# KALY ANJI MAVJI & CO v. C.I.T., WEST BENGAL-II

- **Citation:** [1976] 2 S.C.R. 966
- **Court:** Supreme Court of India
- **Decided:** 1975-12-10
- **Bench:** K. K. Mathew, S. Murtaza Fazal Ali
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/kaly-anji-mavji-co-v-c-i-t-west-bengal-ii-6595
- **Pages:** 15

## Headnote

. Income Tax Act, 1922-Section 34(l)(b)-Scope, extent and ambit of,
with part1c11lar reference to the connotation and import of the word "information" used. in s . . 34( 1) (b )-Escaped assessment-Reopening the original as~es:r
ment on tne basis of subsequem facts as also on the materials of the original
assessment rcvea(ed by more careful and closer circumspection is "i11formario11"
wulun the meanzng of s. 34(1) (b). of the Act and not a case of mere change
Of O{Jl/11011.
The appellant company, a registered partnership firm, filed its income tax
returns for the years 1956-57 and also for 1957-58 respectively showing a total
income of' Rs. 7,44,551/-, after claiming a deduction of a sum of Rs. 43,116/-,
being the amount of interest paid by the assessee on the debts incurred for the
partnership business along with the balance sheet in support of the said deductions. The Income Tax Officer accepted the claim on the basis of the balance
sheet.
When the assessee filect his return for the year 1958-59, the Income
Tax Officer discovered that the deduction claimed by the appellant was
not
correct and called upon the assessee1 to prove its plea.
But, the assessee did not
lead any evidence before him. The Income Tax Officer finding that the deduction
of interest claimed was utilised for giving interest free loans to the partners for
clearing their income-tax dues and, as such, it could not be said to be a loan
incurred for the expenses of the partnership firm, not only disallowed the deduction claimed for that assessment year, but also issued a notice under s. 34 (l)(b)
for the re-opening
of' the original assessment of the previous year5 on the
ground that the deduction having been wrongly allowed, taxable income escaped
assessment. Accordingly, the Income Tax Officer re-assessed him by including
Rs. 43, 116 to the total income. The appeal to the Appellate Assistant Commissioner failed.
However, on second appeal, the Income Tax Appellate Tribunal "B" Bench, Calcutta, set aside the order of the reassessment opining that
the information resulting in the reassessment notice under s. 34(1) (b) was not
based on any fresh facts, but was derived from the materials on the record of
the original assessment amounting to a change of opinion and, as such, was not
\ufficient to attract the provisions of s. 34(1 )(b). On the application of the
respondent-Revenue, the Tribunal made a reference under s. 66(1) of the Act
framing a question, namely,
"Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the reassessment .made_ by the Income Tax
Officer under s. 34(1)(b) of the Indian Income Tax Act (1922) was
incompetent ?"
to the High Court, which answered it in the negative a_nd held that the. case
squarely fell within the ambit of s. 34(1)(b) of the Act urnsmuch as the mf.o~
mation on the basis of which the Income Tax Officer sought to reopen the onglnal assessment, was based on subsequent facts as also on the mat:rials of the
original assessment revealed by more careful and closer cll'cumspectton of these
materials.
Negativing the following three contentions of
the
assessee·
appellant,
namely,
H
(i) The information relied upon by the Income Tax Officer not .h~ving been
derived from external sources, it amoUJ}ted to a mere change or op_lf!lOn on the
very facts and materials that were present on the record of the ongmal assessment not attracting the provisions of s. 34(1)(b) of the Act.
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KALYANJI MAVJI & CO. V. C.l.T.
967
(ii) It was not open to the Income Tax Office,r to have reopened the original
assessment merely because he took a diffurent view of the matter in the assessment year 1958-59·.
(iii) That the High Court has not appreciated the ratio laid down by the
Supreme Court in Commissioner of Income-tax, Gujw:at v. A. Rllman and Company, 67 J.T.R. 11, and disnuss1ng the appeal by sp•ecial leave, the Court
HELD : (1) S. 34( l) contemplates two categories of cases for reopening the
previous

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966
KALY ANJI MAVJI & CO
v.
C.I.T., WEST BENGAL-II
December 10, 1975
(K. K. MATHEW AND S. MURTAZA FAZAL ALI, JJ.]
. Income Tax Act, 1922-Section 34(l)(b)-Scope, extent and ambit of,
with part1c11lar reference to the connotation and import of the word "information" used. in s . . 34( 1) (b )-Escaped assessment-Reopening the original as~es:r
ment on tne basis of subsequem facts as also on the materials of the original
assessment rcvea(ed by more careful and closer circumspection is "i11formario11"
wulun the meanzng of s. 34(1) (b). of the Act and not a case of mere change
Of O{Jl/11011.
