A.V. Savant, J.
1. By this petition, the petitioner-company seeks to challenge the notices issued to it under section 148 of the Income-tax Act, 1961, in respect of the six assessment years where it is alleged that the income which had escaped assessment is estimated to be around Rs. 9.20 lakhs for the assessment year 1967-68, Rs. 12.38 lakhs for the assessment year 1968-69, Rs. 2.77 lakhs for the assessment year 1970-71, Rs. 10.10 lakhs for the assessment year 1971-72, Rs. 25.17 lakhs for the assessment year 1972-73 and Rs. 4.70 lakhs for the assessment year 1973-74. The petitioner is a company incorporated under the Indian Companies Act and owns an integrated plant carrying on the manufacture of woollen worsted fabrics. In view of the process of manufacturing, the petitioner imports certain fabrics and the petitioner has adopted a particular accounting method for charging to its profit and loss account, fiscal duties paid during the year as well as labour charges, wages, power, fuel, chemicals, etc. However, for the assessment years 1967-68, 1968-69, 1970-71, 1971-72, 1972-73 and 1973-74, while valuing its closing stock, the element of fiscal duty and other direct aforementioned, manufacturing costs were not included therein. This resulted in under valuation of the inventories and understatement of the profits resulting in the income escaping the assessment. For the said six assessment years mentioned above, the assessment orders were passed on the dates mentioned below :
Assessment year Date of passing final order1967-68 24-2-19701968-69 17-3-19711970-71 26-3-19731971-72 14-3-1974 Original order20-9-1979 Fresh order passed onoriginal orderbeing set aside1972-73 24-3-1975 Original order20-9-1979 Fresh order passed onoriginal orderbeing set aside1973-74 21-9-1976 Original order20-9-1979 Fresh order passed onoriginal orderbeing set aside.'
2. The petitioner-company has, in this petition, challenged the notices under section 148 read with section 147(a) of the Income-tax Act, 1961, issued on February 16, 1984. As stated earlier, the estimated income which has escaped assessment can be tabulated as under :
Assessment year Estimated amount of incomewhich hasescaped assessmentRs.1967-68 9.20 lakhs1968-69 12.38 lakhs1970-71 2.77 lakhs1971-72 10.10 lakhs1972-73 25.70 lakhs1973-74 4.70 lakhs
3. The petitioner has also sought to challenge the circular, exhibit 'A', dated March 24, 1981, issued by the Under Secretary, Central Board of Direct Taxes, New Delhi.
4. The petitioner's case is that it had adopted a particular method of valuing the closing stock and till the commencement of the assessment year 1972-73, there was no mention in the prescribed form of return requiring the assessee to disclose the method of stock valuation. According to the petitioner, the method adopted by it was a method which it has consistently adopted for a number of years and that there was a full and true disclosure of all the material facts necessary for making the assessment in those relevant years. The petitioner has, therefore, contended that there was no omission or failure on its part to disclose fully and truly all the material facts necessary for the assessment. The said six notices issued under section 148 on February 16, 1984, have been challenged in the present petition.
5. The Revenue has filed its affidavit-in-reply setting out that the method of valuation of the closing stock adopted by the assessee was really no method at all. It has contended that the petitioner has considered all the above items of fiscal duties as part of the material costs in the manufacturing account and hence, the petitioner could not have excluded the said fiscal duties while valuing its inventories resulting in understatement of profits and consequently income escaping assessment. It has been further contended that the respondent came to know of the non-inclusion of the fiscal duties and other direct manufacturing expenses while valuing the closing stock for the first time when the auditors made a mention of the same in the balance-sheet pertaining to the assessment year 1977-78. The affidavit, therefore, avers that the petitioner had not disclosed fully and truly all the material facts necessary for their assessment resulting in the income chargeable to tax escaping assessment. It is, therefore, contended that all the ingredients of section 147(a) are satisfied and the issuance of the notices under section 148 was justified. Section 147, prior to its amendment with effect from April 1, 1989, stood as under :
'If -
(a) the Assessing Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under section 139 for any assessment year to the Assessing Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, or
(b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Assessing Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereafter in sections 148 to 153 referred to as the relevant assessment year).
Explanation 1. - For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely :
(a) where income chargeable to tax has been underassessed; or
(b) where much income has been assessed at too low a rate; or
(c) where such income has been made the subject of excessive relief under this Act or under the Indian Income-tax Act, 1922 (11 of 1922); or
(d) where excessive loss or depreciation allowance has been computed. Explanation 2. - Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence, have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of this section.'
