The Income-tax Officer's jurisdiction to reassess income under Section 147(1)(b) of the Income-tax Act, 1961, arises if he has reason to believe that income chargeable to tax has escaped assessment based on information in his possession, and the High Court cannot set aside the notice for reassessment on a re-appraisal of the evidence.

Headnote:
INCOME TAX - Reassessment - Condition precedent - Information in possession of Income-tax Officer - Meaning of - Information that income chargeable to tax has escaped assessment - Furnishes starting point for assessing or reassessing income - Not necessary that on materials before Income-tax Officer previous order of assessment was vitiated by error of fact or law - High Court cannot set aside notice for reassessment on re-appraisal of evidence.
Fact of the Case:

The assessee, a dealer in mill stores, was assessed for the assessment years 1959-60, 1960-61, and 1961-62. The Income-tax Officer, upon receiving information that the assessee had diverted profits to its partners' Hindu undivided families, issued notices under Section 147 of the Income-tax Act, 1961, to reopen the assessments. The assessee challenged the notices, arguing that the Income-tax Officer had no jurisdiction to reopen the assessments since the Hindu undivided families had submitted complete returns of income and provided all necessary information during the initial assessments.
Finding of the Court:

The High Court quashed the notices issued by the Income-tax Officer, holding that he had no jurisdiction to reopen the assessments. The Commissioner of Income-tax appealed to the Supreme Court.
Issues: 1. Whether the Income-tax Officer had reason to believe that income chargeable to tax had escaped assessment, as required under Section 147(1)(b) of the Income-tax Act, 1961, to reopen the assessments? 2. Whether the High Court erred in setting aside the notices for reassessment based on a re-appraisal of the evidence?
Ratio Decidendi: 1. The condition precedent for the Income-tax Officer to exercise jurisdiction under Section 147(1)(b) is that he has reason to believe that income chargeable to tax has escaped assessment, based on information in his possession. 2. Information in the context of Section 147(1)(b) means instruction or knowledge derived from an external source concerning facts or particulars, or as to law relating to a matter bearing on the assessment. 3. If the Income-tax Officer has information that income chargeable to tax has escaped assessment, he has jurisdiction to assess or reassess income under Section 147(1)(b), even if the previous order of assessment was not vitiated by any error of fact or law. 4. The High Court has the power to set aside a notice issued under Section 147 if the condition precedent to the exercise of jurisdiction does not exist. However, the Court cannot set aside the notice based on a re-appraisal of the evidence. 5. The Income-tax Officer alone is entrusted with the power to administer the Act, and it is for him to decide whether to commence a proceeding for assessment or reassessment based on the information in his possession.
Final Decision: The Supreme Court held that the Income-tax Officer did not have reason to believe that income chargeable to tax had escaped assessment, as required under Section 147(1)(b) of the Income-tax Act, 1961, to reopen the assessments. The Court dismissed the Commissioner of Income-tax's appeal and confirmed the High Court's order quashing the notices for reassessment.

Judgement

SHAH, J.:- The assessee -M/s. A. Raman and Company-are dealers in "mill stores". In the course of their business they sell "mill stores" to other dealers including two concerns trading in the names of M/s. A. M. Shah and Co. and M/s. R. Ambalal and Co., which are owned by the Hindu undivided families, managers of which are the only partners of the assessees. For the assessment years 1959-60, 1960-61 and 1961-62 the assessees were originally assessed by the Income-tax Officer, Circle-I, Ward-A, Ahmedabad, while the partners of the assessees and the Hindu undivided families which traded in the names of M/s. A. M. Shah and Co. and M/s. R. Ambalal and Co. were assessed by Income-tax Officers in other Circles. The cases of the assessees, of the partners of the assessees and of the two Hindu undivided families trading in the names of A. M. Shah and Co. and R. Ambalal and Co. were later transferred to the Income-tax Officer, Group Circle-J, Ahmedabad. That Officer by letter dated March 20, l964 informed the assessees that he was convinced from a perusal of the assessment records of the assessees, their partners and their individual Hindu undivided families that the partners of the assessees had contrived to divert profits of the assessees to their respective Hindu undivided families and had tried to "evade proper taxation", and on that ground he called upon the assessees to submit their objections, if any, to the reopening of the assessments for the year 1959-60, 1960-61 and 1961-62. The assessees in reply contended that the Income-tax Officer had no jurisdiction to reopen the assessments since the Hindu undivided families of the two partners and the assessees had submitted "correct and complete returns of income" supported by their books of account, "quantity details" of purchases, sales and expenses and had given all material facts and relevant information necessary for assessment at the time of each assessment.

2. The Income-tax Officer issued three separate notices under Section 147 of the Income-tax Act; 1961. requiring the assessees to show cause why the assessments for the years 1959-60, 1960-61 and 1961-62 should not be reopened. The High Court of Gujarat in a petition for a writ under Article 226 of the Constitution quashed those notices and restrained the Income-tax Officer from taking proceedings in pursuance thereof. With special leave granted by this Court, the Commissioner of Income-tax has appealed to this Court.

3. In support of the claim of the Income-tax Officer, to reopen the assessments, reliance was placed in the High Court on Clause (b) of Section 147 (1) of the Income-tax Act 1961. The material part of Section 147 (1) (b) may be read :

"If-

(a) * * * *

(b) notwithstanding that there has been no omission or failure as mentioned in Cl.(a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year,

he may, subject to the provisions of Sections 148 to 153, assess or re-assess such income or recompute the loss or the depreciation allowance as the case may be, for the assessment year concerned.

Explanation 1. - For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax teas escaped assessment, namely:

(a) where income chargeable to tax has been under-assessed; or * * * * *"

Under Section 147 (1) (b) reason to believe that income chargeable to tax has escaped assessment in consequence of information in the possession of the Income-tax Officer is a condition precedent to the exercise of his jurisdiction to assess or reassess the income of the assessee. If that condition does not exist, steps taken by the Income-tax Officer to assess or reassess the income will be without jurisdiction.

(4) It was held by this Court in Calcutta Discount Co. Ltd. v. Income-tax Officer, (1961) 41 ITR 191 that the High Court in appropriate cases has po

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1967 Supreme(SC) 194

Cases Referred (1)