The appellant company, a registered partnership firm, filed its income tax
returns for the years 1956-57 and also for 1957-58 respectively showing a total
income of' Rs. 7,44,551/-, after claiming a deduction of a sum of Rs. 43,116/-,
being the amount of interest paid by the assessee on the debts incurred for the
partnership business along with the balance sheet in support of the said deductions. The Income Tax Officer accepted the claim on the basis of the balance
sheet.
When the assessee filect his return for the year 1958-59, the Income
Tax Officer discovered that the deduction claimed by the appellant was
not
correct and called upon the assessee1 to prove its plea.
But, the assessee did not
lead any evidence before him. The Income Tax Officer finding that the deduction
of interest claimed was utilised for giving interest free loans to the partners for
clearing their income-tax dues and, as such, it could not be said to be a loan
incurred for the expenses of the partnership firm, not only disallowed the deduction claimed for that assessment year, but also issued a notice under s. 34 (l)(b)
for the re-opening
of' the original assessment of the previous year5 on the
ground that the deduction having been wrongly allowed, taxable income escaped
assessment. Accordingly, the Income Tax Officer re-assessed him by including
Rs. 43, 116 to the total income. The appeal to the Appellate Assistant Commissioner failed.
However, on second appeal, the Income Tax Appellate Tribunal "B" Bench, Calcutta, set aside the order of the reassessment opining that
the information resulting in the reassessment notice under s. 34(1) (b) was not
based on any fresh facts, but was derived from the materials on the record of
the original assessment amounting to a change of opinion and, as such, was not
\ufficient to attract the provisions of s. 34(1 )(b). On the application of the
respondent-Revenue, the Tribunal made a reference under s. 66(1) of the Act
framing a question, namely,
"Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the reassessment .made_ by the Income Tax
Officer under s. 34(1)(b) of the Indian Income Tax Act (1922) was
incompetent ?"
to the High Court, which answered it in the negative a_nd held that the. case
squarely fell within the ambit of s. 34(1)(b) of the Act urnsmuch as the mf.o~
mation on the basis of which the Income Tax Officer sought to reopen the onglnal assessment, was based on subsequent facts as also on the mat:rials of the
original assessment revealed by more careful and closer cll'cumspectton of these
materials.
Negativing the following three contentions of
the
assessee·
appellant,
namely,
H
(i) The information relied upon by the Income Tax Officer not .h~ving been
derived from external sources, it amoUJ}ted to a mere change or op_lf!lOn on the
very facts and materials that were present on the record of the ongmal assessment not attracting the provisions of s. 34(1)(b) of the Act.
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KALYANJI MAVJI & CO. V. C.l.T.
967
(ii) It was not open to the Income Tax Office,r to have reopened the original
assessment merely because he took a diffurent view of the matter in the assessment year 1958-59·.
(iii) That the High Court has not appreciated the ratio laid down by the
Supreme Court in Commissioner of Income-tax, Gujw:at v. A. Rllman and Company, 67 J.T.R. 11, and disnuss1ng the appeal by sp•ecial leave, the Court
HELD : (1) S. 34( l) contemplates two categories of cases for reopening the
previous assessment-(i) where there has be~n an omission or failure on the
part of the assessee to make a return of his mcome under s. 22 or t~ disclose
fully and truly all material facts necessary for his assessment; and (u) where
there has been no such omission on the part of the assessee but the1 Inco_me Tax
Officer, on the basis of the information in his possession, finds that. income
chargeable to tax has escaped assessment fori any year. The first category deals
with cases where an assessee is himself in default and the second category
deals with cases where. there is no default on the part of the assessee but where
the income chargeable to tax has actually escaped assessment for one reason
or the other and the Income Tax Officer comes to know abont the same f97 I
E-F]
(2) The word "information" which has not been defined in the Act is of
the widest amplitude and comprehends a variety of factors.
Nevertheless, the
power under s. 34(1)(b), however, wide it may be, is not plenary because the
discf'Ction of the Income Tax Officer is controlled by the words "reason to
.believe". [973 C & E]
Bhimraj Pannalal v. Commissioner of Income-tax, Bihar and Orissa, 41 I.T.R.
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221 an Bhimraj Panna Lal v. Commissioner of Income-tax, Bihar & Orissa, 32
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I.T.R. 289, followed.
