# COMMISSIONER OF INCOME-TAX, GUJARAT v. A. RAMAN a COMPANY

- **Citation:** [1968] 1 S.C.R. 10
- **Court:** Supreme Court of India
- **Decided:** 1967-07-18
- **Bench:** J. C. Shah, S. M. Sikri, V. llAMASWAMI
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-gujarat-v-a-raman-a-company-4085
- **Pages:** 7

## Headnote

Indian Income-tax Act, 1961. s. 147-Conditions for the exercise of
power to re-open assessnient.
Constitution of India. 1950. Art. 226-Powers of High Court to
issue writ when Income-tax Officer's jurisdiction to issue notice under
s. 147 of the Indian Income-tax Act, 1961 is questioned-High Court
must not re~ppraise evidence.
The assessee firm consisted of two partners who were managers
of their respective Hindu Undivided Families. The firm sold its
goods to the aforesaid families· and the families again sold the goods
on their own account. In income-tax proceedings for the years 195\160, 1960-61 and 1961-62 the firm and the Hindu Undivided Families
were separately assessed in respect of their incomes. Subsequently
B
c
the Income-tax Authorities took view that the sale of goods by the D
firm to the families was only a device to divert the profits of
the firm and on this view issued notices under s. 147 oi the Incometax Act. 1961 requiring the assessee to show cause why the assessments for the years 1959-60, 1960-61 and 1961-62 should not be reopened. The High Court of Gujarat in a petition for a writ under
Art. 226 of the' Constitution quashed those notices. and restrained
the Income-tax Officer from taking proceedings in pursuance thereof.
With special leave granted by this Court. the Revenue appealed.
Held: (i) The High Court may issue a high prerogative writ
prohibiting the Income-tax Officer from proceeding with reassessment when it appears that the Income-tax Officer had no jurisdiction
to commence proceedings because the conditions precedent do not
exist. [12G-H; 13B-C]
Calcutta Discount Co. Ltd. v. Income-tax Officer. Companies
E
District I, Calcutta, & Anr. 41 I.T.R. 191, followed.
F
It is however not open to the High Court exercising powers
under Art. 226 to set a~ide or vacate the notice for reassessment by
itself re-appraising the evidence. [15B]
(ii) The condition which invests the Income-tax Officer with
jurisdiction has two branches: (i) that the Income-tax Officer has
reason to believe that income chargeable to tax has escaped assessment; and (ii) that it is in consequence of information which he has G
in his possession and that he has reason so to believe. The expression,
'information' in the context of which it or.curs must mean instruction or knowledge derived from an external source concerning facts
or particulars, or as to law relating to a matter bearin~ on the assessment. If he has such information the Income-tax Officer mav commence proceedings under s. 147(1)(b). But to commence such· a proceeding it is not necessary that on the materials which came to the
notice of the Incom.,.tax Officer, the previous order of assessment H
was vitiated by some error of fact or law. [13C-G]
(iii) In the present case however the pre-conditions for the
issue of a notice of re-assessment did not exist. The law does not
oblige a trader to make the maximum profit that he can out of his
c.I.T. v. RAll.AN & co. (Shall, J.)
11
A tra<ling transactions: Income which accrues to a trader is taxable
in his hands: income which he could have. but has not earned IS
not made taxable as income accrued to him. Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not.. prohibited. [15D-G]
B
c
Civn. APPELLATE JuRJsDICTION: Civil Appeal No. 768 of
1966.
Appeal by special leave from the judgment and order dated
December 18, 1964 of the Gujarat High Court in Special Civil
Application No. 332 of 1964.
B. Sen, S. K. Aiyar, R. N. Sachthey and S. P. Nayar, for the
appellant.
