Sambasiva Rao, J.
1. The assessee is a member of the family of Bhuwalkas hailing from Ratnaghar in the former State of Bikaner, now in Rajasthan. As a young man of 19 or 20 years, he came to Guntur in 1941 in the wake of his father who had already come there to participate in the management of Bhajarang Jute Mills Ltd., Guntur. To start with, he learnt some work and after some time he also joined the jute mill as an employee. For the first time, he was assessed to income-tax for the assessment year 191-1-45, For that year, the items of income were few and limited, his salary being Rs. 3,345 and the interest accrued to him being Rs. 103. From October 28, 1943, however, he started his own independent business in gunnys, groundnut oil, etc. For the assessment year 1945,46, ho filed a return of income on July 19, 1945, consisting of salary of Rs. 3,737 and showing loss from business of Rs. 2,831. On March 26, 1946, however, he filed returns for the earlier assessment years 1941-42 to 1944-45 and a revised return for the assessment year 1945-46, adding varying amounts as income by way of interest accrued outside the Indian Union. The assessments of these years were completed on the following dates ; for the assessment years 1943-44, 1944-45 and 1945-46 on March 27, 1946, for 1942-43 on March 30, 1946, and for 1946-47 on January 12, 1947. These assessments included the different amounts of income by way of interest accrued outside the Indian Union, as shown by the assessee. For the next year, viz 1947-48, the assessment was made on March 28, 1949, and the assessment order was signed by the Income-tax Officer on March 31, 1949. The accounting year for this assessment was the Diwali year which ended on October 21, 1946. Along with this return, Various statements were also filed by the assessee of which one was a copy of the assessee's capital account which showed a credit entry of Rs. 3,06,000 received by way of draft on the Imperial Bank of India, Jaipur Branch, on April 8, 1946. This amount was credited to the assessee's account in the Guntur Branch of the Central Bank. In this return, the assessee disclosed an income of Rs. 57,040 as interest accrued outside the Indian Union but brought into the Indian Union. In addition to this income, he also showed other items by way of salary, profits and interest. But, the Income-tax Officer, on a consideration of the matter, was not prepared to accept this return. Besides making certain additions to the other items of income, he added a further sum of Rs. 14,168 to the foreign income brought into the Indian Union, thus making it a total of Rs. 71,208 instead of the sum of Rs. 57,040 as returned by the assessee. He further deducted, from out of this amount, a sum of Rs. 651 as income assessed in British India but not taken into account by mistake by the assessee. The Income-tax Officer thus completed the assessment for the year 1947-48 on a total income of Rs. 79,351. As stated earlier, this was completed by the order dated March 31, 1949.
2. For more than 6 1/2 years, this assessment was left unchallenged by the department. But, in November, 1955, the Income-tax Officer, Guntur, began to entertain some doubts about the receipt of Rs. 3,06,000 by the assessee on April 8, 1946. He, therefore, examined the assessee on November 14, 1955, and November 15, 1955, and his father on December 3, 1955. According to their explanation, the nucleus of the money originally belonged to the mother of the assessee, who died when he was only two or three years old. It represented her stridhana assets of cash and jewellery. The father, who married again, converted the jewellery also into cash and kept the amount separate, by lending it to some persons in Ratnaghar. Gradually, it grew into larger proportions. After some time, the account was handed over to the assessee by his father. By 1944, it became Rs. 3,00,000, after deducting certain amounts which had been withdrawn by the assessee. That amount was deposited in a bank in Jaipur in December, 1944. In April, 1946, that amount and the interest that accrued thereon, the total of which came to Rs. 3,06,000, was brought into the Indian Union. This explanation did not satisfy the Income-tax Officer. He, therefore initiated proceedings under Section 34(1)(a) of the Income-tax Act, 1922 (hereinafter called 'the Act'), with the prior approval of the Commissioner of Income-tax with notice dated March 26, 1956, which was served on the assessee on March 28, 1956. In the assessment that was finally made in pursuance of the above notice on February 28, 1957, the Income-tax Officer included Rs. 3,06,000 (in the place of Rs. 70,557 originally assessed), as income under other sources 'Income outside British India' remitted into British India, and Rs. 25,000 as income not disclosed. That sum of Rs. 25,000 represented a cash credit in the name of one Bishundas Ramgopal, which the Income-tax Officer discovered during the assessment proceedings in the accounts of the assessee and which according to him was a fictitious borrowed.
3. Aggrieved by this, the assessee appealed to the Appellate Assistant Commissioner, before whom he raised several grounds dealing with the validity of the action under Section 34(1)(a) and also with the merits of the assessment under which the two items of Rs. 3,06,000 and Rs. 25,000 had been added as income. The appellate authority found no substance in the appeal and confirmed the assessment. The assessee then carried the matter in second appeal to the Income-tax Appellate Tribunal, Hyderabad Bench. The same contentions were: urged before the Tribunal also. The Tribunal allowed the appeal of the assessee by holding that:
(i) the notice issued under Section 34(1)(a) of the Act was bad in law ;
(ii) even on merits, the two sums of Rs. 3,06,000 and Rs. 25,000 could not be included in the assessment. In so far as the first amount was concerned, it existed as early as December, 1944, and as such would be includible only for 1945-46 assessment and the second amount was liable to be included only for 1946-47 assessment, as the amount had been credited in the assessee's books on December 31, 1945 ; and
(iii) the notice, having been issued under Section 34(1)(a) on the basis of the amount of Rs. 3,06,000 having escaped assessment, could not be validated because of the second amount of Rs. 25,000.
4. In compliance with the direction of this court under Section 66(2), the Tribunal drew up an agreed statement of the case and referred the following four questions to this court:
'(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the proceedings started under Section 34(1)(a) were bad in law ?
(2) If the answer to question No. 1 is in the negative whether, on the facts and in the circumstances of the case, the sum of Rs. 3,06,000 remitted into British India on April 8, 1946, is income assessable for the assessment year 1945-46 or 1947-48?
(3) Whether, on the facts and in the circumstances of the case, the sum of Rs. 25,000 found credited on December 31, 1945, would be income assessable for the assessment year 1946-47 or 1947-48 ?
