# KANTAMANI VENKATA NARAYANA & SONS v. FIRST ADDmONAL INCOME-TAX OFFICER, RAJAHMUNDRY

- **Citation:** [1967] 1 S.C.R. 984
- **Court:** Supreme Court of India
- **Decided:** 1966-10-27
- **Case number:** Civil Appeals Nos. 154 to 165 of 1966
- **Bench:** J.C. Shah, V. R.Amaswami, V. 8Hargava
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/kantamani-venkata-narayana-sons-v-first-addmonal-income-tax-officer-rajahmundry-3955
- **Pages:** 7

## Headnote

Income-tax Act (11 of 1922). s. 34--Escaptd assessment-Not/ct,
whelh.er necessary to state c/ause--<Jrounds of challenge.
(
B
During the assessment proceedings of a
company,
the
Income-tu.
'f"
Officer discovered that there was a large accretion to the wealrh of the
assessee, which bad not been disclosed in the assessment pror.eedings of the
C
assessee, and the Officer issued notires under s. 34 for the reassessment of
income during that period. The assessee filed writ petitions in the High
Court, in reply to which the Income-tax Officer filed affidavits stating that
relying on the information received by him, be had reason to believe that
the assessee had not disclosed fully and truly all material facts and in consequence, income chargeable to tax had escaped assessment. The writ petitions were rejected and the order was confirmed in appeal by the High
Court. In appeals by the assessee, this Court,
D
HELD : The appeals must be dismissed.
From the affidavit of the Income-tax Officer it clearly appeared that
there had been considerable increase in the investments in the transactions
,. '
and the wealth of the assessee. The Income-tax Officer was not seeking
to reassess the income on a mere change of opinion. (989 BJ
The Income-tax Officer bad pr/ma facle reason to believe that information material to assessment bad been withheld, and that on account of
withholding of that information income liable to tax had escaped assessment.
From the mere production of the books of account. it could not
be inferred that there had been full disclosure of the material "1cts necessary for the purpose of assc5'ment. Sections 23 and 24 of the Act lay that
the assessee is under a duty to disclose fully and truly material facts necessary for the assessment of the year and that duty is not discharged merely
by the production of the books of accounts or other evidence. It is the
duty of the assessee to bring to the notice of the Income-tax Officer particular items in the books of account or portions of documents which are
relevant. Even if it be assumed that from the books produced, the lncomC>-
tax Officer, if be had been circumspect, could have found out the truth,
the Income-tax Officer may not on that account be precluded from exercising the power to assess income which had escaped assessment. (989 G990 Bl
It is not necessary 'or imperative that a notice under s. 34 must specify
under which of the two clauses-<:!. (a) or cl. (b) of suf>..s. (I) of s. 34,
the notice is issued.
(986 Al
P. R. Mukherjee· v. Commissioner of Income-tax, West
Bengal,
30
l.T.R. 535, approved.
Two conditions precedent must co-exist, before a notice nnder s. 34
(l)(a) of the Act may be i'ISIJed: the ·Income-tax Officer mUSI
have
reason to beli~ ( l) lllat income, profits or gains had been under usessed. and (2) that such under assessment was due to non-<lisclosure
of
material facts by the assessce.
Wbm: the Incomo-tax Officer has prinuJ
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VENKATA NARAYANA v. I.T.O. (Shah, J.)
985
facie reasonable grounds for believing that there has been a. non.disclosure
of primary material fact, that by itself gives him juriS<!iction to issue
notice under s. 34 and the adequacy or otherwise of the grounds of such
belief is not open to investigation by the Court. [987 CJ
Calcutta Discount Company Ltd. v. Income-tax Officer, CompanieJ
District I [1961] 2 S.C.R. 241 and S. Narayanappa v. The Commissioner
of Income-tax, Bangalore [1967] 1 S.C.R. 596 relied on.

## Text

KANTAMANI VENKATA NARAYANA & SONS
v.
