S.D. Shah, J.
1. On being directed by this court, under section 256(2) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal has made these references to us and has referred the following questions of law for our opinion :
'1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in law in holding that the reopening of assessment under section 147(a) of the Income-tax Act, 1961, was not justified
2. Whether, on the facts and in the circumstances of the case, it can be said that the assessee had disclosed fully and truly all the material necessary for assessment and, therefore, the reassessment under section 147(a) of the Income-tax Act, 1961, was not justified
2. It may be stated that the questions of law which are referred to us for our opinion relate to the assessment years 1962-63, 1963-64, 1964-65 and 1965-66. Four separate orders of assessment were passed by the Income-tax Officer and all throughout for separate orders of assessment, four separate proceedings were preferred. This court, vide its order dated March 29, 1977, passed in Income-tax Applications Nos. 4778, 4749, 4750 of 1977, directed the Tribunal to state the case and make reference of questions of law and, accordingly, the Tribunal made for references to us. However, the office of this court appears to have combined the four references into one. We, therefore, direct the office to regard this reference as four independent references, and renumber them as Income-tax References Nos. 113, 113/A, 113/B and 113/C of 1978.
3. In order to appreciate the aforesaid questions of law, it would be necessary to state the relevant facts giving rise to the aforesaid references. The relevant facts are stated here under :
(1) The assessee is an individual who carried on the business of groundnuts, grains and grocery articles and also derived income from running trucks on hire. The assessment years in question are 1962-63, 1963-64, 1965-66 and 1966-67. The assessee filed the returns for the aforesaid four years and the Income-tax Officer, vide order dated August 7, 1963, passed the order of assessment for the assessment year 1962-63 and by orders dated September 22, 1966, passed orders of assessment for the assessment years 1963-64, 1964-65 and 1965-66. From the orders of assessment passed by the Income-tax Officer, it appears that the assessments were completely based on copies of the trading account and profit and loss accounts filed by the assessee. Admittedly, the assessee did not file balance-sheets as the same were not drawn up. Capital account was not maintained and, therefore, the same was also not filed.
(ii) The Income-tax Officer has, thereafter, served a notice on the assessee under section 148 of the Act as he was of the opinion that the income returned by the assessee for the aforesaid years under reference as compared to the assets, properties and holdings of the assessee at the end of the respective according year was understated to the following extent :
Assessment year AmountRs.1962-63 1,04,0901963-64 0,46,9121964-65 0,72,4001965-66 0,11,243 (iii) The assessee objected to the exercise of the powers by the Income-tax Officer under section 148 of the Act. The Income-tax Officer overruled the objection and, based on the balance-sheet which was prepared and filed pursuant to the notice issued to the assessee, came to the conclusion that the assessee had understated his income for the respective years under reference. He accordingly brought to tax the aforesaid amount as suppressed income of the respective years and passed the order revising the assessment.
(iv) Being aggrieved by the order passed by the Income-tax Officer, the assessee preferred an appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner, relying upon the decision of the Supreme Court in the Case of Calcutta Discount Co. Ltd. v. ITO : [1961]41ITR191(SC) , came to the conclusion that the assessee had discharged his duty of placing all the material facts before the Income-tax Officer for all the assessment years. The Appellate Assistant Commissioner, in his order, found that, however, the orders of assessment were passed by the Income-tax Officer after full scrutiny of the books of account and also scrutiny of extracts produced by the assessee before the Income-tax Officer. He also found that, in each of the orders passed by the Income-tax Officer, he has categorically written that the balance-sheets were not drawn up by the assessee. Despite this position, the Income-tax Officer has proceeded to assess. The Appellate Assistant Commissioner also found that, in the earlier orders, i.e., for the assessment year 1958-59 to the assessment year 1961-62, the books of account produced by the assessee were rejected and because of non-production of balance-sheets, extra profits were added. The Appellate Assistant Commissioner, therefore, found that it was open to the Income-tax Officer to call upon the assessee to prepare the balance-sheet and to produce the same in exercise of his powers under section 142(1)(ii) or, secondly, it was also open to him to estimate extra profits for each of the years as he has done in the past. The Appellate Assistant Commissioner, therefore, ultimately, found that the assessee had discharged his duty by placing all the material facts before the Income-tax Officer for all the four assessment years and also found that the Income-tax Officers, though he was aware of the fact that the balance-sheets and to produce the same nor did he call upon the assessee to furnish net wealth statement nor did he estimate the extra profits after scrutiny of the books of account produced before him as was done by the Income-tax Officer for the assessment year from 1958-59 to 1961-62. The Appellate Assistant Commissioner was, therefore, pleased to allow the appeal of the assessee holding that the Income-tax Officer was not within his power and jurisdiction to invoke section 147(a) of the said Act.
