(1961) 41 ITR 191 (SC)
Income escaping assessment
The duty is to disclose fully and truly all primary facts. Drawing inferences from those facts is the officer's function, and a failure by him to draw the correct inference does not constitute a failure to disclose by the taxpayer.
How far does a taxpayer's duty of disclosure extend — must it disclose only the primary facts, or also the inferences the Assessing Officer should draw from them?
The assessee had disclosed in its returns and accompanying accounts the particulars of transactions in shares, including the relevant entries and figures. The Assessing Officer completed the assessments on the footing that these were capital transactions. He subsequently formed the view that the transactions were in the nature of trade and that the profits should have been taxed as business income, and sought to reopen the assessments on the ground that there had been a failure to disclose fully and truly all material facts.
The assessee challenged the reopening by writ petition. The matter reached the Supreme Court, which examined both the scope of the disclosure obligation and the availability of writ relief against a notice issued without jurisdiction.
For the assessee
Every primary fact concerning the transactions had been placed before the officer. The characterisation of those transactions as trading or investment is an inference of law and fact to be drawn by the officer from the material before him. A change in the inference he chooses to draw is not a failure of disclosure by the taxpayer.
For the Revenue
The assessee, knowing the true nature of its activity, ought to have disclosed that the transactions were in the nature of trade. Withholding that characterisation deprived the officer of a material fact and justified reopening.
The Court held that the taxpayer's duty is to disclose fully and truly all primary facts — the raw material relevant to the assessment. Once those facts are placed before the officer, it is for him to decide what inferences of fact and law should be drawn from them; that is the essence of the assessing function. The taxpayer is under no obligation to instruct the officer on the conclusions he ought to reach, and a failure by the officer to draw the correct inference from facts fully disclosed cannot be converted into a failure to disclose by the taxpayer. The Court held that any other view would allow every assessment to be reopened whenever the Revenue later formed a different opinion, which the provision does not permit. On the procedural question, it held that where the jurisdictional precondition is absent, the taxpayer is not confined to the statutory appellate route: a writ may issue to restrain proceedings founded on a notice issued without jurisdiction, since requiring the taxpayer to undergo the entire process first is no adequate remedy.
The foundational authority on the disclosure obligation, applying to reopening under Section 279 of the IT Act 2025. It continues to govern reopenings beyond the ordinary period, which typically require a failure to disclose fully and truly, and its holding on writ jurisdiction underpins the practice of challenging reassessment notices directly rather than waiting for the assessment to be completed.