INCOME TAX OFFICER, CUTTACK AND ORS.versusBIJU PATNAIK

            INCOME TAX OFFICER, CUTTACK AND ORS.
A
                              v.
                        BIJU PATNAIK

                             DECEMBER 7, 1990

B            [KULDIP SINGH AND K. RAMASWAMY, JJ.]

          Income Tax Act, 1961: Sections 147 & 148--Condition Prcedent
    for exercise of jurisdiction by I. T. 0.

          The respondent•assessee was assessed to income tax for the assess-
    ment year 1957-58 ending with f"mancial year March 31, 1957. Subse-
C   quently, it came to the notice of the Income Tax Officer that the assessee
    bad not shown in bis return a sum of Rs.15 Iakbs which be bad earned
    as capital gains by the sale of bis mining business. According to the
    assessee, the transfer of the business bad been made on 31.3.1956 and
    as such the capital gain was not Ieviable to taxation since capital gain
D   was not subjected to taxation in the assessment year 1956-57. But from
    the informaation available with the Income Tax Officer it appeared that
    the transfer of business took place on 3.11.1956.

          On the basis of this information the Income Tax Officer, with the
    approval of the Commissioner of Income Tax, issued notice to reopen
E   the assessment in question under sections 147 (a) and 148 of the Income
    Tax Act, 1961.

          The assessee challenged the notice by way of writ petition under
    Article 226 of the Constitution which was dismissed by the learned
    Single Judge. On appeal, the Division Bench, while upholding the exer-
F   cise of the power under section 147 (a) of the Act, held that the income
    derived by the respondent was towards sale of goodwill and, therefore,
    the income was not liable to capital gains tax.

           On behalf of the assessee it was contended before this Conrt that
    (i) the sum received by him was consideration for the transfer of the
G   goodwill of the business as an ongoing concern; (ii) the Income Tax
    Officer bad no reason to believe that the income bad escaped assessment
    for that year; and (iii) the satisfaction arrived at by the Income-Tax
    Officer under section 147(a) did not exist on the facts of the case, and
    the Income-Tax Officer merely communicated the notice without com-
    plying with the provisions of section 147(a) read with section 148 of the
H   Act.

                                       488
                        I.T.0. v. BIJU PATNAIK                       489

     Allowing the appeal, setting aside the judgment of the Division         A
Bench and restoring that of the Single Judge, this Court,

      HELD: (1) Section 147 (a) of the Income Tax Act postulates two
conditions, namely, that the Income-Tax Officer must, on the basis of
material facts on record, prima facie, be satisfied that the income of the
assessee is exigible to tax for that relevant assessment year and that he    B
had reason to believe that it bad escaped assessment. Further, be must
have reason to believe that the escapement of income was on account of
the omission or failure of the part of the assessee to fully and truly
disclose all the material facts necessary for the assessment. Both the
conditions are conditions precedent to the exercise of the jurisdiction
under section 147 (a) read with section 148. [492B-C]
                                                                             c
      Calcutta Discount Co. Ltd. v. I.T.O., (1961] 41I.T.R.191 (SC),
referred to.

      (2) It is true that the notice does not prima facie disclose the
satisfaction of the two conditions precedent enjoined under section 147 D
(a), but in the counter affidavit f"tled by the Income-Tax Officer in the
High Court, he has stated all the material facts. It is settled law that in
an administrative action, though the order does not ex facie disclose the
satisfaction by the Officer of the necessary facts, but if the record
discloses the same, the notice or the order does not per se become
illegal. I492G-493B l                                                       E

      (3) The Division Bench bas committed illegality in coming to the
conclusion that the sum of Rs.15,00,000 was received towards consi-
deration for sale of goodwill of the on-going business. It is premature on
the facts and circumstances in this case to reach such a decision.
Whether assets and goodwill together were transferred or the goodwill F
alone was transferred as on-going concern of the mining business is a
matter yet to be gone into by the Income-Tax Officer. I493E-G]

     CIVIL APPELLATE JURISDICTION: Civil Appeal No. 571
(NT) of 1976.
                                                                             G
     From the Judgment and Order dated 27/28.11.1974 o( the
CalcuttaHigh Court in Appeal from Original Order No. 271of1973.

     Dr. V. Gaurishanker, B.B. Ahuja, Ms. A. Subhashini and
S. Rajjappa for the Appellants.                                              H
    490         SUPREME COURT REPORTS              [1990] Supp. 3 S.C.R.

A       Dr. Debi Prasad Pal, Ms. A.K. Verma and S. Sukumaran for
    JBD & Co. for the Respondent.