S. T. Desai and 0. C. Mathur, for the respondent.
Tlie Judgment of the Court was delivered by
Sllall, J.-The assessces-Mls A. Raman & Company-are
dealers in "mill stores" in the course of their business they sell
"mill stores" to other dealers including two concerns trading in the
D names of Mis A. M. Shah & Co. and Mis R. Ambalal & Co.,
which are owned by the Hindu undivided families, managers of
which are the only partners of t

## Text

10
COMMISSIONER OF INCOME-TAX, GUJARAT
A
v.
A. RAMAN a COMPANY
July 18, 1967
[J. C. SHAH, S. M. SIKRI AND V. llAMASWAMI, JJ.)
Indian Income-tax Act, 1961. s. 147-Conditions for the exercise of
power to re-open assessnient.
Constitution of India. 1950. Art. 226-Powers of High Court to
issue writ when Income-tax Officer's jurisdiction to issue notice under
s. 147 of the Indian Income-tax Act, 1961 is questioned-High Court
must not re~ppraise evidence.
The assessee firm consisted of two partners who were managers
of their respective Hindu Undivided Families. The firm sold its
goods to the aforesaid families· and the families again sold the goods
on their own account. In income-tax proceedings for the years 195\160, 1960-61 and 1961-62 the firm and the Hindu Undivided Families
were separately assessed in respect of their incomes. Subsequently
B
c
the Income-tax Authorities took view that the sale of goods by the D
firm to the families was only a device to divert the profits of
the firm and on this view issued notices under s. 147 oi the Incometax Act. 1961 requiring the assessee to show cause why the assessments for the years 1959-60, 1960-61 and 1961-62 should not be reopened. The High Court of Gujarat in a petition for a writ under
Art. 226 of the' Constitution quashed those notices. and restrained
the Income-tax Officer from taking proceedings in pursuance thereof.
With special leave granted by this Court. the Revenue appealed.
Held: (i) The High Court may issue a high prerogative writ
prohibiting the Income-tax Officer from proceeding with reassessment when it appears that the Income-tax Officer had no jurisdiction
to commence proceedings because the conditions precedent do not
exist. [12G-H; 13B-C]
Calcutta Discount Co. Ltd. v. Income-tax Officer. Companies
E
District I, Calcutta, & Anr. 41 I.T.R. 191, followed.
F
It is however not open to the High Court exercising powers
under Art. 226 to set a~ide or vacate the notice for reassessment by
itself re-appraising the evidence. [15B]
(ii) The condition which invests the Income-tax Officer with
jurisdiction has two branches: (i) that the Income-tax Officer has
reason to believe that income chargeable to tax has escaped assessment; and (ii) that it is in consequence of information which he has G
in his possession and that he has reason so to believe. The expression,
'information' in the context of which it or.curs must mean instruction or knowledge derived from an external source concerning facts
or particulars, or as to law relating to a matter bearin~ on the assessment. If he has such information the Income-tax Officer mav commence proceedings under s. 147(1)(b). But to commence such· a proceeding it is not necessary that on the materials which came to the
notice of the Incom.,.tax Officer, the previous order of assessment H
was vitiated by some error of fact or law. [13C-G]
(iii) In the present case however the pre-conditions for the
issue of a notice of re-assessment did not exist. The law does not
oblige a trader to make the maximum profit that he can out of his
c.I.T. v. RAll.AN & co. (Shall, J.)
11
A tra<ling transactions: Income which accrues to a trader is taxable
in his hands: income which he could have. but has not earned IS
not made taxable as income accrued to him. Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not.. prohibited. [15D-G]
B
c
Civn. APPELLATE JuRJsDICTION: Civil Appeal No. 768 of
1966.
Appeal by special leave from the judgment and order dated
December 18, 1964 of the Gujarat High Court in Special Civil
Application No. 332 of 1964.
B. Sen, S. K. Aiyar, R. N. Sachthey and S. P. Nayar, for the
appellant.
