1. The question referred to at the instance of the revenue in this reference is as under :
'Whether the initiation of proceedings under section 34(1A) against the assessee for the assessment years 1943-44 to 1946-47 was legal and valid when the assessments which were already made against the assessee for those years, were not canceled by a competent authority and when the department was taking proceedings against the assessee for the recovery of tax under those very assessments after rejecting the assessee's plea that they were illegal and void ?'
2. For the assessment years 1943-44 to 1946-47, the relevant previous years are the financial years ending March 31, 1943,1944,1945 and 1946, respectively. The assessee, H. N. Shindore, was deriving income from lands, money-lending and country liquor business. He denied having kept or maintained any books of account in respect of his business. He denied having kept or maintained any books of account in respect of his business and sources of income except the excise registers in connection with the liquor business. Prior to the assessment years 1941-42, the income of the assessee did not reach the taxable limit. In the year 1941, money-lending business was reach the taxable limit. In the year 1941, money-lending business was started and the country liquor business was expanded. Assessments for the assessment years 1943-44 to 1946-47 were completed on total incomes of Rs. 14,884, Rs. 14,922, Rs. 33,592 and Rs. 25,155, respectively. Between April 1, 1942, and March 31, 1946, there was substantial and vast expansion of the assessee's business, his investments in properties, lands, sites and National Savings Certificates, etc. It was, therefore, suspected that the assessee had suppressed a lot of income form taxation. His case the assessee had supressed a lot of income form taxation. His case accordingly was referred to in the year 1950 by the Central Government to the Income-tax Investigation commission under section 5(1) of the Taxation on Income (Investigation commission) Act, 1947 (hereinafter referred to as 'the Act'). The said Commission submitted its report on September 9, 1952. Pursuant to the said report of the Commission, consequential assessment orders were passed by the Income-tax Officer on January 31, 1953, for the above assessment years. After those orders were passed proceedings for recovery of tax due under the said assessment orders were commenced.
3. In the year 1955, the assessee field a petition being petition No. 445 of 1955 in the Supreme Court challenging the validity of section 5 of the act. In the said petition counsel of behalf of the revenue made a statement that proceedings against the assessee under section 34(1A) of the Indian Income-tax act were initiated and he had no objection to the prayers of the assessee being granted in the said writ petition. Accordingly, the Supreme Court, by an order dated February 14,1957, quashed the notice under section 34(1)(b)(sic)(a) of the Indian Income-tax Act issued by the Income-tax and the Excess Profits Officer with the concurrence of the Commissioner of Income-tax, Bombay, Kutch and Saurashtra; eight assessment orders dated January 13, 1953, passed by the said officer assessing the assessee to a total amount of over Rs. 2 lakhs were quashed and the revenue was restrained from recovering in pursuance of the said assessment orders any tax from the assessee. It was, however, made clear that the said order was without prejudice to the right of the revenue to pass appropriate orders under section 34(1A) of the Indian Income-tax Act and to attach the assesse's properties if they are so entitled to do according to law. Before this petition was field the Supreme Court by its order dated May 28, 1954, in the case of Suraj Mall Mohta and Co. v. A. V. Visvanatha Sastri : 26ITR1(SC) , declared that the Provision of section 5(4) of the Act were ultra vires and while and petition field by the assessee was pending, by an order dated December 20, 1955, Income-tax : 29ITR390(SC) held that the provisions of sections 5(1), and 8(5) and (6) of the Act were ultra vires.
4. By four notices dated March 28, 1956, for the above four assessment years the Income-tax Officer commenced proceedings against the assessee under section 34(1A) of the Indian Income-tax Act, 1922, after obtaining the permission of the Commissioner of Income-tax. By the said notices he was called upon to file his total wealth statement as on March 31, 1940, and March 31, 1947. Pursuant to the said direction the assessee field his wealth statements according to which his total wealth as on March 31, 1940, was Rs. 2,59,313 and that as on March 31, 1947, was Rs. 4,81,436. Thus, according to the assessee, during this period there was an increase in his total wealth by Rs. 2,22,123. It was, however, submitted by the assessee that a sum of Rs. 3,59,538 was available to him from agricultural income, jagir income and also from the assessed income and that the total investments were fully explainable and that no income chargeable to tax had escaped assessments for those years. Before the Income-tax Officer he also raised objection to the validity of the initiation of reassessment proceedings. The said contentions of the assessee were rejected by the Income-tax Officer and he came to the conclusion that the increase in the wealth of the assessee during the said period was Rs. 3,27,705 and brought it to tax for the assessment years 1943-44 to 1946-47. The said assessment orders were passed on July 31, 1959.