FIRST ADDmONAL INCOME-TAX OFFICER,
RAJAHMUNDRY
October 27, 1966
[J.C. SHAH, V. R.AMASWAMI AND V. 8HARGAVA, JJ.)
Income-tax Act (11 of 1922). s. 34--Escaptd assessment-Not/ct,
whelh.er necessary to state c/ause--<Jrounds of challenge.
(
B
During the assessment proceedings of a
company,
the
Income-tu.
'f"
Officer discovered that there was a large accretion to the wealrh of the
assessee, which bad not been disclosed in the assessment pror.eedings of the
C
assessee, and the Officer issued notires under s. 34 for the reassessment of
income during that period. The assessee filed writ petitions in the High
Court, in reply to which the Income-tax Officer filed affidavits stating that
relying on the information received by him, be had reason to believe that
the assessee had not disclosed fully and truly all material facts and in consequence, income chargeable to tax had escaped assessment. The writ petitions were rejected and the order was confirmed in appeal by the High
Court. In appeals by the assessee, this Court,
D
HELD : The appeals must be dismissed.
From the affidavit of the Income-tax Officer it clearly appeared that
there had been considerable increase in the investments in the transactions
,. '
and the wealth of the assessee. The Income-tax Officer was not seeking
to reassess the income on a mere change of opinion. (989 BJ
The Income-tax Officer bad pr/ma facle reason to believe that information material to assessment bad been withheld, and that on account of
withholding of that information income liable to tax had escaped assessment.
From the mere production of the books of account. it could not
be inferred that there had been full disclosure of the material "1cts necessary for the purpose of assc5'ment. Sections 23 and 24 of the Act lay that
the assessee is under a duty to disclose fully and truly material facts necessary for the assessment of the year and that duty is not discharged merely
by the production of the books of accounts or other evidence. It is the
duty of the assessee to bring to the notice of the Income-tax Officer particular items in the books of account or portions of documents which are
relevant. Even if it be assumed that from the books produced, the lncomC>-
tax Officer, if be had been circumspect, could have found out the truth,
the Income-tax Officer may not on that account be precluded from exercising the power to assess income which had escaped assessment. (989 G990 Bl
It is not necessary 'or imperative that a notice under s. 34 must specify
under which of the two clauses-<:!. (a) or cl. (b) of suf>..s. (I) of s. 34,
the notice is issued.
(986 Al
P. R. Mukherjee· v. Commissioner of Income-tax, West
Bengal,
30
l.T.R. 535, approved.
Two conditions precedent must co-exist, before a notice nnder s. 34
(l)(a) of the Act may be i'ISIJed: the ·Income-tax Officer mUSI
have
reason to beli~ ( l) lllat income, profits or gains had been under usessed. and (2) that such under assessment was due to non-<lisclosure
of
material facts by the assessce.
Wbm: the Incomo-tax Officer has prinuJ
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VENKATA NARAYANA v. I.T.O. (Shah, J.)
985
facie reasonable grounds for believing that there has been a. non.disclosure
of primary material fact, that by itself gives him juriS<!iction to issue
notice under s. 34 and the adequacy or otherwise of the grounds of such
belief is not open to investigation by the Court. [987 CJ
Calcutta Discount Company Ltd. v. Income-tax Officer, CompanieJ
District I [1961] 2 S.C.R. 241 and S. Narayanappa v. The Commissioner
of Income-tax, Bangalore [1967] 1 S.C.R. 596 relied on.
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 154 to
165 of 1966.
Appeals by special leave from the judgment and order dated
February 3, 1965 of the Andhra Pradesh High Court in Writ
Appeals Nos. I17 to 128 of 1964.
P. Ram Reddy and A. V. V. Nair, for the appellants (in all the
appeals).
s. V. Gupte, Solicitor-General, R. Ganapathy Iyer and R. N.
Sachthey, for respondent (in all the appeals).