          The Judgment of the Court was delivered by

         K. RAMASWAMY, J. By proceeding dated January 21, 1959
B   the respondent was assessed to income tax for the assessment year
    1957-58 ending with financial year March 31, 1957. On transfer on
    point of jurisdiction, the Income-Tax Officer, Special IV Circle,
    Cuttack had drawn his proceeding on July 2, 1965 to reopen the assess-
    ment under sections 147(a) and 148 of the Income-Tax Act, 1961 (for
    short 'the Act') and obtained the approval of the Commissioners of
    Income-tax, Cuttack, Bihar and Calcutta thus:
c
               "The assessee sold his mining business during the relevant
               accounting year to a Company named M/s. B. Patnaik
               Mines (P) Ltd. and earned a profit of Rs.15 lakhs which
               was assessable as capital gains but was not shown by the
D              assessee in his return. The transfer of the business was
               stated by the assessee to have been made on 31:3.1956 and
               as such the amount of capital gains was not liable to taxa-
               tion, it was claimed by the assessee since capital gains was
               not subjected to taxation in the assessment year 1956-57.
               But from information now available it appears that the
E              transfer of the business took place on 3. 11.1956 and thus
               the assessee was liable to be taxed on the capital gains
               earned. in the accounting year ended 31.3.1957. Hence
               action under section 147(a) is required to assess the said
               sum of Rs.15 lakhs which escaped assessment".

F         The respondent was called upon by notice dated July 31, 1965 to
    deliver within 30 days from the date of the service of the notice a
    return in the prescribed form of the income assessable for the assess-
    ment year 1957-58 and on failure thereof the notice dated September
    17, 1965 under section 147(a) was followed to produce or caused to be
    produced the relevant records before the officer. Calling in question
G   and to quash the notices the respondent filed writ petition under
    section 226 of the Constitution. The learned single Judge by judgment
    dated February 7, 1973, dismissed the writ petition upholding the
    validity of the notice under section 147 of the Act. On appeal, the
    Division Bencn by judgment dated November 27-28, 1974, while
    upholding the exercise of the power under section 147(a) of the Act
H   held that the income derived by the respondent was towards sale of
              l.T.0. v. BIJU PATNAIK [K. RAMASWAMY. J.]               491

 goodwill and that, therefore, the income was not liable to capital gains
 tax and the impugned notices were quashed. The High Court granted           A
 leave under Article 133(1) (a) & (b) of the Constitution. Thus this
 appeal.

       The contention of Dr. Pal, the learned counsel for the respon-
 dent is that the Income-tax Officer merely communicated the notice          B
 without complying with the provisions of Section 147(a) read with
 Section 148 of the Act. The Income-tax Officer must have reason to
 believe that the income for the relevant assessment year had escaped
 assessment and that the escapement of the income was on account of
 the omission or failure on the part of the assessee to disclose fully and
 truly all material facts necessary for that assessment year. The sum of
 Rs.15,00,000 received by the respondent was consideration for the           c
 transfer of the goodwill of the business as an ongoing concern. The
 Income-tax Officer had no reason to believe that the income had
 escaped assessment for that year. The findings of the Courts below
 that the respondent failed to disclose the material facts that the trans-
 fer of the goodwill took place on November 3, 1956 and a sum of             D
 Rs.15,00,000 escaped assessment was not correct. Even otherwise, as
  per findings of the Division Bench, it was not liable to tax. Therefore,
  the condition precedent, namely, that the Income-tax Officer is
  satisfied that the escapement was due to omission or failure to disclose
  the material facts was not made out. Since the receipt of a sum of
  Rs.15,00,000 was consideration for the transfer of the goodwill, it was    E
  not liable to capital gains tax: The satisfaction arrived at by the
  Income-tax Officer under section 147(a) did not exist on the facts of
  the instant case. The impugned notices under Section 147(a) read with
  Section 148 and Section 142(1) of the Act are without jurisdiction and
  illegal. Shri Ahuja, the learned counsel appearing for the revenue
· resisted these contentions and contended that the learned Single Judge     F
  has rightly found all the facts against the respondent and that the
  Division Bench was not justified in law in reversing the well con-
  sidered judgment of the learned Single Judge. ·

       Section 12-B of the Indian Income-tax Act, 1922 making capital
 gains exigible to tax had come into force with effect from April 1, G
 1957. Therefore, for the assessment year 1956-57 ending with financial
 year March 31, 1956 the capital gains was not exigible to tax. It is not
 also in dispute that the respondent claimed that the income of
 Rs.15,00,000 was received before March 31, 1956. Consequently the
 Income-tax Officer did not assess Rs.15,00,000 to capital gains tax. By
 agreement dated November 3, 1956 the assets and goodwill of the H
    492         SUPREME COURT REPORTS                [1990] Supp. 3 S.C.R.

