- (1.) THIS is a reference by the Income-tax Appellate Tribunal under Section 66 of the Income-tax Act at the instance of the Badar Shoe Stores (hereinafter called the assessee). The statement of the case beings by saying that the necessary facts are set out in the judgment of the Appellate Tribunal and in greater detail in the assessment orders for the years 1939-40 and 1940-41. We deprecate the practice, which is becoming too common, of omitting a sufficient statement of facts from the statement of the case and of referring this Court to a miscellany of other documents for the collection of the full facts necessary for the determination of the question of law submitted, and we shall take the opportunity of referring to the unfortunate consequences if this practice at a later stage of this judgment.
(2.) THE assessee, a firm of which a certain Mr. Badr-Uzzaman was the proprietor, had carried on business as dealers in shoes at the Shoe Market Agra, since at least the beginning of the year 1936. For the accounting year 1935-36 the gross profits returned by the assessee amounted to approximately five percent. of the turnover of the year and in each of the subsequent four years, including the accounting year 1939-40, the gross profits returned varied between 5 per cent. and 5.6 per cent. of the years gross turnover. In due course on the 18th July, 1940, the Income-tax Officer received the return of the assessee of the profits of the accounting year 1939-40 for the assessment year 1940-41. This disclosed that the gross income for the accounting year was Rs. 9,433, being a percentage of 5.6 of the turnover, and a net income of Rs. 2,050. THEse figures, apparently for the first time, aroused the suspicion of the income-tax Officer and he, there upon, examined the accounts of the accounting year 1939-40 in detail. As a result of this examination be found that the on the 29th October, 1939, an item on the debit side of the accounts had been inflated by a sum of Rs. 5,000. THE Income-tax Officer came to the conclusions that this was fraudulent and he caused a notice to be served on the assessee under Section 23(2) of the Indian Income-tax Act to attend at his office. On the 6th August, 1940, the assessees statement was recorded and, to put the matter shortly, the assessee had no explanation to give satisfactory to the Income-tax Officer, whose suspicions by this time had also been aroused in respect of the balances brought forward in the 1939-40 accounts from previous years. On or about the same date a notice was served on the assessee by the Income-tax Officer under Section 22(4) of the Act calling upon him to produce, or to cause produced, his books of account for the accounting years ending 31st March 1937, 1938 and 1939, in addition to those for the year 1939-40 already before the Income-tax Officer. This notice provoked the reply from the assessee on the 15th August, 1940, that his books for previous years were not available as, following the practice of his firm, he apprehended that they had been sold as waste paper by his Delhi office. THE assessee attempted to produce some evidence to this effect, but it was disbelieved as fact by the Income-tax Officer. THE Income-tax Officer on the following day, on the 16th August, 1940, recorded the statement of the assessee to the foregoing effect. At the same time he issued a notice, which is Ex. T. - C. to the statement of the case, under Section 34(1) of the Act stating that in consequence of definite information which had come into his possession he had discovered that the assessees income assessable to income-tax for the year ending 31st March, 1940, had been under assessed, and he required the assessee to deliver to him by a certain date a return in the form attached. It is to be noticed that this affected the assessment year 1939-40 in respect of the accounting year 1938-39, which was the year previous to the year in which the Income-tax Officer had found - we deliberately use a neutral word -the discrepancy of Rs. 5,000. Having, as the assessment order puts it, got scent of the mischief though the discrepancy of Rs. 5,000 in the year 1939-40 mentioned above, the Income-tax officer then went through the books thoroughly for that year and discovered further discrepancies, amounting to inflation of purchases to the extent of a further three thousand and four hundred rupees, making Rs. 8,400 in all, and a reduction of cash balance to the extent of Rs. 10,000 in respect of the year 1939-40. THE position, therefore, was, as we understand it, that, at the time the Income-tax Officer had actually served his notice under Section 34 in respect of the accounting year 1938-39, he had already, to his own satisfaction, actually found out a fraud to the extent of Rs. 5,000 in respect of the accounting year 1939-40, which subsequently led to his making further discoveries of the same kind in respect of the same year to the extent of a further Rs. 3,400 by way of inflation of purchases and Rs. 10,000 by way of reduction of cash balances. Moreover, at the time of the service of the notice on the 16th August, 1940, his suspicions had been thoroughly aroused as regards the balances brought forward in the books of the accounting year 1939-40 from the previous year. We have had to collect these facts painfully rather from a number of documents included in the volume accompanying the statement of the case than from the statement of the case itself. The statement of the case, which is a relatively brief document, sums the matter up as we think inaccurately in paragraph 6 by saying : It would appear from the above resume that the information that came into the possession of the Income-tax Officer, viz., (1) that the appellant had inflated purchases by Rs. 8,400; (2) that the he had attempted to reduce cash balances by Rs. 10,000;and (3) that there were cash deposits in his books of account with regard to which he was unable to give any satisfactory explanation, was actually obtained in the course of the assessment for the year 1940-41, and that all the irregularities that were noticed related in fact to transactions that the took place during the financial year 1939-40 and not during the