(4) Whether, on the facts and in the circumstances of the case, when a notice is issued under Section 34 based on a certain item of income that had escaped assessment, is it permissible for the income-tax authorities to include other items which had escaped assessment in the assessment in addition to the item which had initiated and resulted in the notice under Section 34 ?'
5. The crucial point that has to be answered in this case is the one that is posed by the first question. If the proceedings started under Section 34(1)(a) of the Act were bad in law and the Appellate Tribunal was justified in holding them to be so, the reopening of the assessment and the consequential reassessment of the assessee would be unsustainable. In that case, questions Nos. 2 and 3 need not be answered. In fact, question No. 2, itself, is specifically couched in a manner that it is unnecessary to answer it, if the answer to the first question is in the affirmative. The third question also is in the same position. Both the learned counsel for the assessee as well as the revenue also agreed that questions Nos. 2 and 3 need be answered only in the event of the first question being answered in the negative and that they need not be dealt with in case the /answer to the first question is in the affirmative.
6. In order to answer the first question, it is necessary to read the relevant provisions of Section 34.
'34. (1) If-
(a) the Income-tax Officer has reason to believe that by reason of the omission or failure on the part of an assessee to make a return of his income under Section 22 for any year or to disclose fully and truly all material facts necessary for his assessment for that year, income, profits or gains chargeable to income-tax have escaped assessment for that year, or have been under-assessed, or assessed at too low a rate, or have been made the subject of excessive relief tinder the Act, or excessive loss or depreciation allowance has been computed, or
(b) notwithstanding that there has been no omission or failure as mentioned in Clause (a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income, profits or gains chargeable to income-tax have escaped assessment for any year, or have been under-assessed, or assessed at too low a rate, or have been made the subject of excessive relief under this Act, or that excessive loss or depreciation allowance has been computed, he may in cases falling under Clause (a) at any time and in cases falling under Clause (b) at any time within four years of the end of that year, serve on the assessee, or, if the assessee is a company, on the principal officer thereof, a notice containing all or any of the requirements which may be included in a notice under Sub-section (2) of Section 22 and may proceed to assess or reassess such income, profits or gains or recompute the loss or depreciation allowance ; 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.'
7. It is to be seen that the proceedings against the assessee were not started under Clause (b). Indeed any such proceedings would have been time-barred, since it was commenced after more than four years after the end of the assessment year for which the assessment was sought to be re-opened. The allegation is that there was omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment for the year 1947-48 and, on that account, a large portion of his income escaped assessment for that year. Therefore, the proceedings were taken under Clause (a). Since he had filed his return of his incomeunder Section 22 in response to a notice at the time of the first assessmentfor the year 1947-48, the first limb of Clause (a) has no application to thiscase. Thus, the question for consideration is whether the Income-taxOfficer has reason to believe that by reason of the omission or failure on thepart of the assessee to disclose fully and truly all necessary facts necessaryfor the assessment for the year 1947-48, his income escaped assessment forthat year.
8. The legal position in regard to this is well established. The Supreme Court itself has, on many an occasion, laid down the law very comprehensively. Though many a decision was cited at the bar by both sides, it is sufficient here to refer to some of the salient cases. In Calcutta Discount Co. v. Income-tax Officer, : [1961]41ITR191(SC) profits realised by the appellant-company by sales of shares were not assessed to tax during three assessment years 1942-43 to 1944-45. The Income-tax Officer proposed to initiate reassessment proceedings under Section 34. The company submitted the returns, but at the same time applied to the High Court under Article 226 of the Constitution for directing the officer not to proceed with reassessment proceedings. It contended that the officer did not have reason to believe that under-assessment had occurred by reason of the omission or failure on the part of the company to disclose fully and truly all material facts necessary for assessment. In reply, the officer filed an affidavit stating the grounds on which he came to the belief that by reason of the omission or failure of the company to disclose fully and truly all material facts necessary for the assessment, its income had been under-assessed. Though a single judge of the High Court granted the writ sought by the assessee, it was refused in appeal by a Division Bench of that court. The company, therefore, appealed to the Supreme Court. A majority of the Bench of the Supreme Court set aside the appellate order of the Calcutta High Court and allowed the appeal, by quashing the proceedings started under Section 34. The majority held that to confer jurisdiction under Section 34 to issue notice in respect of assessment beyond the period of four years, but within a period of eight years, from the end of the relevant year, two conditions had to be satisfied. The first was that the Income-tax Officer must have reason to believe that income, profits or gains chargeable to income-tax had been under-assessed. The second was that he must have also reason to believe that such 'under-assessment' had occurred by reason of either (1) omission or failure on the part of an assessee to make a return of his income under Section 22 or (2) omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment for that year. Both these conditions were conditions precedent to be satisfied before the Income-tax Officer could have jurisdiction to issue a notice for the assessment or reassessment beyond the period of four years but within the period of eight years, from the end of the year in question,
9. Amplifying the meaning of the words 'omission or failure to disclose fully and truly all material facts necessary for his assessment for that year,' the learned judges said that they postulated a duty on every assessee to disclose fully and truly all material facts necessary for his assessment. What facts were material and necessary for assessment differed from case to case. In every assessment proceeding, the assessing authority would, for the purpose of computing or determining the proper tax due from an assessee, require to know all the facts which help him in coming to the correct conclusion. From the primary facts in his possession, whether on disclosure by the assessee, or discovered by him on the basis of the facts disclosed, or otherwise, the assessing authority had to draw inferences as regards certain other facts; and ultimately from the primary facts and the further facts inferred from them, the authority had to draw the proper legal inference, and ascertain, on a correct interpretation of the taxing enactment, the proper tax leviable. So far as primary facts were concerned, it was 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. The duty, however, did not extend beyond the full and truthful disclosure of all primary facts. Once all the primary facts were before the assessing authority, it was for him to decide what inferences of facts could be reasonably drawn and what legal inferences had ultimately to be drawn. It was not for anybody else--far less the assessee--to tell the assessing authority what inferences, whether of facts or law, should be drawn.
