Dismissed

Baladin Ram v. Commissioner of Income-Tax, U.P.

Supreme Court21 Aug 19681968 INSC 203 · [1969] 1 S.C.R. 8001968 INSC 203

Case brief

AI extract

What is this about?

The Supreme Court held that the High Court correctly upheld two revised assessments under s. 34 of the Indian Income-tax Act, 1922. The Court ruled that undisclosed share of partnership income could be taxed under s. 34(1)(a) despite the firm's accounting year ending later, and that investments in a new business discovered later must be assessed in the financial year of the investment, not the ass

What did the court decide?

The appeals by Baladin Ram against the revised assessments dated 1952 and 1954 were dismissed with costs.

Baladin Ram versus Commissioner of Income-Tax, U.P. — Property and Title | Supreme Court (1969)

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BALADIN RAM

COMMISSIONER OF INCOME-TAX, U.P.

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August21, 1968

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(J. C. SHAH, V. RAMAsWAMI AND A. N. GROVER, JJ.]

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Indian lncom'-la.x Act, 1922, s. 2( I) Gnd 34(1) (al-Assessment of int:cnne escaping assessment-Applicability of s. 34( 1) (a)-Depo.rils assessed ar; reprPsenting inconie from undisclosed sources-Previous year for.

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. l"he asscc;sce--a Hindu undivided fa1nily (-) \Vas ascsscd in 194445 for the income of its previous year ending Ocrober 30, 1943. The incon1c shown in the return \ras from iron foundry business and properly, and income from these sources only was taken into account in the original assessment. The asscsscc through a son of the karta was also a partner in the firm Raj Narain Durga Prasad. The accounting year of the firm ended on April I, 1944 and the assesscc's return did not show any income as share of profit in the firm nor was mention made in the return of Lhc cxislcnce of the partnership. In Dcccmhcr, 1943 1he asscssce aJong v.·ith Raj Narain Durga Prasad started a joint venture of supplying Sarpar and bamhoo to the Government. Bct\·ecn the commenccmeat of rhc joint venture and Februry 18, 1944, the asscsscc made investments in the Sarpar and hamboo business to the tune of Rs. 27,000 (as found by the Tribunal). The Income-tax Officer, when he discovered the asscssec's connection with the firm Rajnarain Durga Prasad gave a notice under s. 34 d[ the Indian Income-tax Acf, 1922 and nladc in I952 a revised ac;sessment for 1944-45, assessment year, in which he added the income of the assec:;see as found in the book.<i of the firm to the income already assessed. Later, he discovered the asc:;e'.See's invcsrmcntc; in the Sarpat an<l hamboo buc;ine5;o; and in 1954 he made another revi<ied assessment for the aSJiessment year 1944-45 treating the said investments as representing income from undisclosed ources. ·inc assec:;sec challenged both the asc;essments on the ground that s. 34( 1) (a) was not auracted. The a'-.c;es'\ee's pica was rejected hy the Appellale Asislant Commissioner and the Tribuna,l. The High Court in reference also held against the asses.see \.·ho by special leave appealed t0 this Court. The cootcnrions on behalf of rhc appdlant wcro: (i) As regards income from firm Rajnarain Durga Prasad it y,.·a<; suhmitti?d that th~ accounting year or that firm ended on April I, 1944 which v.·as y,.·ett after the close of the assessee's previot.l"ve:LT \Vhich ended on Octohcr 28. 1943. ci1hcr the income of the finn. ·nor the share of ac:;sesscc had hec:n determined till then, and it \vas not poc;,sible for 1he asse,sce to show the said incon1e in the return for 1944-45. foreover the full facts came to the kno\'ledge of the Tncome-tax Officer \vhen the assessment for the next a"6C..<;ment year \Vas made. ·rhcrefore s. 34( I) (a) y,.•as not attracted. (ii) As regards investn1en1s in the S:trpat and hamboo business the as5e'sec submitted that the husincss iLo;elf com menccd in Dccen1her, 1943 and having reuard to the definition o·f 'previou<; rear' in s. 2( 11) as it existed at the~ relcv:int time, the income from this ·source could not be shown a.. income of his previous year which ended on October 28 1941. The income from this source was duly disclosed to the lncomc.-iax Officer and was actuallv assessed in 1945-46. The;-eforc in the case of the 1954 revised J'Sessment also s. 34( I )(a) was not attracted. •