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( 3) Sincei the Income Tax Officer was to see that the tax collecting machinery is. made as perfect aild effective as possible so that the tax-payer is not
allowed to get away with escaped income-tax, in view of the difficulty in laying
down any rule of tmiversal application, the following tests and principles would
apply to determipe the applicability of s. 34(1 )(b) to the following categories
of cases :
( i) Where the infqrmation is as to the true and correct state of law derived
from relevant judicial decisions;
(ii) Where in the original assessment the income liable to tax has escaped
assessment due' to oversight, inadvertence or a mistake committed by the Income
Tax Officer on the principle that the tax-payer would not be allowed to take
advantage of an oversight or mistake committed by the taxing authority;
(iii) Where the informat\on is pe~ived from an external source of any kind.
Such external source would Include discovery of new and important matters or
knowledge of fresh facts which were not present at the time of the original
assessment; and
(iv) Where the information may be obtained even from the record of the
original assessment from an investigation of the materials on the record or
the facts disclosed thereby or from other enquiry or research into facts of
law.
If these conditions are satisfied, then the Income Tax Officer would have
complete jurisdiction to re-open the original
as&essment.
It is obvious
that
where the Income Tax Officer gets no subsequent information, but merely
proceeds to reopen the original assessment without any fresh facts or materials
o~ without any enquiry into the materials which form part of the original assess.
men!, s. 34( l) (b) would have no application. [973 C, D, 976 A-El
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.Maharai Kumar Kamal Singh v. The Commissioner of Income-tax, Bihar &
Onssa,f 1959] Supp. (1) S.C.R. 10; Commissidner of Wealth-tax, West Bengal v.
l'.npenal Tobacco Company of India Ltd. [1966] Supp. S.C.R. 174; CominisH
·swner of Income-tax. Excess Profits Taix, Hyderabad, Andhra Pradesh v. V.
Jagan Mohan Rao and Ors. [1970} 1 S.C.R. 726 and Commissioner of /ncometax Gujarat v. A. Raman and Cdmpany, 67 I.T.R. 11, discussed .
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SUPREME COURT REPORTS
[1976] 2 S.C.R ..
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( 4) In the instant case the sub e
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the Income Ta:x. Officer that the d d s ci,uent 1 ormat10n w~s the discovery by
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quent disallowance of that deductio~cuo~ ~as wrongly claimed and th~ consenot adducing any evidence or m
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t e con~uct of the assessee Itself m
validly made which led to th
. atenals to prove its stand that the claim was
opening the assessment. [978e HJue of the notice under s. 34(1)(b) for re-
(5) The case really fell within the tests and principles
laid
down
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Ramal! Company's case and within the .ambit of s. 34( 1) (b) inasmuch as the
ncome Tax Offi.cer pr()ceeded on the basis of the information which came to
~hm after
1~f8 o~gmaJ asses.sment, by fresh facts revealed in the assessment for
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an
c~ns1sted of the' .conduct of the assessee in not addncing
any evi ence to support its plea. It was not a case of ·a mere change of 0 inion
tc\he lncome Tax Officer on the materials which were already on recordp [979
Commissioner of Income-tax, Gujarat v. A. Raman and Company, 67 J.T.R.
11, epplied.
Bankipur Club. Ltd . . v. Commissioller of Income-tax, Bilwr and Orissa 82
l.T.R. 831, 834, d1stingu1shed.
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[On the question. "Whether it is open to the I.T.O. to change his opinion
subsequently on the same materials and re-open the original assessment" which
arose in the decision in Commissioner of Income Tax, Bombay City-2 v. H. Holck
Larsen,_ 85 I.T.~. 467, 479, relied on by the appellant assessee and also on the ·
~ontent10n th.at .m .fact the amount sought to be deducted was paid towards the
mcome-tax hab1ht1cs of the partners, the Court applied "Non /iq11et"]
ClVIL APPELLATE JURISDICTION: Civil Appeal No. 522 of 1971.
Appeal by special leave from the judgment and order dated the
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26th April, 1968 of the Calcutta High Court in I. T. Reference No.
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50 of 1965.
N. N. Goswamy and Arvind Minocha for the Appellant.
B. B. Ahuja and S. P. Nayar for the Respondent.
The Judgment of the Court was delivered by
FAZAL ALI, J.
This appeal by special leave involves the interpretation of the scope, extent and ambit of s. 34 ( 1) (b) of the Incometax Act, 1922 with particular reference to the connotation and import
of the word 'information' used in s. 34 ( 1) (b).
Although the question appears to have been settled in one form or the other by the decisions of this Court, the changing and diverse society such as
ours'
dealing in complex commercial activities continues to produce multifarious facets of taxable income which has escaped assessment cloaked under difficult propositions and knotty legal problems.
