The dispute revolves around a notice issued under Sections 148 and 147 of the Income Tax Act, questioning the validity of certain hundi loans claimed by the assessee for the Assessment Year 1959-60.
Srikrishna (P) Ltd, the assessee, had initially shown hundi loans totalling Rs 8,53,298 for 1959-60, which were accepted by the Income Tax Officer and assessed accordingly.
Subsequently, during the assessment for the succeeding year, 1960-61, the assessee again claimed hundi loans, this time exceeding Rs 17 lakhs. Upon investigation, many of these loans were found to be bogus, and some alleged lenders were found to be closely associated with the assessee.
The Income Tax Officer disallowed loans amounting to Rs 11,15,275 as genuine loans, treating them as income from undisclosed sources.
Due to the similarity in the claims and the lenders between the two assessment years, the Income Tax Officer issued a notice under Section 148 for the Assessment Year 1959-60, alleging that income had escaped assessment due to the assessee's failure to fully and truly disclose all material facts.
The Single Judge initially allowed the writ petition filed by the assessee against the notice, but this decision was overturned by the Division Bench.
The Supreme Court entertained a special leave petition filed by the assessee and granted leave, although it did not stay the proceedings pursuant to the notice.
Ultimately, the Income Tax Officer completed the reassessment.
Present appeal before the Supreme court against HC’s judgment.
ISSUE
Whether under the facts and circumstances, the notice issued under Section 148 of the IT Act, 1961 was valid.
RULE
Having created and recorded bogus entries of loans, the assessee could not say that he had truly and fully disclosed all material facts necessary for his assessment, therefore, in the circumstances of the case a false assertion or statement attracts the jurisdiction of assessing officer.
HELD
Section 139 of the Income Tax Act imposes an obligation on every taxpayer to voluntarily furnish a return of income, disclosing all material facts necessary for assessment. Failure to disclose such facts can lead to the reopening of assessment under Section 147.
The decision in Phool Chand Bajrang Lal v. ITO [(1993) 4 SCC 77] rightly emphasizes the obligation of the assessee to disclose all material facts necessary for making his assessment fully and truly.
In ITO v. Mewalal Dwarka Prasad [(1989) 176 ITR 529] this Court held that if the notice issued under Section 148 is good in respect of one item, it cannot be quashed under Article 226 on the ground that it may not be valid in respect of some other items.
Central Provinces Manganese Ore Co. Ltd. v. ITO [(1991) 4 SCC 166]: ―The only question which arises for our consideration is as to whether the two conditions required to confer jurisdiction on the Income Tax Officer under Section 147(a) of the Act have been satisfied in this case.
The first is that the Income Tax Officer must have reason to believe that the income chargeable to income tax had been under-assessed and
the second that such under-assessment has occurred by reason of omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment for the year 1953-54.
The Income Tax Officer can issue a notice under Section 148 only if there is a reason to believe that income has escaped assessment due to the assessee's failure to disclose fully and truly all material facts necessary for assessment. This belief must be based on tangible material and cannot be arbitrary.
The obligation to disclose is not merely to provide information but to ensure that it is full and true. A false disclosure does not fulfill this requirement.
The court concluded that the notice issued by the Income Tax Officer was justified based on the findings of bogus loans in the subsequent assessment year. The commonality of lenders between the two years supported the belief that income had escaped assessment due to the assessee's failure to disclose fully and truly all material facts.
For the above reasons, the appeal fails.
COMMENTARIES NOTE
The assessee must disclose fully and truly all material primary facts; if any such fact is suppressed, misrepresented or falsified, reassessment under the first proviso even beyond four years may be justified.1. In Phool Chand v CIT,2. the Supreme Court observed that where the transaction itself, on the basis of subsequent information, is found to be a bogus transaction, the mere disclosure of that transaction at the time of original assessment cannot be said to be a disclosure of the ‘true’ and ‘full’ facts of the case and the AO can reopen the concluded assessment in such a case. The Supreme Court distinguished Burlap Traders (supra)on the ground that in that case, the AO had no fresh, tangible material to show that the transaction was bogus, whereas in Phool Chand, the AO received further information based on which he concluded that the transaction was bogus.
Where the assessee avers that he had disclosed all material facts, in the absence of a contradiction by the AO who made the original assessment, such averment would normally be accepted. A material fact is one that leads to some income, or one that is related to escapement of income. The status of the assessee, e. resident or non-resident, is a material fact which should be disclosed. The Delhi High Court wrongly held that a mere issuance of shares must be disclosed to the AO even if the assessee reasonably believed that it did not result in any taxable income. However, when the assessee had not disclosed the cost of acquisition of certain shares and the statutory declaration filed by the assessee also did not give a clear picture regarding the transaction, it would amount to a failure to disclose a material fact. An assessee whose method of income has been accepted for earlier assessment years could not be held to have suppressed any material facts when the assessing officer seeks to question such method of accounting.