(v) Being aggrieved by the said order passed by the Appellate Assistant Commissioner, the Revenue went in appeal before the Income-tax Appellate Tribunal. The Tribunal has confirmed the order passed by the Appellate Assistant Commissioner. The Tribunal referred to the decision of the Gujarat High Court in the case of Gujarat Ginning and . v. CIT : [1977]108ITR674(Guj) and also to the decision of a Full Bench of this court in the case of Poonjabhai Vanmalidas and Sons (HUF) v. CIT : [1974]95ITR251(Guj) , and, ultimately, in the light of the observations made in the aforesaid judgment, recorded a finding to the effect that it cannot be said that there was non-disclosure of primary facts by the assessee. All along in the past, the assessee did not file any balance-sheet, and the Income-tax Officer, in recording the facts in his assessment order, did not find it fit to call for the balance-sheet or the statements of total wealth for any of the assessment years under appeal at the time of original assessment. The Income-tax Officer was fully empowered to do so, but he did not invoke the powers vested in him for calling for the statement of total wealth as provided for under section 142(1)(ii) of the Act. The Tribunal also found that the Income-tax Officer did not choose to call for the statement of total wealth at the time of original assessment and was satisfied with the information available at that time and, therefore, it could not be said that there was any failure on the part of the assessee to disclose fully and truly all the primary facts relating to the assessments for the respective years. In view of the aforesaid findings of the Tribunal, it agreed with the judgment and order of the Appellate Assistant Commissioner and, consequently, the appeals were dismissed.
On being moved for reference, the aforesaid question are referred to us for our opinion.
4. In order to answer the questions referred to us, it would be necessary to set out the relevant provisions of the Act. Section 147(a), in so far as it is relevant and as it stood at the relevant time, is reproduced herein :
'147. 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..... 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.'
5. Reference is also required to be made at this stage to the powers of the Assessing Officer under section 142(1)(ii) because it shall have also to be seen at the time of answering the questions referred to us as to whether the Assessing Officer has failed to exercise the powers which were available to him. Section 142(1)(ii) of the Act is reproduced herein :
'142. (1) For the purpose of making an assessment under this Act, the Assessing Officer may serve on any person who has made a return under Section 139 or in whose case the time allowed under sub-section (1) of that section for furnishing the return has expired, a notice requiring him, on a date to be therein specified, - ........
(ii) to produce, or cause to be produced, such accounts or documents as the Assessing Officer may require, or.'
6. From the aforesaid provisions, it becomes clear that, in order to invoke the powers under section 147(a), the following conditions must be satisfied :
The Assessing Officer should have reason to believe that income has 'escaped assessment' by reason of omission or failure on the part of the assessee.
(i) to make a return of his income under section 139 for the year, or
(ii) to disclose fully and truly all the material facts necessary for his assessment for the year as required under section 147(a).
7. The Assessing Officer has also power in consequence of information in his possession to record a necessary finding that the income has escaped assessment under section 147(b). However, we are not concerned in this reference with the provisions of section 147(b). Two distinct conditions precedent are required to be fulfilled before the Assessing Officer can exercise jurisdiction under clause (a) of section 147, namely, (i) he must have reason to believe that income has escaped assessment, and (ii) he must have reason to believe that such escarpment is by reason of omission or failure on the part of the assessee to make a return or to disclose fully and truly all the material facts necessary for his assessment for the relevant years. The next question which is required to be examined in order to arrive at a proper determination of the questions referred to us is the question as to what is meant by the expression 'material facts' which it is the duty of the assessee to disclose before the Income-tax Officer at the time of assessment. In the case of Calcutta Discount Co. Ltd. v. ITO : [1961]41ITR191(SC) , the Supreme Court had occasion to consider this very provision. As per the said decision of the Supreme Court, the 'material facts' which are required to be disclosed by the assessee at the time of his assessment are 'primary facts' mainly necessary for the purpose of his assessment. The duty of the assessee is to disclose only primary facts and it is for the Assessing Officer 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 other facts inferred from them. The assessee is not bound to tell the assessing authority what inferences, whether of fact or law, should be drawn and his failure to communicate to the assessing authority the proper and correct inferences to be drawn from the primary facts cannot be regarded as failure to disclose 'material facts'. The assessee is required to disclose only primary facts and the primary facts to be disclosed by him must be material or relevant to the decision of the question before the assessing authority so that the non-disclosure of such facts would have a material bearing on the question of escapement of income from assessment. If the assessee has disclosed primary facts which are material and necessary for the purpose of his assessment, his assessment cannot be reopened by the Income-tax Officer by resorting to section 147(a), but, if there is omission or failure on the part of the assessee to disclose any material or relevant primary facts and, in consequence, there is escapement of income from assessment, such income can be got taxed by the Revenue by reopening the assessment under section 147(a).
