The Income-tax Officer is not fettered by technical rules of evidence and pleadings, and that he is entitled to act on material which may not be accepted as evidence in a court of law. The Spl. Bench of the ITAT at Delhi in the case of Kailash Moudgil Vs. Deputy Commissioner of Income-tax (248ITR059) held that it is equally important to know that in making the assessment under sub-section (3) of section 143 of the Income tax Act, the assessing officer is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all. There must be something more than bare suspicion to support the assessment under section 143(3).
The Apex Court in Dhakeswari Cotton Mills Ltd. Vs. Commissioner of Income-tax (26ITR775, 782) earlier on the point estimation of gP Ratio held that in making an assessment under section 23(3) ( correspomnding to section 143(3) of 1961 Act) of the Indian Income-tax Act, 1922, the Income-tax Officer is not fettered by technical rules of evidence and pleadings, and he is entitled to act on material which may not be accepted as evidence in a court of law, but the Income-tax Officer is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all. There must be something more than bare suspicion to support the assessment under section 23(3). The Apex Court approved the rule of law on this subject so stated by the Lahore High Court in the case of Seth Gurmukh Singh v CIT [1944] 12 ITR 393.
In this case Seth Gurmukh Singh was assessed to Income tax on an income of Rs. 11,142/-. Some time later the Income-tax Officer was informed that the assessee had received some income which had accrued to him in Siam and he consequently reopened his case and ultimately added a sum of Rs. 40,000/- on that account and assessed him accordingly. The assessee took an appeal to the Assistant Commissioner challenging the finding of the Income-tax Officer that income had accrued to the assessee in Siam and that he had received it in the accounting year. The Assistant Commissioner remanded the case to the Income-tax Officer, observing that ” it is absolutely necessary that there should be some data and definite material on record for the finding that some profits were received into British India during the accounting period. A further report was accordingly submitted by the Income-tax Officer which satisfied the Assistant Commissioner who then declined to interfere with anymore. The Commissioner too held that the upshot of the whole is that the assessee failed to discharge the onus that lay on him, while there was abundant circumstantial evidence to prove the existence of productive sources of income in Bangkok and influx of money from there.
The following six points of law were suggested by the assessee for a reference to the High Court: –
(1) Whether there is any evidence in support of the finding that the assessee carries on business in Siam and has rent producing property there and that he brought any earnings from Siam to Gujranwala, the extent of which is Rs. 40,000/- ?
(2) Whether the onus of proof that the assessee has no source of income outside India, and that he has not received any income from abroad, is on the assessee in an enquiry under Section 34 of the Act, particularly when during previous five years no assessment on such income was made by the Income-tax Department?
(3) Whether in law the absence of explanation by an assessee in the following matters is circumstantial evidence of the fact that he brought during the year under assessment Rs. 40,000/- from Siam to British India: –
(a) Ten years ago assessee held assets worth four lacs in Siam. No satisfactory explanation given as to disposal of these assets.
(b) Investments made in Gujranwala of Rs. 24,000/- during the year of assessment and of two lacs during the last ten years. No satisfactory explanation from where he did so, though assessee has other sources of non-taxable income.
(4) Whether it was permissible in law to base a finding on the question involved under Section 34 enquiry on the history of last ten years of assessment and was that legal evidence in the case?
(5) Whether in the circumstances of this case action under Section 34 was justified in law, and whether the Income-tax Officer could act on information which he does not place on the record?
(6) Whether it is within the competency of the Income-tax authorities to know the total amount of wealth possessed by an assessee, hoarded or otherwise, or is their jurisdiction limited to discover assessable income for a particular year?
In the absence of any uniformity in the matter of framing questions of law the High Court therefore chose to formulate the question itself keeping the substance in such form as to give the question indicated by the assessee a proper shape, or to bring out most prominently the legal aspect of the case. The Bench framed the following relevant questions for reference to a Full Bench of five Judges:-
(2)(a) Whether, after rejecting the accounts of an assessee without reference to method of accounting but otherwise, an Income-tax Officer is bound to rely on the evidence, true or false, adduced by the assessee?
(b) If he makes his own estimate, is he bound to disclose the material on which he founds that estimate to the assessee?
(c) Is he entirely debarred from relying on private sources of information which he may not disclose to the assessee at all?
(d) In case he utilises the private inquiries made by him is it enough for him to communicate the substance of information’s to the assessee?
All these questions are very relevant even in today’s context and therefore need to be well understood both by the assessing officer and the assessee.
The High Court answered the questions as under: –
(a) While proceeding under sub-section (3) of section 23 (corresponding to section 143 of 1961 Act) the Income-tax Officer is not bound to rely on such evidence produced by the assessee as he considers to be false;
(b) if he proposes to make an estimate in disregard of the evidence, oral or documentary, led by the assessee, he should in fairness disclose to the assessee the material on which he is going to found that estimate;
(c) he is not, however, debarred from relying on private sources of information, which sources he may not disclose to the assessee at all
(d) in case he proposes to use against the assessee the result of any private inquiries made by him, he must communicate to the assessee the substance of the information so proposed to be utilised to such an extent as to put the assessee in possession of full particulars of the case he is expected to meet and should further give him ample opportunity to meet it, if possible.