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BALADIN v. c. I. T. (Gmver, /.) 8 OJ

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A HELD : (i) The High Court had rightly observed in dealing with the J 952 assessment that there was no finding of the appellate tribunal that the share of income from the fi'rm was not known at the time when the return was filed. In view of the admitted fact that the return filed by the assessee did not disclose the fact of partnership in the firm Raj Narain Durga Prasad it was no longer open to the assessee to urge that s. 34(1) (a) was not attracted, particularly when the burden lay upon the assessee to show that the Income-tax Officer was aware of the B income received from the firm. [804 G-H]

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(ii) It is now well"Settled that the only way in which income from undisclosed sources can be taxed is to take it as the income of the relevant financial year. Therefore the investments made by the assessee in Sarpat and bamboo business between December, 1943 and February, 1944 were rightly taxed by the Income-tax Officer in the year 1944-45. The disclosure of the investments by assessee in the proceedings for 1945-46 c cannot be treated as a disclosure for the purpose of assessment year 194445. The plea that the revised assessment made in 1954 was not covered bys. 34(l)(a) could not therefore be accepted. [806 B.C]

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Se.ction 68 of the Indian Income-tax Act, 1961 which provides that amounts credited in the account books df the assessee and not satisfactorily explained by him should be treated as income of the 'previous year', D does not alter the position under the old Act. Even under the new Act the position, except where the credits are found in the assessee's account books, is probably not different from that laid down in the cases under the old Act. [806 D-F]

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Commissioner of lncome-<tax, Bihar and Orissa v. P. Darolia &: Sons, 27 I.T.R. 515 and Bishan Dutt v. Commissioner of Income-tax, U.P. &: V. P. 39 I.T.R. 534, applied.

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E Jethmal v. Commissioner of Income-tax, 49 I.T.R. 633, approved.

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P. R. Mukherjee v. Commissioner of Income-tax, W~st Bengal, 30 I.T.R. 535, referred to.

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CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 663 and 664 of 1966.

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Appeals by special leave from the judgment and order dated January 2, 1964 of the Allahabad High Court in I.T. Reference No. 244 of 1959.

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S.C. Manchanda and I. P. Goyal, for the appellant (in both the appeals) .

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D. Narsaraju, T. A. Ramachandran and S. P. Nayar, for the respondent (in both the appeals).

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The Judgment of the Court was delivered by

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Grover, .T. In these appeals by special leave the facts may be stated : The assessee at the material time was a Hindu Un- H ~ivided Family. The relevant assessment year is 1944-45 corresponding to the accounting year ending on Diwala Samvat 2,000 (October 28, 1943). On February 20, 1945 the Income