10. Discussing the scope of the jurisdiction of the Income-tax Officer to start the proceedings under Section 34(1), the majority of the judges observed:
'If there were in fact some reasonable grounds for the Income-tax Officer to believe that there has been any non-disclosure as regards any primary 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 notices under Section 34. Whether these grounds were adequate or not to arriving at the conclusion that there was a nondisclosure of material facts was not open for the courts investigation. In other words, all that was necessary to give this special jurisdiction was that the Income-tax Officer had, when he assumed jurisdictions, some prima facie grounds for thinking that there had been some non-disclosure of material facts. It was the duty of the assesses, who wasted the court to hold that jurisdiction was lacking, to establish that the Income-tax Officer had no material at all before him for believing that there had been such nondisclosure.'
11. Applying these principles to the circumstances of the case before them, the majority came to the conclusion that the Income-tax Officer did not have any material before him for believing that there had been any material non-disclosure by reason of which underassessment had taken place. Consequently, they held that the Income-tax Officer had no jurisdiction to issue the notice and allowed the appeal.
12. Shah and Hidayatullah JJ., as their Lordships then were, in their dissenting judgments, did not lay down any different principles of law, though they disagreed with the majority and held that the Income-tax Officer had reason to believe that there was underassessment which occurred by reason of the omission of the company to disclose fully and truly all material facts necessary for assessment. Shah J., explaining the meaning of the expression 'reason to believe', held that it postulates belief and the existence of reasons for that belief. The belief must be held in good faith; it cannot be merely a pretence. The expression does not mean a purely subjective satisfaction of the Income-tax Officer: the forum of decision as to the existence of reasons and the belief is not in the mind of the Income-tax Officer. It predicates that the Income-tax Officer holds the belief induced by the existence of reasons for holding such belief. Such a belief may not be based on mere suspicion ; it must be founded upon information and the court is not concerned with the question whether the materials may be regarded by a court, before which a .dispute is raised, to be sufficient to sustain the belief entertained by the Income-tax Officer.
13. Hidayatullah J., as he then was, enunciated his view that if it be merely a question of interpretation of evidence by an Income-tax Officer from whom nothing had been hidden and to whom everything has been fully disclosed, then the assessee cannot be subjected to Section 34, merely because the Income-tax Officer miscarried in his interpretation of evidence. But, it is otherwise if a contention which is contrary to fact is raised and the Income-tax Officer is set to discover the hidden truth for himself. In the latter case, there is suppression of material facts, or, in other words, that lack of full and true disclosure which would entitle action under Section 34 of the Act.
14. Thus, we find that in enunciating the basic principles in accordance with which an Income-tax Officer can invoke his jurisdiction under Section 34 all the judges including the majority and the minority are agreed. The difference was only in regard to emphasis and amplification and, ultimately, in the application of the principles to the facts of the case.
15. In S. Narayanappa v. Commissioner of Income-tax, [1967] 63 I.T.R. 212 (S.C.) the Supreme Court restated the same principles It held that two conditions must be satisfied to confer jurisdiction on the Income-tax Officer to issue the notice under Section 34(1)(a), viz., (1) that the Income-tax Officer must have reason to believe that income, profits or gains chargeable to income-tax had been under-assessed; and (2) that he must have reason to believe that such 'under-assessment' had occurred by reason of either omission or failure on the part of the assessee to make a return of his income under Section 22 or omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that year. The expression 'reason to believe' does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The belief must be held in good faith : it cannot be merely a pretence. 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 under-assessment, that would be sufficient to give jurisdiction to the Income-tax Officer to issue the notice under Section 34. Whether these grounds are adequate or not is not a matter for the court to investigate. It is, however, open to the assessee to contend that the Income-tax Officer did not hold the belief that there had been such non-disclosure. It is also open to the court to examine whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section. It was further held that the Income-tax Officer need not communicate to the assessee the reasons which led to initiate proceedings under Section 34.
16. In Kantamani Venkata Narayana and Sons v. 1st Additional Income--tax Officer, : [1967]63ITR638(SC) the Supreme Court considered the extent of the duty of the assessee to disclose material facts necessary for his assessment. It was held that the assessee does not discharge his duty in this regard by merely producing the books of account or other evidence. He has to further bring to the notice of the Income-tax Officer, particular items in the books of account or portions of documents which are relevant. Even if it be assumed that, from the books produced, the Income-tax Officer, if he had been circumspect, could have found out the truth, he is not on that account precluded from exercising the power to assess income which had escaped assessment.
17. This court in Parimisetti Seetharamamma v. Commissioner of Income-tax, [1963] 50 I.T.R. 450,while observing that the assessee is obliged only to disclose the primaryfacts upon which the assessment may be founded and it may not benecessary for him to indicate the inferences to be drawn from such material,held that the assessee before them failed to disclose the real relationship between herself and the person from whom certain amounts of money had come to her and by failing to do so had omitted to disclose material facts necessary for her assessment.
18. The Madras High Court considered the nature of the disclosure of all material facts by the assessee to the assessing officer in E.M. Muthappa Chettiar v. Commissioner of Income-tax, [1964] 53 I.T.R. 642. At page 650, the court observed :
'It is the duty of the assessee to reveal the major facts which have a bearing on the assessment to be made...............He cannot delve into themind of the Income-tax Officer and try to fathom it and predicate what are material facts in the view of the officer. The facts must be such that if taken into account, they would have an adverse effect on the assessee by the passing of a greater assessment than the one actually made. The rule of full and true disclosure of material and necessary facts should not be so fastidiously construed as would enable the department to say that non-disclosure of a fact which may have a remote bearing on the assessment attracts the section, as the assessing officer would have material use of it to charge the assessee more than what he did. The Income-tax Officer cannot certainly fall back on the section to make good his deficiencies in the first completed assessment............The department is not at liberty to take holdof any and every circumstance, call it non-disclosure of material facts and set the machinery of reassessment in motion.'
19. The Gujarat High Court reviewed the legal position and the case law on the point in Kanji Ranchhod v. Commissioner of Income-tax, [1966] 61 I.T.R. 339 and Bhanji Lavji v. Commissioner of Income-tax, [1967] 63 I.T.R. 1. In the former case, the Income-tax Officer discovered that the assessee had omitted to disclose a credit entry of Rs. 21,352 during the accounting year and believing that owing to such non-disclosure, that income had escaped assessment, reopened the Assessment under Section 34. The officer found that the relevant entry was only a carry forward entry of a deposit made in the earlier years, and, therefore, did not include this item on reassessment, but added a different sum of Rs. 13,300 being the total of cash credits standing in the assessee's books in the name of the assessee's family treating these amounts as income from undisclosed sources. The High Court of Gujarat held that the belief of the officer was based on the fact that the assessee had failed to disclose a particular entry ; but the nature of the entry was such that its disclosure could have had no bearing on the amount under assessment. In that view, the court found that the belief of the officer that income had escaped assessment was based on no material and consequently the proceedings under Section 34 were invalid.
