Full Judgment Text
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PETITIONER:
MADHYA PRADESH INDUSTRIES LTD.
Vs.
RESPONDENT:
THE INCOME-TAX OFFICER, NAGPUR
DATE OF JUDGMENT:
16/04/1970
BENCH:
HEGDE, K.S.
BENCH:
HEGDE, K.S.
SIKRI, S.M.
SIKRI, S.M.
MITTER, G.K.
SHAH, J.C.
GROVER, A.N.
CITATION:
1970 AIR 1039 1970 SCR (3) 266
ACT:
Indian Income-tax Act (11 of 1922) s. 34(1)(a)
Circumstances for initiating proceedings under s. 34(1)
(a)-If open to challenge in a Court of law.
HEADNOTE:
The assessee paid commission to A, one of its selling
agents, and claimed that amount as a revenue outgoing in the
computation of its profits for that year. The Income-tax
Officer made the order of assessment without expressly
referring to the said deduction but proceeding on the basis
that it was a permissible deduction. Later, the Income-tax
Officer issued notices under s. 34(1)(a) of the Income-tax
Act, 1922 stating that he had "reason to believe that" the
income of the assessee had escaped assessment and was under-
assessed. He sent a questionnaire to the assessee. Since
the assessee , did not reply to the questionnaire, the
income-tax officer informed the assessee, that he presumed
that no correspondence with A existed that no service was
rendered by A and the payments made were without
justification. The assessee filed petitions under Arts. 226
and 227 of the Constitution for restraining the Income-tax
Officer from taking any action on the notices. The
assessee’s case was that it had placed all the material
facts before the income-tax officer that the Income-tax
Officer had examined those facts before making the
assessments, and that the Income-tax officer had added back
the commission paid to another selling agent to the profits
of the assessee, but took no objection to the commission
paid to A. The High Court dismissed the petition. Allowing
the assessee’s appeal, this Court
HELD : The proceedings taken under s. 34(1) (a) must be
quashed. Two conditions must be satisfied in order to
confer jurisdiction on the Income-tax Officer to issue the
notice under s. 34 of the Act in respect of assessments
beyond the period of four years, but within a period of
eight years, from the end of the relevant year, viz. (i) the
Income-tax Officer must have reason to believe that income,
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profits or gains chargeable to income-tax had been under-
assessed, and (ii) he must have reason to believe that such
"under-assessment" had occurred by reason of either (a)
omission or failure on the part of the assessee to make a
return of his income under s. 22 or (b) omission or failure
on the part of the assessee to disclose fully and truly all
the material facts necessary for his assessment for that
year. Both these conditions are conditions precedent to be
satisfied before the Income-tax Officer acquires
jurisdiction to issue a notice under the section. If there
are in fact some reasonable grounds for the Income-tax
Officer to believe that there had been any nondisclosure as
regards any fact, which could have a material bearing on the
question of under-assessment, that would be sufficient to
give jurisdiction to the Income-tax Officer to issue the
notice under s. 34. Whether these grounds are adequate or
not is not a matter for the Court to investigate. In other
words, the sufficiency of the grounds which induced the
Income-tax Officer to act is not a justiciable issue. It
is of course open for the assessee to contend that the
Income-tax Officer did not hold the belief that there had
been such non-disclosure. In other words, the existence of
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the belief can be challenged by the assessee, but not the
sufficiency of the reasons for the belief. The expression,
"reason to believe" in s. 34 does not mean purely subjective
satisfaction on the part of the Income-tax Officer. The
belief must be held in good faith-, it cannot be merely a
pretence. It is open to the court to examine whether the
reasons for the belief have a rational connection or a
relevant bearing to the formation of the belief and are not
extraneous or irrelevant to the purpose of the section. To
this limited extent, the action of the Income-tax Officer is
starting proceedings under s. 34 of the Act is open to
challenge in a court of law. [273 E-H; 274 A-C]
Calcutta Discount Company Ltd. v. Income-tax Officer
Companies Dist. 1 and another; [1961] 2 S.C.R. 241; S.
Nailayanappa and Ors. v. Commissioner of Income-tax
Bangalore, 63 I.T.R. 219; Kantamani Venkata Narayana and
Sons v. First Addl. Income-tax Officer, Rajahmundry; 63
I.T.R. 638, followed.