6. We have heard learned counsel for both the parties at length. Shri Dastur, learned counsel appearing for the petitioner-company contended, in the first place, that there was no omission or failure on the part of the assessee to disclose fully and truly all the materials facts necessary for the relevant assessment years. He has further contended that on such facts as were disclosed by the petitioner in the return, the Income-tax Officer could have asked for further details and that the failure on the part of the Officer to investigate into the matter further cannot be equated with omission or failure on the part of the assessee to disclose fully and truly all the material facts necessary for the assessment. Shri Dastur further contended that the form of return prescribed for the assessment years prior to the assessment years 1972-73 did not contain a specific heading regarding the method of stock valuation and it was only for the first time in the form of return for the assessment year 1972-73, that at page 4 of the printed form, there is a specific heading 'Method of stock valuation' in annexure 'C', item 6. According to learned counsel, the particulars furnished in item 6 under the heading of 'Method of stock valuation' by the assessee for the assessment year 1972-73 onwards are 'as described in the balance-sheet'. Learned counsel further contended that the balance-sheet was not a statement of account and hence, it cannot be said that there was omission or failure on the part of the assessee to disclose fully and truly all the material facts necessary for the assessment resulting in the income chargeable to tax escaping assessment. In short, he contended that the authority had no jurisdiction to issue the impugned notices.
7. In support of his contention that the action under section 147(a) was without jurisdiction, learned counsel has placed reliance in several authorities as under :
(i) Shri Dastur has first placed reliance on the judgment of this court in the case of D. R. Dhanwate v. CIT : [1961]42ITR253(Bom) , where a Division Bench of this court took the view that there was no obligation cast on the assessee in filing a return of his total income to include therein the income of his wife or minor child arising directly or indirectly from her or its membership in a firm of which he is also a partner. The Division Bench in Dhanwate's case : [1961]42ITR253(Bom) , observed that even assuming that it was obligatory on the assessee in making a return for any year to include in his total income the income of his wife or minor child arising directly or indirectly from her or its membership in a firm of which he is also a partner, failure on his part to do so does not amount to 'failure to disclose fully and truly all material facts necessary for his assessment for that year' within the meaning of section 34(1) (a) of the Indian Income-tax Act, 1922, and does not enable the Income-tax Officer to issue a notice or reassessment under section 34(1) (a).
(ii) Shri Dastur then placed reliance on the decision of the Supreme Court in the case of CIT v. Burlop Dealers Ltd. : [1971]79ITR609(SC) . This was a case where the Supreme Court held that on the evidence and the materials produced during the original assessment proceedings, the Income-tax Officer could have reached a conclusion other than the one which he had reached in a proceeding under section 34(1) (a) of the Indian Income-tax Act, 1922. Hence, it was held that the proceedings under section 34(1) (a) of the Indian Income-tax Act, 1922, will not lie merely on the ground that the Income-tax Officer had raised an inference which he may later regard as erroneous. Burlop Dealers was a case where for the assessment year 1949-50, the assessee had disclosed a profit of Rs. 1,75,875 from the joint venture and had claimed that half of the said profit, viz., Rs. 87,937, was paid to one 'R' under an agreement dated October 7, 1948, for financing the transactions in the joint venture. Despite this disclosure being made by the assessee, the Income-tax Officer brought to tax only Rs. 87,937 as profit earned from the joint venture. Even for the assessment year 1950-51, the assessee had similarly claimed that it had paid half the profit of joint venture to 'R' for financing the transaction in the joint venture. Though this claim of the assessee was initially allowed, on May 13, 1955, the officer issued notice to the assessee under section 34(1) (a) of the Indian Income-tax Act, 1922, for reopening the assessment for 1949-50 and brought to tax the amount of Rs. 87,937, which was being allowed as having been paid to 'R'. The Tribunal held that the assessee had produced all the relevant accounts and documents necessary for completing the assessment and the assessee was under no obligation to inform the Revenue about the true nature of the transactions. The Tribunal, therefore, directed that the amount of Rs. 87,937 be excluded. The Tribunal and the High Court rejected the Revenue's application under sections 66(1) and 66(2) of the Indian Income-tax Act, 1922. Dismissing the appeal, the Supreme Court held that the assessee had disclosed its books of account and the evidence from which material facts could be discovered. Since the assessee had done this, the assessee was under no obligation to inform the Income-tax Officer about the possible inferences that might be raised against it. It was for the officer to raise such inferences and if he had not done so in the original assessment, the income which had escaped assessment could not be brought to tax under section 34(1) (a) of the 1922 Act.
(iii) Shri Dastur further placed reliance on a decision of the Supreme Court in the case of Parashuram Pottery Works Co. Ltd. v. ITO : [1977]106ITR1(SC) . In Parashuram Pottery's case : [1977]106ITR1(SC) , the Supreme Court observed that when an Income-tax Officer relies upon his own records for determining the amount of depreciation allowable to the assessee and makes a mistake in doing so, the responsibility for that mistake cannot be ascribed to an omission or failure on the part of the assessee. The Supreme Court in Parashuram Pottery's case : [1977]106ITR1(SC) was dealing with a case where, in working out the figure of depreciation for certain items of capital assets, the Income-tax Officer had lost sight of the fact that the aggregate of the depreciation, including the initial depreciation allowed under the different heads, could not exceed the original cost to the assessee on those items of capital assets. It was in these facts that the Supreme Court observed that the assessee cannot be held responsible for the remissness on the part of the Income-tax Officer in not applying the law contained in proviso (c) to section 10(2) (vi) of the Indian Income-tax Act, 1922, and it cannot be said that the excess depreciation allowed because of the mistake in the calculation of the depreciation, was allowed and income escaped assessment because of the assessee's omission or failure to disclose fully and truly all material facts. It was in these facts that the Supreme Court observed that no action can be taken for reopening the assessment under section 147(a) of the Income-tax, 1961, on the basis of detection of that mistake alone after the expiry of the prescribed period.