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[ 1969] 1 s.cR

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St:PRE~fl: CUCl{T REPORTS

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8 02

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tax Of1ccr m,><.k an a"cssmcnt on a total income of Rs. 26,800 odd which comprised income from the share in the business of Kasi Iron Foundry and the income from the property. This order was revised under s. 34 of the Indian Income tax Act, 1922 hereinafter called the Act. In the revised assessment order the total income of the assessec was computed at Rs. 71,731. Jn this amount a sum of Rs. 40,000 was included as income from undisclosed sources. This assessment was challenged before the Appellate Tribunal and was set aside on the ground that !here had not been proper service of a notice under s. 34. A fresh notice under s. 34 was issued in October 1951. On October 16, 1952 a revised assessment order was passed and the total income of the assessce wa' computed at Rs. 85,817 which included a sum of Rs. 49,696 as income from undisclosed sources. On March 31, 1953 the Income tax Officer served on the asscee another notice under s. 34 in respect of the same assessment year 1944-45. On March 18, 1954 a revised assessment was made in which was included a sum of Rs. 32,000 as the.asscssee's income from undisclosed sources, being the alleged investment of the assessee in the Sarpat and bamboo business prior lo February 18, 1944. The total income of the assessec was computed at Rs. 1,17,817. The income from undisclosed source which earn.: to be included in this computation amounted to Rs. 8 l,696. The as.sessee filed appeals against the assessment order dated October I 6, 1952 contending inter a/ia that there had been no escapement of any income and that in any case the first revised assessment dated October I 6. 1952 was barred by time under s. 34(1) (b) of the Act as the provisions of s. 34 (I)( a) did not apply. The second revised assessment was challenged on the ground. inter a/ia, that the Income tax Officer had no jurisdiction to issue the notice under s. :14 as the material facts necessary for making the assessment were fully and truly disclosed to the Income tax Officer during the assessment proceedings for the year 1945-46. That· appeal was also dismissed. Thereafter the assessec filed two appeals before the Income Tax Appellate Trihunal. Before the tribunal it was contended hy the assessee that the first revised assessment dated October 16, 1952 was barred by limitation and that the period of limitation was four years under s. 34 ( l )( b) and not eight years under s. 34 (I )(a). The second revised assessment was challenged on the ground that the Income tax Officer had no jurisdiction to issue a notice and make assessment under s. 34. It wa.' argued that the investment, expenditure and the profits earned from the business of Sarpat and bamboo had been duly· shown. As regards the first revised assessment thct tribunal held that the income of the asscssee from the firm Rajnarain Durga Prasad had escaped assessment by failure on the part of the assessee to disclose fully and truly !!II the fad!: necessary for making !he assessment and that the provisions of

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803

BA!,ADlN v. C. I. T. (Grover,/,).

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A s. 34(1)(a) were attracted and therefore the period of limitation was eight years and not four years. With regard to the second revised assessment it was urged that all the materials necessary for making the assessment were before the Income tax Officer and by issuing a notice under s. 34 the Income tax Officer had changed his opinion and a mere change of opinion did not authorise the Income tax Officer to take recourse to s. 34. The tribu-

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B nal disposed of the argument with regard to the second revised assessment in the following words :

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"The Income tax Officer who made the assessment

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for 1945-46 might have had all the accounts of the business in Sarpat and bamboos before him and might have

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c known the investments made by the assessee in that busine". The question for consideration is whether the Income tax Officer had reason to believe that by the failure on the part of the assessee to fully and truly disclose all the material facts necessary for the making of the assessment for the year 1944-45, income had es-

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D caped assessment. Surely, even if the Income tax Officer had known that the investment made by the assessee in that business were his revenue income, he could not have proceeded u/s 34 because the income could not have been assessed in the assessment year 1945-46. It could be assessed in the assessment year 1944-45. The income appearing by way of deposits in

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E the Sarpat business could be assessed only as income from some undisclosed source and the previous year for income from undisclosed source for which the assessee had not elected any previous year would be the financial year. The investments were made in the financial year relevant for the assessment year 1944-45 and were not

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F made in the financial year relevant for the assessment year 1945-46. The Income tax Officer had, therefore, no choice but to resort to section 34 of the Act."

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The tribunal, however, found as is apparent from its order dated March 21, 1957 that the unexplained investment which was really the income of the assessee from undisclosed source was G Rs. 27,875 instead of Rs. 32,000. The tribunal called for a report on certain other matters with which we are not concerned and which were disposed of by subsequent order dated August 31, 1958. On a petition filed under s. 66(1) of the Act the tribunal referred the following question to the High Court for decision :

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"Whether on the facts and in tke circumstances of

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' the case the revised assessments under section 34 dated • 16-10-1952 and 18-3-1954 are legal and valid".