S. T. Desai and 0. C. Mathur, for the respondent.
Tlie Judgment of the Court was delivered by
Sllall, J.-The assessces-Mls A. Raman & Company-are
dealers in "mill stores" in the course of their business they sell
"mill stores" to other dealers including two concerns trading in the
D names of Mis A. M. Shah & Co. and Mis R. Ambalal & Co.,
which are owned by the Hindu undivided families, managers of
which are the only partners of the assessees. For the assessment
years 1959-60, 1960-61 and 1961-62 the assessees were originally
assessed by the Income-tax Officer, Circle-I, Ward-A, Ahmedabad,
while the partners of the assessees and the Hindu undivided families which traded in the names of MI s A. M. Shah & Co. and MI s R.
E Ambalal & Co. were assessed by Income,tax Officers in other
Circles. The cases of assessees, of the partners of the assessees and
of the two Hindu undivided families trading in the names of A. M.
Shah & Co. and R. Ambalal & Co. were later .transferred to the
Income-tax otlicer, Group Circle-J, Ahmedabad. That Officer by
-letter dated March 20, f964 inifom'ied the assessees that he was
p convinced from a perusal of ·the assessment records of the assessees,
tlieir partners and their individual Hindu undivided families, that
tile partners of the assessees had contrived t(l divert profits of the
•Sse5sces to their respective Hindu undivided families and had
tried . to "evade proper taxation", and on that ground he called
uiion the assessees to submit their objections, if ariy, to the reopening of the assessments for the years 1959-60, 1960-61 and 1961-62.
G The assessees in re.ply contended .that the. Income-tax Officer-had
no. jurisdiction to. reopen the assessments since the Hindu undivided families of the ·two partners and the assessees had submitted
"correct and complete returns of income" sup.ported· by their books
of account; "quantity details" of .purchases, sales and· expenses,
and. had given all material facts and relevant infdrmation necesB sary for assessment at the time of each assessment.
The Income-tax Officer issued three separate !lotlces under
s. 147 of the Income-tax Act, 1961, requiring the lissessees to
show cause 'why the assessments for the years 1959-60, 1960-61
12
SUPREME COURT REPORTS
[1968] l 8.1). ..
and 1961-6.! should not be reopened. The High Court of Gujarat A
in a petition for a. writ under Art. 226 of the Constitution quashed
those notices and restrained the Income-tax Officer from taking
proceedings in pursuance thereof. With special leave granted by
this Court, the Commissioner of Income-tax has appealed to this
Court.
In support of the claim of the Income-tax Officer, to reopen B
the assessments, reliance was placed in the High Court on cl. (b)
of s. 147(1), of the Income-tax Act, 1961. The material part of
s. 147(1)(b) may be read:
"Ifw
0
(b) notwithstanding that there has been no omission 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 chargeable to tax has escaped assessment
for any assessment~ year,
D
he may, subject to the provisions of sections 148 to 153,
assess or reassess such income or recompute the loss or
the depreciation allowance as the case may be, for the
assessment year concerned.
Explanation I-For the purposes of this section, the
following shall also be deemed to be cases where income
E
chargeable to tax has escaped assessment, namely: -
(a) where incpme chargeable to tax has been underassessed; or
I
I
I
I
I
"
Under s. 147(1)(b) reason to believe that income chargeable to tax p
has escaped assessment in consequence of information in the
possession of the Income-tax Officer is a condition precedent to
the exercise of his jurisdiction to assess or reassess the income of
the assessee. If that condition does not exist, steps taken by the
Income-tax Officer to assess or reassess the income will be without
jurisdiction.
It was held by this Court in Calcutta Discount Co. Ltd. v. G
Income-tax Officer, Companies District I, Calcutta & Another(')
that the High Court in appropriate cases has power to issue an
order prohibiting the Income-tax Officer from proceeding to reassess the income when the conditions precedent do not exist. At
p. 207, K. C. Das Gupta, J., delivering the majority judgment of
the Court observed:
R
"It is well-settled however that though the writ of
prohibition or certiorari will not issue against an executive
(I) 41 J,T,R. 191,
.l
A
B
c
C.I.T. V. lWIAN & CO. (Shah, J.)
authority, the High Court> have power to issue in a fit
case an order prohibiting an executive authority from
acting without jurisdiction. Where such action of an executive authority acting without jurisdiction subjects or
is likely to subject a person to lengthy proceedings and
unnecessary harassment, the High Courts, it is well settled, will issue appropriate orders or directions to prevent
such consequences".