20. After referring to Calcutta Discount Company v. Income-tax Officer, Shelat C. J., speaking for the Bench, observed at pages 350 and 351:
'The Supreme Court observed that it is the duty of the assessee who wants the court to hold that jurisdiction was lacking, to establish that the Income-tax Officer had no material at all before him for believing that there had been such non-disclosure. Though the court cannot investigate into the adequacy or otherwise of the grounds on which the reason to believe on the part of the Income-tax Officer rests, the assessee is entitled to show that there was no material at all on which the Income-tax Officer could found such belief, that is, have reason for such belief. If, therefore, an assessee is in a position to show that he had disclosed at the time of the original assessment all that he was bound to disclose, i.e., all the primary facts relevant to and having a bearing on his assessment, there would be no ground for the Income-tax Officer to have reason to believe that there was any omission or failure on the assessee's part to disclose. Similarly, if an assessee can show that, though there was omission or failure to disclose on his part, such failure or omission had not resulted in any non-assessment or underassessment, etc., surely there would be no ground for the Income-tax Officer to have reason to believe that there was any non-assessment or under-assessment, etc., consequent upon such omission or failure. It would, therefore, follow that primary facts necessary for a proper assessment are objective facts, the existence or the non-existence of which is not a matter of reasonable belief on the part an Income-tax Officer. An Income-tax Officer cannot say that he had reason to believe that a certain fact which was relevant for assessment and, therefore, a primary fact existed and that it was not disclosed by an assessee if such a fact did not factually exist.'
21. Again after referring to E.M. Muthappa Chettiar v. Commissioner of Income-tax the learned Chief Justice states as page 353 :
'These observations clearly show what we have already said that whether a fact, the non-disclosure of which is sought to be relied on, is a material fact or, as the Supreme Court called, is a primary fact relevant to the assessment is an objective fact and does not depend merely on the taxing officer's reason to believe. Such a fact, according of this decision, must be such that it would adversely affect the original assessment by the passing of an assessment higher than the original assessment. That being the position, if it is found that the reason to believe that there was non-assessment on account of any non-disclosure of a material fact on the part of an assessee rested on a non-existent fact or a fact found to be incorrect, there would be no material or ground for such a belief and the initiation of proceedings consequently would be contrary to the provisions of Clause (a) of Sub-section (1).'
22. In Bhanji Lavji v. Commissioner of Income-tax, the same learned judges, who had decided the earlier case in Kanji Ranchhod v. Commissioner of Income-tax, laid down the tests for finding out what, constituted material facts. In addition to restating the conditions precedent which should exist before the Income-tax Officer could exercise jurisdiction by issuing a notice under Section 34(1)(a), the learned judges held that the 'material facts' which are required to be disclosed by an assessee at the time of his assessment are primary facts, material and necessary, for the purpose of his assessment. The duty of the assessee is to disclose only primary facts and it is for the assessing authority to decide what inferences of facts can be reasonably drawn from the primary facts and what legal inferences must ultimately be drawn from the primary facts and the other facts inferred from them. The 'primary facts' which are required to be disclosed must also be material or relevant to the decision of the question before the assessing authority so that their non-disclosure could have a material bearing on the question of escapement of income from assessment. This requirement must be satisfied before the primary facts can be said to be 'material facts' within the meaning of Section 34(1)(a); but what primary facts satisfy this requirement must necessarily depend upon the facts of each case.
23. A review of the above rulings yields the following principles according to which alone reassessment under Section 34(1)(a) can be validly made:
(i) the Income-tax Officer must have reason to believe that income, profits or gains chargeable to income-tax have escaped assessment,
(ii) he must have also reason to believe that such escapement has taken place by reason of either, (a) omission or failure on the part of an assessee to make a return of his income under Section 22, or (b) omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment for that year.
24. These conditions are conditions precedent to be satisfied before the Income-tax Officer could have jurisdiction to issue a notice under Section 34(1)(a).
(2) The 'material facts' which an assessee is required to disclose at the time of his assessment are primary facts material and necessary for the purpose of his assessment. The 'primary facts' which are required to be disclosed must be material or relevant to the decision of the question before the. assessing authority so that their non-disclosure could have a material bearing on the question of escapement of income from assessment. Only when this requirement is satisfied, 'primary facts' can be said to be 'material facts' within the meaning of Section 34(1)(a).
(3) What primary facts satisfy such a requirement depends upon the facts and circumstances of each case.
(4) The duty of an assessee is only to disclose primary facts and it is for the assessing authority to decide what inferences of facts can be reasonably drawn from the primary facts and what legal inferences must ultimately be drawn from the primary facts and the other facts inferred from them.
(5) If there were in fact some reasonable grounds for thinking that there had been any non-disclosure as regards any primary 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 34. Whether these grounds were adequate or not for arriving at the conclusion that there was a non-disclosure of material facts would not be open for the court's investigation. Though the court cannot investigate into the adequacy or otherwise of the grounds on which reason to believe on the part of the Income-tax Officer rests, the assessee is entitled to show that there was no material at all on which the Income-tax Officer could found such belief. Primary facts necessary for a proper assessment are objective facts, the existence or non-existence of which is not a matter of reasonable belief on the part of the Income-tax Officer.
(6) The expression 'reason to believe' does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The belief must be held in good faith; it cannot be merely a pretence nor can it be based merely on suspicions.
