HYDERABAD ALLWYN METAL WORKS LIMITED Vs. INCOME TAX OFFICER

JUDGEMENT

(1.) THESE three connected writ petitions have been filed by the Hyderabad Allwyn Metal Works Ltd. and all of them can be conveniently disposed of by a single judgment as they raise common questions of fact and law. In these petitions, the petitioner company challenges the legality of the three notices dt. 20th March, 1959, issued to it by the ITO, Special Investigation Circle (the first respondent herein), under S. 34 of the Indian IT Act in respect of the three asst. yrs. 1950 -51, 1951 -52 and 1952 -53, and seeks an appropriate writ, order or direction in each case prohibiting the ITO from taking any action on the basis of the concerned notices.

(2.) THE sum and substance of the contention on behalf of the petitioner is that the conditions precedent to the exercise of jurisdiction under S. 34 of the Indian IT Act did not exist in the present cases, and consequently, the ITO had not jurisdiction to issue the three impugned notices, the conditions precedent being, (1) that the ITO must have reason to believe that income, profits or gains chargeable to income -tax have escaped assessment for the relevant years or have been under -assessed, and (2) that he must have also reason to believe that such a result has been brought about by the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that year. It was contended that in the present cases there was no material what -ever upon which the ITO could have entertained such reasonable belief.

(3.) THE petitioner's assessments for the years, 1950 -51, 1951 -52 and 1952 -53, had been completed on 24th Oct., 1950, 19th March, 1952, and 30th March, 1957, determining a loss of Rs. 5,03,872, Rs. 4,51,625 and Rs. 7,54,617 respectively. The loss for the asst. year 1950 -51 was subsequently revised to Rs. 6,74,964 and for the year 1952 -53 to Rs. 7,57,223. In the course of the assessment proceedings for the year 1954 -55, the then ITO, Special Investigation Circle, Mr. D.S. Sarma, made a detailed investigation of the account books maintained by the petitioner. In the course of the examination of the accounts for the year 1954 -55, the ITO had occasion to ascertain the gross profit margins of similar concerns engaged in the manufacture of steel furniture and he discovered that the gross profit returned by the petitioner was phenomenally low. It was also noticed that the cash book maintained by the petitioner was defective in that on various dates withdrawals were much in excess of deposits for which there was no convincing explanation. Further, the ITO noticed numerous discrepancies between stock balances as per the stock ledger cards and actual balances as per physical verification. On several dates it was found that there were variations and shortages for which there was no satisfactory explanation. These and various other defects came to light as a result of the meticulous scrutiny of the accounts pertaining to the asst. year 1954 -55. These discrepancies and inaccuracies naturally gave the ITO food for thought since the petitioner had shown huge losses in the previous years as well ; and after investigation, he was prima facie satisfied that by resorting to similar devices, the petitioner had got away with under -assessments for the years 1950 -51, 1951 -52 and 1952 -53. It is the case of the Department that the ITO had in fact called for the cash books of the three accounting years corresponding to the three asst. yrs. 1950 -51, 1951 -52 and 1952 -53 and, on a scrutiny of those books, had found that the accounts had been cooked up. By manipulating cash, raw materials, closing stocks and expenses, the petitioner company had shown huge losses which had been accepted by the assessing authority and allowed to be carried forward. It is the further case of the Department that, on the data available to him, the ITO had reason to believe that the petitioner's income for those three years had escaped assessment by reason of the failure on the part of the petitioner to furnish true particulars of its income and expenditure. It may be mentioned here that the case of the petitioner is that the ITO had not at all looked into the petitioner's account books for the accounting years 1948 -49, 1949 -50 and 1950 -51 because they had not been produced before him in the course of the assessment proceedings for the year 1954 -55 ; and that the ITO had acted on mere suspicion and conjecture in issuing the notices in question.