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[1969] \S.CR

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SUPREME COURT REPORTS

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As regards the first revised assessment the High Court was of the view that even if the provisions of s. 34 ( 1 ){ b) were to apply the assessment could not be said to be barred by time nor could it be said to be barred under s. 34( 1) (aJ as the ass<:.sscc had failed to show that the Income t;,x Olliccr was aware that the assessee had received income from its share in the firnl. The question was consequently answered in the affirmative so far as the assessment order dated October 16, 1952 was concerned. The assessment order of March 18, 1954 was challenged before the High Court on the ground that there was no default on the part of the assessec attracting applicability of s. 34 (I)( a). It was noticed by the High Court that although the Income tax Officer had, during the proceedings for the assessment year 1945-46, made an enquiry about the in'estments in Sarpat and bamboo business no action had been taken in those assessment proceedings against the assessee but it could not be presumed that he had accepted the explanation of the assessce. Having held that the investment represented income from undisclosed source he was bound to treat it as income which accrued in December 1943 when it was invested, being the income during the financial year 1943-44 and therefore it had to be taxed in the assessment year 1944-45. The question referred was answered in the affirmative with regard to the assessment order of March 18, as well.

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The argument of Mr. S. C. Manchanda in respect of th.~ assessment made in October 1952 is that there was no failure on the part of the assessee to disclo;e nwterial facts. It is submitted that the share income of the assessee's son from the firm Raj Jsiarain Durga Prasad could not be shown in the assessee's return as the accounting period of that firm closed on April 1 , 1944 which was well after the close of the previous year of the assessee which ended on October 28. 1943. Tt is said that neither the income of the firm nor the share of the assessce\ son had been determined till then and it was not possible for the asscssee to show the said income in his return. Moreover the Income tax Officer had knowledge of the asse.ssee's interest in the firm Ramnarain Durga Prasad on May 12, 1947 when the assessment for the year 1945-46 was made. Thus the escapement. if any, has not resulted from any default or omission on the part of the assessee. The High Court had disposed of this contenlion by observing that there was no finding in the order of the appellate tribunal that the share of the income from the said firm was not known at the time when the return was filed. It was admitted that the return filed hv the a.ssessce did not disclose that the assesscc enjoyed income from his share in that finn. Tt was no ionger open to the assessec to press this contention particularly when the burden lav utxm him to show that the Income lax Officer was aware that the assessce received income from his shafe in that firm. Mr. Manchanda l1as not been able to persuade us

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805

BALAD!N v. c. I. T. (Grover, J.)

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A to take a different view in the matter. The real challenge on behalf of the assessee before us has been to the amount which was included as income from undisclosed source in the revised assessment order made ill March 1954 being the capital which had been invested in the business of Sarp<)t and bamboos. This amount, as found by the tribunal, came to Rs. 27,000 odd and had been invested in partnership with Ram Narain Durga Prasad

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II for the business of the supply of Sarpat and bamboo to the Gov·ernment, the investment having been made between December 8, 1943 and February 17, 1944. According to Mr. Manchanda no income from the aforesaid business could be shown in the return for the year 1944-45 because the business itself had been commenced after the close of the relevant previous year which

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c ended on October 28, 1943. For the assessment year 1945-46, however, a sum of Rs. 1640 was assessed as the assessee's income in this joint venture. During the course of the assessment proceedings for the year 1945-46 the assessee is stated to have filed an affidavit before the Income tax Officer giving details in respect of the Sarpat and bamboo business. Mr. Manchanda has invited

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D our attention to the definition of "previous year" as contained in s. 2 ( 11) of the Act at the relevant period and has pointed out that the Sarpat and bamboo business did not fall within the year up to which accounts had been made i.e. October 28, 1943. It was verily impossible, says Mr. Manchanda, to have shown in the return any amount relating to Sarpat and bamboo business. The method to be adopted in such a situation has now been settled by a long course of decisions. In Commissioner of Income tax, Bihar & Orissa v. P. Darolia & Sons(¹ ) the facts were that for the assessment year 194 7-48 the accounting year of the assessee was the Diwali year corresponding to November 4, 1945 to October 24, 1946. The Income tax Officer rejected the books of the assessee and ascertained his income from the business at an esti-

