Full Judgment Text
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PETITIONER:
SHEO NATH SINGH
Vs.
RESPONDENT:
APPELLATE ASSISTANT COMMISSIONER OFINCOME TAX, CALCUTTA
DATE OF JUDGMENT12/08/1971
BENCH:
GROVER, A.N.
BENCH:
GROVER, A.N.
HEGDE, K.S.
CITATION:
1971 AIR 2451 1972 SCR (1) 175
ACT:
Income-tax Act, 1922, s. 34(1-A)-Preconditions for issue of
notice-’Reason to believe’-Belief must be of honest and
reasonable person and must not be based on mere suspicion-
Court can examine this aspect in writ petition.
Supreme Court Appeal-Practice-High Court sustaining
preliminary objection to petition under Art. 226 but
nevertheless proceeding to decide on merits question of
validity of notice under s. 34 (1-A)-This Court in appeal is
not barred from considering High Court’s decision on
validity of section.
HEADNOTE:
The assessee appellant was at all material times a
shareholder of a number of companies engaged in the business
of managing hotels. Gradually he came to own a large block
of shares of $pence’s Hotel Ltd. and also became its
managing director. He was in charge of the management
thereof at the material time. He further purchased interest
in Associated Hotels of India Ltd. and Hotels (1938) in
association with M. S. Oberoi. In 1944 Oberoi purchased
from the assessee his share holding in the Associated Hotels
of India Limited for an amount of Rs. 20,657,05/13/0. The
assessee maintained that he had filed returns of income in
respect of the relevant assessment years and that during the
assessment for the year 1944-45 he had disclosed to the
Income-tax Officer that he had received the aforesaid amount
for the sale of the shares of the Associated Hotels. That
amount was held to be a capital receipt on which no income-
tax was payable. Subsequently the Income-tax Officer issued
seven notices dated 5th November 1954 to the assessee tinder
s, 34 (1-A) of the Income-tax Act, 1922 in respect of
assessment years 1940-41 to 1946-47 alleging therein that
the income of the appellant had partly escaped assessment.
In spite of the assessee’s objections relating to
jurisdiction the Income Tax Officer made asseessmerits in
respect of the years 1942-43 to 1945-46. In appeal the
Appellate Assistant Commissioner remanded the case to the
Income-tax Officer to submit a report on various matters.
Thereafter the appellant submitted a petition under Art. 226
in the High Court challenging inter alia the validity of the
notice under s. 34 (1-A). The High Court accepted the
preliminary objection of the Revenue that since the
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appellant had invoked the remedy under the Act a petition
under Art. 226 did not lie. Nevertheless it proceeded to
hold that the notice under s.34 (1-A) was valid and the
required preconditions were satisfied, Appeal was filed by
the assessee in this Court by special leave.
HELD : (i) The correct course for the High Court to follow
after sustaining the preliminary objection was to have
dismissed the writ petition, Since the High Court gave a
decision in the matter which
17 6
would be binding on the Appellate Assistant Commissioner.
the contention of the Revenue that this Court should decline
to go into the question arising out of the provisions of s.
34 (1-A) could not be accepted. [179 D-E]
(ii) There can be no manner of doubt that the words ’reason
to believe’ suggest that the belief must be that of an
honest and reasonable person based upon reasonable grounds
and that the Income-tax Officer may act on direct and
circumstantial evidence but not on mere suspicion gossip or
rumour. The Income-tax Officer would be acting without
jurisdiction if the reason for this belief that the
conditions are satisfied does not exist or is not material
or relevant to the belief required by the section. The
Court can always examine this aspect though the declaration
or sufficiency of the reasons for the belief cannot be
investigated by the Court. [182F-H]
Chhugamal Rajpal v. S. P. Chaliha & Ors., 1971 (79) I.T.R.
603. referred to,
There was no material or fact which had been stated in the
reasons for starting proceedings in the present case on
which any belief could be founded of the nature contemplated
by s. 34 (1-A) The so called reasons were stated to be
beliefs, thus leading to an obvious self contradiction.
Therefore the requirements of s. 34(1-A) were not satisfied
and, the notices which had been issued were wholly illegal
and invalid.