It is the
onerous task of this Court to dispel the doubts and resolve and reconcile the differing views taken by the High Courts in various situations
which every time poses a new problem.
The points involved in the instant case have baffied many a legal
brain so much so that the High Court also appears to have been in
two minds whether to place the information in the instant case as ·
based on the materials already on the record of the original assessment of 1956-57 revealed by closer circumspection or to the information derived from subsequent or fresh facts.
Before, however, examining the legal incidents of s. 34 of the Income-tax Act, 1922, it may
be necessary for us to travel into the domain of the facts of the present case which are short and simple.
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KALYANJI MAVJI & co. v. C.I.T. (Fazal Ali, J.)
969
The assessee appellant M/s Kalyanji Mavji & Company is a registered partnership firm dealing in vanous commercial activities.
The
said firm filed its return for the year 1956-57 corresponding to the
accounting Gujarati Diwali Year 2001 showing a total · income
of
Rs. 7,44,551/- after claiming a deduction of a sum of Rs. 43,116/-
being the amount of interest paid by the assessee on the debts incurred tor the partnership business.
The Income-tax Officer
accepted
the return but on appeal to the Appellate Assistant Commissioner the
assessment was reduced by a sum of Rs. 9,200/- by his order dated
July 3, 1958. For the assessment year 1957-58 the assessec showed
the same income and the deduction claimed was allowed.
The next
year 195.8-59, however, presented quite a different complexion. While
the assessee filed his return in the year 1958-59, the Income-tax Officer concerned suspected the correctness of the return particularly the
deduction of interest and found that as the amount of the deduction
claimed was utilised for giving interest-free loans to the partners for
clearing up their income-tax dues it could not be said 1.o be a loan incurred for the expenses of the partnership business and he accordingly
disallowed the deduction claimed by the appellant.
This discovery
led the Income-tax Officer to issue. notice· to the
appellant under
s. 34(1) (b) of the Income-tax Act, 1922-hereinafter referred to as
'the Act'-for reopening the assessment of the year
1956-57-hereafter to be referred to as 'the original assessment' -on the ground that
the deduction having been wrongly allowed, taxable income and escaped assessment. After hearing the appe11ant the Income-tax Officer completed the assessment and included the sum of Rs. 43,116/- to
the
total income shown by the assessee. Thereafter the appellant filed an
appeal before the Appellate Assistant Commissioner against the order
of the Income-tax Officer but the appeal was dismissed by the Appellate authority which confirmed the order of the Income-tax Officer.
It
may be pertinent to note here that in his order the Appellate Assistant
Commissioner pointed out that in the assessment years 1958-59 and
1959-60 the Income-tax Officer found that the appellant had no evidence with him to show that the funds borrowed on which the interest
was paid were utilised for the purpose of the business and not diverted
to the partners.
Thereafter the appellant filed a second appeal to the
Income-tax Appellate Tribunal, "B", Bench Calcutta.
The Tribunal
after having accepted the facts culminating in the order of the Appellate
Assistant Commissioner was of the opinion that the information of the
Income-tax Officer .resulting in the notice under s. 34 ( 1) (b) of the
Act to the assessee was not based on any fresh facts but was derived
from the materials on the records of the original assessment.
The
Tribunal further found that if the Income-tax Officer while completing the original assessment would have been car~ful enough. to
scrutinise the balance-sheet he would have at once detected the mfirmity on the basis of which the subsequent Income-tax Officer issued
the notice under s. 34(1) (b) of the Act to the appellant. The Tribunal further was of the opinion that the subsequent Income-tax Officer
merely changed his opinion on the basis of the very materials that were
before him when the original assessment was made and that was not
sufficient to attract the provisions of s. 34 (1) (b) of the Act.
The
Tribunal accordingly allowed the appeal and set aside the order of the
Income-tax Officer issuing notice to the assessee under s. 34 ( 1) (b)
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970
SUPREME COURT REPORTS
[1976] 2 S.C.R.
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for reopening the original assessment.
Thereafter
the
respondent,
namely, the Commissioner of Income-tax approached the Tribunal for
making a reference to the High Court under s. 66(1) of the Act as a
result of which the Tribunal referred the case to the High Court at
Calcutta after framing the following question :
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"Whether on the facts and in the circumstances of the
case, the Tribunal, was right in holding that the re-assessment made by the Income-tax Officer under s. 34 (1) (b) of
the Indian Income-tax Act, 1922 was incompetent?"