25. We will now proceed to examine in the light of the aforesaid principles whether the Appellate Tribunal was justified in holding that the proceedings started by the Income-tax Officer under Section 34(1)(a) were bad in law. We have already referred to the findings recorded by the Tribunal, as they are stated in the agreed statement of the case made by the Tribunal in compliance with the requisition of this court. It is stated in paragraph 6 of the statement that:
'The Tribunal accepted the contention on behalf of the assessee that there was merely a change of opinion on the part of the successor Income-tax Officer and that there was no failure On the part of the assessee to disclose fully and truly all material facts necessary- for his assessment. The Tribunal also declined to accept the arguments on behalf of the department that the Income-tax Officer who made the original assessment had not applied his mind in regard to the whole sum of Rs. 3,06,000 but only to a part of it, which had been disclosed, viz., Rs. 57,040.'
26. The reasoning of the Tribunal in coming to the aforesaid conclusion is that the Income-tax Officer had before him the fact of the remittance of Rs. 3,06,000 by the assessee in April, 1946, under the draft received by him from the bank in Jaipur, Part of this amount had already been declared by the assessee as income thereby necessarily implying that the balance was claimed by him to be the capital amount. Obviously, the Income-tax Officer, who made the original assessment, had accepted this claim of the assessee but he did not do so blindly. Obviously, he applied his mind and tested the correctness of the various items of income, because he made variations in the estimates of income as returned by the assessee. In fact, he added R. 14,168 to the admitted foreign income of Rs. 57,040 brought into the Indian Union and arrived at a total amount of Rs. 71,028. Out of this amount, he deducted Rs. 651 as income assessed in British India but not taken into account by mistake by the assessee. This would clearly demonstrate that the assessing officer had applied his mind carefully while making the assessment. Obviously, the explanation of the assessee in regard to the accrual of different sums of interest and the capital amount out of which such interest accrued was believed by the then Income-tax Officer. In the circumstances, it cannot be said that the assessee had failed to disclose fully and truly all material facts necessary for his assessment at the time of the original assessment. The Tribunal, therefore, came to the conclusion that the alleged assessability of the entire sum of Rs. 3,06,000 was merely based on a change of opinion on the part of the Income-tax Officer and, consequently, the proceedings started under Section 34(1)(a) were bad in law. The question now, therefore, is whether the Appellate Tribunal was justified in holding so.
27. The assessee is an individual and the assessment year under reference is 1957-58 for which 'the previous year was the Deepavali year which ended on October 21, 1946'. His source of income in British India were salary, business in groundnut oil, etc., and other sources including small items of interest. Besides these sources, he had also a money-lending business in Bikaner State which was then an Indian State outside British India. This latter fact is recorded in paragraph 3 of the agreed statement of the case. Sri Ananta Babu, learned counsel for the revenue, demurred to this statement saying that the fact did not clearly emerge form the order of the Tribunal and the circumstances of the case. As we have observed, the statement of the case is an agreed one. When that is so, it is not open to either party to go beyond that (vide Abdul Hameed Khan v. Commissioner of Income-tax, [1967] 63 I.T.R. 738). That apart the fact that the assessee had money-lending business outside British India at the relevant time, is clearly evidenced by the circumstance that he had received interest from outside and was assessed thereon in the previous years. In any case, it is not the suggestion of the revenue that he had another business outside the territory of British India which brought him these items of income.
28. In response to a notice under Section 22(2) for the assessment year 1947-48, the assessee filed a return of his income showing a total income of Rs. 63,633 which included a sum of Rs. 57,039-9-6 shown under Section (B) as income which accrued outside the taxable territories but brought into the taxable territories. The agreed statement of the case proceeds to state that, 'along with the return of income, various statements were also filed of which one was a copy of the assessee's capital account, which showed the following entry on the credit side: April 30, 1966. Draft received from Jaipur Bank Rs. 3,06,000-0-0.
29. When this was stated, it can be unhesitatingly understood that the Tribunal was not only informed that these various statements were filed along with the return, but also that it looked into them because it. quoted the credit entry of Rs. 3,06,000 from one of such statements. The department placed before us the file relating to the original assessment. A statement at page 12 of that file showed the total income from outside British India at Rs. 90,039-9-6 out of which a sum of Rs. 33,000 (as assessed previously) was deducted showing a balance of Rs. 57,039-9-6. Page 21 of the file contains a statement of capital account which showed an entry of 30th April, 1946, of Rs. 3,06,000. It is, thus, obvious that the statement's were filed by the assessee along with the return, one of which was a copy of his capital account and that, the Tribunal had. them before it when it decided the case. The learned counsel for the revenue argued that, in its order, the Tribunal did not refer to these statements and base its conclusions on them. It is true that the discussion of the point by the Tribunal was not elaborate and detailed. We must also observe that it is always desirable for the Tribunal as a final fact-finding authority, especially when it disagreed from the lower authorities, to consider the facts and circumstances of the case in detail and give its reasons clearly for its conclusions. But, at the same time, we cannot agree with the criticism of the learned counsel for the revenue that the Tribunal did not consider the statements filed by the assessee along with the original return. While coming to the conclusion that the amount of the interest of Rs. 70,557 calculated by the Income-tax Officer was part of the amount of Rs. 3,06,000, the Tribunal observed:
'Nay, the Income-tax Officer bad before him a copy of the assessee's account which showed the credit of the said sum of Rs. 3,06,000 as the proceeds of the bank draft received from Jaipur, then in Indian State, Considering the explanation of the assessee in regard to both the sum of Rs. 3,06,000 and the sum of Rs. 57,040, the Income-tax Officer made the original assessment as above.'
30. It also referred to the observation of the Appellate Assistant Commissioner which had taken notice of the fact that the assessee had disclosed the receipt of Rs. 3,06,000 in the capital account of the appellant. In paragraph (9) of its order, it further found 'that this sum of Rs. 3,06,000, though received on April 8, 1946, relevant for the assessment year 1947-48, had its origin in the sum of Rs. 3,00,000 deposited in the bank at Jaipur in December, 1944. This fact cannot be disputed.' The Tribunal, must have gathered this information also from the statements filed by the assessee at the time of the original assessment and available before it. There can, therefore, be no doubt, that the Tribunal not only had these statements before it when it considered the case, but also considered them and treated them as part of the material on which it came to its conclusions.