In the present case, the assessee in its writ-petitions had
repudiated the assertion of the Income-tax Officer that he
had reason to believe, that due to the omission or failure on t
he part of the company to give material facts, some
income had escaped assessment. Under those circumstances
the officer who issued the notices under s. 34(1) (a) was
expected to file an affidavit setting out the circumstances
under which he formed the necessary belief. That officer
had not filed any affidavit in these proceedings. The
proceedings recorded by him before issuing the notices had
not been produced nor his report to the Commissioner and
even the Commissioner’s sanction had not been produced.
Hence it was not possible to hold that the Income-tax
Officer had any reason to form the belief in question or the
reasons before him were relevant for the purpose. [274 D-F]
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 2419 to
2421 and 2423 to 2425 of 1966.
Appeals by special leave from the judgment and order dated
February 22, 1966 of the Bombay High Court, Nagpur Bench in
Special Civil Applications Nos. 140 to 142 of 1962.
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A. K. Sen, G. L. Sanghi, Rameshwar Nath, for the appellant
(in all the appeals).
S. C. Manchanda, S. K. Aiyar and R. N. Sachthey, for the
respondent (in all the appeals).
The Judgment of the Court was delivered by
Hegde, J. In these appeals by special leave, the only ques-
tion of law that arises for decision is whether the
respondent was competent to initiate proceedings under S. 34
of the Indian Income Tax Act, 1922 (which will hereinafter
be refer-red to as the Act).
The respondent initiated proceedings under S. 34 of the Act
against the appellant by issuing notices under that section
on December 26, 1960 in respect of the assessment years
1953-54, 1954-55 and 1955-56. The appellant challenged the
validity of
268
those proceedings by means of a writ petitions under Art.
226 and 227 of the Constitution in the High Court of
Judicature at Bombay (Nagpur Bench) . Those petitions were
summarily dismissed. The appellant thereafter appealed to
this Court after obtaining special leave from this Court.
This Court allowed those appeals on April 8, 1965 holding
that the High Court was not justified in summarily
dismissing the writ petitions as the allegations made
therein merited examination. Thereafter the High Court
issued rule nisi in those petitions. The respondent opposed
those petitions. After hearing the parties, the High Court
again dismissed those writ petitions. Hence these appeals.
The facts of the case material for deciding these appeals
have been set out in detail in this Court’s order dated
April 8, 1965. We shall briefly refer to them.
The above appeals relate to proceedings under S. 34 of the
Act in respect of three assessment periods. It would be
sufficient if we set out the facts relating to the
assessment year 1953-54. There is no dispute that if the
proceedings relating to that year are held to be invalid,
similar would be the position regarding the proceedings
relating to the other two assessment periods. On the other
hand, if they- are held to be valid, the same would be true
in respect of the other assessment periods.
The appellant, Madhya Pradesh Industries Ltd. (hereinafter
referred to as the company), is engaged in the business of
mining ,manganese ore. On March 18, 1952, the company
appointed M/s. J. K. Alloys Ltd. (hereinafter called
’Alloys’) as its selling agents. In the account year
relating to the assessment year 1953-54, the company paid as
commission, Rs. 1,13,052/8/9 to the selling agents and
claimed that amount as a revenue outgoing in the computation
of its profits for that year. The Income-tax Officer made
the order of assessment without expressly referring to the
said deduction but proceeding on the basis that it is a per-
missible deduction. On December 26, 1960, the Income-tax
Officer issued a notice to the company in exercise of his
powers under s. 34 of the Act reciting therein that he
having "reason to believe that" the income of the company
assessable to income-tax for the assessment year 1953-54 had
(a) escaped assessment and (b) under-assessed, he proposes
to reassess the income that had escaped assessment or had
been under-assessed. He called upon the company to deliver
a return of the total income of the company assessable for
the said assessment year 1953-54. In response to a letter
sent by the company, the Income-tax Officer informed the
company that the notice issued by him was under s. 34 (1)
(a). Thereafter there was some correspondence between the
Income-tax Officer and the company. The Income-tax
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269
Officer required the company to give him the information
called for in the questionnaire issued by him. The company
did not send any reply to the said questionnaire. On
December 21, 1961, the Income-tax Officer informed the
company that since the questions asked were not replied to,
he presumed that no correspondence with Alloys existed and
the payment of commission had been made without any
justification, Alloys having rendered no service as selling
agents.