(iv) Shri Dastur also invited our attention to the decision of the Supreme Court in the case of ITO v. Madnani Engineering Works Ltd. : [1979]118ITR1(SC) . This was a case where the assessee had produced in the original assessment proceedings all the hundis on the strength of which it had obtained loans from the creditors as also entries in the books of account showing payment of interest. It was for the Income-tax Officer to investigate and determine whether these documents were genuine or not. The Income-tax Officer in his first affidavit and declined to disclose the fact on the specious ground that if such facts were disclosed, it would cause great prejudice to the interests of the Revenue. However, in the second affidavit, the Income-tax Officer merely stated his belief but did not set out any material on the basis of which he had arrived at such belief. The Supreme Court observed that it was for the Income-tax Officer to investigate and determine whether the documents disclosed by the assessee were genuine or not and the failure of the Income-tax Officer to do so could not be equated with the assessee having failed to make a true and full disclosure of the material fact.
8. Shri Dastur's second contention is that the sanction accorded by the Central Board of Direct Taxes under section 151 of the 1961 Act was mechanical and there was no application of mind in according the sanction to the impugned action by the Central Board of Direct Taxes. According to learned counsel, the order did not disclose any application of mind by the concerned authority while according sanction to the issuance of the impugned notices under section 148 of the said Act. In support of this contention, Shri Dastur relied upon the decision of the Calcutta High Court in Chanchal Kumar Chatterjee v. ITO : [1974]93ITR130(Cal) . In the said case, the Income-tax Officer had stated in the notice served on the assessee that the statement about the sanction having been granted by the Commissioner of Income-tax was inadvertently deleted. In the file, however, there was only a rubber stamp for the signature of the Commissioner under the date, March 30, 1971. It was in these facts that the learned single judge of the Calcutta High Court held that as the Commissioner had mechanically accorded the sanction, the sanction was not proper.
9. Thirdly, Shri Dastur contended that the reasons were not made available to the assessee and that the reasons which have now been made available to us, a copy of which has been furnished to the assessee, are not relevant or germane to the exercise of the power under sections 147(a) and 148 of the Income-tax Act, 1961. At this stage, it must be mentioned that at the very commencement of the hearing of this petition Shri Jetley, appearing for the Revenue, had made available to us the reasons for the issuance of the notices and a copy whereof was also furnished to the assessee. Since the reasons are almost identical for the six years in dispute, we may as well reproduce the reasons recorded for the assessment year 1967-68 by way of a sample :
'The assessee, Messrs. Raymond Woollen Mills Ltd., has been charging to its profit and loss account fiscal duties paid during the year as well as labour charges, wages, power, fuel, chemicals, etc. However, while valuing its closing stock the element of fiscal duty and the other direct, aforementioned, manufacturing costs are not included therein resulting in under valuation of inventories and understatement of profits. The income that has escaped assessment is estimated as under : Rs.(a) Direct manufacturing costs, such aslabour charges, wages, power, fuel, etc.,estimated at 15 per cent. of the valueof inventories shown at Rs. 129.62 lakhs19.44 lakhs(b) Excise duty element :The assessee has paid excise duty ofRs. 35,26,958 during the year. Thetotal consumption of material as perbalance-sheet is Rs. 1,56,91,321. Hence, thepercentage of excise duty comes to22.48 per cent. Applying thispercentage to the closing stock shownat Rs. 129.62 lakhs, the excise dutyelement works out to -29.13 lakhs-------------48.57 lakhsLes : Incremental element of opening stockcalculated on the same basis as above39.37 lakhs-------------Difference 9.20 lakhs-------------
10. The difference of Rs. 9.20 lakhs has been estimated as the amount of income which has escaped assessment for the assessment year 1967-68. There are identical notices for the remaining five years, excepting that the amount under items (a) and (b) above, and the estimated amount which has escaped assessment, however, varies with each year. It has been further mentioned in paragraph 2 of the notices that the assessee had never disclosed the fact of not including the fiscal duties and other direct manufacturing expenses in the inventories. The Department came to know of the non-inclusion of fiscal duties while valuing the closing stock for the first time when the auditors made a mentioned of the same in the balance-sheet pertaining to the assessment year 1977-78. The fact that the assessee was not including direct manufacturing costs while valuing the inventories came to be known to the Department only during the course of assessment proceedings for the assessment year 1979-80. The Income-tax Officer, therefore, concluded in the notices that he had reason to believe that as a result of the failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment, the income had escaped assessment.'
11. What we have reproduced and summed up above are the reasons for the issuance of the notice for the assessment year 1967-68. However, identical notices with variation of the figures, viz., the amounts involved have been issued for the remaining five year. Shri Dastur's contention is that either these are no reasons or that the said reasons are not relevant or germane to the exercise of the powers under section 147(a) of the Act for reopening the assessments.
