JUDGEMENT OF THE APPELLATE TRIBUNAL
Under Section 33 of the Indian Income-tax Act (XI of 1922) the Income-tax Appellate Tribunal, (Bombay Branch) (consisting of N. R. GUNDIL, Judicial Member, and P. C. MALHOTRA, Accountant Member) delivered the following judgment on May 10, 1941.
'This appeal calls into question a supplementary assessment made by the Income-tax Officer, under Section 34 of the Indian Income-tax Act and confirmed by the Appellate Assistant Commissioner of Income-tax, A Range, Bombay, on December 9, 1940.
2. The contest is in regard to the assessment made in the assessment year 1936-37. The original assessment for the year in question was made by the Income-tax Officer on July 9, 1937 computing the appellants assessable income at Rs. 1,47,160. Some time later, on definite information received, the same Income-tax Officer issued a notice under Section 34 to the appellant to make a fresh return of his income, stating that his income from 'all sources' had partially escaped assessment. The matter came before another Income-tax Officer who on July 23, 1940, made a fresh assessment, computing the assessable income at Rs. 4,54,417. The appellant asks that this later assessment be set aside on three main grounds, which we will consider in order.
3. In the first place, it is contended that the notice under Section 34 was irregular and invalid, because no particular source of income was shown in the notice as having escaped assessment. The learned counsel pointed out a form of the notice prescribed at page 269 of the Income-tax Manual, 7th Edition, and contended that the Income-tax Officer was bound to abide by the particular form. The present case is governed by Section 34 as it stood before the amendment of 1939. A form of notice under that section is prescribed in the Income-tax Manual, and one of the two footnotes referring to the mode of filing in the blank space in the body of the notice is worded 'Here enter the source.' No such footnote, however, occurs in the form in 8th Edition of the Income-tax Manual compiled after the Income-tax Act was amended in 1939. The learned departmental representative, however, maintained that Section 34 itself did not prescribe a notice in any particular form, and that the departmental instructions contained in the Income-tax Manual were intended only as directory and not by any means mandatory. He urged further that even if the Income-tax Officer had written a letter that would have been a sufficient compliance with law, provided it stated that an assessees income or part of his income had escaped assessment. Without going as far as to accept the latter proposition, it appear to us to be clear that all that Section 34 requires is a notice containing all or any of the requirements which may be included in a notice under Section 22(2) of the Act. This view is supported by In the matter of Messrs. Burn & Co., followed in Jawala Prasad Chobey v. Commissioner of Income-tax, Bengal. Moreover, in the present case, the appellant had no different sources of income. His only source was business. Thus the expression 'all sources' occurring in the notice really meant one source, that is to say, the appellants business. That being so, we do not think that the appellant could be unaware of the source which was stated to have escaped assessment and which was intended to be re-assessed. At any rate, the appellant put in a return in compliance with the notice and might be therefore taken to have waived the irregularity, if any. We are therefore unable to hold that the notice was bad in law.
4. The most important dispute in this appeal reference to the re-assessment of three items, namely, Rs. 2,95,619, Rs. 8,368 and Rs. 3,000. The first is alleged to be a loss arising out of connected transactions of straddle business done by the appellant in Samvat 1990-91, and carried forward to the accounting year Samvat 1991-92. The second item is an aggregate of different sums lying to the credit of several individuals who are alleged by the respondent to be fictitious. The third item of Rs. 3,000 is alleged to be the amount paid by the appellant as rebate from exchange brokers, and not accounted for in his books.
