Sambasiva Rao, J. - (1.) THE assessee is a member of the family of Bhuwalkas hailing from Ratnaghar in the former State of Bikaner, now in Rajasthan. As a young man of 19 or 20 years, he came to Guntur in 1941 in the wake of his father who had already come there to participate in the management of Bhajarang Jute Mills Ltd., Guntur. To start with, he learnt some work and after some time he also joined the jute mill as an employee. For the first time, he was assessed to income-tax for the assessment year 191-1-45, For that year, the items of income were few and limited, his salary being Rs. 3,345 and the interest accrued to him being Rs. 103. From October 28, 1943, however, he started his own independent business in gunnys, groundnut oil, etc. For the assessment year 1945,46, ho filed a return of income on July 19, 1945, consisting of salary of Rs. 3,737 and showing loss from business of Rs. 2,831. On March 26, 1946, however, he filed returns for the earlier assessment years 1941-42 to 1944-45 and a revised return for the assessment year 1945-46, adding varying amounts as income by way of interest accrued outside the Indian Union. THE assessments of these years were completed on the following dates ; for the assessment years 1943-44, 1944-45 and 1945-46 on March 27, 1946, for 1942-43 on March 30, 1946, and for 1946-47 on January 12, 1947. THEse assessments included the different amounts of income by way of interest accrued outside the Indian Union, as shown by the assessee. For the next year, viz 1947-48, the assessment was made on March 28, 1949, and the assessment order was signed by the Income-tax Officer on March 31, 1949. THE accounting year for this assessment was the Diwali year which ended on October 21, 1946. Along with this return, Various statements were also filed by the assessee of which one was a copy of the assessee's capital account which showed a credit entry of Rs. 3,06,000 received by way of draft on the Imperial Bank of India, Jaipur Branch, on April 8, 1946. This amount was credited to the assessee's account in the Guntur Branch of the Central Bank. In this return, the assessee disclosed an income of Rs. 57,040 as interest accrued outside the Indian Union but brought into the Indian Union. In addition to this income, he also showed other items by way of salary, profits and interest. But, the Income-tax Officer, on a consideration of the matter, was not prepared to accept this return. Besides making certain additions to the other items of income, he added a further sum of Rs. 14,168 to the foreign income brought into the Indian Union, thus making it a total of Rs. 71,208 instead of the sum of Rs. 57,040 as returned by the assessee. He further deducted, from out of this amount, a sum of Rs. 651 as income assessed in British India but not taken into account by mistake by the assessee. THE Income-tax Officer thus completed the assessment for the year 1947-48 on a total income of Rs. 79,351. As stated earlier, this was completed by the order dated March 31, 1949.
(2.) FOR more than 6 1/2 years, this assessment was left unchallenged by the department. But, in November, 1955, the Income-tax Officer, Guntur, began to entertain some doubts about the receipt of Rs. 3,06,000 by the assessee on April 8, 1946. He, therefore, examined the assessee on November 14, 1955, and November 15, 1955, and his father on December 3, 1955. According to their explanation, the nucleus of the money originally belonged to the mother of the assessee, who died when he was only two or three years old. It represented her stridhana assets of cash and jewellery. The father, who married again, converted the jewellery also into cash and kept the amount separate, by lending it to some persons in Ratnaghar. Gradually, it grew into larger proportions. After some time, the account was handed over to the assessee by his father. By 1944, it became Rs. 3,00,000, after deducting certain amounts which had been withdrawn by the assessee. That amount was deposited in a bank in Jaipur in December, 1944. In April, 1946, that amount and the interest that accrued thereon, the total of which came to Rs. 3,06,000, was brought into the Indian Union. This explanation did not satisfy the Income-tax Officer. He, therefore initiated proceedings under Section 34(1)(a) of the Income-tax Act, 1922 (hereinafter called "the Act"), with the prior approval of the Commissioner of Income-tax with notice dated March 26, 1956, which was served on the assessee on March 28, 1956. In the assessment that was finally made in pursuance of the above notice on February 28, 1957, the Income-tax Officer included Rs. 3,06,000 (in the place of Rs. 70,557 originally assessed), as income under other sources "Income outside British India" remitted into British India, and Rs. 25,000 as income not disclosed. That sum of Rs. 25,000 represented a cash credit in the name of one Bishundas Ramgopal, which the Income-tax Officer discovered during the assessment proceedings in the accounts of the assessee and which according to him was a fictitious borrowed. Aggrieved by this, the assessee appealed to the Appellate Assistant Commissioner, before whom he raised several grounds dealing with the validity of the action under Section 34(1)(a) and also with the merits of the assessment under which the two items of Rs. 3,06,000 and Rs. 25,000 had been added as income. The appellate authority found no substance in the appeal and confirmed the assessment. The assessee then carried the matter in second appeal to the Income-tax Appellate Tribunal, Hyderabad Bench. The same contentions were: urged before the Tribunal also. The Tribunal allowed the appeal of the assessee by holding that: (i) the notice issued under Section 34(1)(a) of the Act was bad in law ; (ii) even on merits, the two sums of Rs. 3,06,000 and Rs. 25,000 could not be included in the assessment. In so far as the first amount was concerned, it existed as early as December, 1944, and as such would be includible only for 1945-46 assessment and the second amount was liable to be included only for 1946-47 assessment, as the amount had been credited in the assessee's books on December 31, 1945 ; and (iii) the notice, having been issued under Section 34(1)(a) on the basis of the amount of Rs. 3,06,000 having escaped assessment, could not be validated because of the second amount of Rs. 25,000. In compliance with the direction of this court under Section 66(2), the Tribunal drew up an agreed statement of the case and referred the following four questions to this court: "(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the proceedings started under Section 34(1)(a) were bad in law ? (2) If the answer to question No. 1 is in the negative whether, on the facts and in the circumstances of the case, the sum of Rs. 3,06,000 remitted into British India on April 8, 1946, is income assessable for the assessment year 1945-46 or 1947-48? (3) Whether, on the facts and in the circumstances of the case, the sum of Rs. 25,000 found credited on December 31, 1945, would be income assessable for the assessment year 1946-47 or 1947-48 ? (4) Whether, on the facts and in the circumstances of the case, when a notice is issued under Section 34 based on a certain item of income that had escaped assessment, is it permissible for the income-tax authorities to include other items which had escaped assessment in the assessment in addition to the item which had initiated and resulted in the notice under Section 34 ?"
(3.) THE crucial point that has to be answered in this case is the one that is posed by the first question. If the proceedings started under Section 34(1)(a) of the Act were bad in law and the Appellate Tribunal was justified in holding them to be so, the reopening of the assessment and the consequential reassessment of the assessee would be unsustainable. In that case, questions Nos. 2 and 3 need not be answered. In fact, question No. 2, itself, is specifically couched in a manner that it is unnecessary to answer it, if the answer to the first question is in the affirmative. THE third question also is in the same position. Both the learned counsel for the assessee as well as the revenue also agreed that questions Nos. 2 and 3 need be answered only in the event of the first question being answered in the negative and that they need not be dealt with in case the /answer to the first question is in the affirmative. In order to answer the first question, it is necessary to read the relevant provisions of Section 34. "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 income-tax have escaped assessment for that year, or have been under-assessed, or assessed at too low a rate, or have been made the subject of excessive relief tinder the Act, or excessive loss or depreciation allowance has been computed, or (b) notwithstanding that there has been no omission or failure as mentioned in Clause (a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income, 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, 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 Clause (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." ;