On April 2, 1962, the company moved the High Court of
Judicature of Bombay (Nagpur Bench) praying for the issue of
a writ of certiorari under Art. 226 of the Constitution or
an appropriate direction or order under Art. 227 of the
Constitution calling for the record of the case and for the
issue of writs in the nature of Prohibition or Mandamus
restraining the Income-tax Officer from taking any action or
proceeding in enforcement or implementation of the notice
dated December 26, 1960. The petition, as mentioned
earlier, was rejected in limini.
In the writ petition, the plea taken by the company was that
in issuing the notice under s. 34(1) (a) of the Act, the
Income-tax Officer acted without jurisdiction and for a
colourable purpose. Its case as set out in the writ
petition is as follows
In its return the company disclosed for the year ending
March 31, 1953 Rs. 15,70,587/- as its total profits
according to its books of account. In the statement under
s. 38 (3) of the Act filed with the return, the company
disclosed that it had paid Rs. 1,13,052/8/9 as "commission
sales" "on different dates" by cheques to Alloys and Rs.
6,091/4/- to J. S. Williams on October 4, 1952 by cheque as
commission on sales. In the profit and loss account of the
company filed with the return, the amount of Rs.
29,76,067/10/8 was disclosed as received by "sales less com-
mission". On December 7, 1953, R. K. Gupta, a Director of
the company made a statement before the Income-tax Officer
stating that the commission was paid to Williams on the
sales accounted for during the year ended March 31, 1953 and
that the same should be allowed as deduction and that
"similar was the case with the commission payable to J. K.
Alloys Ltd., which had already been paid subsequently." On
February 21, 1954, the Income-tax Officer called upon the
company to produce amongst other documents, certificates
showing whether any receipt included in the income, profits
or gains had been credited or transferred to any assets,
capital account, or any other liability account, a similar
certificate regarding any credit for important expenses
claimed under the head "profit and loss A/c", a list of
buyers with full addresses along with quantity, number and
net proceeds of export business as well as Indian sales, a
statement setting out full details of various items of
indirect expenses debited to profit
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and loss account and a statement of expenses grouped and
sorted out under the heads, wages, salary and other
emoluments. On June 21, 1954, the company filed the
certificates and the statements demanded together with the
statement showing that out of the sale proceeds, commission
paid to Alloys and J. S. Williams was deducted. In the
course, of the assessment proceedings, R. S. Agarwal, a
representative of the company appeared before the Income-tax
Officer and agreed that the commission "debited as paid to
Williams may be added back’ and about Alloys he said that
the commission "had already been paid". Thereafter on
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February 14, 1955, the assessment of the company was com-
pleted by the Income-tax Officer. The Income-tax Officer
rejected the commission said to have been paid to Williams
and added back that amount to the gross profits of the
company. He took no objection to the commission paid to the
Alloys.
The case pleaded by the company in the writ petition is that
it had placed before the Income-tax Officer all the material
facts; the Income-tax Officer before making the assessment
had examined those facts and was satisfied with the
explanation given by the company. The company denied that
the Income-tax Officer had any reason to believe that by
reason of the omission or failure on the part of the company
to disclose fully ’and truly all material facts necessary
for his assessment for the year in question income, profits
or gains chargeable to income-tax have escaped assessment
for that year or have been under-assessed. The company dis-
puted that the Income-tax Officer had any reason before him
to have the required belief. It also denied the fact that
it had omitted or failed to disclose fully and truly all
material facts necessary for the assessment in question or
that any income, profits, or gains chargeable to income-tax
have escaped assessment in that year.