8. In the case of CIT v. Burlop Dealers Ltd. : [1971]79ITR609(SC) in connection with section 34(1) (a) of the Indian Income-tax Act, 1922, a provision which was substantially in pair material with section 147(a) of the 1961 Act, the Supreme Court has observed as under (at page 612) :
'We are of the view that under section 34(1) (a) if the assessee has disclosed primary facts relevant to the assessment, he is under no obligation to instruct the Income-tax Officer about the inference which the Income-tax Officer may raise from those facts. The terms of the Explanation to section 34(1) (a) also do not impose a more onerous obligation. Mere production of the books of account or other evidence from which material facts could with due diligence have been discovered does not necessarily amount to disclosure within the meaning of section 34(1), but where on the evidence and the material produced the Income-tax Officer could have reached a conclusion other than the one which he has reached, a proceeding under section 34(1) (a) will not lie merely on the ground that the Income-tax Officer has raised an inference which he may later regard as erroneous.'
9. From the aforesaid observations in the case before the Supreme Court, it becomes clear that, to confer jurisdiction under section 147(a) to issue notice in respect of an assessment beyond the period of four years from the end of the relevant year, two conditions have to be satisfied. The first is that the Income-tax Officer must have reason to believe that income chargeable to tax has escaped assessment, and the second is that he must also have reason to believe that such escapement has taken place by reason of either (i) omission or failure on the part of the assessee to make a return of his income under section 139, or (ii) omission on the part of the assessee to disclose fully and truly all the material facts necessary for his assessment for that year. Both these conditions are conditions precedent to be fulfilled for the Income-tax Officer to have jurisdiction to issue notice for the assessment or reassessment beyond the period of four years from the end of the assessment year.
10. In the facts of the present case, it shall have now to be examined as to whether the action of the assessee in not filing the balance-sheets for the aforesaid four years along with his returns of income can be said to be a non-disclosure of material facts, i.e., primary facts, which has resulted in escapement of income from being assessed. In order to answer this question, it is first required to be seen as to what is the liability of the assessee under the statute. Rule 12 of the Income-tax Rules, 1962, in Part III of the said Rules deals with returns of income. The return of income is required to be furnished under sub-section (1) or sub-section (2) or sub-section (3) of section 139. Usually, in the case of a person, not being a company, it is required to be in Form No. 2 and is required to be verified in the manner indicated therein. Form No. 2 which is prescribed under the said Rules, inter alia, provides for a number of particulars to be supplied by the assessee. Notes Nos. 1 and 2 at the bottom of the said Form No. 2 being material are reproduced herein :
'Notes :
1. If the accounts are kept on the mercantile system of accounting, a copy of the manufacturing account or trading account, the profit and loss account and balance-sheet must be attached.
If the accounts are audited, a copy of the auditors' report together with a statement of audited accounts should be attached.
2. Where the assessee has speculation business, besides any other business or profession, particulars as at items Nos. 1 to 33, so far as may be relevant, should be furnished separately in respect of the speculation business.'
11. From the aforesaid provision of the Rules, the prescribed Form No. 2 and Note No. 1 which is part and parcel of the said Form No. 2, it becomes clear that the assessee is also required to attach a copy of any statement which corresponds to the profit and loss account and balance-sheet in a mercantile accounting system. If the accounts are audited, a copy of the auditors' report together with the statement of audited accounts is also required to be attached. From the aforesaid provision, it becomes clear that if the balance-sheet is prepared and maintained by the assessee, the same is required to be attached to the return of income. In the present case, admittedly, for the aforesaid four assessment years, as found by the Income-tax Officer at the time of original assessment, no balance-sheet was prepared by the assessee. It is also found by the Income-tax Officer that, even in the past, the balance-sheet was not prepared by the assessee. For the relevant assessment year also, that fact is clearly noticed by the Income-tax Officer. The question that would now arise for consideration would be whether the action of non-attaching the balance-sheet to the return of income can be said to be and would amount, in law, to non-disclosure of a material fact so as to attract the provisions of section 147(a). Mr. B. J. Shelat, the learned advocate for the Revenue, has, by reference to Explanation 2 to the aforesaid section 147(a), strenuously urged that non-production of the balance-sheet along with return of income would amount to non-disclosure of material facts and would justify the Income-tax Officer in taking action under section 147(a). On the other hand, Mr. D. A. Mehta, learned counsel appearing for the assessee, has submitted that it is the requirement of the statute to file the balance-sheet along with the return of income. In a case where the assessee has not maintained the balance-sheet at all, there cannot be disclosure of the balance-sheet because something that does not exist or something that is not at all maintained cannot be said to be not disclosed. The word 'disclosure', in his submission, stipulates and pre-supposes the existence of a thing or material. If the material or thing does not exist, the question of disclosure thereof would not arise. He submits that such material or thing can be called upon to be brought into existence by the Income-tax Officer by reference to his power under section 142(1)(ii). True it is, that, statutorily, the balance-sheet is required to be failed along with the return of income, but he submits that, if the same is not prepared at all, the Income-tax Officer, while assessing the assessee, could have justifiably and within the exercise of his powers under section 142(1)(ii), called upon the assessee to prepare the balance-sheet and to file the same. However, when the Income-tax Officer has not would it necessary to call upon the assessee to prepare the same and to produce the same, it can be said the said material, namely, the balance-sheet, did not constitute necessary material for the Income-tax Officer for the purpose of completing the assessment. Otherwise, be could have insisted on the preparation and production thereof in exercise of his powers under section 142(1)(ii). He, therefore, submits that the factum of non-attaching the balance-sheet with the return of income itself would not justify the Income-tax Officer to exercise his powers under section 147(a).