[183 B]
In the result the appeal must be allowed and the impugned
notices were quashed.
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1477 of
1967.
Appeal from the judgment and order dated October 6, 1966 of
the Calcutta High Court in Matter No. 236 of 1961.
M. C. Chagla, M. L. Aggarwal, N. K. Aggarwal and M. N.
Pombara, for the appellant.
S. D. Desai, A. N. Kirpal, R. N. Sachthey and B. D.
Sharma, for the respondents.
The Judgment of the Court was delivered by.
Grover, J.-This is an appeal by certificate from the
judgment of the Calcutta High Court.
The assesses who is the appellant was at all material times
a share-holder of a number of companies engaged in the
business of managing Hotels. He had also been a Director
and Managing Director of various companies. Gradually he
came to own a large block of shares of Spencer’s Hotel
Limited and also became its Managing Director. He was
incharge of the Management thereof at
177
the material time. He further purchased interest in
Associated Hotels of India Limited & Hotels (1938) in
association with M. S. Oberoi. In 1944, M. S. Oberoi
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purchased from the assessee his share holding in the
Associated Hotels of India Limited for an amount of
Rs.20,657,05/13/0. Similarly in" or about 1949, the holding
in Hotels (1938) Limited was purchased by the said M. S.
Oberoi. It was maintained by the assessee that he has
,filed returns of his income in respect of the relevant
assessment years and that during the assessment for the year
1945-46, the assessee had disclosed to the Income-tax
Officer, District II,(2) Calcututa that he had received the
aforesaid amount for the sale of the shares of the Asso-
ciated Hotels. The amount was held to be a capital receipt
on which no income tax was payable. During the subsequent
years, the assessee continued to show in his returns the
interest received on the amount of Rs. 20,657,05/13/0.
It appears that the case of M. S. Oberoi was referred to the
Investigation Commission set up under the Taxation on Income
(Investigation Commission) Act, 1947. The assessee was also
served a notice by the Commission on or about 18th August,
1951 under section 5(4) of the aforesaid Act, in respect of
the assessment year 1940-41. The assessee filed a Writ
Petition in March, 1953 in the Punjab High Court (Circuit
Bench) Delhi to quash the proceedings before the said
Commission. According to the assessee, the Solicitor
General, who appeared in the High Court after a rule had
been issued, gave an undertaking that all proceedings
against the assessee would be dropped. Upon such
undertaking being given, the rule was discharged. The
Income-tax Officer, District 11 (2) Calcutta issued seven
notices dated 5th November, 1954 to the assessee under S.
34(1-A) of the Income Tax Act, 1922 in respect of assessment
years 1940-41 to 1946-47 alleging therein that the appellant
had partly escaped assessment. In spite of the objection of
the assessee that in the absence of any material on record,
the Income Tax Officer had no jurisdiction to issue any
notice under 34(1-A), the said Officer proceeded to make
assessment in respect of the assessment years 1942-43, 1943-
44, 1944-45 and 1945-46. The assessee filed an appeal to
the Appellate Assistant Commissioner of Income Tax who
remanded
178
the case to the Income Tax Officer to submit a report on
various matters. One of such matters was that the Income
Tax Officer should state as to what fresh material was
before him to satisfy him that the sum of Rs. 20,00,000/-
which was previously treated as ’capital should be treated
as income. In 1961, the assessee filed a petition under
Art. 226 of the Constitution in the Calcutta High Court
challenging the order of the Appellate Assistant Commis-
sioner. This Writ Petition was dismissed on 6th October,
1966.
In clause (v) of Para (22) of the Writ Petition, the
assessee had stated that at the time when the notice had
been issued under S. 34(1-A) of the Act, the Income Tax
Officers concerned did not have any material before them
constituting reason to believe that any income, profits or
gains of the assessee had escaped assessment for any year.
It was asserted that the only material before the Income Tax
Officers concerned on which they had purported to issue the
notices consisted of the fact of the receipt of about Rs.