Section 34(1) of the Act as at the relevant
time read
(a) The Income-tax Officer has reason to
believe that by Mason of the omission or
failure on the part of an assessee to make a
return of his income under section 22 for any
year or to disclose fully and truly ail
material facts necessary for his assessment
for that year, income, profits or gains
chargeable to income-tax have escaped
assessment for that year, or have been under-
assessed, or assessed at too low a rate, or
have been made the subject of excessive relief
under the Act, or excessive loss or
depreciation allowance has been computed, or
(b) notwithstanding that there has been no
omission or failure as mentioned in clause (a)
on the part
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of the assessee, the Income-tax Officer has in
consequence of information in his ’possession
reason to believe that income, profits or
gains chargeable to income-tax have been under
assessed or assessed at too low a rate, or
have been made the subject of excessive relief
under this Act, or that excessive loss or
depreciation allowance has been computed.
he may in cases falling under clause (-a) at any time within
eight years and in cases falling under clause (b) at any
time within four years of the end of that year, serve on the
assessee, or, it the assessee is a company, on the principal
officer, thereof, a notice containing all or any of the
requirements which may be included in a notice under sub-
section (2) of section 22 and may proceed to assess or re-
assess such income, profits or ,gains or recompute the loss
or depreciation allowance; and the provisions of this Act
shall, so far as may be, apply accordingly as if the notice
were a notice issued under that subsection
Provided that-
(i) the Income-tax Officer shall not issue a
notice under this sub-section, unless he has
recorded his reasons for doing so and the
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Commissioner is satisfied on such reasons
recorded that it is a fit case for the issue
of such notice;
(ii) the tax shall be chargeable at the rate
at which it would have been charged had the
income, profits or gains not escaped
assessment or full assessment, as the case may
be; and
(iii) where the assessment made or to be made
is an assessment made or to be made on a
person deemed to be the agent of a non-
resident person under section 43, this sub-
section shall have effect as if for the
periods of eight years and four years a period
of one year was substituted.
Explanation.-Production before the Income-tax Officer of
account-books or other evidence from which material facts
could with due diligence have been discovered by the Income-
tax Officer will not necessarily amount to disclosure within
the meaning of this, section."
272
In Calcutta Discount Company Ltd. v. Income-Tax Officer
Companies Dist. 1 and another(1), this Court ruled that
before an Income-tax Officer could issue a notice under s.
34 (1) (a) of the Act, two conditions must co-exist, namely,
that he must have reason to believe (1) that income, profits
or gains had been under-assessed and (2) that such under-
assessment was due to non-disclosure of material facts by
the assessee. It was observed therein that where, however,
the Income-tax Officer has prima facie reasonable grounds
for believing that there has been a nondisclosure of a
primary material fact, that by itself gives him the
jurisdiction to issue a notice under s. 34 of the Act and
the adequacy or otherwise of the grounds of such belief is
not open to investigation by the court. It is for the
assessee who wants to challenge such jurisdiction to
establish that the Income-tax Officer had no material for
such belief. Speaking for the majority Das Gupta J.
observed therein
"To confer jurisdiction under this section to
issue notice in respect of assessments beyond
the period of four years, but within a period
of eight years, from the end of the relevant
year two conditions have therefore to be
satisfied. The first is that the income-tax
Officer must have reason to believe that
income, profits or gains chargeable to income-
tax have ’been under-assessed. The second is
that he must have also reason to believe that
such "under-assessment" has occurred by reason
of either (i) omission or failure on the part
of an assessee to make a return of his income
under s. 22, or (ii) omission or failure on
the part of an assessee to disclose fully and
truly all material facts necessary for his
assessment for that year. Both these
conditions are conditions precedent to be
satisfied before the Income-tax Officer could
have jurisdiction to issue a notice for the
assessment or re-assessment beyond the period
of four years but within the period of eight
years, from the end of the year in question."
Proceeding further the learned judge observed
"The position therefore is that if there were
in fact some reasonable grounds for thinking
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that there had been any non-disclosure as,
regards any primary fact, which could have a
material bearing on the question of ’under-
assessment’ that would be sufficient to give
jurisdiction to the Income-tax Officer to
issue the notices under s. 34. Whether these
grounds were adequate or not for arriving at
the conclusion that there was a non-disclosure
of material facts would not be open for-the
(1) [1961] 2 S.C.R. 241
273
court’s investigation. In other words, all
that is necessary to give this special
jurisdiction is that the Income-tax Officer
had when he assumed ’ jurisdiction some prima
facie grounds for thinking that there had been
some non-disclosure of material facts".