13
The High Court may, therefore, issue a high prerogative writ
prohibiting the Income-tax Officer from proceeding with re-assessment when it appears that the Income-tax Officer had no jurisdiction to commence proceeding.
The condition which invests the Income-tax
Officer
with
juri~diction has two branches: (i) that the Income-tax Officer has
reason to believe that income chargeable to tax has escaped assessment; and (ii) that it is in consequence of information which he
has in his possession and that he has reason so to believe. Since
the learned Judges of the High Court have concentrated their
D attention upon the second branch of the condition and have reached their conclusion in favour of the assessees on that branch, it
would be appropriate to deal with the correctness of that approach.
The expression "information" in the context in which it occurs
must, in our judgment, mean instruction or knowledge derived
from an external source concerning facts or particulars, or as to
B law relating to a matter bearing on the assessment. If as a result
of information in his possession, the Income-tax Officer has reason
to believe that income chargeable to tax had escaped assessment,
the Income-tax Officer has jurisdiction to assess or reassess income
under s. 147(l)(b) of the Income-tax Act, 1961. Information in his
possession that income chargeable to tax has escaped assessment
p furnishes a starting point for assessing or reassessing income, If
he has that information, the Income-tax Officer may commence
proceedings for assessment or reassessment.
To commence the
proceeding for reassessment it is not necessary that on the materials which came to the notice of the Income-tax Officer, the previous order of assessment was vitiated by some error of fact or
law.
G
The High Court exercising jurisdiction under Art. 226 of the
Constitution has power to set aside a notice issued under s. 147 of
the Income-tax Act, 1961, if the condition precedent to the exercise of the jurisdiction does not exist. The Court may, in exercise
of its powers, ascertain whether the Income-tax Officer had in
B his possession any information: the Court .may also determine
whether from that information the Income-tax Officer may have
reason to believe that income chargeable to tax had escaped
assessment. But the jurisdiction of the Court extends no further ..
Whether on the information in his possession he should commence .
SUPREME COURT REPORTS
[1968] 1 s.c.a.
a proceeding, for assessment or reassessment, must be· decided A
by the Income-tax Officer and not by the High Court. The Incometax Officer alone is entrusted with the power to administer the Act:
if he has information from which ·ii may be said, prima facie, that
he had reason to believe that income chargeable to tax had escaped
assessment, it is not open to the High Court, exercising powers
under Art. 226 of the Constitution, to set aside or vacate the
notice for reassessment on a re-appraisal of the evidence.
B
The High Court in this case was apparently of the view that
the information in consequence cf which proceedings for reassessment were intended to be started, could have been gathered by
tlte Income-tax Officer in charge of the assessment in the previous
years from the disclosures made by the two Hindu undivided fami- ii
lies. But that, in our judgment, is wholly irrelevant. Justification
of the Income-tax Officer to reassess income arises if he has in
consequence of information in his possession reason to believe
that income chargeable to tax has escaped assessment. That information, must, it is true, have come into the possession of the
Income-tax Officer after the previous assessment, but even if the JI
information be such that it could have been obtained during the
previous assessment from an investigation of the materials on the
record, or the facts disclosed thereby or from other enquiry or
research into facts or law, but was not in fact obtained, the
jurisdiction of the Income-tax Officer is not affected.