22,00,000/- which the assessee had received for the sale of
his shares in the Associated Hotels of India Limited in the
year 1944 that receipt had already been disclosed to the
Income Tax Officer who had made the original assessment
relating to the year 1945-46 and he had held that the said
amount was a capital receipt. There was merely a denial in
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the affidavit in reply with reference to paragraph 22(v),
that the conditions precedent to the exercise of power under
S. 34(1-A) had not been fulfilled. An objection was also
taken that it was not open to the assessee to urge the said
ground in a petition under Art. 226 when he had already
invoked the remedy available under the Act against the
assessment order pursuant to the notice under S. 34 (1-A) of
the Act. In para (29) it was stated that " all necessary
information.regarding the reasons for which the proceedings
were started under S. 34 was available from the records of
the Income Tax Department ralating to the assessment of the
assessee.
The High Court dealt with several points which were raised
on behalf of the assessee which included the question
whether the Income Tax Officer had the jurisdiction to make
an assessment under the provisions of S. 34 unless the,
conditions contained in S. 34 (1-A) were satisfied. In
179
other words, unless he had "reason to believe" that"income
profits or gains chargeable to income had escaped assess-
ment, he could not have proceeded under the aforesaid
provision. The High Court in the first place sustained a
preliminary objection which had been raised on behalf of the
revenue that because the assessee had filed appeals to the
Appellate Assistant Commissioner, he could not pursue his
petition under Art. 226 of the Constitution before the High
Court. The other points which had been canvassed related to
the validity and constitutionality of S. 34(1-A). The High
Court held that it had been settled by a series of decisions
of this Court that it was not unconstitutional. Indeed that
point was subsequently abandoned by the learned counsel for
the assessee. But after holding that preliminary objection
had substance, the High Court proceeded to decide the
question relating to the satisfaction of the preconditions
under S. 34 (1-A), although the correct course for it to
follow after sustaining the preliminary objection was to
have dismissed the Writ Petition. Since the High Court gave
a decision on that matter, which would be binding on the
Appellate Assistant Commissioner, we are unable to accede to
the submission made by the learned counsel for the revenue
that we should decline to go into, the question arising out
of the provisions of S. 34 (1-A).
The impugned notices which were issued under S. 34 (1-A)
stated that the Income Tax Officer had "reason to believe"
that income, profits and gains assessable to income tax had
escaped assessment. There was also a note at the foot of
the notices that they had been issued after necessary
satisfaction of the Central Board of Revenue. The High
Court observed that the Income Tax Officer had obtained the
sanction of the Board upon reasons recorded in writing, and
although the record containing those reasons was sought to
be produced before the Court, an objection was raised on
behalf of the assessee that the recorded reasons should not
be looked into. The High Court felt that there was no
necessity to travel beyond the order of the Appellate
Assistant Commissioner read with the assessment orders which
were under challenge. The Appellate Assistant Commissioner,
it was felt, had looked into the records which included the
statements and other materials filed with the Income Tax
Investigation Commis-
180
sion by the petitioner. The High Court proceeded to say
that although the Appellate Asssistant Commissioner had
looked at all the material, he had expressed some difficulty
in coming to a conclusion without further material on the
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question as to what fresh evidence was available before the
Income Tax Officer to convince him that the sum of Rs.
20,00,000/- which was previously treated as capital should
be treated as, income. It was finally held that the
assessee had failed to establish that the preconditions
contained in S. 34 (1-A) had not been fulfilled and
consequently there was an initial lack of jurisdiction.
Section 34 (1-A) to the extent it is necessary, may be
reproduced.
"34 (1-A). if, in the- case of any assessee,
the income-tax officer has reason to believe-
(i) that income, profits or gains chargeable
to income-tax have escaped assessment for any
year in respect of which the relevant previous
year falls and
(ii)that the income, profits or gains which
have so escaped assessment for any such year
or years amount or are likely to amount to one
lakh of rupees or more; he may serve
on the assessee a notice containing and may
proceed to assess or reassess the income,
profits or gains of the assessee ;
Provided that the Income-tax Officer shall not issue a
notice under this sub-section unless he has recorded his
reasons for doing so and the Central Board of Revenue is
satisfied on such reasons recorded that it is a fit case for
the issue of such notice".