    Mining business of the respondent was transferred to Mis. B. Patnaik
A   Mines (P) Ltd. for a consideration of Rs.15,00,000 payable in instal-
    ments. The Income-tax Department subsequently came into posses-
    sion of this information through the Director of Mines, by letter dated
    June 29, 1965. On the basis of this information the afcirestated pro-
    ceedings to reopen the assessment has been drawn by the Income-tax
B   Officer. Section 147(a) of the Act postulates two conditions, namely,
    that the Income-tax Officer must, on the basis of material facts on
    record, prima facie, be satisfied that the income of the assessee is
    exigible to tax for that relevant assessment year and that he has reason
    to believe that it had escaped assessment. He must have reason to
    believe that the escapement of income was on account of the omission
    or failure on the part of the assessee to fully and truly disclose all the
c   material facts necessary for the assessment. Both the conditions are
    conditions precedent to the exercise of the jurisdiction under section
    147(a) read with Section 148. This is so laid by this Court in Calcutta
    Discount Co. Ltd. v. l.T.O., [1961] 41 I.T.R. 191 (SC). and host of
    later decisions.
D
          The learned Single Judge found that the material on record
    would show that the Income-tax Officer had before him the material
    that the respondent had a sum of Rs.15,00,000 as capital gains by
    transferring his mining business to a limited company during the
    accounting year ended on March 31, 1957 which had escaped assess-
E   ment. The respondent had stated that he received the amount before
    March 31, 1956 from the material which had come to the possession of
    the Income-tax Officer, but was not available at the time of original
    assessment, disclosed that the date of transfer of the business under
    law fell during the accounting year ended on March 31, 1957. Hence it
    was necessary to reopen the assessment for the year 1957-58. This
p   finding was affirmed by the Division Bench.

          It is undoubtedly true that the notice does not prima facie dis-
    close the satisfaction of the two conditions precedent enjoined under
    section 147(a), but in the Counter Affidavit filed by the Income-tax
    Officer in the High Court he stated all the material facts. The respon-
G   dent had inspected the record and the record also bears out the exis-
    tence of the material facts. The proceedings drawn which was
    abstracted earlier also shows that the Income-tax Officer had applied
    his mind to the facts on record and was prima facie satisfied that
    reopening of the assessment for the assessment year 1957-58 was
    needed due to those stated facts. Thus though ex facie the notice does
H   not disclose the satisfaction of the requirement of Section 147(a), but
              l.T.O. v. BIJU PATNAIK [K. RAMASWAMY, J.l               493

from the record and the averments in the counter affidavit it is clear
that the Income-tax Officer had applied his mind to the facts and after     A
prima faice satisfying himself of the existence of those two conditions
precedent reached the conclusion to reopen the assessment. It is
settled law that in an administrative action, though the order does not
ex facie disclose the satisfaction by the officer of the necessary facts,
but if the record discloses the same, the notice or the order does not      B
per se become illegal.

       We reject the contention of Dr. Pal that the Income-tax Officer
had no reason to believe that the income had escaped assessment for
the relevant accounting year for the reasons mentioned by the Income-
tax Officer in the proceedings drawn on July 2, 1965. It is also clear C
therefrom that the escapement of assessment was on account of the
omission of failure on the part of the respondent to disclose the mate-
rial facts truly and fully. It is the contention of the respondent, before
making assessment, that the income was received before March 31,
1956 by which date Section 12-B of the Indian Income-tax Act had not
come into force. Accepting this sum of Rs.15,00,000 was excluded D
from the consideration of the assessment. The subsequent information
in possession of the Income-tax Officer discloses that the assets were
transferred on November 3, 1956 by which date Section 12-B came
into force.

      It is true that the Division Bench has stated in the judgment that    E
it repeatedly enquired of the counsel for the revenue whether the
income was towards the transfer of goodwill of the mining business as
on-going concern as the capital receipt and that no satisfactory reply
was given by the counsel. We are afraid that it is not correct to reach a
conclusion or to record a finding on the basis of indecisiveness of the
counsel for revenue to make a positive statement or a wrong conces-         p
sion that the sum of Rs.15,00,000 was received towards consideration
for sale of goodwill of the on-going mining business. The Division
Bench, therefore, has committed illegality in reaching the above
conclusion. Whether assets and goodwill together were transferred or
the goodwill alone was transferred as on-going concern of the mining
business is a matter yet to be gone into by the Income-tax Officer. It is   G
open to the respondent to place all the necessary material facts and the
Income-tax Officer is free to consider the material and to make a
decision in that regard. The Division Bench rested its conclusion on the
ground that since income derived was for the transfer of the goodwill
of the business as on-going concern it is not capital gain and that,
therefore, is not exigible to tax. (It is premature, on the facts and       H
    494         SUPREME COURT REPORTS               [1990] Supp. 3 S.C.R.

A circumstances in this case. to reach such a decision.) We are clearly of
  the opinion that the Division Bench committed grave error of law in
  holding that the notice under sections 148 and 142 are vitiated on
  account of the above conclusion. It is open to the respondent to submit
  his return and all the necessary materials in support of his case and the
  Income-tax Officer is free to consider on merits and pass the assess-
B ment order in accordance with law. It is made clear that any observa-
  tions made here or by the High Court shall not be construed to mean
  any opinion expressed by this Court on merits. It is limited only for the
  purpose of finding the legality of the exercise of the power under
  sections 147(a) and 142. The Income-tax Officer had validly and
  legally exercised his jurisdiction and reopended the assessment for the
C assessment year 1957-58. The judgment of the division Bench is set
  aside and that of the Single Judge is restored.

          The appeal is allowed, but in the circumstances without costs.

    R.S.S.                                                 Appeal allowed.