31. The original assessment was on a total income of Rs. 79,351 made up as under:
Rs.Salary...2,200Business...6,576Other sources...18Foreign income brought to Indian Union...70,557
79,351
32. As has been already stated, the Income-tax Officer on the first occasion did not accept the sum of Rs. 57,040 as foreign income, but added Rs. 14,168 to it. The notice under Section 34(1)(a) was served on the assessee on March 28, 1956, and according to the reassessment which was completed on February 28, 1957, the total income was estimated at Rs. 3,39,794 which was made up as under:
Rs.Salary...2,200Business...31,576(a) Income outside British India remitted into British India...3,06,000(b) Interest...18
3,09,794
33. It will be seen that under the head 'business' a sum of Rs. 25,000 was added and under the head 'income outside British India' the entire sum of RS. 3,06,000 was added in the place of Rs. 70,557. The officer, while reassessing, considered the entire amount of Rs. 3,06,000 received by the assessee by draft on 8th April, 1946, as income. In coming to the conclusion, the Income-tax Officer tested the explanation of the assessee and his father that he had lent the amount to four persons In Ratnaghar, the native place of the assessee. While doing so, he referred to the explanation of the assessee that he had received interest on the above lines as shown below:
Rs.As.Ps.Year ending 21-10-193914,167 15 6Year ending 9-10-194013.901 8 9Year ending 29-9-194115,044 1 0 Year ending 18-10-191216,970 0 9Year ending 31-10-194317,554 8 0
77,638 2 0
34. But the officer failed to include the amount of interest of Rs. 16,546, accrued outside British India and Rs. 103 accrued in British India for the year 1943. He did not also include the sum of Rs. 3,921 being interest accrued by October 31, 1945. Similarly, he failed to add Rs. 6,000 that accrued by October 31, 1946, on the bank deposit of Rs. 3,00,000 made in the year 1944. If all these amounts of interest that accrued outside British India are correctly put together and added, the total interest that accrued would be Rs. 1,03,557. The assessee accounted for and was actually assessed for this entire income by way of interest of Rs. 1,03,557. Rs. 3,000 was included in the assessment year 1942-43, Rs. 30,000 was included in the year 1946-47 and Rs. 70,557 was included in 1947-48. All these three amounts make a total of Rs. 1,03,557. The assessee thus accounted for the entire interest that accrued to him outside British India. The Income-tax Officer committed a mistake in not including the interest of Rs. 16,546 accrued in the assessment year 1943, Rs. 3921 which was the interest for the year ended with October 31, 1945, and Rs. 6,000 which was the interest on bank deposit for the year ended with October 31, 1946.
35. This apart, there is another fallacy in the reasoning of the Income-tax Officer. The assessee explained that he had received a sum of Rs. 2,44,423-5-3 left by the deceased mother by way of accumulated cash and sale proceeds of her jewellery and that, out of that amount, he lent a sum of Rs. 25,000 to four persons. While testing whether the total amount of Rs. 3,39,000 consisting of Rs. 3,000, Rs. 30,000 and Rs. 3,06,000 which he had received was satisfactorily explained or not, he estimated the accrued income at Rs. 1,14,000 after deducting the sum of Rs. 2,25,000 he had advanced to four persons in Ratnaghar. Since only Rs. 1,03,557 was assessed the officer thought that there was at least an unaccounted unassessed balance of Rs. 10,443. While doing this the officer completely ignored the balance of rupees nineteen thousand and odd in the hands of the assessee out of his original assets (according to his claim) after deducting Rs. 2,25,000. The officer thus committed errors apparent on the record while proceeding under Section 34(1)(a).
36. Apart from these obvious errors committed by the Incomes-tax Officer the crucial question is whether at the time of the original assessment the assessee had failed to disclose fully and truly all material facts necessary for his assessment and for that reason a part of his income had escaped assessment. We find from the order of the Income-tax Officer dated February 28, 1957, which is annexure 'B' to the statement and which is stated to be part of it, the assessee filed on March 26, 1946, returns for the assessment years from 1941-42 to 1944-45 and a revised return for the assessment year 1945-46, showing incomes from the alleged accrued interest at his native place, Ratnaghar. We have already stated that the assessment was made on March 27, 1946, for assessment years 1943-44, 1944-45, and 1945-46 ; on 30th March, 1946, for 1942-43 and on January 12, 1947, for 1946-47. The statement of account filed by the assessee along with the return and which is at page 12 of the file of the department produced before us (to which we have already adverted) show the total income accrued till then at Rs. 90,939-9-6. From this was deducted the sum of Rs. 33,000 (consisting of Rs. 3,000 shown in 1942-43 and Rs. 30,000 in 1946-47), and the balance of Rs. 57,039-9-6 was shown as income from interest outside British India for the assessment year 1947-48. Details of the interest accrued outside British India every year were also given. These were referred to by the Income-tax Officer in reassessment. But, as we have said, the officer has omitted to include the interest of Rs. 16,546 accrued for the year 1943 and Rs. 3,921 accrued for the year 1945 and Rs. 6,000 accrued for the year 1946. When all the amounts are correctly included the total amount of interest comes to Rs. 1,03,557. These details were available to the Income-tax Officer at the time of first assessment. Since these details related to the earlier years, the earlier assessments also had a bearing on the assessments for the year 1947-48. There is no reason to suppose and in fact, it should be expected that the Income-tax Officer made the assessment for the year 1947-48 on the first occasion not only looking into the return and the statements then filed by the assessee but also into the previous assessments which had been made in March, 1946, and January, 1947. It is obvious that the officer carefully scrutinised the different statements and the claims made by the assessee. He did not accept Rs. 57,040 shown by the assessee as income from outside British India. He added Rs. 14,168 to that item, as 'income of the previous year to the assessment year 1940-41 not taken into account by the assessee and agreed to at the time of hearing'. This would clearly show beyond any doubt that he had carefully examined the Statements and the amounts of interest that accrued to him right from the previous year to the year 1940-41 up to the assessment year. If all the amounts of interest that accrued for all those years are added up an income of Rs. 71,208 would be left unassessed, after excluding a sum of Rs. 33,000 assessed earlier. This 71,208 was arrived at as the total income of the assessee from outside the Indian Union. This could have been arrived at by the Income-tax Officer, on the previous occasion, only on the basis that a certain amount of capital was available to the assessee from out of which he could derive this income. Indeed, the assessee's capital account filed along with the return for the year 1947-48 showed the receipt of Rs. 3,06,000.
