Subba Rao, C.J.
(1) The Income-tax Appellate Tribunal, Madras Bench 'B' referred the following questions under S. 66 (1), Indian Income-tax Act to the High Court of Judicature, Madras
(i) 'Whether there was definite information in the possession of the Income-tax Officer in consequence of which he could have discovered that there was an under-assessment within the meaning of Section 34 as it stood before its amendment in 1948?
(ii) Whether the re-assessment of Rs.11,185/- is a vliad.'
The said reference was tranferred to this Court afterits constitution.
(2) The facts that gave rise to the reference may be breiefly stated. M. M. A. K. Mohiddin Thumby and Co., was a firm having four tanneries at Eluru and one at Guntur. Its head office was situated at Eluru. The following were the six partners of the firm:
1. M. M. Mohamed Mama Labbai,
2. M. K. A. S. Syed Mohammad.
3. Vavoo Mohammad Hasana Labbai.
4. O. M. Ahmed Mohideen Sadaktulla.
5. Velak Mohammed Shekna Labbai.
6. Velak Mohammad Mohideen.
Though they were carrying on business at Eluru, they were permanent resident of Kayapatnam village in Tinnevelly District. For the assessment year 1940-41 the assessee filed a return showing a total income of Rs.21,420/- durin tghe scrutiny of the accounts, the Income-tax Officer came across a transfer of Rs.1,15,000/- from the account of V. Syed Moahmed Ali of Calcutta to the accounts of the following four partners of the assessee firm:
1. M. M. Mohammad Mama Labbai Rs. 25,000/-2. A. K. Mohamed Omar Sahib Rs. 30,000/-3. V. M. K. Dawood Labbai Rs. 30,000/-4. N. K. A. S. Syed Mohammad Rs. 30,000/-
Though the Income-tax Officer suspected that the said amount represented the secret profits of the fir, he was not able to get any definite information to hold that the said sum also was part of the profits of the firm. Ignoring that item, he made an order of assessment dated 17-3-1941. On 31-3-1941, the said amount was spread over the accounts of the fourteen partners. The explanation of the assessee was that in October 1939, 14 persons contributed amounts totalling Rs.1,15,000/- with the view of constituting a partnership, that the said amounts were remitted to Syed Mohamed Ali of Calcutta as the money was urgently required for purchasing skins for the partnership and that the money was subsequently adjusted on 31-3-1941 by transferring the same to the capital account of the four partners and thereafter to that of the 14 parners.
In addition to the enquiries started by the Income-tax Officer before 17-3-1941, he addressed the Income-tax Officer, Tuticorin, to make an enquiry in respect of the financial position of the said four partners. On 17-2-1942, he sent a report that none of the partners had any private interest of his own apart from his interest in the business of the assessee. On receiving the said information, the Income-tax Officer issued a notice under S. 34, Indian Income-tax Act for the purpose dof re-opening the assessment.
After following the procedure prescribed, he re-opened the assessment and found that the aforesaid amount of Rs.1,15,000/- transferred from Syed Mohammed Ali's account to the credit of the four partners really represented the profits of the firm. The was satisfied that the financial position of the said four partners was not such as to enable them to advance such a large amount towards capital. On that basis, he assessed the company to tax.
(3) The Assessee filed an appeal to the Apellate. Assistant Commissioner of Income-tax, Nezwada, but he accepted the view of the Incoem-tax Officer and confirmed and assessment. when an appeal was filed to the Tribunal, that was dimsised. Thereafter the present reference was made at the instance of the assessee.
(4) Learned counsel for the assessee contended that under s. 34, Indian Income-tax Act, the Income-tax Officer has jurisdiction only to re-open an assessment already made if he discovers that any income has escaped assessment in consequence of definite information which has come into his possession and that in the present case the income-tax Officer did not re-open the assessment on my such basis but only because he changed his opinion on the facts, which were within his knowledge at the time the first assessment was made.
Section 34 reads:
'If in consequence of definite information which has come into his possession the Income-tax Officer discovers that income profits or gains chargeable to income-tax have escaped assessment in any year ............................. the Income-tax Officer may in any case which he has rreason tobelieve that the assessment has concealed the particulars ................................ serve on the person liable to pay tax on such income. profits............................ and may proceed to assess or re-assess such incoem profits and gainst and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section'.
The necessary conditions for the application of the section are;
(i) Subsequent to the assessment, the Income-tax Officer comes into possession of information,
(ii) that information must be definite and
(iii) by reason of that information, he discovers that the income has escaped assessment.
The scope of these three conditions has been the subject of judicial scrunity. It will be convenient at this stage to consider those decisions to ascertain the settled law on the subject.
