Holding

A notice under section 148 issued beyond the four‑year limitation period is invalid, and the High Court cannot partially uphold such a notice; therefore, the notice was quashed.

Summary

The Income‑Tax Officer issued a notice under section 148 of the Income‑Tax Act, 1961, alleging that three cash‑credit entries totalling Rs 1 lakh had escaped assessment for the year 1965‑66. The assessee challenged the notice, arguing that it was issued more than seven years after the original assessment and beyond the four‑year limitation prescribed under the Act. The High Court upheld the notice only with respect to one entry of Rs 30,000 and dismissed it for the other two entries. On appeal, the Supreme Court held that the High Court should not have partially upheld the notice and that the notice was beyond the statutory limitation period, rendering it invalid. Consequently, the notice under section 148 was quashed and the revenue’s appeal dismissed, while the assessee’s appeal was allowed. Both parties were ordered to bear their own costs.

Issues considered

Whether a notice issued under section 148 of the Income‑Tax Act is valid when served beyond the four‑year limitation period after the assessment year.
Whether the High Court could uphold the notice for one item while invalidating it for others.
Whether clause (a) or clause (b) of section 147 applies to the alleged escapement of income.
Whether the expression ‘material facts’ under section 147(a) includes only primary facts.
Whether the Income‑Tax Officer may include other items in a reassessment once a notice under section 148 is upheld for a particular item.

Legislation cited

Income Tax Act, 1961s. 142, s. 143, s. 147, s. 148, s. 149(1)(b), s. 22(2)

Subjects

Income Tax reassessmentSection 148 noticeLimitation periodMaterial factsJurisdiction of High CourtSupreme Court judgment

Judgment

A
.\.-
INCOME TAX OFFICER, AZAMGARH & ANR.
v.
MEWALAL DW ARKA PRASAD & VICE VERSA

FEBRUARY 10, 1989
B
[R.S. PATHAK, CJ AND RAN<;JANATH MISRA, J.)

Income Tax Act, 1961: Sections 142, 143, 147 and 148-l. T.O.
issuing notice in respect of three entries on the ground of escapement of ·-{ "-
income-Validity of the notice-Jurisdiction of High Court to
examine-Limits thereof.
c
In respect of assessment year 1965·66, the Income-tax Officer ,,_
issued notices to the assessee under s. 148 read with ss. 142(1) and 143(2)
of the Act on the ground that income has escaped assessment in respect
of three cash credit entries totalling Rs. l lakh. The assessee challenged
D the notices by way of writ petitions before the High Court. The High
Court gave a finding that the notice was within jurisdiction only in
respect of an entry of Rs.30,000 and in respect of the other two entries
viz. Rs.40,000 and Rs.30,000 it directed the Income-tax Officer not to
reopen the assessment. Ii.:

E These two appeals are against the High Court's judgment. The
· appeal by Revenue, by certificate, is in respect of the two entries of
Rs.40,000 and Rs.30,000 and the other appeal of the assessee, by special ...
leave, is in respect of the entry of Rs.30,000.

On behalf of the Revenue, it was contended that once the High
F Court sustained the notice in respect of a sum of Rs.30,000, that gave
.full jurisdiction to the Income-tax Officer to reopen the assessment and
that the High Court should not have examined the tenability of the
assessee's contention in regard to the two transactions of Rs.30,000 and
Rs.40,000 and that aspect should have been left to be considered by the
Income-tax Officer while making the reassessment.
G
The contention of the assessee was that the notice was issued more
than 7 years after the assessment was completed and was also beyond
the period of limitation, viz., four years, that the escapement of the
income from assessment had not resulted from failure on the part of the
assessee to disclose fully and truly all material facts necessary for the
H assessment.

604
INCOME TAX OFFICER v. M.D. PRASAD 605

·+ Allowing the appeal of the assessee, and dismissing the appeal by
A
the Revenue.

HELD: 1. The notice issued under s. 148 of the Act is quashed. It
was not for the High Court to examine the validity of the notice under
s. 1~8 in regard to the two items if the High Court came to the conclu-
sion that the notice was valid at least in respec~ of the remaining item. B
Whether the Income-tax Officer while making the reassessment would
take into account the other two items, should have been left to be
considered by the Income-tax Officer in the fresh assess111ent proceed-
)- 1
ing. l6lOC-D] .