12. As against this, Shri Jetley has contended that this is a clear case where the assessee had deliberately resorted to under valuation of his inventories and understatement of his profits resulting in the income escaping assessment to a large extent as mentioned above. Shri Jetley contended that merely because there was no specific item or head in the printed form of return of income, it would not absolve the assessee from his obligation to disclose fully and truly all material facts necessary for his assessment. Shri Jetley contended that the assessee itself had been charging to its profit and loss account the fiscal dues paid during the year as well as labour charges, power, fuel, chemicals, etc. However, while taking its closing stock, the element of fiscal duty and direct, aforementioned, manufacturing costs were not included therein. Admittedly this resulted in under valuation of inventory and understatement of profits. A large amount of income had, therefore, escaped assessment. According to Shri Jetley, while calculating the purchase price, the assessee had calculated these items of fiscal duties and other direct, aforementioned, manufacturing costs but deliberately excluded the same while valuing the closing stock. He, therefore, contended that this was certainly not a proper method and in any event was not a method which was recognised by the principles of accountancy nor was it sanctioned by any commercial practice. It was like the assessee saying that it values the closing stock at costs but will take the costs at 75 per cent. of the actual costs. Irrespective of the question as to whether the assessee had been following this method over a period of time. Shri Jetley contended that this was a clear case of there being an omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment as result of which the income chargeable to tax has escaped assessment for that year. According to learned counsel for the Revenue, all the ingredients of section 147(a) have been complied with. Shri Jetley, therefore, contends that the authority had the necessary jurisdiction to issue the notices. He also relied upon Explanation 2 to section 147 of the Act which has been reproduced above which says that production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence, have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of section 147.
13. As far as authorities cited by Shri Dastur are concerned, Shri Jetley contended that as far back as in the case of Calcutta Discount Co. Ltd. v. ITO : [1961]41ITR191(SC) , the Supreme Court had observed that mere production of evidence was not enough and that there may be an omission or failure to make a full and true disclosure if some material fact necessary for the assessment lies embedded in that evidence which the assessee can uncover but does not. If there is such a fact, it is the duty of the assessee to disclose it. Das Gupta J. observed at page 200 of the report as under :
'There can be no doubt that the duty of disclosing all the primary facts relevant to the decision of the question before the assessing authority lies on the assessee. To meet the possible contention that when some account books or other evidence has been produced, there is no duty on the assessee to disclose further facts, which on due diligence, the Income-tax Officer might have discovered, the Legislature has put in the Explanation, which has been set out above. In view of the Explanation, it will not be open to the assessee to say, for example - 'I have produced the account books and the documents : You, the Assessing Officer, examine them, and find out the facts necessary for your purpose : My duty is done with disclosing these account books and the documents.' His omission to bring to the assessing authority's attention those particular items in the account books, or the particular portions of the documents, which are relevant, will amount to 'omission to disclose fully and truly all material facts necessary for his assessment.' Nor will he be able to contend successfully that by disclosing certain evidence, he should be deemed to have disclosed other evidence, which might have been discovered by the assessing authority if he had pursued investigation on the basis of what has been disclosed. The Explanation to the section gives a quietus to all such contentions; and the position remains that so far as primary facts are concerned, it is the assessee's duty to disclose all of them - including particular entries in account books, particular portions of documents, and documents and other evidence which could have been discovered by the assessing authority, from the documents and other evidence disclosed.'
14. Further, Hidayatullah J. (as he then was), observed thus at page 219 of the report :
'This means quite clearly that the mere production of evidence is not enough, and that there may be an omission or failure to make a full true disclosure, if some material fact necessary for the assessment lies embedded in that evidence which the assessee can uncover but does not. If there is such a fact, it is the duty of the assessee to disclose it. The evidence which is produced by the assessee discloses only primary fact, but to interpret the evidence, certain other facts may be necessary. Thus, the question of status, agency, the benami nature of transactions, the nature of trading and like matters may not appear from the evidence produced, unless disclosed.'