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The Judgment of the Comt was delivered by
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Shah, J. M/s. Kantamani Venkata Narayana & Sonshereinafter referred to as 'the assessee' is a Hindu undivided family,
which was assessed to tax on ineome derived principally from
money-lending. In the course of proceedings for assessment of a
private limited company styled "Motu Industries Ltd.," the Incometax Officer, Rajahmundry discovered that there was a large
accretion to the wealth of the assessee which had not been disclosed
in proceedings for its assessment. On March 12, 1959, the
Income-tax Officer issued a notice seeking to reopen the assessment for the year 1950-51. The assessee filed a return under protest. On March 14, 1960 the Income-tax Officer issued notice of
re-assessment for the year 1951-52, and on December 19, 1960, the
Income-tax Officer intimated the reasons that had prompted him to
issue the notices of re-assessment. On March 24, 1962 the Incometax Officer issued notices under s. 34 for re-assessment of income of
the assessee for the years 1940-41 to 1949-50. The assessee then
presented petitions in the High Court of Andhra Pradesh for writs
of prohibition directing the Income-tax Officer to refrain from proceeding in pursuance of the notices for the assessment years 1940-41
to 1949-50 and 1950-51 and 1951-52. A single Judge of the High
Court rejected the petiuons and the order was confirmed in appeal
by a Division Bench of the High Court. The assessee has appealed
with special leave.
H
The notice issued by the Income-tax Officer did not specifically
refer to s. 34(1)(a) of the Income-tax Act : it did not set out the
Clause under which it was issued. But on that account the proceeding under s. 34 is not vitiated.
Tt was held by the Calcutta
Ml 7Sup.C.I./66-18
986
SUPRBMB COURT llBPOllTS
[1967) l SC.It.
High Court in P. R. Mukherjee v. Co111111issio11er of l11come-tax,
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West Bengal('), ·1hat it is not necessary or imperative that a notice
under s. 34 must specify under which of the two clauses---<:!. (a) or
cl. (b) of sub-s. (I) of s. 34, the notice is issued. The main notice Iv
be issued in a case under s. 34 is the notice under s. 22(2), and
s. 34 merely authorises the issue of such a notice.
The proceedings for re-assessment cover a period of 12 years :
1940-41 to 1951-52. Section 34 of the Income-tax Act has undergone some changes during that period, but the basic scheme of the
section has remained substantially the same. Power to re-assess
income under s. 34(1) as amended by Act 7 of 1939 could be exercised if"definite infonnation" had "come into" the possession of the
Income-tax Officer, and in consequence of such infonnation it was
discovered that income chargeable to tax had escaped assessment.
By the Income-tax and Business Profits Tax (Amendment) Act 48
of 1948, s. 34(1) was recast to read as follows :
"(!) If-
(a) the Income-tax Officer has reason to believe
that by reason of the omission or failure on the part of
an asscssee 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 income-tax have escaped assessment for that year, or
have been under-assessed, or assessed at too low
a rate, ...• or
(b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part
of the asscssee, 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,
. . •
he may in cases falling under clause (a) at any time and in
cases falling under clause (b) at the time within
four
years of the end of that year, serve on the assessee,
•
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 snch income,
profits or gains
"
(I) 30 1.T.R. 535.
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VENKATA NARAYANA V. I.T.O. (Shah, J.)
An Explanation was also added which states :
"Explanation.-Production before the Income-tax
Officer of account books or other evidence from which
material facts could with due diligence have been discovered by the Income-tax Officer will not necessarily
amount to disclosure within the meaning of this section."
987
Since on the matter canvassed in these appeals there is no material
change in the section, we will only refer to the section as amended
by Act 48 of 1948.
This Court in Calcutta Discount Company Ltd. v. Income-tax
Officer, Companies District I and Another(!) observed that before
the Income-tax Officer may issue a notice under s. 34(1) (a) of the
Indian Income-tax Act, two conditions precedent must co.-exist :
the Income-tax Officer must have reason to believe (1) that income,
profits or gains had been under-assessed, and (2) that such underassessment was due to non-disclosure of material facts by the
assessee. The Court further held that where the Income-tax Officer
has prima facie reasonable grounds for believing that there has
been a nop-disclosure of a primary material fact, that by itself gives
him 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.