5. Aggrieved by the orders passed by the Income-tax Officer, the assessee field separate appeals before the Appellate Assistant Commissioner. Before him, the assessee challenged the validity of reopening of the assessments on the ground that the Income-tax officer had no reason to believe that income of more than Rs. 1 lakh which was chargeable to tax had escaped assessment and, therefore, the Income-tax Officer had no jurisdiction to reopen the assessments. The Appellate Assistant Commissioner, as regards the merits of the matter, found that the income of the assessee of Rs. 1,29,468 alone had escaped assessments and not Rs. 3,27,705 as found by the Income-tax Officer had to jurisdiction to reopen the assessments and the reassessment orders were bad and illegal. He, therefore, set aside the same.
6. Aggrieved by these orders of the Appellate Assistant Commissioner, the revenue preferred appeals before the Tribunal. The representative, on behalf of the revenue, justified the initiation of reassessment proceedings on the ground that even though a formal order canceling those revised assessment orders for the same years on the basis of the decision of the Supreme Court was not passed, still the department knew that the said assessments in fact were illegal and the income which had been bought to tax in these assessments had really escaped assessments. According to the representative, assessments for the years 1943-44 to 1946-47 were reopened under a bona fide belief that the income for those years had escaped assessments. It was submitted on behalf on the revenue that notices for reassessments were issued without formally canceling the reassessment orders passed earlier by the Income-tax Officer because it was known that the said assessments were illegal and void. The Tribunal took the view that the assessments for all the four years made by the Income-tax Officer on the basis of the Investigation Commission's report were quite valid until they were quashed by the Supreme Court on February 14,1957, in the writ petition filed by the assessee. The Tribunal further found that the income-tax authorities had commenced certificate proceedings based on those assessments for the recovery of tax assessee had submitted before the Inspecting Assistant Commissioner of Income-tax that the assessments made by the Income-tax Officer on January 31, 1953, were illegal in view of the pronouncement of law by the Supreme court and that the consequential assessments made on that basis were also void. Such a connection of the assessee, however, was not accepted by the revenue and the Inspecting Assistant Commissioner intimated the assessee that the attachment levied pursuant to the said revised assessment orders will be kept in force, but further proceedings would be kept in abeyance till the final order was passed by the Supreme Court in the writ petition field by the assessee. In view of these facts and circumstances the Tribunal held that it did not lie in the mouth of the revenue to contend that the reassessment proceedings were commenced against the assessee under a bona fide belief that the assessments made on the assessee were illegal and that the incomes which were brought to tax under those illegal assessments had really escaped assessments. The Tribunal, accordingly, came to the conclusion that no income which was chargeable to tax had escaped assessments on the date on which the assessments were reopened and that the Income-tax Officer had no jurisdiction to reopen the assessments. In view of these findings, the Tribunal dismissed the appeals that were filed on behalf of the revenue. The question referred to above arises from this order of the Tribunal.
7. Mr. Joshi, on behalf of the revenue, submitted that, as the Supreme Court in the two decisions in : 26ITR1(SC) Suraj Mall Mohta and Co. v. A. V. Visvanatha Sastri and : 29ITR390(SC) M. CT. Muthiah v. Commissioner of Income-tax took the view that sections 5 and 8 of the Act were ultra vires, the revised assessment orders passed by the Income-tax Officer on January 31, 1953, had become invalid and were not enforceable. He, therefore, submitted that such being the clear position in law as pronounced by the Supreme Court the Income-tax Officer was justified in entertaining a reasonable belief that the income for the relevant assessment years had escaped assessments and consequentially he was fully justified in issuing the notices dated March 28, 1956, for initiation or reassessment proceedings for the said years.