Since nothing had been disclosed which was relevant for the
purpose of finding out whether the Income Tax Officer had
any reason to believe that the income, profits or gains of
the assessee chargeable to income-tax had escaped
assessment, we gave an opportunity to the Revenue to
181
have been found in the records are reports in Form ’B’ made
in connection with starting of proceedings under S. 34(1-A),
each report relating to a different assessment year. Items
(7) and (8) of this form relate to brief reasons for
starting proceedings and whether the Central Board of
Revenue was satisfied that it was a fit case for issue of
notice. Against item (7) it is stated "reasons as per
separate sheet attached". Against item (8), the Secretary
of the Central Board of Revenue signed after writing "Yes,
satisfied". The reasons for starting the proceedings given
in the separate sheet may be fully reproduced.
"For the reasons hereinafter recorded I
believe that income, profits and gains earned
by the assessee in his personal capacity and
in conjunction with others and chargeable to
income-tax have escaped assessment and that
the amount of such concealed income relating
to the Accounting years covering the period
beginning on the 1st day of September, 1939
and ending on the 31st day of March, 1949,
amount to or is likely to amount to Rs.
1,00,000/-. The reason for such belief, inter
alia, is as follows :-
(1) The assessee who is or was at the
relevant time a Managing Director in about a
dozen limited companies, along with "Oberois"
is believed to have made some secret profits
which were not offered for assessment.
(2) The assessee is believed to have
received a sum of Rs. 22 lakhs from
"Oberois",and this sum or at least part of
which represents income has escaped
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assessment.
Sd/- (A. K. BHOWMIK)
Income-tax Officer
Distt. 11 (2), Calcutta".
It is abundantly clear that the two reasons which have been
given for the belief which was formed by the Income Tax
Officer hopelessly fail to satisfy the requirements of the
statute. In a recent case-Chhugamal Rajpal
18 2
v. S. P. Chaliha and Others ’)which came up before this
Court, a similar situation had arisen and under the direc-
tions of the Court, the Department produced the records to
show that the Income Tax Officer had complied with the
conditions laid down in the statute for issuing a notice
relating to escapement of income. There also, the report
submitted by the Officer to the Commissioner and the
latter’s orders thereon were produced. In his report, the
Income Tax Officer referred to some communications received
by him from the Commissioner of Income-tax , Bihar and
Orissa from which it appeared that certain creditors of the
assessee were mere name-lenders and the loan transactions
were bogus and, therefore, proper investigation regarding
the loans was necessary. It was observed that the Income
Tax Officer had not set out any reason for coming to the
conclusion that it was a fit case for issuing a notice under
S. 148 of the Income Tax Act, 1961. The material that ,he
had before him for issuing notice had not been mentioned.
The facts contained in the communications which had been
received were only referred to vaguely and all that had been
said was that from those communications it appeared that the
alleged creditors were name-lenders and the transactions
were bogus. It was held that from the report submitted by
the Income Tax Officer to the Commissioner it was clear that
he could not have had reasons to believe that on account of
assessee’s omission to disclose fully and truly all material
facts, income chargeable to tax had escaped assessment.
In our judgment, the law laid down by this Court in the
above case is fully applicable to the facts of the present
case. There can be no manner of doubt that the words
"reason to believe" suggest that the belief must be that of
an honest and reasonable person based upon reasonable
grounds and that the Income Tax Officer may act on direct or
circumstantial evidence but not on mere suspicion, gossip or
rumour. The Income Tax Officer would be acting without
jurisdiction if the reason for his belief that the
conditions are satisfied does not exist or is not material
or relevant to the , belief required by the section. The
court can always examine this aspect though the declaration
or sufficiency of the reasons for the belief cannot be
investigated by the court.
(1) 1971 (79) I.T.R. 603.
183
There is no material or fact which has been stated in, the
reasons for starting proceedings in the present case on
which any belief could be founded of the nature contemplated
by S. 34 (1-A). The so-called reasons are stated to be
beliefs thus leading to an obvious self-contradiction. We
are satisfied that the requirements of S. 34 (1-A) were not
satisfied and, therefore, the notices which had been issued
were wholly illegal and invalid.
In the result, the appeal is allowed and the judgment of the
High Court is set aside. The writ petition succeeds to the
extent that the impugned notices shall stand quashed.
The assessee shall be entitled to his costs.
G. C. Appeal allowed.
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13-MI245SupCI/71
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