' CIT. Punjab, H.P. & Bilaspur, Simla v. Jagan Nath Maheshwary,
J2 AIR ~18 and PulavarthiYiswanadham v. CIT. A.P., SO ITR 463 c
-·'>\> approved.
V. laf{an Mohan Rao & Ors. v. CIT & Excess Profits Tax,
A.P .. 75 ITR 373 and Parimisetti Seetharamamma v. CIT, 11963] SO
ITR 450 referred to.
D
2. I The three amounts mentioned in the notice under s. 148 of the
Act were found in the assessee's account by the Income-tax Officer
when he examined the same in course of the assessment proceedings. He
had called upon the assessee to substantiate the genuineness of the
transactions and the assessee had produced material to support the
same, The Income-tax Officer accepted the documents produced and E
treated all the three transactions to be genuine and on that footing
completed the assessment. The primary facts were before the Income-
tax Officer at the time of the regular assessment and he called upon the
assessee to explain to his satisfaction that the entries were genuine and
on the basis of materials provided by the assessee, satisfaction was
reached. It was then open to the Income-Tax Officer to make further F
probe before completing the assessment if he was of the view that the
mat~rial provided by the assessee was not sufficient for him to be
satisfied that the assessee's contention was correct. l6IOE-H)

2.2 The expression 'material facts' used ins. 147(a) referred only
to primary facts and the duty of the assessee was confined to disclosure G
of primary facts and he had not to indicate what factual or legal infer-
ences should properly be drawn from primary facts and this clause did
apply to the facts of the present case as the alleged escapement of
income for assessment had not resulted from failure on the part of the
assessee to disclose fully and truly all material facts necessary for its
assessment for that year. The notice in the instant case, did not indicate H
606 SUPREME COURT REPORTS [1989) 1 S.C.R.

A whether it was a case covered by cl. (a) or cl. (b). On the finding of this
+
Court that cl. (a) was not invokable, the power under cl. (b) could be
called in aid under s. 149(l)(b) of the Act within four years from the end
of ihe relevant assessment year. Admittedly, the notice has· been issued
beyond a period of four years and, therefore, the notice itself was
beyond the time provided under the law. The Hi2h Court overlooked to
B consider this aspect of the matter. [61 OH; 6llA-C I

Calcutta Discount Company Ltd. v. ITO, 41ITR191, followed.

CIVIL .APPELLATE JURISDICTION:Civil Appeal No. - { .,_,,
1970(NT) of 1975 & 855(NT)/1975. \
c From the Judgment and Order dated 22.4.1974 of the Allahabad
High Court in Civil Miscellaneous Writ No. 152 of 1974

Dr. V. Gauri Shankar, Miss A. Subhashini and K.C. Dua for the
Appellants.
D
S.C. Manchanda, Ms. S. Janani, Mrs. Urmila Kapoor and Ms.
Meenakshi for the Respondent.

The Judgment of the Court was delivered by

E MISRA, J. Civil Appeal No. 1970 of 1975 is by the Revenue by
certificate of the High.Court while the other is an appeal by the asses- ,..
see by special leave. Both arise out of the same judgment of the
Allahabad High Court dated 22.4.1974 in an application under Art.
226 of the Constitution by the assessee challenging the notices .jssued '
under s. 148 read with ss. 142(1) and 143(2) of the Income Tax Act of_.+ 'r·
F 1981, all dated 7th of March, 1973 relating to the assessment year ·
1965-66. The notke under s. 148 was on the basis of three cash credit
entries dated 22nd of August, 1964 from Messrs Meghraj Dulichand,
Messrs Associated Commercial Organisation Private Limited and
Messrs Laxminarain Atmaram, the first two being for a sum of
Rs. 30,000 each and the last one for a sum of Rs.40,000. The High
G Court ultimately found:

"The result is that the notice dated 7th March 1973, was
within jurisdiction only in regard to the cash credit entry
from the firm Meghraj Dulicham! of Calcutta. In regard to
the other two transactions, the case did not fall within the
H purview of clause (a) of section 147.
INCOME TAX OFFICER v. M.D. PRASAD [MISRA, J.] 607

As seen above, the Income Tax Officer had no mate-
A
rial in his possession on the basis of which he could have
reason to believe (mere suspicion apart) that income had
escaped assessment. For this reason the case was not
covered by clause (b) of section 147 either. In regard to
those two items the notice was totally without jurisdiction.
The Income Tax Officer had no jurisdiction to re-open the B
assessment in respect of these two cash credit entries.

In this view it is unnecessary to decide whether the
•\ i
notice was barred by time on the footing that it was covered
by clause (b) to section 147.

In the result, the petition succeeds and is allowed in c
part. The respondent Income Tax Officer is directed not to
re-open the assessment of tl;ie petitioner firm for the assess-
ment year 1965-66 in relation to the cash credit entries of
Rs.30,000 from M/s. Associated Commercial Organisation
Private Ltd. and of Rs.40,000 in respect of M/s. Laxmina- · D
rain AtmaraJJI."