8. It is quite clear from the provisions of section 34(1A) of the Indian Income-tax Act, 1922, that proceedings under the said sub-section can only be commenced if the Income-tax Officer has reason to believe that income, profits or gains chargeable to income-tax have escaped assessments for the years in question. The question arises whether having regard to the circumstances which cannot be disputed before us, can it be said that the Income-tax Officer when he issued the notices on March 28, 1956, entertained such a reasonable bona fide belief If the circumstances existing are such that no one could entertain such a belief, then initiation of proceedings by him pursuant to the notices dated March 28, 1956, would entirely unjustified and are liable to be quashed. It is one of the essential conditions for initiation of proceedings under that section that income for a particular year must have escaped assessment. If regard be had to the facts of the present case, such a reasonable bona fide belief could not have been entertained by the Income-tax Officer when he issued the notices of reassessment. It is not disputed that in the year 1950, the case of the assessee was referred by the Central Government to the Income-tax Investigation Commission under section 5(1) of the Act. Pursuant thereto on September 9, 1952, the Investigation Commission submitted its report to the Central Government. Consequential revised assessment orders were passed on January 31, 1953, for these assessment years by the Income-tax officer on the basis of the report of the Investigation Commission. If pursuant to these revised assessment orders recovery proceedings were commenced and continued on the date when the notices were issued on March 28, 1956, it could not lie in the mouth of the Income-tax Officer, to say that he entertained a reasonable belief that income had escaped assessment for the relevant years. The facts in this case are very clear. After the revised assessment orders were passed, the properties of the assessee were attached and even though the Supreme Court on December 20, 1955, in the case of M. CT. Muthiah v. Commissioner of Income-tax : 29ITR390(SC) took the view that the provisions of sections 5 and 8 of the Act were ultra vires, the proceedings which were commenced for enforcement of the revised orders were pursued. Actually, even after this date, as shown to us from the file by counsel for the revenue, on January 27, 1956, the Income-tax Officer, Ward 'A', Nasik, wrote to the collector of Nasik in regard to the recovery of tax from the assessee, that he had received instructions from the higher authorities that execution of certificate pertaining to the amount to be recovered be held in abeyance till instructions from the higher authorities are received for terminating the abeyance requested for by the assessee. Even though the recovery proceedings were not quashed by the income-tax department, still the impugned notices were issued on March 28, 1956, and after the same were issued on August 23, 1956, the Inspecting Assistant commissioner of Income-tax, Surat Range, Surat, wrote to the advocates of the assessee that the recovery proceedings already initiated were merely kept in abeyance and it was not possible for them to raise the said attachment and release the properties that were attached. In fact, he clearly stated that the properties that were attached by the Collector for recovery of tax could continue to remain under attachment but further proceedings for recovery of tax would be kept in abeyance till the writ petition field by the assessee before the Supreme Court was disposed of. Thus, this letter clearly shows that the revenue had not treated the revised assessment orders as illegal nor even the attachment notwithstanding the fact that the Supreme Court in the case referred to above declared the provisions of sections 5 and 8 of the Act ultra vires. The fact that the attachment levied on the properties of the assessee was continued, indicates that the revenue had not quashed the revised orders of assessments passed on January 31, 1953, nor the initiation of proceedings made pursuant thereto. The very fact that the attachment was continued shows that the assessee was prevented from dealing with his properties even though the revised assessment orders were in fact illegal and unenforceable. Thus, on March 28, 1956, it was impossible for the Income-tax Officer to entertain a reasonable belief that any income for the relevant assessment years had escaped assessment when in fact the recovery proceedings for the same years pursuant to the revised assessment orders were being continued. Thus, in our opinion, the Tribunal was right in taking the view that the Income-tax Officer had no jurisdiction to reopen the assessments because he could not have entertained a reasonable belief that any income for the relevant years had escaped assessment.
9. Accordingly, our answer to the question referred is in the negative and against the revenue. The revenue shall pay the costs of the heirs of the deceased assessee.