 1942-43, 1943-44 and 1944-45
proceeded on the basis that this was an investment
company and considered the question whether in spite
of its being an investment company certain sales of
shares wherefrom the company made a profit were by
way of trading in shares and not by way of changing
the form of investment. Whether t.hese sales by an
investment company should in law be treated as trading transactions, and the profits made from the sales
trading profits liable to tax, was the matter which it
was the Income-tax Officer's task to decide. No duty
lay on the company to admit that these transactions
were by way of trade. The fact that on behalf of the
company Mr. Smith of Lovelock & Lewes stated that
the company was not a dealer in shares and securities
does not therefore amount to an omission to disclose
fully and truly any material fact.
To ascertain whether the Income-tax Officer could
have had in mind any non-disclosure a.s a. ground for
thinking that by reason of such non-disclosure an
under assessment had occurred-apart from what was
mentioned in the affidavit-we enquired from respondent's counsel whether he could suggest any other
non-disclosure that might have taken place. Mr. Sa.stri
suggested two. One is that the sales had not been
disclosed; the other that the memorandum and articles of association of the company had not been
shown. This suggestion is against the record and we
have no hesitation in repelling it. Not only is it not
the ground set out by the Income-tax Officer at any
256
SUPREME COURT REPORTS
[1961]
1960
stage-not even in the affidavit in court, but the
Calcutta Discount matters mentioned by the officer that the assessee had
Company Limited claimed that the profits realised were of a casual
v.
nature obviously indicate that the assessee disclosed
Jucome-tax Officer, that a surplus resulted from the sales which were
Coinpauies
also disclosed.
District, I
Th
t
d
•t · t
d
t
·
h
c;. Another
e assessmen or ers 1 1s rue o no ment10n t a
details of the sales. They state however that the
Das Gupta J. audited accounts of the company were furnished. The
sales of shares were expressly mentioned in the
report. In these circumstances it is reasonable to
believe that a.s regards sale of shares full details were
in fact disclosed.
Nor can we believe tha.t the two Income-tax Officers
L. D. Roza.rio a.nd K. D. Banerjee concluded the proceedings without referring to the memorandum a.nd
articles of association of the company. These officers
known well tha.t the company was claiming to be an
investment company only. They ha.d to consider the
question whether sales were of the nature of trade or
of the nature of change of investment. It is unthinkable that they would not examine the memorandum
of association. Besides, it is pertinent to note that in
para.. 4 of his affidavit Ka.na.kendra Narayan Banerjee
refers to the Memorandum and articles of Association
and states that " by its memorandum of association
the company has been authorised to carry on the
various kinds of business which have been specified in
sub-section (1) a.n(j (2) of cl. 3 of the sa.id memorandum
of a.ssocia.tion." He does not say that the articles or
the memorandum of association were not shown during the assessment proceedings for the yea.rs 1942-43,
1943-44 a.nd 1944-45. If he ha.d a.ny reason to believe
that these were not shown he would have certainly
mentioned that fa.ct. For that would undoubtedly
a.mount to non.disclosure of a. ma.teria.l fact.
It must tnerefore be held that the Income-tax Officer who issued the notices ha.d not before him any
non-disclosure of a. material fa.ct and so he could have
no material before him for believing that there ha.d
been any material non-disclosure by reason of which
an under-assessment had ta.ken place.
2 S.C.R. SUPREME COURT REPORTS.
257
We a.re therefore bound to hold tha.t the conditions
z96o
Precedent to the exercise of jurisdiction under s. 34 ofc 1
11-D.
1
•
•
a cu a
SSCOUtl
the Income-tax Act did not exist a.nd the Income-tax Company Limited
Officer had therefore no jurisdiction to issue the imv.
pugned notices under s. 34 in respect of the years Income-tax Officer,
1942-43, 1943-44 and 1944-45 a.fter the expiry of four
Companies
rs
District, I
yea. •
.
.
.
& A not her
Mr. Sastn argued that the question whether the
Income-tax Officer ha.d reason to believe tha.t under Das Gupta J.
assessment ha.d occurred" by reason of non-disclosure
of material facts" should not be investigated by the
courts in a.n application under Art. 226. Learned
Counsel seems to suggest that as soon as the Incometax Officer has reason to believe that there has been
under assessment in any yea.r he ha.a jurisdiction to
start proceedings under s. 34 by issuing a notice
provided 8 years ha.ve not elapsed from the end of the
yea.r in question, but whether the notices should have
been issued within a period of 4 years or not is only a.
question of limitation which could and should properly
be raised in assessment proceedings. It is wholly
incorrect however to suppose thitt this is a question of
limitation only not touching the question of jurisdiction. The scheme of the law clearly is that where the
Income-tax Officer has reason to believe that an under
assessment has .resulted from non-disclosure he shall
have jurisdiction to start proceedings for re-assessment
within a. period of 8 yea.rs; and where he has reason
to believe tha.t an under assessment has resulted from
other causes he shall have jurisdiction to start proceedings for re-assessment within 4 years. Both the
conditions, (i)•the Income-tax Officer having reason to
believe that there ha.a been under assessment a.nd
(ii) his having reason to believe that such underassessment
ha.a
resulted from
non-disclosure of
ma.teria.l facts, must co-exist before the Income-tax
Officer ha.s jurisdiction to eta.rt proceedings after the
expiry of 4 yea.rs. The argument that.