(5) In -- 'FAzal Fhala v. Commr. of Income-tax. B. and O.', AIR 1944 pat 338 (A), the assessee was assessed for the year 1937-38 on 4-9-1937 but proceedings under Section 34 were started on 7-5-1938 on the ground that the income of the Madras Branch of the assessee had escaped assessment. In that case, the Income-tax Officer had in mind the existence of the Madras Branch of the business when the assessment was completed on 30-8-1938.
He did dnot come into possession of any new definite information subsequently which enabled him to reopen the assessment already made. As the conditions laid down in Section 34 had not been complied with, the learned Judges held that the assessment was invalid.
(6) In -- 'Badar Shoe Stores, Agra v. commr. of Income-tax, C P. and U. P. Lucknow', AIR 1949 All 164 (B), the assessee a dealer in shoes returned gross profits varying between 5 and 5.6 per cent. of the gross turnover for the four years including the accounting year 1930-40. As the return for the accounting year 1939-40 aroused the suspicion of the Income-tax Officer, he examined the accounts of that year in detail and foiund that an item on the debit side of the accounts had been inflated by a sum of Rs.5,000. His suspicion was also around in respect of the balance brought forward in 1939-40 accounts from previous years.
When the assessee was asked to produce accounts for the accounting years ending 31-3-1937, 31-3-1938 and 31-3-1939, he replied that they were sold away as waste paper. The Income-tax Officer thereafter issued a notice under Section 34. The learned Judges held that the Income-tax Officer had definite infromation in consequence of which he discovered that the assessee's income of 1938-39 had escaped assessment in the assessment year 1939-40. The learned Judges, at page 168, defined the crucial words as follows:
'Our conclusion from a consideration of these authroities is that, so far as the word 'discovers' in the amended Section 34 is concerned , it requires that the Income-tax Officer should have formed an honest and reasonable behlief upon materials which could reasonably support such belief. In the nature of things, it cannot amount to a conclusion of certainly .......................................;
These present less difficulty, but it has to be remembered that both what is a 'discovery' and what is 'derfinite information' must necessarily vary with the circumstances of the case. We think that the words 'definite inforamtion' are placed in Section 34, Indian Income-tax Act to protect the subject against an assasult by the Income-tax Officer based upon mere suspicion. The definite information which is something more than mere gossip or rumous must lead to the discovery or belief as we have described it above.
But we are not prepared to engage ourselves to the view that, provided the information is is definite and does lead to that belief, it need necessarily be information of fact, though in ninety-nine cases out of a hundred it would investably be information of fact'.
(7) In -- 'Kedar Nath v. Commr. of Income-tax, U. P. and C. P. and Berar, Lucknow', AIR 1947 All 153 (C), the assessee a practising Barrister was assessed for the assessment year 1940-41 by the Income-tax Officer on 28-1-1941 and, in the course of that assessment, it transpired that the assessee had purcahsed and sold shares in companies and suffered losses in the course of those transactions. But the Income-tax Officer did not allow any deductions on that account. Subsequently, on 12-12-1942, a new Officer started proceedings under Section 34 in respect of the year 1940-41 and enhanced the assessment.
He made the assessment in respect of the profits said to have been earned by the assessee in what was foiund to be a business in the purcahse and sale of shares. Thelearned Judges held that the officer did not receive any new and definite information and that the assessment, having been based only on a change of opinion based on the same facts, was invalid. At page 155, the learned Judge observed:
'It still remains a fact that there is not an iota of material in this record to show that the Income-tax Officer re-opened, the matter in consequence of any iformation he had received, definite or otherwise, prior to the re-investigation ........... the Second Income-tax Officer was dissatisfied with the view taken by the first and therefore decided to re-open the matter'.
(8) In -- 'Gaya, Ram Gabbu Lal v. Commissioner of Income-tax', : [1951]19ITR114(All) (D), the Income-tax Officer gave notice under Section 34 of the Act for re-opening the assessment for the year 1940-41. When he found fictitious depsoits during the course of the assessment for the year 1941-42, he made enquiries and found that the rates of purchase shown in the books of account of the assessee and supported by memoranda for the assessment year 1940-41 were much higher than the rate shown in the books of other dealrers and that the assessee had a large sum of money which he showed in the accounts of the next year as deposits in the names of certain persons which entries were wrong.
On the basis of this new information, he issued a notice under Section 34. The learned Judges held that he had jurisdiction to do so. The reasons for so holding are found at page 326, in the following terms :
'Before notice can be issued, the Income-tax Officer must be satisfied and the satisfaction must be that of a reasonable man i.e., the definite information in his possession should lead to the conclusion that income has escaped assessment'.
