(Appeal by certificate from the judgment dated November 27 and 28, 1974 of the Calcutta High Court in A.O.O. No.271 of 1973).

Income-tax---

----Reassessment---Jurisdiction---Capital gains from transfer of mining business ---Assessee claiming transfer took place on March 31, 1956, when no tax was imposed on capital gains---Not considered for assessment-- Subsequent information that transfer was effected on November 3, 1956, falling within year when capital gains became taxable---Notice for reassessment proper---Question whether consideration was for goodwill and not taxable-- Premature at stage of notice.

During the assessment proceedings for the accounting period ending March 31, 1957, relevant to the assessment year 1957-58, it was claimed by the respondent that the transfer of a mining business for Rs.15 lakhs effected by him had taken place on March 31, 1956, and, as there was no capital gains tax for that year, the capital gains on the transaction was not subjected to tax Subsequently, the Income-tax Officer obtained information to the effect that the transfer took place on November 3, 1956, which date fell within the accounting period relevant to the assessment year 1957-58. Since capital gains tax was levied with effect from that year, the Income-tax officer issued on July 31, 1965, a notice for reassessment under section 147(a) of the Income-tax Act, 1961, and, on failure of the respondent to file a return, followed it up with a notice under section 142 for production of relevant material. The respondent, thereupon, filed a writ petition in the High Court challenging the notices. A single judge of the High Court upheld the validity of the notice under section 147(b). A Division Bench, on appeal, upheld the validity of the notice; but, since counsel for the Department, after repeated enquiry, had not given a satisfactory reply to the question whether the income was towards transfer of goodwill of the mining business, the Division Bench held that the consideration was towards sale of goodwill of the mining business as an on-going concern and that the amount was not liable to tax and quashed the notices. On appeal to the Supreme Court:

Held, reversing the decision of the Division Bench of the High Court and restoring the order of the single judge, (i) that the Income-tax Officer had reason to believe that income had escaped assessment for the assessment year 1957-58 and that the escapement was on account of omission or failure of the respondent to disclose the material facts fully and truly. Because, accepting the respondent's contention in the original assessment that the sale took place on March 31, 1956, on which date section 12B of the 1922 Act had not come into force, the Income-tax Officer excluded the sum of Rs.15 lakhs from consideration. Only the subsequent information disclosed that the date of the transfer of the business fell within the accounting period relevant to the assessment year 1957-58.

(ii) That the question whether the consideration was towards goodwill was a matter yet to be gone into by the Income-tax Officer and it was premature for the Division Bench to go into the question and arrive at its conclusion that the income derived was for transfer of goodwill and was not taxable. Therefore, the Division Bench erred in quashing the notices on its conclusion on the question.

By the Court: It is not correct to reach a conclusion or to record a finding on the basis of indecisiveness of counsel to make a positive statement or a wrong concession.

Calcutta Discount Co. v. I.T.O. (1961) 41 ITR 191 (SC) referred to.

B.B. Ahuja, S. Rajappa and Ms. A. Subhashini, Advocates, for Appellants.

Dr. D. Pal, Senior Advocate (Sukumaran, Advocate of Messrs. J.B. Dadachanji and Co., with him) for Respondent.

JUDGMENT

K. RAMASWAMY, J.---By a proceeding dated January 21, 1959, the respondent was assessed to income-tax for the assessment year 1957-58 ending with the 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 assessment 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:

"The assessee sold his mining business during the relevant accounting year to a company named Messrs. 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 assessee in his return. The transfer of the business was stated by the assessee to have been made on March 31, 1956, and, as such, the amount of capital gains was not liable to taxation, 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 transfer of the business took place on November 3, 1956, and, thus, the assessee was liable to be taxed on the capital gains earned in the accounting year ended March 31, 1957. Hence, action under section 147(a) is required to assess the said sum of Rs.15 lakhs which escaped assessment."

The respondent was called upon by notice dated July 31, 1965, to deliver within 30 days from the date of service of the notice a return in the prescribed form of the income assessable for the assessment year 1957-58 and, on the failure thereof, the notice dated September 17, 1965, under section 142(1) followed to produce or cause to be produced the relevant records before the Officer. Calling in question and to quash the notices, the respondent filed a writ petition under Article 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 Bench, by judgment dated November 27, 28, 1974, while upholding the exercise of the power under section 147(a) of the Act, held that the income derived by the respondent was towards sale of goodwill and that, therefore. the income was not liable to capital gains tax and the impugned notices were quashed. The High Court granted leave under Article 133(1)(a) and (b) of the Constitution. Thus this appeal.