The High Court, after hearing the parties, differed from the view taken
by the Tribunal and held that the tJresent case squarely fell within the
ambit of s. 34(1) (b) of the Act inasmuch as the information on the
basis of which the Income-tax Officer sought to re-open the original
assessment was based on subsequent facts as also on the materials ot
the original assessment revealed by more careful and closer circumspection of those materials.
The High Court referred to a number of
decisions of this Court as also to the decisions of the Calcutta High
Court.
The appellant sought leave to appeal to this Court against the
order of the Higry Court, which having been refused, the appellant obtained special leave from this Court, and hence this appeal.
In support of the appeal it was contended by Mr. Banerjee that the·
view taken by the High Court is legally erroneous inasmuch as
the
admitted facts of this case would disclose that the information relied
upon by the Income-tax Officer in order to re-open the original assessment was not derive from external sources but amounted to a mere
change of opinion on the very facts and materials that were present on
the record of the original assessment.
It was also submitted that it
was not open to the Income-tax Officer to have re-opened the original'
assessment merely because he took a different view of the matter in·
the assessment year 1958-59.
Lastly it was argued that the High
Court had not correctly applied the ratio laid down by this Court in
Commissioner of Income-tax, Gujarat v. A. Raman and Company(').
Mr. Ahuja appearing for the Revenue submitted that the order of
the Income-tax Officer was fully justified and the High Court had taken
the correct view of the Jaw.
In order to appreciate the contentions advanced by counsel for the
parties, it is necessary to make a brief survey of the provisions of"
s. 34(1) of the Income-tax Act, 1922.
The section runs thus:
"34. ( 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 section 22 for any year or to disclose fully and truly all
material facts necessary for his assessment for that
year, income, profits or gains chargeable to incometax have escaped assessment for that year, or have
been under-assessed' or assessed at too low a rate, or
(1) 67 I.T.R. 11.
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KALYANJI MAVJI .& co. v. C.I.T. (Faza[ Ali, J.)
9 71
(b)
have been made the subject of excessive relief under
the Act, or excessive loss or depreciation allowance
has been computed, or
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, profits or gains chargeable to
income-tax
have escaped assessment for any year, or have been
under-assessed, or asses.sect 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 caluse (a) at any time and in
cases falling under clause (b) at any time 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
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It would be seen that s. 34 (I) contemplates two categories of cases
for re-opening the previous assessment-(!) where there has been an
omission or failure on the part of the assessee to make a return of his
income under s. 22 or to disclose fully and truly all material facts
necessary for his assessment; and (2) where there has been no such
omission on the part of the assessee but the Income-tax Officer on the
basis of information in his possession finds that income chargeable to
tax has escaped assessment for any year.
It is, therefore,
manifest
that the first category deals with cases where an assessee is himself in
default and the second category deals with cases where there is
no
fault on the part of an assessee but where the income chargeable to
tax has actually escaped assessment for one reason or the other and
the Income-tax Officer comes to know about the same.
In the instant
case, however, we are concerned with clause (b) of s. 34(1) extracted
supra. Before however proceeding to interpret the ambit and import
of s. 34( 1) (b) it may be necessary to consider the history of s. 34 of
the Act which appears to have passed through different phases with
amendments and additions made to the section from time to time.
Section 34 as it stood in 1922 was as follows :
"34. If for any reason income profits or gains chargeable to income-tax has escaped assessment in any year, or ~has
been assessed at too low a rate, the Income-tax Officer may,
at any time within one year of the end of that year, serve on
7-277SCl/76
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9 72
SUPREME COURT REPORTS
[1976] 2 S.C.R.
the.person liable to pay tax on such income, profits or gains,
or m. the case. o~ a company on the principal officer thereof,
a n?t1ce cont.ammg a!l or any of the requirements which may
be mcluded m a notice under sub-section (2) of section 22
and may proceed to assess or reassess such income profits or
gains, and the provisions of this Act shall, so far ~s may be,
apply accordingly as if the notice were a notice issued under
that sub-section :
Provided that the tax shall be charged at the rates at
which it would have been charged had the income profits
or gains not escaped assessment or full assessment, as 'the case
may be."
It would be seen that in the section as it stood in 1922 the word 'information' was not there at all and the section merely empowered the
Income-tax Officer to reopen the assessment of any year where income
chargeable to tax had escaped assessment.
No conditions or limitations on the power of the Income-tax Officer were at all laid down
under the section.
It appears that the appropriate Legislature in its
wisdom thought that this would be too wide a power to be given to
the Income-tax Officer and may not be workable.