(9) In -- 'Haji Ahmad Haji Esak and Co. v. Commissioner of Income-tax', : AIR1951Bom299 (E), it was contended that the books of account were present before the first officer and all the facts, which were elicited from those books, could have been elicited by the first officer, and, therefore, no fresh information came into the possession of the officer who decided to act under S. 34 of the Act. Chagla, C.J., and Tendolkar, J., observed at page 301 :
'Does Section 34 or S. 15 contemplate that it information could have come into the possession of the officer by due diligence, then although in fact he had no knowledge of that information for the purposes of these two sections, it must be deemed that he had the information and he could not act one that information although in fact he came to know of it subsequently. In our opinion, the section does not and cannot bear that interpretation. 'Information' meanse something that the mind had acqired.
The mere fact of the presence of a book before a person does not give him the information or the contents of that book unless he opens the book and reads it. According to Sir Jamshedji, the mere fact that a book was placed before an officer is sufficient to give him information of its contents. That may be constructive notice of the contents, but Section 15 does not deal with contructive notice.
Section 15 deals with actual notice andin order that an officer should be incapacitated from acting under Section 34 or S. 15, he must have actual knowledge of certain facts which knowledge he is again using for the purpose of acting under these sections. If actual knowledge was about -- it is immaterial how that actual knowledge was absent -- then when the actual knowledge does come about it confers jurisdiction upon the officer to act under those two sections'.
These observations, therefore, support the view that the mere fact that an Income-tax Officer before the assessment could have discovered the facts which he came to know at a subsequent stage, if he acted with diligence even before the assessment, could not in law preclude him from acting under Section 34, if as a matter of fact, he received definite information subsequently.
(10) In -- 'Jitan Ram Nirmal Ram v. Commissioner of Income-tax', : AIR1952Pat163 (F), learned Judges held that the phrase 'definite information in Section 34 cannot be construed in an universal sense and its meaning must depend and must necessarily vary with the circumstances of each case. But they made it clear that it is necessary that the information should be more than mere gossip or rumour.
(11) In -- 'Commissioner of Income-tax, Madras v. Janab S. Kaderwalli Sahib', : AIR1951Mad994 (G), the Madras High Court held that a mere change of opinion based on the same facts and figures, which were present to the mind of the Income-tax Officer at the time of the original assessment, does not amount to 'discovery' within the meaning of Section 34, Indian Income-tax Act, 1922. There the assessee was a partner in a registered firm consisting of three individuals.
During the course of assessment proceedings, the Income-tax Officer made enquiries as regards the acquisition of house property by the assessee during the year of account and he came to the conclusion that a sum of Rs. 16,000/- invested by the assessee on the purchase of house property came from his share of the profits of the partnership of which he was a member. On that basis, he added that sum to the income of the firm and the profits of the partnership were assessed on an estimate.
Against the assessment of the firm, an appeal was filed and the Assisstant Appellate Commissioner held that the inclusion of Rs. 16,000/- in the firm's income was not justified. Thereafter the Income-tax Officer purported to take proceedings under Section 34, Indian Income-tax Act and added the sum of Rs. 16,000/- to the income of the assessee and assessed hin afresh. The learned Judges held that the assessment was invalid. At page 994, they observed :
'It is clear that a mere change of opinion based on the same facts and figures which were present to the mind of the Income-tax Officer at the time of the original assessment does not amount to discovery. The must be the result of definite information, that is to say, new information that has come to the knowledge of the Income-tax Officer.
The Income-tax Officer cannot act under this section even though the tax-payer has escaped assessment if he is acting on information which was already in his possession and within his knowledge'.
(12) In -- 'Debi Prasad Malviya v. Commissioner of Income-tax', : [1952]22ITR539(All) (H), the Income-tax Officer, though he knew that the assessee had a one-third share in a partnership firm and the profits from that firm had to be included in his total income, finished the assessment and observed in the assessment order that as the assessment of the firm had not been completed, necessary action for revising the assessment by inclusion of the assessee's share of profit in the firm would be taken later on the receipt of the report from the Income-tax Officer assessing the firm.
Subsequently the Income-tax Officer issued notice under Section 34 for including in the assessment the share of profits of the assessee from the firm. The learned Judges held that the notice under S. 34 was wrong and the Income-tax Officer had no authority to re-open the assessment already made by him. At pages 227-228, the learned Judges give their reasons for so holding as follows :
'As regards the question referred to us under Section 66 (1) we find that the facts on the basis of which notice under Section 34 was issued were all know to the Income-tax Officer concerned except of course the actual amount of profits that had been made by the Kanpur Iron Supply and Co., in the two years in question ............... the Income-tax Officer knew that the assessee had a one-third share in the partnership firm Kanpur Iron Supply Co., and that the profits of that concern had to be added to the total income of the assessee .................... Section 23, Indian Income-tax Act contemplates that the Income-tax Officer should make and complete assessment on the basis of the total income of an assessee.