financial year 1938-39 whose income, profits and gains formed the subject-matter of the assessment in question.... This may be true as far as it goes, but, in view of the real point raised by the question, it is very material to know exactly what the state of mind of the Income-tax Officer was at the time he served the notice of the 16th August, 1940, under Section 34 of the Income-tax Act in respect of the accounting year 1938-39. At that date he had already formed the definite conclusion in respect of the accounting year 1939-40 that there had been a fraud to the extent of at least Rs. 5,000. He suspected further frauds in respect of that year, which were not verified until later. Moreover, from the conclusions he had drawn from his discovery of the five thousand rupees fraud, he suspected the balances brought forward from previous years. He had actually formed a conclusion of fact that the assessee had told him a falsehood in respect of the disposal of his previous books as waste paper. In addition to these things, he had, on the 16th August, 1940, the following further facts before him. He knew that the assessees returns of gross profits in each of the five years, including the accounting year 1939-40, had been shown at a uniform rate of 5 per cent. of the turnover. He had already found out that in respect of one of those years (the accounting year 1939-40) the rate of actual profit relative to the turnover had been substantially higher than 5 per cent. As appears from the assessment order itself, he knew that the assessees business had been more or less uniform throughout those five years and he, therefore, based on these materials a conclusion of fact on the 16th August, 1940, that there was the likelihood of similar results in the previous accounting years. That is our analysis of the facts, which, as we have said, we have had to collect for ourselves rather than discover from the statement of the case. They can be summarized thus :- (1) At the date of the relevant notice under Section 34, the Income-tax Officer had established to his own satisfaction an actual fraud in the books for the accounting year 1939-40; (2) the Income-tax Officer had established to his own satisfaction that he had been told by the assessee a falsehood as regards the destruction of the books for the previous years, and (3) the Income-tax Officer had reached the conclusion that, in the circumstances of his knowledge of the course of business over the whole period of five years, there was a probability that, the returned income having proved false in one year, it would on investigation prove false in other years of that period also.
(3.) WE can now approach the actual question of law put to us. WE must concede that it is a question of law, because it involves not only the careful construction of the words of Section 34 of the Act, but the determination of certain principles of law involving such considerations as the degree of certainty in the mind of the Income-tax Officer required to constitute definite information and "discovery within the meaning of the section. The actual question is in these words :- Whether, in the circumstances of the case, the Income-tax Officer had, within the meaning of Section 34, definite information in consequence of which he could have discovered that the assessees income of 1938-39 had escaped assessment in the assessment year 1939-40. The use of the expression in the circumstances of the case is to be deprecated where those circumstances are not in fact set out in the case itself, but otherwise the question appears to cover the point involved. It is now necessary to turn to the section itself. It runs :- (1) If in consequence of definite information which has come into his possession the Income-tax Officer discovers that income, profits or gains chargeable to income-tax 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...... serve on the person liable to pay tax on such income, profits or gains.... a notice.... under sub-section (2) of Section 22, and may proceed to assess or re-assess such income, profits or gains..... The construction of this sections needs to be carefully approached. In the first place, it has to be observed that the section as amended in 1939 is radically different from the section prior to that amendment. Prior to the amendment, it provided that if, for any reason, income, profits or gains chargeable to income-tax had escaped assessment in any year or had been assessed at too low a rate, the Income-tax Officer might, at any time within one year after the end of that year, serve on the assessee a notice preliminary to re-assessment. This left it uncertain both whether the Income-tax Officer himself was to be the sole judge of whether circumstances had arisen to justify his action and as to the degree of certainty which was required from him. The amendment of 1939 is designed, we think, to dispel that uncertainty, and, therefore, it must be assumed that the legislature in laying down in the amended section the positive conditions in which the Income-tax Officer can take action intends those conditions to be strictly fulfilled. Section 34 as amended, is, we think, not merely is a section designed to afford the Income-tax Department a ready means of reopening past accounts, but is a section which is designed to protect the subject against anything in the nature of an inquisition at the instance of the department, founded on mere suspicion rather than on positive material. We think that, for the proper application of the amended Section 34 of the Indian Income-tax act to any given set of circumstances, it is important to bear these considerations in mind. There are two things required by Section 34 to exist before it can be put into operation. First, the has to be in the possession of the Income-tax Officer and it must be in his possession at the date on which he puts Sections 34 into operation definite information. Secondly, the consequences of that definite information has to have been that, at the date at which he puts Section 34 into operation, he has discovered that income, profits or gains chargeable to income-tax 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. ;