In these circumstances, by the Indian Income-tax (Amendment) Act, 1939, this section was recast as under :
"34 ( 1) If in consequence of definite information which
has come into his possession the Income-tax Officer, discovers that income, profits and gains chargeable, to incometax have escaped assessment in any year, or have been
under-assessed, or have been assessed at too low, a rate, or
have been the subject of excessive relief under this Act the
Income-tax Officer may, in any case in which be has reason
to believe that the assessee has concealed the particulars of
his income or deliberately furnished inaccurate particulars
thereof, at any time within eight years, and in any other
case at any time within four years of the end of that year,
serve on the person liable to pay tax on such income, profits
or gains, or, in the case of a company, on the principle
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 re-assess
such income, profits or gains, 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
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It may be pertinent to note that ~Y. virtue o~ thi~ ~mend~ent the
concept of the Income-tax Officer denvmg .~efimte . mi,ormatton . was
introduced for the first time.
The word mformat10n was qualified
by 'definite' and an additional condition was incorporated namely that
the Income-tax Officer discovers that income chargeable to tax bad
.,
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KALYANJI MAVJI & co. v. C.I.T. (Fazal Ali, !.)
973
escaped assessment.
This provision led the Courts to approach the
provisions of the section with greater circumspection and stricter scrutiny as a result of which many cases of escaped assessments had to be
set at naught by some decisions of the Courts. This led the Parliament
to take a fresh view of the situation.
Accordingly by the Income-tax
and Business Profits Tax (Amendment) Act, 1948, the section was
re-cast in the present form as quoted above.
There were further
amendments in 1954 and 1956 with which we are not concerned. Ultimately by the Income-tax Act, 1961, the section underwent a complete
transformation and even the setting of the section was changed which
now forms s. 147(a) & (b) of the Income-tax, 1961.
We are now
concerned in this case only with s. 34 ( 1) (b) as it stood after the
amendment of 1948.
Another pertinent fact which may be mentioned here is that although s. 34 was the subject of several amendments, yet the word
'information' which was introduced in 1939 has not been defined at
all.
Since the word 'information' has not been defined, it is difficult
to lay down any rule of universal application.
At the same time it
cannot be disputed that the object of the Act was to see that the tax
collecting machinery is made as perfect and effective as possible so that
the tax-payer is ,not allowed to get away with escaped Income-tax. The
fact that the adjective 'definite' qualified the word 'information' and the
word 'discovers' which were introduced in the Income-tax
(Amendment) Act, 1939 were deleted by the Amendment Act of 1948 would
lead to the irresistible inference that the word 'information' is of the
widest amplitude and comprehends a variety of factors.
Nevertheless
the power under s. 34 ( 1) (b) , however wide it may be, is not plenary,
because the discretion of the Income-tax Officer is controlled by the
word "reason to believe".
It was so held by this Court in Bhimraj
Pannalal v. Commissioner of Income-tax Bihar and Orissa(I), while
affirming the decision of the Patna High Court in Bhimraj Panna Lal
v. Commissioner of Income-tax, Bihar and Orissa('). This legal proposition, however, is· not disputed.
It, therefore, follows that information may come from external sources or even from materials already
on the record or may be derived from the discovery of new and important matter or fresh facts.
The word 'information" will also include true and correct state of the law derived from relevant judicial
decisions either of the Income-tax authorities or other courts of law
which decide income-tax matters.
Where the ground on which
the
original assessment is based is held to be erroneous by a superior
court in some other case, that will also amount to a fresh information
which comes into existence subsequent to the original assessment.
A
subsequent Privy Council decision is also included in the word 'information'. Thus it is very difficult to lay down any hard and fast rule.
But this Court has in two leading cases laid down some objective tests
and principles to determine the applicability of s. 34 ( 1) (b) of the Act
which we shall now discuss.
(1) 41 I. T. R. 221.
(2) 32 I. T. R. 289.
A
B
c
D
E
F
G
H
A
8
c
D
E
F
G
H
974
SUPREME COURT REPORTS
[1976] 2 s.c.R.
In Maharaj Kumar Kamal Singh v. The Commissioner of Incometax, Bihar & Orissa(1) the word "information" fell for interpretation
by this Court, where it was observed thus :
"We would accordingly hold that the word "infoi·mation"
in s. 34 (1) (b) includes information as to the true and correct state of the law and so would cover information as to
relevant judicial decisions. If that be the true position, the
argument that the Income-tax Officer was not justified in
treating the Privy Council decision in question as information
withins. 34(1) (b) cannot be accepted.
*
*
*
*
In our opinion, even in a case where a return has been
submitted, if the Income-tax Officer erroneously fails to tax
a part of assessable income, it is a case where the said part of
the income has escaped assessment.
The appellant's attempt
to put a very narrow and artificial limitation on the meaning
of the word "escape" in s.