The appeal by the Revenue is in relation to the two transactions
totalling Rs. 70,000 and the appeal by the assessee is in regard to the
-remaining one in respect of a sum of Rs.30,000. Dr. Gouri Shankar
appearing for the Revenue has contended that itwas not for the High E
Court to go into the question as to whether the· notice under s. 148 of
the Act was partly valid and partly not because if the Income Tax
Officer proceeded to issue notice under s. 148 of the Act for reopening
the assessment, he would require the assessee to furnish a fresh return
and the entire assessment proceeding has to be re-done after the asses-
see furnishes the return. In the present case, along with the notice F
under s. 148 of the Act the Income Tax Officer did call upon the
. assessee-to furnish a return as required under s. 142 of the Act. That
notice casts an obligation on the assessee to make a fresh return and
therein it was obliged to make a complete disclosure of its income in
accordance with law and it was open to the Income Tax Officer to
examine not only the three items referred to in the notice but also G
..-.·),-- whatever came within the legitimate ambit of an assessment proceed-
. ' ing. This being the legal position, Dr. Gouri Shankar for the Revenue
contends, once the High Court sustained the notice in respect of a sum
of Rs.30,000 that gave full jurisdiction to the Income Tax Officer to
reopen the assessment and take to a fresh assessment proceeding. The
High Court should not have examined the tenability of the assessee's H
608 SUPREME COURT REPORTS [1989) 1 S.C.R.

A contenton in regard to the two transactions of Rs.30,000 and
Rs.40,000 and that aspect should have been left to be considered by
the Inc0me Tax Officer while making the reassessment.

A Division Bench of the Punjab High Court in Commissioner of
Income Tax, Punjab, Himachal Pradesh & Bilaspur, Simla v. Jagan
B Nath Maheshwary, 32 ITR 418 examined this aspect of the matter with
reference to a proceeding for reassessment under s. 34 of the earlier
Act of 1922 and came to hold:

"When a notice is issued under s. 34 based on a certain
item of income that had escaped assessment, it is permissi-
ble for the Income-tax authorities to include other items in
c the assessment, in addition to the item which had.initiated
and resulted in the notice under section 34."

A Division Bench of the Andhra Pradesh High Court in
Pu/avarthi Viswanadham v. Commissioner of Income-Tax, Andhra
D Pradesh, 50 ITR 463 considered the same position with reference to
s. 34 of the earlier Act. After extracting the two clauses in sub-s. (1)
of s. 34, the Court held:

"It is immediately plain that when once the Income-tax \;
Officer reaches the conclusion on the material that is be-
E fore him that there has been a non-disclosure as regards
part of the income, profits or gains chargeable to income-
tax by the assessee, he is entitled to issue a notice either .
under clause (a) or (b), as the case may be, under section
22(2) of the Income-tax Act."

F After extracting s. 22(2) the High Court proceeded to say:

"What emerges from _sub-section (2) of section 22 is that
when once an assessee is requ_ired to submit a return of his
income, he is obliged to disclose the totality of his income.
The question that falls to be decided on the language of
G these two sections is whether after notice is issued under
section 34(1)(a) the assessment should be 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. The contention of learned
counsel for the assessee is that having regard to the terms
H of clause (b) it was not withi11-the powers of the Income-tax
INCOME TAX OFFICER v. M.D. PRASAD [MISRA, J.] 609

Officer to bring to charge such of the items as have escaped A
from being truced without any remissness on his part. It is
only items that escaped assessment due to omission or fai-
lure of the assessee that come within the range and sweep
of section 34, continues learned counsel for the assessee.
We do not think that we can accede to this proposition.
When once the assessment is reopened, no distinction B
could be made between items falling under clause (a) and
those coming within the pale of clause (b ). As pointed out
by a Division Bench of this Court in R.C. No. 12 of 1960
(Parimisetti Seetharamamma v. Commissioner of Income-
tax, [1963) 50 ITR 450, to which cine of us was a party:
)

" ..... when once an assessment is reopened under c
section 34, the Income-tax Officer proceeds de novo
under the relevant sections of the Income-true Act,
i.e., he issues notice under section 22(2) and proceeds
to assess the assessee. He has to follow the same pro-
cedure as in the case of the first assessment as is clear D
from the clause in section 34 and the provisions of
this Act shall, so far as may be, apply acccirdingly as if
the notice were a notice issued under that sub-
section. The proceedings under section 34 must be
deemed to relate to proceedings which commence
with publication of notice under section 22(1)." E