It is not open to him to make assessments piecemeal and in case where the Income-tax Officer has proceeded to assess one part of the income and has decided to asses the rest of the income on a later date, he cannot rely on the provisions of Section 34 for the purpose of re-opening the assessment ............. It cannot, therefore, be said that the fact was discovered later that the assessee laid been under-assessed.
(13) From the aforesaid discussion of the caselaw, the law on the subject may be summarised thus. Section 34 was enacted both in the interests of the State and the subject. If it is necessary to prevent evasion of tax, it is equally important to protect a citizen from undue harassment by over-zealous officers. The Act does not contemplate peicemel assessment and ordinarily it is expected of an Income-tax Officer to complete his assessment for a particular year once and for all. He cannot resort to the method of piecemeal and compartmental assessment. But, at the same time. to detect evasion and to assess the escaped income, the section confers on an officer power conditioned by the provisions of the section itself.
Unless he gets definite information i.e, clear and unambiguous information not based on gossip, rumour or surmises, which in its turn leads him to arrive at a reasonable belief that the income escaped assessment etc., he had no power to start an enquiry under Section 34. No doubt, the word 'discover' cannot in the context mean arriving at a final decision but it can be interpreted to mean only a reasonable belief on the part of the Income-tax Officer that the income had escaped assessment.
There is also an essential distinction between discovery based upon a new fact brought to the notice of the Income-tax Officer and a change of opinion arrived at by him on the facts that existed prior to the assessment for, in the latter case, he does not receive any new information. All the facts were already within his knowledge.
(14) Applying the said principles, can it be said that in this case that the Income-tax Officer received definite information on the basis of which he came to a reasonable belief that the income of the assesse escaped assessment From the statement of facts, it is clear that even before the first assessment, the Income-tax Officer had not only a doubt, but even a shrewd suspicion that some fraud was committed in respect of the item of Rs. 1,15,000/-. Though he made enquiries he did not get any definite information before the closing of the assessment to induce him to come to any reasonable belief that the said item represented the profits of the firm.
On receipt of the definite information from the Income-tax Officer, Tuticorin Circle to the effect that the said four partners had no income other than that which they got from the firm assessed and that they did not sell any properties of their own to advance large amounts towards the capital of the partnership, the lingering doubt in his mind was crystallised into a reasonable belief that the said sum represented the profits of the firm. The Income-tax Officer did not change his opinion on the facts, which were already before him at the time of first assessment. The fact that the partners had no other resources for advancing large amounts towards the capital of the business was not before him.
It was communicated to him only subsequent to the assessment and that fact really and naterially turned the scales against the assessee. We would, therefore, hold that 'discovery' within the meaning of the section was made by the Income-tax Officer on the receipt of definite information from the Income-tax Officer. Tuticorin Circles, and therefore, the action taken by the Income-tax Officer under S. 34 the Act was right.
(15) It was then contended that the information given by the Income-tax Officer was not of a fact but only based on his surmises. The report clearly shows that he made the enquiries and the enquiries convinced him that the partners had no other source yielding the required amount for making a deposit, towards the capital of the business. We cannot, therefore, say that the communications made by the Income-tax Officer, Tuticorin was not 'definite information' within the meaning of the section.
(16) Learned counsel then contended that the re-assessment under Section 34 was based upon pur surmises, ignoring the definite and direct evidence adduced by the assessee. This is not one of the questions referred to us. Further the question raised is one of fact. The Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal considered the entire material and came to the conclusion that the said item represented the profit of the firm and was therefore liable to assessment. We cannot in this reference question a finding of fact arrived at by them.
(17) No contention has been raised before us that when the assessment was re-opened, the Income-tax Officer had no jurisdiction to find out the other items that escaped assessment at the earlier stage. The Income-tax Officer added Rs. 11,185/- to the assessable income on account of undervaluation of stock discovered by him. The Assisstant Commissioner and the Tribunal agreed with him.
When once it is not disputed that the Income-tax Officer has jurisdiction to reopen the other items. we cannot go into the correctness of the figures arrived at by the Tribunal. We accordingly answer the question referred to us. The applicant will pay the consts of the respondent which we fix at Rs. 200/-.
(18) Answer accordingly.