(a) The sum of Rs. 2,95,619 is the opening debit balance in the Vilayat Badla account brought forward from the books of Samvat 1990-91, and represents the figure of losses incurred in silver speculation in India in the months of Shrawan, Bhadarva and also of Samvat 1990-91. The bringing forward of the losses into the accounts of subsequent years was contrary to Setion 24 of the Income-tax Act as it stood before its amendment by the additions of several provisos in 1939. In other words, an assessee was not entitled to, any allowance in this respect so as to set of the losses thus brought forward to the profits of the next year. The learned counsel of the appellant, however, contended that the several transactions resulting in loss were a part of the straddle transactions done by the appellant in London, it would not be a correct thing to include the items of the loss in the profit and loss account of the Samvat 1990-91, as the connected transactions were done in England, and the profit amounting to Rs. 1,96,000 and odd has been brought in in the books of account for the year Samvat 1991-92; and that therefore this loss was really not for the Samvat 1990-91 but for 1991-92. The learned departmental representative, however, maintained that the appellant did not produce the books for the year Samvat 1990-91 at the time of the reassessment, nor produced them even at the time of the original assessment, and that therefore it was not established tab tiny straddle business was done by the appellant as alleged by him. We are not quite sure about the correctness of the second part of the learned departmental representatives statement, i.e., regarding the non-production of the books at the time of the original assessment. The record contains the Examiners report of the original assessment. It shows the details of the item of Rs. 2,95,619, which, in our opinion, was not possible to ascertain unless the books of Samvat 1990-91 were before the Examiner. However, the point has no material bearing on the question before us and need not be noticed further. The fact remains that we have little or no evidence of any straddle business done by the appellant in London in the year in question. Assuming, however, that he did such kind of business in London, it will have to be borne in mind that the loss with which we are concerned in this case had been incurred in respect of Bombay transactions, and had been ascertained before the end of the year, or, at any rate, before closing the accounts for that year. The transaction done in London could not in any sense be regarded as any part of the corresponding transactions made in India. Obviously, the London transactions must have been made as a cover for any possible losses here. In other words, the two sets of transactions were, in our opinion, altogether independent. We therefore fail to find any justification for the item of Rs. 2,95,619 not being adjusted in the profit and loss account of the year in which they were sustained. Next, the method of accounting adopted by the appellant has been to bring in the losses or profits in Bombay transactions in the particular financial year in which the settlements were made; and the losses and profits of England in the particular financial year in which the advises were received from England. It is, however, remarkable that in the years under assessment the has maintained the same method as adopted by him all through in the case of Vilayat Badla account, but has varied it in the case of Bombay transactions which he could not do. It was a variation in the method of accounting regularly employed by the assessee. It is admitted that the appellant has been continuously adopting the method as just stated. This part of the case may be summarised as follows. In the assessment year 1935-36, the appellant did not include the losses suffered by him for the months of Shrawan, Bhadarva and Aso, i.e., he brought in the transactions of 9 months only for the Bombay transaction. But in the case of London transactions he followed his usual practice of bringing in the loss and profit of 12 months. In the assessment year 1936-37, however, he brought in his profit for the Vilayat Badla account (London transactions) for the period of 12 months as had been done by him all through in the previous year and also subsequent years; but in the case of the Bombay transactions he brought in profit and loss for 15 months which he could not do under the Act. In order to find out the assessable income for the assessment year 1936-37, only 12 months transactions should have been included as far as Bombay transactions were concerned, and not 15 months as was done by the appellant. His object in adopting the particular course that the did appears to us to be transparent enough. For the assessment year 1935-36 the appellant was assessed on a total income of Rs. 12,879 only. This income being divided among a number of partners, no tax could be levied from the appellant in that year. If the loss of Rs. 2,95,619 had been brought in the computation, as it should have been done, it would have made practically no difference to the appellants liability to the payment of the tax (sic) was concerned. He must have found that he had made large profits in the assessment year 1936-37 when he put in his return for 1935-36, on June 6, 1935. Accordingly, he cleverly manipulated his accounts by not bringing this item to the debit of his profit and loss account of 1935-36, but resorted to the device of carrying it forward the next year with a view to evade Income-tax on the profits accrued during the assessment year 1935-36. Apparently, the Income-tax Officer who made the first assessment was not able to detect the appellants underlying motive at that time, and so soon as he realised the effect of such an entry he forthwith served the appellant with a notice under Section 34. For these reasons, we are unable to hold that this item of loss should not be excluded form the assessment of the year under reference.