In a recent judgement of this Court in S. Narayanappa & Others
v. The Commissioner of Income-tax, Banga/ore,(2) Ramaswami ].,
speaking for the Court observed:
"
the legal position is that if there are in
fact some reasonable grounds for the Income-tax Officer
to believe that there had been any non-disclosure as regards
any 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 notice
under s. 34. Whether these grounds are adequate or not
is not a matter for the Court to investigate. In other
words, the sufficiency of the grounds which induced the
Income-tax Officer to act is not a justiciable issue. It is
of course open for the assessee to contend that the Incometax Officer did not hold the belief that there had been such
non-disclosure. In other words, the existence of the
belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. ·Again the expression
"reason to believe" in section 34 of the Income-tax Act
does not mean a purely subjective satisfaction on the part
of the Income-tax Officer. The belief must be held in good
(I) (1961] 2 S.C.R. 241.
(2) [1967} I S.C.R. $96.
988
SUPREME OOURT REPORTS
(1967) l S.C.R.
faith: it cannot be merely a pretence. To put it differently
it is open to the Court to examine the question whether the
reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section. To this
limited extent, the action of the Income-tax Officer in starting proceedings under s. 34 of the Act is open to challenge
in a court of law."
It is clear from the affidavits filed in the Court of First Tnstance that the Income-tax Officer had received information relying
upon which he had reason to believe that the assessee had not disclosed fully and truly all material facts necessary for the assessment
and in consequence of non-disclosure of that information, income
chargeable to tax had escaped assessment.
In his affidavit, the
Income-tax Officer stated :
"A scrutiny of
the money-lending
'statements'
filed by the assessee for the years ended 31-3-50 and 31-3-51
revealed that there were large investments made by the
assessce in his money-lending business in those two years.
The assessee did not file balance sheets forthe said two years,
or for the earlier assessment years and consequently it
was not clear from the statements filed by him, how he could
make heavy investments in money-lending business in those
two years."
The Income-tax Officer also stated that in the year of account
1949-50 the total investments in money-lending business had increased by Rs. 1,33,000/- and in the following year by Rs. 49,000/-,
and the plea of the assessce that growth in the investments of the
assessce in those years was mainly due to "the cash balance" held
by the manager out of his share received on partition between him
and his brothers, and cash gifts from his father-in-law which were
till then keP.t uninvested even in the money-lending business, was
not supported by any evidence, that the assessce had suppressed the
account books for the periods prior to April 1, 1949, and that the
assessee "had not produced the deed of partition relied upon. According to the Income-tax Officer, the net wealth of the family
on April I, 1937, inclusive of investments in the money-lending
business was less than Rs. 50,000/- and the investments made by
the assessee in money-lending business were approximately of the
order of Rs. 21,000/-, that the assessments made on the family
from 1937-38 till 1948-49 showed that the asscssce's aggregate
income for those years was Rs. 30,000/-, that taking into account
the manager's professional income and the agricultural income
of the assessee, the aggregate could not exceed Rs. one Iakh, and
that possession of large wealth on April I, 1949 \·:hich was not explained justified him in inferring that there "was escapement of
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VENKATA NARAYANA V. I.T.O. (Shah, /.)
989
... A
assessment of huge income or in any event it had resulted in underassessment on account of the failure of the assessee in not disclosing
the material facts fully and truly for the assessment years 1940-41
to 1949-50."
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The averments made by the Income-tax Officer in his affidavit
which have been accepted by the Court of First Instance, prima
facie, establish that the Income-tax Officer had reason to believe
that by reason of the omission or failure on the part of the assessee
to disclose fully and truly all material facts necessary for his assessment, income chargeable to income-tax has escaped assessment.