37. Thus, we find, the assessee placed before the assessing authority even on the first occasion the basic facts necessary for his assessment. He showed a receipt of Rs. 3,06,000 in his capital account. The receipt of this amount could not have been ignored or brushed aside by the assessing authority for the simple reason that amounts of interest accrued over the previous years were all clearly indicated. They were clearly indicated not only in the return for the assessment year 1947-48 but were also shown in the previous returns and were in fact assessed in part. When a particular capital receipt is shown along with the amounts of income, that accrued from year to year as interest, there is disclosure true and full of all basic facts which are material for the assessment in that respect. There is no reason to suppose that the Income-tax Officer had overlooked, on the earlier occasion, the receipt of Rs. 3,06,000 which was admittedly shown in the capital account. Indeed, the actual assessment made by the officer would also clearly demonstrate that he had noted it and estimated the interest accrued thereon. When he found out that a sum of Rs. 14,168 was not included in the total estimate made by the assessee in his return he included it in the assessment. That assessment order also shows that the assessee had in fact agreed to such inclusion at the time of hearing. From out of this total amount, the Income-tax Officer deducted a sum of Rs. 651 as income assessed in British India. This again dispels all doubts, if there are any, that the Income-tax Officer had not applied his mind to the assessment. There cannot, therefore, be any doubt that in regard to the assessment of income from outside the Indian Union the assessee placed before the assessing authority, at the time of the original assessment, all the basic facts, fully and truly which are material for his assessment for that year and that the assessment was made only after careful scrutiny by the Income-tax Officer.
38. A reading of the assessment order would show that the Income-tax Officer who made the reassessment was entertaining a suspicion about the source of the capital for this income and the manner in which it had ultimately swollen to the large amount of Rs. 3,06,000. But, an assessment cannot be reopened under Section 34(1)(a) on the basis of mere suspicions. There should be some material on which the Income-tax Officer came to the belief that a portion of the assessee's income had escaped assessment on account of non-disclosure of material facts by the assessee necessary for his assessment. The facts necessary for a proper assessment are objective facts, the existence or non-existence of which is not a matter of reasonable belief on the part of the Income-tax Officer. Whether the Income-tax Officer has reasons to believe is a subjective test showing that the belief must be that of an honest and reasonable person based upon reasonable grounds which, however, would exclude his acting on mere suspicion, gossip or rumour. As we have said, the assessee hid disclosed on the first occasion that he had received capital and also income thereon. There is no reason to suppose that the Income-tax Officer did not seek and receive an explanation from the assessee about the source of his capital on the earlier occasion. He obviously received one, accepted that explanation and made the assessment on that basis. It is not for the assessee to suggest the inferences that could be drawn from the primary facts, material for his assessment, placed by him before the assessing authority. His only duty is to place before the concerned authority the material facts necessary for a proper assessment. This, the present assessee did even on the first occasion. If the reassessing authority wants to draw a different inference from the one which had been drawn by the original assessing authority, he cannot, on that basis, and for that reason, reopen assessment under Section 34(1)(a). That provision of law does not clothe him with that jurisdiction. He can do so only if he has reason to believe that material facts necessary for the assessment had not been disclosed fully and truly at the time of original assessment. The assessing authority had no material to say that the assessee had failed to do so.
39. Again and again, in the order of reassessment, the Income-tax Officer harped on the absence of satisfactory explanation for the source of the assessee's capital. For one thing, it was for the original assessing authority to draw possible inferences from the basic facts disclosed to him. The reassessing authority purporting to exercise jurisdiction under Section 34(1)(a) cannot question the correctness of these inferences drawn by the original assessing authority and say that the source of capital had not been satisfactorily explained. Besides, the assessee had offered an explanation before the reassessing authority also. No doubt, the Income-tax Officer pointed out certain features in the explanation tendered by the assessee and his father in regard to the source of the capital of the assessee and how it had improved over the years. We have already referred to this explanation. The assessee raised his wealth through the jewels and cash left by his mother who died when he was two or three years old. That nucleus gradually grew into a larger amount under the management of his father and himself. In regard to this, the Income-tax Officer in his reassessment order pointed out some discrepancies in the statements of the assessee and his father. The officer also expressed a doubt that the filing of the returns in respect of the earlier years on March 26, 1946, was nothing but a prelude to the remittance of Rs. 3,06,000 at Jaipur. He referred to the probability that the alleged borrowers from the assessee at Ratnaghar could not be big traders and could not have required the large amounts which they were said to have borrowed from the assessee. He referred to the accounts books produced by the assessee and said that it was nothing but a fabrication. He also pointed out the failure of the assessee to originally give the correct name of the bank in which the amount was deposited. Subsequently, the assessee stated that the bank in which the deposit had been made was the Bank of Jaipur Ltd. at Jaipur. From this, the officer inferred that the assessee had been evading to furnish information regarding his explanation. The assessee also examined the grandsons of two of the borrowers from him in support of his claim that the amount had been lent to some persons at Ratnaghar. This evidence was rejected by the Income-tax officer on the ground that the borrowers belonged to the same caste as the assessee and also on the ground that Ratnaghar was a small place and that the borrowers were not substantial people requiring large amounts of loans for their business. These different criticisms levelled by the Income-tax Officer on the explanation made by the assessee at the time of reassessment are referred to by us for the purpose of pointing out that the entire basis for the reopening of the assessment under Section 34(1)(a) is surmise and suspicion and consequential change of opinion and nothing but that. As we have said, jurisdiction under Section 34(1)(a) cannot be clutched at by the Income-tax Officer on mere surmises and suspicions. When the assessment was first made, the income of Rs. 70,557 from outside British India was accepted and added on a definite basis which must necessarily refer to the existence of certain capital. The existence of such capital was thus already accepted in the earlier assessments. So, the source of that capital was not a material fact for the assessment of the year 1947-48. We have, thus, no hesitation in coming to the conclusion that the Income-tax Officer had no material on which he could come to the conclusion that a part of the assessee's income had escaped assessment for the assessment year 1947-48 on account of the failure of the assessee to disclose fully and truly all material facts necessary for such assessment. In addition, as we have also pointed out, the officer committed certain errors in coming to the conclusion that a part of the income had escaped assessment.