12. In the case of ITO v. Calcutta Chromotype Pvt. Ltd. : [1974]97ITR55(Cal) , the Division Bench of the Calcutta High Court was called upon to decide the question as to whether Issuance of a notice by the Income-tax Officer under section 148 of the Income-tax Act, 1961, was justified. The issuance of notice itself was challenged before the High Court on the ground that there was no omission or failure to disclose the item of profit by sale of machinery because, in the balance-sheet which was submitted as a part of machinery because, in the balance-sheet which was submitted as a part of the return for the relevant year, there was not only an entry showing on the liabilities side under the head 'Machinery sales suspense', the relevant amount, but also in the balance-sheet, there was a note of income. It was, therefore, submitted before the Calcutta High Court that, before the Income-tax Officer, the account books and other evidence were produced from which material evidence could, with due diligence, have been discovered by the officer. Referring to Explanation 2 to section 147, the court held that it was confined to cases of books of account and other evidence which are produced in the course of assessment proceedings. The court found that the balance-sheet had to be filed along with the return by virtue of the provisions of rule 19 framed under the Indian Income-tax Act, 1922 (equivalent to rule 12 to the present Rules), and that makes the balance-sheet to filed part of the return itself. However, the court found that, from the material that was produced by the assessee, it was possible for the Income-tax Officer to ascertain the details of entry of sale of machinery. The court also found that the assessee has done his duty in disclosing the material facts within his knowledge. However, there cannot be any liability to disclose something of which the assessee had no knowledge. In this connection, the court referred to the judgment of the Division Bench of the Calcutta High Court in the case of P. R. Mukherjee v. CIT : [1956]30ITR535(Cal) and the observations of Chakravarti C.J., which read as under (at page 60 of 97 ITR) :
'It may well be said, and I should think said correctly, that a person cannot be said to have omitted or failed to disclose something when, of such thing, he had no knowledge. A similar implication is carried by the word 'disclose', because one cannot be expected to disclose a thing or said to have failed to disclose it, unless it is a matter which he knows or knows of.'
13. Agreeing with the aforesaid observations, the Division Bench of the Calcutta High Court found that a person cannot be said to have omitted or failed to disclose something when, of such thing, he had no knowledge. Lack of knowledge of any further detail was asserted before the Income-tax Officer and he had accepted that confession of ignorance and acted upon it. Similarly, in our opinion, the duty to disclose material facts necessarily postulates existence of a thing or material. If a material is not in existence or if a material is such of which the assessee had no knowledge or cannot be attributed with any knowledge, there would be no duty to disclose such material. If absence of such material handicaps the Income-tax Officer in assessing the income or in passing the order on the return, he has ample power to call upon the assessee, under section 142(1)(ii), to supply such material or to prepare the balance-sheet and to produce the same. If he does not exercise that power or fails to exercise that power and proceeds to assess the assessee on the material which is before him, it can be said that the Assessing Officer did not find that material necessary for assessment and, therefore, he cannot resort to the power under section 147(a) subsequently when he has failed to exercise the power under section 142(1)(ii).
14. In view of the aforesaid position of law, we are of the opinion that the Tribunal as well as the Appellate Assistant Commissioner were justified in holding that the Income-tax Officer was not justified in resorting to section 147(a) of the Act.
15. We, accordingly, answer there reference by answering both the questions in the affirmative, i.e., in favour of the assessee and against the Revenue. No. costs.