15. Shri Jetley then relied upon the decision of the Supreme Court in the case of CIT v. Smt. P. K. Kochammu Amma : [1980]125ITR624(SC) . In the facts of Smt. Kochammu Amma's case : [1980]125ITR624(SC) , the Supreme Court held that the amounts representing the shares of the spouse and the minor daughter in the firms were part of the assessee's income for the purpose of assessment to tax and had to be shown in the return filed by the assessee. In view of the Note in the return, the Supreme Court held that the assessee had failed to disclose those two amounts in the return submitted by her and there was plainly and manifestly a breach of the obligation imposed by section 139(1) of the Act requiring the assessee to furnish a return of her income in the prescribed form, and in failing to do so, the assessee was guilty of concealment of those amounts. Dealing with the judgment of the Supreme Court in (V. D. M. Rm. M. Rm.) Muthiah Chettiar's case : [1969]74ITR183(SC) , the Supreme Court observed thus in P. K. Kochammu Amma's case : [1980]125ITR624(SC) of the report, as under :
'It is obvious that on this view the order imposing penalty on the assessee would have to be sustained, but there is a decision of this court in V. D. M. Rm. M. Rm. Muthiah Chettiar v. CIT : [1969]74ITR183(SC) , which is binding upon us and where we find that a different view has been taken by a Bench of three judges of this court. It was held in this case that even if there were any printed instructions in the form of the return requiring the assessee to disclose the income received by his wife and minor child from a firm of which the assessee was a partner, there was, in the absence in the return of any head under which the income of the wife or minor child could be shown, no obligation on the assessee to disclose this item of income, and the assessee could not be deemed to have filed or omitted to disclose fully and truly all material facts necessary for his assessment within the meaning of section 34(1) (a) of the Indian Income-tax Act, 1922. With the greatest respect to the learned judges who decided this case, we do not think, for reasons already discussed, that this decision lays down the correct law on the subject, and has it not been for the fact that since July 1, 1972, the form of the return prescribed by rule 12 has been amended and since then, there is a separate column provided that 'income arising to spouse/minor child or any other person as referred to in Chapter V of the Act', should be shown separately under that column and consequently there is no longer any scope for arguing that the assessee is not bound to disclose such income in the return to be furnished by him, we would have referred the present case to a larger Bench. But we do not propose to do so since the question has now become academic in view of the amendment in the form of the return carried out with effect from July 1, 1972.'
16. Shri Jetley has then invited our attention to a decision of the Supreme Court in the case of Indo-Aden Salt Mfg. and Trading Co. P. Ltd. v. CIT : [1986]159ITR624(SC) . This was a case where is relation to the assets consisting of reservoirs, salt pans, piers and condensers, the assessee had not disclosed in the original assessment proceedings for the assessment years 1955-56 to 1962-63 either by its valuation report or by a statement before the Income-tax Officer as to what portion of those assets were of earth work and what portion of masonry work. In regard to the entirely of the assets, the Income-tax Officer had allowed depreciation at six per cent. There was no dispute that depreciation at six per cent. was available only in respect of such assets constructed of masonry and not earth work. The Income-tax Officer sought to reopen the original assessments under section 147(a) of the Income-tax Act, 1961. The question was whether excessive depreciation had been allowed and income had escaped assessment for those years owing to the failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. The Supreme Court held that (i) since excess depreciation had been allowed on the entirely of the assets on the basis that they consisted of masonry work, the Income-tax Officer could reasonably be said to have material to form the belief that there was underassessment owing to the failure or omission on the part of the assessee to disclose fully and truly all material facts; (ii) that the fact that the Income-tax Officer could have in the original assessment proceedings found out the correct position by further probing did not exonerate the assessee from the duty to make a full and true disclosure of material facts. It was further held that whether there was such non-disclosure of primary facts as had caused escapement of income from assessment was basically a question of fact. It is well-settled that the obligation of the assessee is to disclose only primary facts and not inferential facts. If some material for the assessment lay embedded in the evidence which the Revenue could have uncovered but did not, then it is the duty of the assessee to bring it to the notice of the assessing authority. The assessee knows all the material and relevant facts - the assessing authority might not. In respect of the failure to disclose, the omission to disclose may be deliberate or inadvertent. That is immaterial. But if there is omission to disclose material facts, then, subject to other conditions, jurisdiction to reopen is attracted. Specifically dealing with Explanation 2 to section 147, Sabyasachi Mukharji J. (as he then was), observed as under (at page 628) :
'The assessee's contention is that the Income-tax Officer could have found out the position by further probing. That, however, does not exonerate the assessee to make full disclosure truly. Explanation 2 to section 147 of the Act makes the position abundantly clear. The principles have also been well-settled and reiterated in numerous decisions of this court : (See Kantamani Venkata Narayana and Sons v. First Addl. ITO : [1967]63ITR638(SC) and ITO v. Lakhmani Mewal Das : [1976]103ITR437(SC) . Hidayatullah J., as the learned Chief Justice then was, observed in Calcutta Discount Co.'s case : [1961]41ITR191(SC) , that mere production of evidence before the Income-tax Officer was not enough, that there may be omission or failure to make a true and full disclosure, if some material for the assessment lay embedded in the evidence which the Revenue could have uncovered, but did not, then it is the duty of the assessee to bring it to the notice of the assessing authority. The assessee knows all the material and relevant facts - the assessing authority might not. In respect of the failure to disclose, the omission to disclose may be deliberate or inadvertent. That was immaterial. But if there is omission to disclose material facts, then, subject to the other conditions, jurisdiction to reopen is attracted. It is sufficient to refer to the decision of this court in Calcutta Discount Co.'s case : [1961]41ITR191(SC) , where it had been held that if there are some primary facts from which a reasonable belief could be formed that there was some non-disclosure or failure to disclose fully and truly all material facts, the Income-tax Officer has jurisdiction to reopen the assessment. This position was again reiterated by this court in Malegaon Electricity Co. P. Ltd. v. CIT : [1970]78ITR466(SC) .'