40. The above discussion shows that the Tribunal was justified in holding that the proceedings started under Section 34(1)(a) were bad in law. That conclusion was based on the definite finding that there was no failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. It also found that the sum of Rs. 3,06,000 received into British India on April 8, 1946, had its origin in a sum of Rs. 3,00,0000 deposited at the Bank at Jaipur in December, 1944. As the Supreme Court said in Commissioner of Income-tax v. Lakhiram Ramdas, : [1962]44ITR726(SC) : 'The question whether the assessee had or had not failed to disclose fully and truly all material facts necessary for his assessment was a question of fact.' Sri Ananta Babu, however, strenuously urged that these findings cannot be accepted as final as they were not based on detailed consideration of the evidence and circumstances of the case. He even suggested that a supplemental statement of the case can be called for. As we have pointed out, it is true that the Tribunal did not elaborately consider the circumstances of the case while coming to its conclusions. But for that reason alone, we cannot refuse to accept those findings of fact. This court can interfere with findings recorded by the Tribunal only if there was no evidence at all in support of them or if inadmissible evidence was relied on in coming to those conclusions or if admissible evidence was rejected in doing so. That is why, we have considered at length the facts and circumstances of the case. We do not find that the findings of the Tribunal suffer from the vice of any of the above three defects. Nor do we consider that this is a case where calling for a supplemental statement is warranted. We are satisfied that all the necessary facts are already on record and they are disclosed by the statement of the case and its annexures which were made part of the statement. When the facts appearing on the record have all been narrated in the statement of the case, even if the Tribunal has failed to consider some of the aspects, though raised before it, but rested its decision only on one or two aspects, the High Court cannot call for a further statement of the case but must decide all the aspects on the evidence already on record and appearing in the statement of the case (vide Abdul Hameed Khan v. Commissioner of Income-tax). In the circumstances, we do not find it proper or necessary to interfere with the findings recorded by the lower court or to call for a supplementary statement.
41. The law in regard to the interference by the High Court with the findings of the Tribunal was stated by the Supreme Court in G. Venkataswami Naidu & Co. v. Commissioner of Income-tax, 0065/1958 : [1959]35ITR594(SC) thus :
'Where the point sought to be raised on a reference is a pure question of fact, the finding of fact recorded by the Tribunal must be regarded as conclusive in proceedings under Section 66(1). If, however, such a finding of fact is based on an inference drawn from primary evidentiary facts proved in the case, its correctness or validity is open to challenge in reference proceedings within narrow limits. The assessee or the revenue can contend that the inference has been drawn on considering inadmissible evidence or after excluding admissible and relevant evidence ; and, if the High Court is satisfied that the inference is the result of improper admission or exclusion of evidence, it would be justified in examining the correctness of the conclusion. It may also be open to the party to challenge a conclusion of fact drawn by the Tribunal on the ground that it is not supported by any legal evidence ; or that the impugned conclusion drawn from the relevant facts is not rationally possible ; and if such a plea is established, the court may consider whether the conclusion is not perverse and should not, therefore, be set aside. It is within these narrow limits that the conclusions of fact recorded by the Tribunal can be challenged under Section 66(1).'
42. This view was reiterated by the Supreme Court in Commissioner of Income-tax v. Daulatram Rawatmull, : [1964]53ITR574(SC) . As we have said, the findings of fact recorded by the Tribunal do not suffer from any of the vices stated above. On the other hand, we find that they are fully justified by the facts and circumstances of the case.
43. Our answer to the first question is, therefore, in the affirmative and that the Appellate Tribunal was justified in holding that the proceedings stated under Section 34(1)(a) were bad in law.
44. Since our answer to the first question is in the affirmative as we have started and was agreed to by both sides, we need not answer questions Nos. 2 and 3. In view of the answer to the first question the very reassessment is invalid and the question of adding of Rs. 3,06,000 and Rs. 25,000 in the assessment years 1946-47 or 1947-48 do not arise.
45. Now remains the last question. It was stated that this question was formulated under a misapprehension. Sri Sundara Rao, appearing for the assessee, stated before us that his client never contended before the Tribunal and that he would not contend before us, that when a notice is issued under Section 34 based on a certain item of income that had escaped assessment, it is not proper for the income-tax authorities to include other items which had escaped assessment in the assessment, in addition to the item on account of which Section 34 proceedings had been initiated. Once the assessment is properly reopened under Section 34, it would result in the officer making a de novo assessment. It was held by this court in Pulavarthi Viswanatham v. Commissioner of Income-tax, [1963] 50 I.T.R. 463 that:
'Once an assessment is validly reopened under Section 34(1)(a), the Income-tax Officer proceeds de novo and issues a notice under Section 22, and the assessee is upon service of that notice under an obligation to disclose his total income, and it is not open to him to omit any part of his income; if he does so he does it at the peril of attracting Section 23(4). It is not open to him to contend that it is only such portion of the income which was not included in the original return that would be liable to assessment in the reassessment proceedings. Therefore, after notice issued under Section 34(1)(a), the power of the Income-tax Officer to assess is not limited to items which escaped assessment by reason of the failure on the part of the assessee to disclose all his income, profits or gains which are subject to tax but extends to taxing amounts which were excluded by theIncome-tax Officer in the original assessment even though the assessee hadhimself shown those amounts in his return of income.'
46. To the same effect are the decisions in Anne Nagendram and BommareddiVenkayya & Co. v. Commissioner of Income-tax, [1967] 66 I.T.R. 46 and R.C. Nos. 54/60 and 5/64dated 12-1-64 (Tadikonda Ramudu v. Commissioner of Income-tax). There is no doubt that when an assessment is properly reopened under Section 34(1)(a), the officer can include in the reassessment all the incomes which had escaped assessment in the original assessment. The answer to questionNo. 4 must therefore be in the affirmative. But this question becomes academic in this case, in view of our finding that the proceedings under Section 34(1 )(a) are illegal. In that view, the question of newly adding some more items of income in reassessment does not arise.
47. Thus, the crucial question No. 1 is answered in the affirmative and in favour of the assessee. He shall get his costs from the revenue. Advocate's fee, Rs. 250.