MALIK, C.J. - (1.) THIS is a reference under Section 66 (1), Income -tax Act. The question referred is: 'Whether in the circumstances of the case the Income tax Officer, E. P. T. Circle, Cawnpore, was entitled to re -open the assessment under Section 34 of the Act?'
(2.) THE facts are very simple and are not disputed. The assessee Subhkaran Seksaria entered into an agreement with Kedarnath, who carried on extensive business under the name and style of Kedarnath Subhkaran, on 27th April 1940. Under this agreement the assessee undertook to secure contracts from the Government for Kedarnath Subhkaran and he was to be paid a remuneration of 5 per cent. on the value of the goods, which were supplied to the Government, besides the travelling expenses. The assessee received a sum of Rs. 36,586 -2 -6 during the previous year and in the assessment year 1941 -42 he showed the said amount as his total income from business. The Income -tax Officer, however, on 29th July 1942, passed the following order: 'The total commission received and as entered in the accounts is Rs. 36,586 at 5 per cent, of the total value of the orders received. In view of my findings in the preceding paragraph, the assessee's income is taken to be Rs. 7,317. There being no other source of income, the assessment is made accordingly as per Income -tax Form 30.' In the previous paragraph the Income -tax Officer had mentioned the fact that when Kedarnath Subhkaran were being assessed to excess profits tax, the Excess Profits Tax Officer had held on 20th July 1942, under Schedule I. Rule 12, Excess Profits Tax Act, that the payment of 5 per cent. to Subhkaran was excessive and that the reasonable and necessary amount payable to Subhkaran, regard being had to the requirements of the business, was only 1 per cent, and had allowed Kedarnath Subhkaran a deduction of only l/5th of the amount spent. Rule 12 (1) of Schedule I, Excess Profits Tax Act is as follows : 'In computing the profits of any chargeable accounting period no deduction shall be allowed in respect of expenses in excess of the amount which the Excess Profits Tax Officer considers reasonable and necessary having regard to the requirements of the business and, in the case of directors' fees or other payments for services, to the actual services rendered by the person concerned.' The Income -tax Officer, in Ma assessment order, paraphrased what had been said by the Excess Profits Tax Officer and agreed with him that it was not reasonable or necessary to pay com -mission at a rate higher than 1 per cent, though that was not a matter at all relevant to the assessment of Subhkaran. Kedarnath Subhkaran, however, appealed against the order of the Excess Profits Tax Officer dated 20th July 1942 and the matter ultimately came up before the Appellate Tribunal, who held that 5 per cent. was not an unreasonable amount and added it back to the expenses incurred by Kedarnath Subhkaran. After that decision of 31st July 1943, the Income -tax Officer issued a notice under Section 34 to Subhkaran that as a result of definite information received by him he had reason to believe that a sum of Rs. 29,269 had escaped assessment. He held against the assessee and ultimately this matter came up before the Tribunal, who, on 28th February 1944 came to the conclusion that the Income -tax Officer was entitled, under Section 34, Income -tax Act, to re -open the assessment. On an application made by the assessee the Tribunal referred to us the question mentioned above for answer.
(3.) THERE can be no doubt that the Income, tax Officer knew from the very beginning that the assessee had received the sum of Rs. 36,586 -2 -6 as commission from Kedarnath Subhkaran. The assessee had mentioned the amount in his return. Under the Excess Profits Tax Act, Rule 12, Schedule I, the Excess Profits Tax Officer had the right to consider whether a particular expenditure was or was not reasonable and necessary. The fact that allowable deduction for expenses incurred by Kedarnath Subhkaran for purposes of computation of excess profits tax was held to be one -fifth of what Kedarnath Subhkaran had paid to Subhkaran Seksaria was not at all relevant for the purposes of assessment of income -tax of Subhkaran Seksaria, who, having received the money, was liable to pay income, tax on it. The Income -tax Officer had, therefore, clearly made a mistake.;