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F mate for that year. He also added to this estimate certain cash credits in its acconnt books entered on the 22nd and 27th of November, 1945, as secret profits from undisclosed sources which dates were after the end of the accounting year. It was found that the amount included as secret profits from undisclosed source was not from the business of the assessee but from separate

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G sources and no account was maintained by the assessee in respect of the amount nor had it exercised any option as regards the previous year with respect to that source. It was held that in the aforesaid circumstances the previous year of the assessee in respect of its undisclosed source of income was the financial vear ending on March 31, 1946. In Bishan Dutt v. Commissioner of Income tax U.P. & V.P. (2) the previous year of the assessee for

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H the assessment year 1945-46 in respect of his cloth business was Jul:f 4, 1943 to June 26, 1944. In the account books of that busi-

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(1) 27 I.T.R. 5!5.

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(2) 39 I.T.R. 534.

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1 Sup Cl/69-5

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[!969] i S.C.R·

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SUPREME cot:RT RF.PORTS

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806

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ness for that period a sum cf Rs. 9,800 appeared as credit in the suspense account on September 2, 1943. The Income tax Officer, in the absence .of a satisfactory explanation, held cl1i' amount to be income from undisclosed source. The view expressed by the High Court was that there being nothing to show that any accounts in respect of the undisclosed source of income existed or were maintained or that the asscssec exercised any option under s. 2 ( 11) ( i) (a) in respect of such accounts, the oniy cour.;e open to the department was to tax his income from undisclosed source on the basis of the financial year being the previous year. On that basis the amount could be taxeu only for the assessment year 1944-45 and not for the assessment year I 945-46. On similar facts the Calcutta Hi~h Court expressed the same view in Jc1/1111al v. Commissioner of Income Tax(¹ ). By now it appears to he well settled and no decision even of a High Court has been citeu to the contrary that in such circumstances the only possible way in which such undisclosed income can be assessed or reassessed is to make the assessment during the ordinary financial year.

Mr. Manchanda has called our attention to s. 68 of Income tax Act. 1961 according to which where any sum is found credited in the books an assessec maintained for any previous year and the assessee offers no explanation about the nature and source thereof or the explanation offered hy him is not, in the opinion of the Income tax Officer, satisfactory the sum so credited may be charged to income tax as the income of the asscsscc of that previous year. It is, however. obvious that even under the provisions embodied under the new Act it is only when any amount is found credited in the books of an assessec that the section will apply. On the other hand if the undisclosed income was found to he from some unknown source or the amount represent; some concealed income which is not credited in his books the position would probably not be different from what was laid down in the v:orious cases decided when the Act was in force.

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The last argument of Mr. Manchanda is that in order to attract the applicability of s. 34( 1) (a) of the Act the omission or the failure on the part of the assessec to disclose fully .and truly all material facts necessary for his assessment must be found to he wilful and deliberate. In support of his submi,sion he has relied on P. R. Mukhcrfre v. Commissioner of Income tax, West !Jengal(') in which it was ohserved that a person cannot he said to have omitted or faileu to disclose something wh.:in. of such thing. he has no knowledge and that a similar iniplication is carried by the word "uisclose" because one cannot he expected to disclose a ti1ing unless it is a matter which he know or knows of. Tt is altogether unnecessary to decide whether this view is smtairl!tble (I) --49 J.T.R. ·-633. --·-(2) :tO T.T.R. 5]5.

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BALAnIN v. c. [. T. (Grover,!.)

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807

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A or not. At any rate, in the present case, the assessee had failed fo show that he did not know and was not aware of the true position in respect of the sum of Rs. 27 ,000 odd which was invested in the Sarpat and bamboo business.

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For all these reasons the appeals fail and are dismis~ed with costs.

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