34 (1) (b)
cannot therefore
succeed."
It will be seen that this Court was in favour of placing not a narrow
but a liberal interpretation on the provisions of s. 34(1) (b) of the Act.
This decision was considered by this Court in Commissioner of Wealth
Tax, West Bengal v. Imperial Tobacco Company of India Ud.(2)
where Wanchoo, J., speaking for this Court observed as follows :
"It may be added that after the decision of this Court in
Maharaj Kumar Kamal Singh's case it is now settled that
"information in s. 34 ( 1) (b) included information as to the
true and correct state of law, and so would cover information as to relevant judicial decisions" and that such information for the purpose of s. 34(1) (b) of.the Income-t~x Act
need not be confined only to cases where the lncome-tax
officer discovers as a fact that income has escaped assessment."
Similarly in Commissioner of Income-tax, Excess Profits Tax,
Hyderabad, Andhra Pradesh v. V. Jagan Mohan Rao and
Ors.(3),
while following the decision of this Court in Maharaj Kumar Kamal
Singh's case (supra) it was observed as follows :
"In these circumstances it was held by this Court firstly
that the word information in s. 34 ( 1) (b) included information as to the true and correct state of the law, and so would
cover information as to relevant judicial decisions, secondly
that 'escape' in s. 34 ( 1) was not confined to cases where no
return had been submitted by the assessee or where income
had not been assessed owing to inadvertence or oversight or
other lacuna attributable to the assessing authorities. But even
in a case where a return had been submitted, if the Incometax Officer had erroneously failed to tax a part of the assessa-
(1) (1959) Supp,(1)-s. c. R. 10.
(2) (1966) Supp. s. c. R. 174.
(3) (1970) 1 S. C. R. 726.
..
KALYANJI MAVJI & co. v. C.I.T. (Fazal Ali, !.)
975
ble income, it was a case where that part of the income had
escaped assessment.
The decision of the Privy Council,
therefore, was held to be information within the meaning of
s. 34 ( 1) (b) and the proceedings for
re-assessment were
validly initiated."
The matter was again fully considered by this Court in A. Raman
and Company's case (supra), where Shah, J., speaking for the Court
extended the connotation of the word 'information' to two different
-categories of cases and observed as follows :
"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, as to law relating to a matter bearing on the
assessment.
*
*
*
*
Jurisdiction 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
wevious assessment, but even if the 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."
An analysis of this case would clearly show that the information as
contained in s. 34 ( 1) (b) must fulfil the following eonditions :
{l) The information may be derived from an external
source concerning facts or particulars as to law relating to a matter bearing on the assessmen~;
(2) That the information must come after the previous or
the original assessment was made.
In fact the words
"in consequence of information" as used in s.
34 ( 1) (b) clearly postulate that the information must
be subsequent to the origi.nal assessment sought to be
reopened; and
(3) That the information may be obtained even on the
basis of the record of 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.
These categories are in addition to the categories laid down by this
Court in Maharaj Kumar Kamal Singh's case which ha.s been consistently followed in several decisions of this Court as shown above.
A
B
c
D
E
F
G
H
976
SUPREME COURT REPORTS
(1976] 2 s.c.R.
A
_On a co'!lbi_ned review of the decisions of this Court the following
tests and prmc1ples would apply to determine the applicability of s.
34 ( 1) (b) to the following categories of cases :
B
c
D
E
F
G
H
( 1) Where the information is as to the true and correct
state of the law derived from relevant judicial decisions;
(2) Where in the original assessment the income liable to
tax has escaped assessment due to
oversight,
inadvertence or a mistake committed by the Incometax Officer.
This is obviously based on the principle
that the tax-payer would not be allowed
to take
advantage of an oversight or mistake committed by
the Taxing Authority;
(3) Where the information is derived from an external
source of any kind.
Such external source would include discovery of new and important matters or
knowledge of fresh facts which were not present at the
time of the original assessment;
( 4) Where the information may be obtained even from
the record of the original 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.
If these conditions are satisfied then the Income-tax Officer
would
have complete jurisdiction to re-open the original assessment. It is
obvious that where the Income-tax Officer gets no subsequent information, but merely proceeds to re-open the original assessment without any fresh facts or mate.rials or without any enquiry into the materials which form part of the original assessment, s. 34 ( l) (b) would
have no application.
Learned counsel for the appellant heavily relied on the decision of
this Court in Bankipur Club Ltd. v. Commissioner of Income-tax,.