Shah J. (one of us) in his dissenting judgment has observed
that the expression "has reason to believe" in S. 34(1) (a)
of the Indian Income Tax Act does not mean a purely
subjective satisfaction of the Income-tax Officer but
predicates the existence of reasons on which such belief has
to be founded. That belief, therefore cannot be founded on
mere suspicion and must be based on evidence and any
question as to the adequacy of such evidence is wholly
immaterial at that stage. He further observed that where
the existence of reasonable belief that there had been under
assessment due to non-disclosure by the assessee, which is a
condition precedent to exercise of the power under s.
34(1)(a) is asserted by the assessing authority and the
record prima facie supports its existence, any enquiry as to
whether the authority could reasonably hold the belief that
the under-assessment was due to non-disclosure by the
assessee of material facts necessary for the assessment
must, be barred.
In S. Narayanappa and ors. v. Commissioner of Income Tax,
Bangalore(1), this Court held that two conditions. must be
satisfied in order to confer jurisdiction on the
Income-tax Officer to issue the notice under s. 34 of the
Act in respect of assessments beyond the period of four
years, but within a period of eight years, from the end of
the relevant year, viz. (i) the Income-tax Officer must have
reason to believe that income, profits or gains chargeable
to income-tax had been under-assessed and (ii) he must have
reason to believe that such "under-assessment" had occurred
by reason of either (a) omission or failure on the part
of the assessee to make a return of his income under S. 22
or (b) omission or failure on the part of the assessee to
disclose fully and truly all the material facts necessary
for his assessment for that year. Both these conditions are
conditions precedent to be satisfied before the Income-tax
Officer acquires jurisdiction to issue a notice under the
section. If there are in fact some reasonable grounds for
the Income-tax Officer to believe that there had been any
non-disclosure as regards any fact, which could have a
material bearing on the question of under-assessment, that
would be sufficient to give jurisdiction to the Income-tax
Officer to issue the notice under S. 34. Whether these
grounds are adequate or not is not a matter for the Court to
investigate. In other words, the sufficiency of the grounds
which induced the Income-tax Officer to Act is not a
justiciable issue. It is of course open for the assessee
(1) 63, I.T.E., 219
274
to contend that the Income-tax Officer did not hold the
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belief that there had been such nondisclosure. In’ other
words, the existence of the belief can be challenged by the
assessee but not sufficiency of the reasons for the belief.
Therein it was observed that the expression "reason to
believe" in S. 34 does not mean purely subjective
satisfaction on the part of the Income-tax Officer. The
belief must be held in good faith : it cannot be merely a
pretence. It is open to the court to examine whether the
reasons for the belief have a rational connection or a
relevant bearing to the formation of the belief and are not
extraneous or irrelevant to the, purpose of the section. To
this limited extent. the action of the Income-tax Officer in
starting proceedings under s. 34 of the Act is open to
challenge in a court of law.
The same view was again expressed by this Court in
Karitamani Venkata Narayana and Sons v. First Additional
Income-Tax Officer, Rajahmundry (1).
In these cases, the company in its writ petitions had
repudiated the assertion of the Income-tax Officer that he
had reason to believe that due to the omission or failure on
the part of the company to give material facts, some income
had escaped assessment. Under those circumstances one would
have expected the officer who issued the notices under s.
34(1) (a) to file an affidavit setting out the circumstances
under which he formed the necessary belief. We were told
that one Mr. Pandey had issued the notices in question.
That officer had not filed any affidavit in these pro-
ceedings. The proceedings recorded by him before issuing
the notices have not been produced nor his report to the
Commissioner or even the Commissioner’s sanction has not
been produced. Hence it is not possible to hold that the
Income-tax Officer had any reason to form the belief in
question or the reasons before him were relevant for the
purpose. We have no basis before us to hold that the
Income-tax Officer had jurisdiction to issue, the impugned
notices. Hence the proceedings taken by him have to be
quashed.
For the reasons mentioned above, we allow these appeals, set
aside the order of the High Court and quash the proceeding$
taken under S. 34 (1) (a) of the Act. The respondent shall
pay the costs of these appeals-hearing fee one set.
Y.P. Appeal allowed.
(1) 63, I.T.R. 638.
275