The view taken by the two High Courts has been supported by
this Court in V. Jaganmohan Rao & Ors. v. Commissioner of Income-
tax & Excess Profits Tax, Andhra Pradesh, 75 ITR 373. There, repel-
--,..-f ling the same argument on behalf of the assessee this Court said:
F
"This argument is not of much avail to the appellant
because once proceedings under section 34 are taken to be
validly initiated with regard to two-thirds share of the
income, the jurisdiction of the Income-true Officer cannot
be confined only to that portion of the income. Section 34
in terms states that once the Income-true Officer decides to G
reopen the assessment he could do so within the period
prescribed by serving on the person liable to pay tax a
notice containing all or any of the requirements which may
be included in a notice under section '22(2) and may
proceed to assess or reassess such income, profits or gains.·
It is, therefore, manifest that once assessment is reopened H
610 SUPREME COURT REPORTS [1989) 1 S.C.R.

by issuing a notice under sub-section (2) of section 22 the
A
previous under-assessment is set aside and the whole
assessment proceedings start afresh. When once valid pro-
ceedings are started under section 34(l)(b) the Income-true
Officer had not only the jurisdiction but it. was his duty to
levy tax on the entire income that had escaped assessment
B during that year."

No serious effort, however, was made by Mr. Manchanda
appearing for the assessee-respondent to counter this submission •
advanced on behalf of the Revenue. Accepting the legal position indi- ~ ,,;'__

c
cated in these cases we come to the conclusion that it was not for the
High Court to examine the validity of the notice under s. 148 in regard l
to the two items if the High Court came to the conclusion that the
notice was valid at least in respect of the remaining item. Whether the
Income Tax Officer while making his reassessment would take into
account the other two items should have been left to be considered by
the Income Tax Officer in the fresh assessment proceeding;
D
With this conclusion the decision of the High Court would ordi-
narily have been reversed. As we have already stated, the assessee has
also appealed against that part of the judgment of the High Court
which was adverse to it. Mr. Manchanda contended that in this case
the regular assessment had been made for the assessment year 1965-66
E on 22.1.1966. Notice under s. 147 of the Act was issued on 7th of
March, 1973, i.e., more than seven years after the assessment had
been complted. The three amounts mentioned in the notice under
s. 148 of the Act were found in the assessee's accounts by the Income
Tax Officer when he examined the same in course of the assessment
proceedings. We had called upon the assessee to substantiate the 1.;
F genuineness of the transactions and the assessee had produced mate- ,,., 't-
rial to support the same. The Income Tax Officer accepted the docu-
ments produced and treated all the three transactions to be genuine
and on that footing completed the assessment. The primary facts were
before the Income True Officer at the time of the regular assessment
and he called upon the assessee to explain to his satisfaction that the
G entries were genuine and on the basis of materials provided by the
assessee satisfaction was reached. It was then open to the Income True -'.~
Officer to make further probe before completing the assessment if he /'
was of the view that the material provided by the assessee was not
sufficient for him to be satisfied that the assessee's contention was
correct. This Court in Calcutta Discount Company Limited v. I. T. 0.,
H 41 ITR 191 held that the expression 'Material facts' used in cl. (a)
INCOME TAX OFFICER '· M.D. PRASAD [MISRA, J.J 611

.""· referred only to primary facts and the duty of the assessee was con- A
fined to disclosure of primary facts and he had not to indicate what
factual or legal inferences should properly be drawn from the primary
facts. In the facts appearing on the record we are in agreement with
Mr. Manchanda that cl. (a) of s. 147 did not apply to the facts of the
case as the alleged escapement of income for assessment had not
resulted from failure on the part of the assessee to disclose fully and B
truly all material facts necessary for its assessment for that year. The
notice in the instant case did not fodicate whether it was a case covered
by cl. (a) or cl.(b). On our finding that cl. (a) was not invokable, the
)--. power under cl. (b) could be called in aid under s. 149(1)(b) of the Act
within four years from the end of the relevant assessment year. Admit-
I ' tedly, the notice has been issued beyond a period of four years and, C
therefore, the notice itself was beyond the time provided under the
law. On the facts appearing in the case the High Court overlooked to
. consider this aspect of the matter. Since the proceedings before the
' High Court were under Art. 226 of the Constitution and not by way of
reference under the Act, the jurisdiction of this Court is not advisory
and confined to the questions referred for opinion. On the facts we are D
satisfied that ends of justice require our intervention and we would
accordingly allow the appeal of the assessee by holding that the notice
under s. 148 of the Act cannot be sustained in law for the reasons
indicated above.

The appeal by the assessee is allowed and the appeal by the E
Revenue is dismissed. The notice under s. 148 of the Act is quashed.
Both parties are directed to bear their respective costs throughout.

G.N. Appeal by the assessee is allowed
and Appeal by the revenue is dismissed.
F