(b) Taking up the second item of Rs. 8,368 it is in aggregate of 5 items in a corresponding number of personal accounts. The appellant has a large number of such accounts. The Income-tax Officer required the appellant to prove that the 5 items were actually due by the appellant to the persons to whose credits they are lying. He appears to have thought that the parties were fictitious. The appellant wrote a letter to the Income-tax Officer giving the names and address of the persons to whom these amounts were due. The learned counsel for the appellant has urged that it was not possible for him to actually produce these parties before the Income-tax Officer, and it was the duty of the latter to make necessary inquiries regarding the persons to whom the amounts were shown to be due in the appellants books. The appellant was actually able to produce the parties in some cases, and the Income-tax Officer allowed those sums. In a big concern like that of the appellant where there are a large number of personal accounts we think that it was a hardship if a proudest of every creditor was insisted upon. Beyond the bare fact that the appellant was not able to produce these 5 persons, we do not find anything to sustain the Income-tax Officers view more especially having regard to one of his remarks contained in his report dated July 8, 1940 to the Appellate Assistant Commissioner, Central, Bombay. He told the latter that the examination of accounts over again did not disclose any suspicious facts. We thing therefore that the sum of Rs. 8,368 was an aggregate of 5 different sum due by the appellant to the respective persons whose names and addresses were given by the appellant, and that it did not form a part of his income.
(c) The contest in regard to the last item of Rs. 3,000 has no substance whatsoever. Admittedly, this sum was not brought in in the appellants books. It was said that it really belonged to several sub-brokers. We think that it was the duty of the appellant to show the receipt of this sum as his income and claim a deduction for the payment alleged to have been made to the sub-brokers. In our opinion, his failure to do so justified the Income-tax Officer in adding back this item in the appellants assessment for the year under reference.
5. The last point taken by the appellants learned council is that the re-assessment under Section 34 was illegal as it was not proved that any income had escaped assessment at the time when it was originally made. From the facts stated before, it must be perfectly clear that the original assessment was wrong as the Income-tax Officer had taken into account the Bombay transaction of 15 months instead of 12 months; and secondly, because the sum of Rs. 3,000 had been received by the appellant as income and not accounted for in his books. The learned counsel relies upon the case of the Commissioner of Income-tax, Bombay v. Gopal Vaijnath. But far from supporting the appellant it appears to be reinforcing the view that we take of the case. The actual decision of the case depended upon its particular facts; but the observations of Beamount, C.J., and Rangnekar, J., are clearly to the effect that Section 34 should not be confined to cases in which a source has escaped assessment, but that its provisions extend to correcting assessment in which a deduction had been improperly allowed. Their Lordships expressed themselves in full agreement with the remarks by Rankin, C.J., in the Anglo-Persian Oil Company (India) Ltd. v. The Commissioner of Income-tax, which are to the effect that the Income-tax authorities can put right an assessment by which a deduction has been improperly allowed. That is exactly the case here. The Income-tax Officer who first made the assessment committed an error of judgment which amounted to a mistake of law by allowing a deduction of Rs. 2,95,619 from the assessable income of the appellant who had brought in 15 months transactions instead of 12 months in the computation. In other words, it was an improper deduction which could, in our opinion, be set right under Section 34. We, therefore, hold that he was fully justified in assessing the appellant endorse action 34 of the Indian Income-tax Act.
6. The result is that we partially allow this appeal, and order that the sum of Rs. 8,368 be allowed to the appellant and deduct it from the total assessable income for the year under reference. The rest of the appeal is dismissed.'
On the application of the assessee under Section 66(1) of the Indian Income-tax Act (XI of 1922) as amended by Section 92 of the Indian Income-tax (Amendment) Act (VII of 1939) the Appellate Tribunal referred the case to the Bombay High Court :-