17. Shri Jetley then invited our attention to a decision of the Supreme Court in the case of A. L. A. Firm v. CIT : [1991]189ITR285(SC) . It is true that this was a case under section 147(b) of the Income-tax Act and the assessee-firm in the said case had carried on a money-lending business in Malaya and as a part of and incidental thereto, a business in purchase and sale of house properties, gardens and estates. In the accounting period commencing on April 13, 1960, which would have normally come to a close by about April 13, 1961, the firm closed its accounts as on March 13, 1961, with effect from which date the firm was dissolved. Along with its income-tax return for the assessment year 1961-62, the firm filed on April 10, 1962, a profit and loss account and certain other statements. In the profit and loss account, a certain sum was shown as difference on revaluation of 'estates, gardens and house properties' on the dissolution of the firm on March 13, 1961. In the memo of adjustment for income-tax purposes, that sum was deducted on the ground that it was not assessable to tax either as revenue or as capital gains. The Income-tax Officer completed the assessment on the same day after making a small addition. Thereafter, on September 3, 1963, the Income-tax Officer wrote a letter to the assessee to the effect that the revaluation difference should have been brought to tax in view of the decision of the Madras High Court in the case of G. R. Ramachari and Co. : [1961]41ITR142(Mad) , and after receiving the reply of the assessee, to the effect, inter alia, that no profit or loss could be assessed on the basis of revaluation of assets, the Income-tax Officer issued a notice under section 147(b) of the Income-tax Act, 1961, for reassessment. Rejecting the objections raised by the assessee, the Supreme Court held, 'dismissing the appeal, (i) that though the Income-tax Officer, at the time of the original assessment, had looked at the facts and accepted the assessee's contention that the surplus was not taxable, in doing so, he had obviously missed to take note of the law laid down in the case of G. R. Ramachari and Co. : [1961]41ITR142(Mad) , and there was nothing to show that the case had been brought to his notice. When he, subsequently, became aware of the said decision, he initiated proceedings under section 147(b). The material which constituted information and on the basis of which the assessment was reopened was the decision in G. R. Ramachari and Co.'s case : [1961]41ITR142(Mad) . This material was not considered at the time of the original assessment. Though it was a decision of 1961 and the Income-tax Officer could have known of it had he been diligent, the obvious fact was that he was not aware of the existence of that decision then and, when he came to know about it, he rightly initiated proceedings for assessment.'
18. On the second contention raised by Shri Dastur regarding validity of the sanction, Shri Jetley contended that a perusal of the order according sanction showed that the authority concerned had applied its mind to the reasons recorded which have been summarised above. The said reasons, prima facie, disclose that the inventory had been undervalued and profits had been understated. This resulted in the income escaping assessment in each of the six years under consideration. Shri Jetley, therefore, contended that the ratio of the decision of the learned single judge of the Calcutta High Court in the case of Chanchal Kumar Chatterjee v. ITO : [1974]93ITR130(Cal) , on which Shri Dastur has placed reliance, can have no application whatsoever in the facts of the present case.
19. On the third and last contention of Shri Dastur, Shri Jetley has contended that the reasons disclosed for reopening the assessment under section 147(a) of the Income-tax Act, are valid, relevant and germane to the exercise of power. The scrutiny of the reasons reproduced above would, prima facie, show that they are good reasons justifying exercise of the power under section 147(a) of the Income-tax Act, 1961.
20. We have given our anxious consideration to the rival contentions raised by both learned counsel. In our view, the contentions raised by Shri Dastur are wholly untenable and those raised by Shri Jetley deserve acceptance. In the first place, having regard to the decisions of the Supreme Court in the cases of : (i) Calcutta Discount Co. Ltd. : [1961]41ITR191(SC) , (ii) CIT v. Smt. P. K. Kochammu Amma : [1980]125ITR624(SC) and (iii) Indo-Aden Salt Mfg. and Trading Co. P. Ltd. v. CIT : [1986]159ITR624(SC) , it is not possible for us to accept Shri Dastur's first contention on the basis of the observations of the Division Bench of this court in the case of D. R. Dhanwate v. CIT : [1961]42ITR253(Bom) . Indeed, in view of the Supreme Court decision in the cases of - (i) Calcutta Discount Co. Ltd. : [1961]41ITR191(SC) , (ii) CIT v. Smt. P. K. Kochammu Amma : [1980]125ITR624(SC) , and (iii) Indo-Aden Salt Mfg. and Trading Co. P. Ltd. : [1986]159ITR624(SC) , it must be held that the decision of this court in D. R. Dhanwate v. CIT : [1961]42ITR253(Bom) , is no longer good law. We are not inclined to accept Shri Dastur's contention that merely because there was no specific head or item of disclosure in the printed form of return prior to the assessment year 1972-73, in the facts of the present case, there was no omission or failure on the part of the assessee to disclose fully and truly all the material facts necessary for his assessment. On the contrary, in view of the reasons recorded in the orders for reopening of the assessment under section 147(a) of the said Act, we are clearly of the view that, prima facie, there was omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment resulting in income chargeable to tax having escaped assessment. On the one hand, the assessee had charged to its profit and loss account fiscal duties and labour charges, wages, powers, fuel, chemicals, etc. However, while valuing its closing stock, this very element of fiscal duties and other direct, aforementioned, manufacturing costs were not included. This clearly resulted in under valuation of inventories and understatement of profit resulting in the income escaping assessment. In fact, prima facie, since the closing stock was not properly valued and was undervalued, this would be tantamount to only a partial disclosure of the closing stock and not a full and true disclosure of all the material facts necessary for the assessment. It was only pursuant to the auditor's note attached to the balance-sheet for the assessment year 1977-78 that the Revenue came to know of this device adopted by the assessee. Shri Dastur has, however, tried to contend that the Supreme Court in its decision in the case of Smt. P. K. Kochammu Amma : [1980]125ITR624(SC) , did not observe that the decision in Muthiah Chettiar's case : [1969]74ITR183(SC) did not lay down the correct law on the subject. It is not possible for us to accept this contention inasmuch as it is clear from the judgment of the Supreme Court in Smt. P. K. Kochammu Amma's case : [1980]125ITR624(SC) , that it was only because the question had become academic, in view of the amendment in the form of the return with effect from July 1, 1972, that the Supreme Court did not, in Kochammu Amma's case : [1980]125ITR624(SC) think it necessary to make a reference to a larger Bench. Suffice it to say that the Supreme Court clearly stated so in Smt. P. K. Kochamma's case : [1980]125ITR624(SC) of the report, reproduced earlier above in paragraph 12 (at page 942) and we have emphasised the said observations which are as under :
'With the greatest respect to the learned judges who decided this case, we do not think, for reasons already discussed, that this decision lays down the correct lay on the subject.'
21. It is, therefore, not possible for us to accept the first contention of Shri Dastur regarding the lack of jurisdiction.
22. As far as the second contention of Shri Dastur is concerned, this is a case where the reasons recorded, prima facie, appear to be good and valid reasons which are relevant and germane to the exercise of the powers under section 147(a) of the Act. In our view, the ratio of the judgment of the learned single judge of the Calcutta High Court in the case of Chanchal Kumar Chatterjee : [1974]93ITR130(Cal) can have no application whatsoever to the facts of the present case. The learned single judge of the Calcutta High Court was dealing with a case where there was only a rubber stamp for the signature of the Commissioner in the original file and even in the notice issued to the assessee, the statement about sanction having been granted by the Commissioner was deleted. It was in these peculiar facts that the learned single judge of the Calcutta High Court held that the sanction was not proper. In the present case, the show-cause notice specifically makes a mention as under :
'This notice is being issued after obtaining necessary satisfaction of the Central Board of Direct Taxes.'
23. We have already reproduced the part of the reasons recorded in paragraph 8 (at page 928) of this judgment and we are satisfied that this is not a case where the Central Board of Direct Taxes had accorded its approval or sanction mechanically or without application of mind. There is, thus, no merit in the second contention of Shri Dastur.
24. The third contention of Shri Dastur regarding the reasons not being furnished to him or the said reasons being not germane and not relevant can survive no longer. In the light of what we have stated above, it is clear that the reasons have already been furnished to the assessee and it is clear that the reasons are relevant and germane for the exercise of the powers under section 147(a). Prima facie, therefore, we are satisfied that the Assessing Officer had reason to believe that by reason of omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the six years in question, income chargeable to tax had escaped assessment for the said six years. Exercising our powers under article 226 of the Constitution, it is not possible for us to examine the sufficiency of the reasons. As observed by the Supreme Court in the case of S. Narayanappa v. CIT : [1967]63ITR219(SC) , if there are in fact some reasonable grounds for the Income-tax Officer to believe that there had been any non-disclosure as regards any fact, which could have a material bearing on the question of underassessment, that would be sufficient to give jurisdiction to the Income-tax Officer to issue the notice under section 147(a) of the 1961 Act corresponding to section 34(1)(a) of the 1922 Act. Whether these grounds are adequate or not, is not a matter for the High Court to investigate in a petition under article 226 of the Constitution. In other words, the sufficiency of the grounds which induces the Income-tax Officer to act is not justiciable. It is of course open to the assessee to contend that the Income-tax Officer did not hold the belief that there had been such non-disclosure. In other words, the existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. From what we have stated above, it is not possible for the assessee, in the facts of the present case, to contend that the Income-tax Officer did not hold such a belief that there had been non-disclosure. There is, thus, no merit in the third contention of Shri Dastur.