Bihar and Orissa(l) in support of the proposition that in the instant
case the Income-tax Officer has proceeded to re-open the assessment
on the basis of the very materials which formed the subject of the original assessment. It was submitted that in the original assessment the
assessee had claimed a deduction and had produced the balance-sheet
and these very factors were also present when the Income-tax Officer
sought to make the assessment for the year 1958-59 and 1959-60, and:
since no fresh facts were brought to his notice it was not open to him
to re-open the original assessment.
The facts of the case relied upon
by the appellant are clearly distinguishable from the facts of the present case.
In Bankipur Club Ltd.'s(1) case it appears that the Club
had in its return placed all the materials with full details.
The facts
placed before the Income-tax Officer we~e self-evident and no cal~u,.
latjgn or scrutiny w;i,s necessary to find out the effect of the materialS;
(!) 8~ I.1'.R. 831, -83(
..
KALYANJI MAVJI & co. v. C.I.T. (Fazal Ali, I.)
9 77
placed before the Income-tax Officer.
In view of this peculiar sit~aA
tion, Hegde, J., speaking for the .Court observed :
"The fact that the club had received certain amounts as
guests charges from its members had been placed before the
Income-tax Officer. It is not the case of. the Income-tax
Officer that he did not come to know all the relevant facts
when he made the original orders of assessment. It is also
not his case that at the time he made those orders he was not
aware of the true legal position. It was for the Income-tax
Officer to show that he had received some information subsequent to his passing the original orders of assessment. No
such material was placed before the Tribunal. That being
so, the Tribunal, in our opinion, was right in holding that
the Income-tax Officer was incompentent to initiate pro- ·
ceedings under section 34 (1) (b) ."
In the instant case it would appear that three additional facts
had
come into existence after the original assessment for the year 1956-57
was made by the Income-tax Officer.
These were-(i) that for the
assessment year 1958-59 the Income-tax Officer did not accept the
assessee's plea that he should be allowed deduction for a sum of
B
c
Rs. 43,116/-; (2) that the Income-tax Officer came to a finding that
D
the assessee had not proved that the amount of deduction claimed was
really in con_nection with the partnership business but held that this was
on account of interest-free advance to the partners to pay their incometax dues; and (3) the conduct of the appellant in not clearing the
doubts of the Income-tax Officer when the appellant was given the
notice to contest the assessment merely on the question of law also
spoke volumes against the assessee and was also an additional factor
E
which weighed with the Income-tax Officer.
It would be seen that the
Income-tax Officer in his order, which is Annexure-A to the statement
of case filed by the Tribunal, observed as follows :
"In the course of the assessment proceedinfls for 1958-59
however it was discovered that the assessee's claim of payment of interest on money borrowed was not proper. Inasmuch as the entire money borrowed had been utilised not
for the purpose of business but in giving interest free advance
to the partners of the firm ..................... In fact
no argument as regards the allowance or disallowance of the
interest amount in question was placed but the entire argument of the representative proceeded on the basis that the
action u/s 34 itself was illegal. ....................... .
There is no doubt that there has been under assessment
in this case and there is also no doubt that the fact of underassessment has been brought to the notice of the Incometax Officer only in the course of the income-tax proceedings
for 1958-59."
F
G
Similarly the appellate Assistant Commissioner in his order, which is
Annexure-B to the statemenr of the case, observed as follows :
H
"At the time of the original assessment the appellant
claimed an interest of Rs. 43,116/- which was allowed by
978
SUPREME COURT REPORTS
[1976] 2 s.c.R.
A
the l.T.O; in full.
However, later on, while making the
assessment for the assessment years 1958-59 and 1959-60,
the I.T.O. found that the appellant had no evidence with
him to show that the funds borrowed Oil- which the interest
was paid, in fact, were utilised for the purpose of the business
and not diverted to the partners."
B
These findings by the two authorities have been clearly mentioned in
the order of the Tribunal, which, while narrating the facts, observed as
follows :
c
D
E
F
H
"Subsequently, however, when the Income-tax Officer
was making the assessment for the assessment year 1958-59,
he discovered that the assessee did not utilise the borrowed
money for the purpose of the business but for giving interest
free advances to.its partners.
The Income-tax Officer, therefore, had reasons to believe that income to the extent of
Rs. 43,116/- had been under-assessed and he issued notice
under section, ~4."
Thus in view of the fill'dings given by the Income-tax authorities the
following facts emerge : -
( 1). that at the time of the original assessment the appellant had filed his return claiming a deduction of
Rs. 43,116/- and pied the balance sheet in support
of his plea;
(2) that the balance-sheet showed that the capital of the
firm was Rs. 8,70,000/-, total drawings by the partners stood at Rs. 29,31,998/- and the Joans
were
Rs.