GEMINI LEATHER STORES V. THE INCOME-TAX OFFICER, ‘B’ WARD AGRA AIR 1975 SC 1268

GEMINI LEATHER STORES V. THE INCOME-TAX OFFICER, ‘B’ WARD AGRA AIR 1975 SC 1268

FACTS-

• Partnership firm assessed for income tax in 1956-57.
• Income-tax Officer assessed turnover at Rs. 15 lacs in 1958 via best judgment assessment, rejecting the firm's return and books.
• The turnover assessed by the Income-tax Officer was subsequently reduced by the Appellate Assistant Commissioner and further reduced by the Appellate Tribunal.
• IT Officer issued notice u/s 148 dated March 31, 1965, claiming income had escaped assessment citing undisclosed income from drafts used in purchases at Madras and Calcutta, not considered initially.
• Both the learned single Judge of the High Court and the Division Bench held that the Income-tax Officer did not apply his mind to whether the amounts invested in the purchase of the drafts could be treated as part of the total income of the assessee. 
• They concluded that since the assessee did not disclose the source of these amounts, which were not recorded in the account books, all the conditions for invoking jurisdiction under Section 147(a) were present.
• Hence, the present appeal by assessee for quashing the notice.

ISSUE-

• Whether the Income-tax Officer have jurisdiction to issue a notice under Section 148 for reassessment, considering the alleged undisclosed income from drafts and the failure of the assessee to disclose the source of those amounts?

RULE-

• The Supreme Court ruled that it was a case of oversight on the part of the Income-tax Officer, and income chargeable to tax did not escape assessment due to the assessee's failure to disclose fully and truly all material facts.

HELD-

• The justification for the notice was based on the Income-tax Officer's belief that the amounts invested in the purchase of drafts were part of the total income of the assessee, not disclosed in their account books.
• The Supreme Court referred to the Calcutta Discount Company case [AIR 1961 SC 372], stating that once all primary facts are before the assessing authority, they need no further disclosure from the assessee to draw inferences.
• The assessee did not disclose the transactions evidenced by the drafts, but the Income-tax Officer discovered them. Despite having all the primary facts, the Income-tax Officer did not make necessary inquiries or draw proper inferences regarding the income from these transactions.
• The Income-tax Officer cannot remedy their oversight by invoking Section 147(a) of the Income-tax Act, and thus, the impugned notice and consequent proceedings were quashed.
• The appeal was allowed, and the notice dated March 31, 1965, along with the proceedings in consequence thereof, were quashed.

COMMENTARIES RATIO/NOTE-

• Error of judgment cannot give rise to valid initiation under section 147(a).—Where all the material facts are before the Assessing Officer but he takes a particular view, which subsequently transpires to be an erroneous one, on those facts, it is not permissible for him to initiate proceedings under section 147(a) in order to cure the error of judgment earlier committed.

Similar is the case, where reassessment proceedings initiated by issuing a notice were dropped for the reason that the escaped income for the year might have been assessed for a different year, a second initiation for the same year in respect of the same income is not possible on being unsuccessful in bringing to tax such income for that different year. This is so because such a case is also one of error of judgment on the part of the Assessing Officer [ITO v. A. Y. Panduranga Rao, (1981) 128 ITR 250 (Karn)