It was urged on behalf of the assessee that year after ye_r account books and statements of account were
produced by the
assessee before the Income-tax Officer, and the Income-tax Officer
had computed to taxable income on the materials furnished, no case
for exercising the power of the Income-tax Officer under s. 34 was
made out, since power to re-assess may not be exercised merely
because on the same evidence the Income-tax Officer or his successor
entertains a different opinion. In our view there is no force in this
contention. From the affidavit of the Income-tax Officer it clearly
appears that there had been considerable increase since 1938 in the
investments in the money-lending transactions of the assessee and
in the wealth of the assessee. The Income-tax Officer was not seeking to re-assess the income on a mere change of opinion. The
increase in the wealth discovered was wholly disproportionate to the
known sources of income of the assessee. That was prima facie
evidence on which he had reason to believe that the assessee had
omitted to disclose fully and truly all material facts and that in
consequence of such non-disclosure income had escaped assessment.
The Income-tax Officer has said that no attempt was made by the
assessee to furnish some reasonable proof of the source of the additional wealth : the partition deed was not produced; the books .of
account prior to 1948-49 were withheld on the plea that all the
books were lost; no evidence was tendered to show that the fatherin-law of the manager was possessed of sufficient means to give
and did give any large cash amounts to him; and there was also
no explanation why a large amount exceeding a lakh of rupees was
not invested in the money-lending or other business.
The Income-tax Officer had therefore prima facie reason to
believe that information material to the assessment had been withheld, and that on account of withholding of that information income
liable to tax had escaped assessment. From the mere production of
the books of account it cannot be inferred that there had been full
disclosure of the material facts necessary for the purpose of assessment. The terms of the Explanation are too plain to permit an
argument being reasonably advanced, that the duty of the assessee to
disclose fully and truly all material facts is discharged when he produces the books of account or other evidence which has a material
990
SUPREME COURT REPORTS
)1967) l S.C.11..
boa.ring on the assessment. It is clearly implicit in the terms of ss.
23 and 34 of the Income-tax Act that the assessee is under a duty to
disclose fully and truly material facts necessary for the assessment
of the year, and that the duty is not discharged merely by the production of the books of accounts or other evidence. It is the duty of
the assessee to bring to the notice of the Income-tax Officer particular items in the books of account or portions of documents which
are relevant.
Even if it be assumed that from the books produced,
the Income-tax Officer, if he had been circumspect, could have
found out the truth, the Income-tax Officer may not on that account
be precluded from exercising the power to assess income which
had escaped assessment.
It was urged that since the High Court in appeal did not decide whether any primary facts on which the determination of the
issue of reasonable belief in non-disclosure of material facts necessary for the assessment of the previous year and escapement of tax
in consequence thereof depended, were not disclosed, the judgment
of the High Court should be set aside. The learned Trial Judge hes
dealt with in detail the affidavits of both the assessee and the Income-tax Officer and has come to the conclusion that there was
prima facie evidence of non-d::s<:losure fully and truly of all material
facts necessary for the assessment and on the materials placed before
the Income-tax Officer he had reason to believe that as a consequence
of that non-disclosure income had escaped assessment. The Higb
Court in appeal after referring to the judgment in Ca/cu/fa Di-rcount Company's case(') observed :
" · · without the
enquiry being
held
by
the
concerned Income-tax Officer it is not possible, on the
material on record, to decide whether or not the assessee
omitted to or failed to disclose fully and truly all material
facts necessary for.his assessment for the respective year."
The High Court has pointed out that no final decision about failure to disclose fully and truly all material facts bearing on the assessment of income and consequent escapement of income from assessment and tax could be recorded in the proceedings before them.
It certainly was not within the province of the High Court to finally
determine that question. The High Court was only concerned to
decide whether the conditions which invested the Income-tax Officer
with power to re-open the assessment did exist, and there is nothing
in the judgment of the High Court which indicates that they disagreed with the view of the Trial Court that the conditions did exist.
These appeals therefore fail and arc dismissed with costs.
There will be one hearing fee.
Y.P.
Appeals dismissed.
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(1) (196112 S.C.R. 241.
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