The High Court was also of the view that the inference raised
by the Income-tax Officer that the Hindu undivided families of
the assessees had made profit by sale of articles purchased from
the assessees larger than the profit which the assessees had made,
was not justified, since there was no evidence on the record about
E
the price at which similar goods were sold by the assessees to
other merchants and about the profit which those other merchants P
made by sale of those goods. But in a petition under Art. 226 of
the Constitution the taxpayer may
challenge the validity of a
notice under s. 147 of the Income-tax Act, 1961, on the ground
that either branch of the condition precedent does not exist,
but an investigation whether the inferences raised by the
Income-tax Officer from the information are "correct or proper" G
cannot be made. Counsel for the Commissioner is. therefore, right
in contending that the High Court entered upon an investigation
of matters which were not within their competence.
But the appeal of the Commissioner must still fail. The case
of the Commissioner on the materials placed before the High
Court, suffers from a serious infirmity on the first branch of the B
jurisdictional condition. The averments m:ide in the affidavit filed by
the Tncome-tax Officer in that behalf do not establish the existence
of that branch of the condition. In reply to the averment by the
C.I.T. t>. iWIAN & CO. (8/11i/i, J./
lli
A assessees that the lncome·tax Officer had no reason to believe that
income had escaped assessment, the Income-tax Officer stated :
B
0
"In the course of the discussions I had at the several
meetings herei.nabove referred, I also learnt that in the
earlier years also the petitioners (the assessees) had effect·
ed such sales to the said Hindu undivided families, . and
that over and above the margin of profits earned by the
petitioners (the assessees) from the Hindu undivided fami·
lies, the Hindu undivided families had earned substantial
profits on the resale of such goods. I, therefore, came to
the conclusion that the creation of the Hindu. undivided
family business was merely a subterfuge or a contrivance
by the partners of the petitioner firm (the assessees) to
divert the huge profits made by the petitioners (the assessees) on imported articles".
The plea raised by the
Income-tax Officer is that income
which could have been earned by the assessees was not earned,
I> and a part of that income was earned by the Hindu undivid·
ed families. That according to the Income-tax Officer was brought
about by "a subterfuge or contrivance". Counsel for the Commis·
sioner contended that if by resorting to a "device or contrivance",
income which would normally have been earned by the assessee
is divided between the assessee and another person, the Incomes tax Offirer would be entitled to bring the entire income to tax as if
it had been earned by him. But the law does not oblige a trader to
make the maximum profit that he can out of his trading transactions.
Income which accrues to a trader is taxable in his hands: income·
which he could have, but has not earned, is not made taxable as
income accrued to him. By adopting a device, if it is made to .
appear that income which belonged to the assessee had been
F earned by some other person, that income may be brought to tax
in the hands of the assessee, and if the income has escaped tax
in a previous assessment a case for commencing a proceeding for
reassessment under s. 147(l)(b) may be made out Avoidance of
!ax !ia~ility by so arran~'!g commercial affairs tha.t charge of tax
1s d1stnbuted 1s not proh1b1ted. A taxpayer may resort to a device
G to divert the income before it accrues or arises to him. Effectiveness
of the devi.ce depends not upon considerations of morality, but on
the operation of the Income-tax
Act. Legisla.tive injunction in
taxing statutes may not, except on peril of penalty, be violated,
but it may lawfully be circumvented.
·
If the goods were nominally transferred to the Hindu undivldB ed families, the latter acting merely as benamidars for the assessees
and the profits were earned in truth by the assessees, income earn'.
ed by sale of the goo<;ls by the H!ndu undivided families may be held
chargeable to tax as 10come which has escaped assessment to tax in
1'6
SUPllJJU: COURT RIPOll'l'S
[1968] 1 s.o.a.
the hands of the assessees. In the present case, no such case was A
attempted to be made out in the affida.vit filed by the Income-tax
Officer. We hold, therefore, that on the materials on the record,
the Income-tax Officer had no reason to believe that income
chargeable to tax had escaped assessment for the three years in
question.
B
The order passed by the High Court is therefore confirmed.
There will, however, be no order as to costs in this Court and the
High Court.
G.C.
Appeal dismissed