The contention of Dr. Pal, learned counsel for the respondent, is that the Income-tax Officer merely communicated the notice 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 transfer of the goodwill of the business as an on going concern. The Income tax Officer had no reason to believe that income had escaped assessment for that year. The findings of the courts below that the respondent failed to disclose the material facts that the transfer of the goodwill took place on November 3, 1956, and that a sum of Rs.15,00,000 escaped assessment were not correct. Even otherwise, as per the findings of the Division Bench, it was not liable to tax. Therefore, the condition precedent, namely, that the Income tax Officer was satisfied that the escapement was due to omission or failure to disclose the material facts was, not made out. Since the receipt of the sum of Rs.15,00,000 was consideration for the transfer of the goodwill, it was 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, learned counsel appearing for the Revenue, resisted these contentions and contended that the learned single judge has rightly found all the facts against the respondent and that the Division Bench was not justified in law in reversing the well-considered judgment of the learned single judge.

Section 12B of the Indian Income-tax Act, 1922, making capital gains liable to tax had come into force with effect from April 1, 1957. Therefore, for the assessment year 1956-57, i.e., financial year ending with March 31, 1956, capital gains were not liable 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 mining business of the respondent were transferred to Messrs. B. Patnaik Mines P. Ltd. for a consideration of Rs.15,00,000 payable in instalments. The Income-tax Officer, subsequently, came into possession of this information through the Director of Mines by letter dated June 29, 1965. On the basis of this information, the afore-stated proceedings to reopen the assessment have been drawn up by the Income-tax 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 sated that the income of the assessee was liable to tax for that relevant assessment year and that he had 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 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 down by this court in Calcutta Discount Co. Ltd. v. I.T.O. (1961) 41 ITR 191(SC) and a host of later decisions.

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 March 31, 1957, which had escaped assessment. The respondent had stated that he received the amount before March 31, 1956. The material which had come into the possession of the Income-tax Officer, but was not available at the time of the 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 finding was affirmed by the Division Bench.

It is undoubtedly true that the notice does not prima facie disclose the satisfaction of the two conditions precedent enjoined under section 147(x), but in the counter affidavit filed by the Income-tax Officer in the High Court, he stated all the material facts. The respondent had inspected the record and the record also bears out the existence of the material facts. The proceedings drawn up which are abstracted earlier also show that the Income-tax Officer had applied his mind to the facts on record and was prima facie satisfied that the reopening of the assessment for the assessment year 1957-58 was needed due to those stated facts. Thus, though ex facie of the notice does not disclose the satisfaction of the requirement of section 147(a), 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 prima facie satisfying himself of the existence of those two conditions precedent, reached the conclusion for reopening 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 if the record discloses the same, the notice or the order does not per se become illegal.

We reject the contention of Dr. Pal that the Income-tax officer had no reason to believe that 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 therefrom that the escapement of assessment was on account of the omission or failure on the part of the respondent to disclose the material fad truly and fully. It was 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 Ad had not come into force. Accepting this, the sum of Rs.15,00,000 was excluded from consideration in the assessment. The subsequent information in the possession of the Income-tax Officer discloses that the assets were transferred on November 3, 1956, by which date sermon 12-B came into force.

It is true that the Division Bench has stated in the judgment that it repeatedly enquired of counsel for the Revenue whether the income was towards the transfer of goodwill of the mining business as an on-going concern or a capital receipt and that no satisfactory reply was given by counsel. We are afraid that it is not correct to reach a conclusion or to record a finding on the basis of indecisiveness of counsel for the Revenue to make a positive statement or a wrong concession that the sum of Rs.15,00,000 was received toward consideration for sale of goodwill of the on-going mining business. The Division Bench, therefore, has committed an illegality in reaching the above conclusion. Whether assets and goodwill together were transferred or the goodwill alone was transferred as an on-going concern of the mining business is a matter yet to be gone into by the Income-tax Officer. It is 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 the income derived was for the transfer of the goodwill of the business as an on-going concern, it is not capital gain and, therefore, is not liable to tax. It is premature, on the facts and circumstances in this case, to reach such a decision. We are clearly of the opinion that the Division Bench committed a grave error of law in holding that the notices 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 assessment order in accordance with raw. It is made clear that any observations 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 reopened the assessment for the 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.

1245/TAppeal allowed.