25. On the merits of the matter, regarding the method adopted for under valuation of the stock, Shri Dastur tried to place reliance on the decision of the Calcutta High Court in the case of ITO v. British Paints India Ltd. : [1979]118ITR878(Cal) . Shri Dastur further placed reliance on the observations of the Gujarat High Court in the case of Commercial Ahmedabad Mills Co. Ltd. v. ITO : [1983]144ITR839(Guj) . However, Shri Jetley for the Revenue has invited our attention to a recent decision of the Supreme Court in the case of CIT v. British Paints India Ltd. : [1991]188ITR44(SC) . Shri Jetley's contention is that the Calcutta decision in ITO v. British Paints India Ltd. : [1979]118ITR878(Cal) and the Gujarat decision in Commercial Ahmedabad Mills Co. Ltd. v. ITO : [1983]144ITR839(Guj) are no longer good law in view of the Supreme Court decision in CIT v. British Paints Ltd. : [1991]188ITR44(SC) . In fact, the decision of the Supreme Court in British Paints India Ltd.'s case : [1991]188ITR44(SC) reverses the decision of the Calcutta High Court in British Paints India Ltd. v. CIT : [1978]111ITR53(Cal) . This decision of the Calcutta High Court in the case of British Paints India Ltd. : [1978]111ITR53(Cal) was followed by the Calcutta High Court in its subsequent decision in British Paints India Ltd.'s case : [1979]118ITR878(Cal) , on which Shri Dastur tried to place reliance. However, as rightly pointed out by Shri Jetley, the Supreme Court in its recent decision in British Paints India Ltd.'s case : [1991]188ITR44(SC) , has reserved the decision of the Calcutta High Court in British Paints India Ltd. v. CIT : [1978]111ITR53(Cal) , by holding (i) that even if the assessee had adopted a regular system of accounting, it was the duty of the Assessing Officer under section 145 of the Income-tax Act, 1961, to consider whether the correct profits and gains could be deduced from the accounts so maintained. If he was of the opinion that the correct profits could not be deduced from the accounts, he was obliged to have recourse to the proviso to section 145 of the Income-tax Act, 1961; (ii) that any system of accounting which excluded, for the valuation of stock-in-trade, all costs other than the cost of raw materials for the goods-in-process and finished products, was likely to result in a distorted picture of the true state of the business for the purpose of computing the chargeable income. Such a system might produce a comparatively lower valuation of the opening stock and the closing stock, thus showing a comparatively low difference between the two. In a period of rising turnover and rising prices, such a system was apt to diminish the assessment of taxable profit of a year. The profit of one year was likely to be shifted to another year which would be an incorrect method of computing profits. Each year being a self-contained unit, and the taxes of a particular year being payable with reference to the income of that year, as computed in terms of the Act, the method adopted by the assessee was found to be such that income could not properly be deduced therefrom. It was, therefore, not only the right but the duty of the Income-tax Officer to act in exercise of his statutory power for determining what, in his opinion, would be the correct income. While we are bound by these observations of the Supreme Court in CIT v. British Paints India Ltd. : [1991]188ITR44(SC) , it is not necessary for us at this stage of the case to express any opinion on the merits of the method of valuation of the inventories adopted by the assessee.
26. To sum up the above discussion, our conclusions are as under :
(i) The assessee's first contention that the Income-tax Officer had no jurisdiction to issue the impugned notices in the facts of the present case is negatived. The contention of the Revenue that it had the necessary jurisdiction to issue the impugned notices under section 148 read with section 147(a) of the Income-tax Act, 1961, is supported by the decisions of the Supreme Court in -
(i) Calcutta Discount Co. Ltd.'s case : [1961]41ITR191(SC) ,
(ii) Smt. P. K. Kochammu Amma's case : [1980]125ITR624(SC) , and
(iii) Indo-Aden Salt Mfg. and Trading Co. P. Ltd.'s case : [1986]159ITR624(SC) . The Revenue's contention in this behalf is also supported by some of the observations appearing in the judgment in the case of A. L. A. Firm v. CIT : [1991]189ITR285(SC) . We, therefore, accept the contention raised on behalf of the Revenue on the first point. In the process, we hold that the decision of this court in D. R. Dhanwate's case : [1961]42ITR253(Bom) is no longer a good law in view of the two latter Supreme Court decisions, viz., P. K. Kochammu Amma's case : [1980]125ITR624(SC) and Indo-Aden Salt Mfg. and Trading Co. P. Ltd.'s case : [1986]159ITR624(SC) .
(ii) The second contention raised by the assessee regarding the sanction under section 151 of the Income-tax Act, 1961, being invalid is also rejected in view of the material placed before us in this case which shows that the authority concerned had applied its mind to the reasons recorded for issuing the impugned notices under section 148 of the Act before according its sanction under section 151 of the Act.
(iii) The third and the last contention of the assessee that the reasons recorded by the authority were neither germane nor relevant is also rejected as, in our view, the reasons recorded in the present case are good reasons and are relevant and germane to the exercise of the powers. In view of the decision of the Supreme Court in the case of S. Narayanappa : [1967]63ITR219(SC) , we are not concerned with the sufficiency of the said reasons. We are satisfied that good and valid reasons exist for the exercise of the power.
27. As far as the petitioner's challenge to the circular at exhibit 'A', dated March 24, 1981, issued by the Under Secretary, Central Board of Direct Taxes, is concerned, suffice it to say that, the impugned notices are not based on the said circular, but have been issued in exercise of the powers under section 148 read with section 147(a) of the 1961 Act. Hence, it is not necessary for us to consider the validity of the said circular, exhibit 'A', dated March 24, 1981.
28. In our opinion, therefore, there is no merit in any of the contentions raised by Shri Dastur. The writ petition, thus, fails and the rule is discharged with costs.