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Chiranji Lal Vs. the Income-tax Officer and ors., New Delhi - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtDelhi High Court
Decided On
Case NumberCivil Writ Appeal Nos. 782A and 782D of 1966
Judge
Reported inILR1969Delhi1167
ActsIncome tax Act, 1922 - Sections 34; Income tax Act, 1961 - Sections 147
AppellantChiranji Lal
RespondentThe Income-tax Officer and ors., New Delhi
Advocates: K.R. Bajaj,; R.S. Dass Jain,; P.N. Monga,;
Cases Referred(See Calcutta Discount Co. Ltd. vs. Income
Excerpt:
.....any year or to disclose fully and truly all 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 successive 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 of the assessed, the income-tax officer has in consequence of information in his possession reason to believe that income, profits or gains chargeable to income-tax has escaped assessment for any year, or have been under-assessed, or assessed at too low a rate, or have been made the subject of excessive relief..........any year or to disclose fully and truly all 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 successive 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 of the assessed, the income-tax officer has in consequence of information in his possession reason to believe that income, profits or gains chargeable to income-tax has escaped assessment for any year, or have been under-assessed, or assessed at too low a rate, or have been made the subject of excessive relief.....
Judgment:

H.R. Khanna, J.

(1) PETITIONER-FIRM Chiranji Lal Ramji Dass by means of this petition under Articles 226 and 227 of the Constitution of India has prayed for the issuance of a writ quashing notice dated March 21, 1966 under Section 148 of the Income- tax Act, 1961 (hereinafter referrd to as the Act of 1961).

(2) The petitioner-firm was carrying on business as a Commission Agent in the status of a Hindu undivided family during the accounting period (Dewali year 1947-48) pertaining to the assessment year 1949-50. The Hindu Undivided family remained joint in status and business up to November 13, 1955, thereafter the profits arising from the business were assessed in the status of a registered firm. Previously the head office was at Bhiwani with branch offices at Narnaul, Bikaner, Loharu and Jaipur. After 1955, the business is carried on with head office at Bhiwani and branches at Jaipur, Bikaner, Delhi and Narnaul. On March 21, 1966 Income-tax Officer, Central Circle Iii, Delhi issued the following notice under Section 148 of the Act of 1961 to the petitioner:-

'WHERE As I have reason to believe that your income chargeable to tax for the assessment year 1949-50 has escaped assessment within the meaning of Section 147 of the Income-tax Act, 1961.

re-assess

I, thereforee, propose to--the income for the

re-compute

Said assessment year and I hereby require you to deliver to me within 30 days from the date of service of this notice, a return in the prescribed form of your income in respect of which you are assessable for the said assessment year.

2.This notice is being issued after obtaining the necessary satisfaction of the Central Board of Revenue.'

On receipt of the above notice the petitioner filed a Return stating that notice under section 148 was illegal and no income had escaped assessment. It was added that the income of the petitioner was the same as assessed originally. In a further communication, it was stated that the return was being filed under protest and that notice under Section 148 was barred by time. A number of notices under Section 143(3) of the Act of 1961 were thereafter sent by the Income-tax Officer to.the petitioner. The petitioner thereupon filed the present petition dated September 27, 1966 challenging the validity of the notice under Section 148. Respondents imp leaded in the petition are the Income-tax Officer respondent No. 1, the Commissioner of Income-tax respondent No. 2, Central Board of Direct Taxes respondent No. 3 and Union of India through Secretary, Ministry of Finance respondent No. 4. The original petition was amended and on October 12, 1966 the petitioner filed a petition containing additional grounds.

(3) The petition has been resisted by respondents I to 3 and the affidavit of Shri V. S. Rastogi, Income-tax Officer has been filed in opposition to the petition. According to the affidavit filed on behalf of the respondents, notice under Section 148 was validly issued on the basis of information coming into the possession of the Income-tax Officer that by reasons of the omission or failure on the part of the assessed to disclose fully and truly all material facts, necessary for the assessment, income over Rupees one lakh chargeable to tax had escaped assessment for the assessment year 1949-50. Before dealing with the contentions advanced, it would be necessary to reproduce the relevant provisions of the Act of 1961 as well as those of Income-tax Act, 1922 (11 of 1922) (hereinafter referred to as Act of 1922). The relevant portion of Sec. 34 of the Act of 1922, as it stood immediately prior to its amendment by the Finance Act, 1956 was in the following terms:-

'34.(1) if-

(A) the Income-tax Officer has reasons to believe that by reason of the omission or failure on the part of an assessed to make a return of his income under section 22 for any year or to disclose fully and truly all 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 successive 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 of the assessed, the Income-tax Officer has in consequence of information in his possession reason to believe that income, profits or gains chargeable to income-tax has escaped assessment for any year, or 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 in cases falling under clause (b) at any time within four years of the end of that year, serve on the assessed, or if the assessed 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 re-compute 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 sub-section :

Provided that -

(I) the Income-tax Officer shall nto issue a notice under this sub-section, unless he has recorded his reasons for doing so and the Commissioner is satisfied on such reasons recorded that it is a fit case for the issue of such notice.

Amendments were made in Section 34 with effect from April 1, 1956 by the Finance Act of 1956.

(4) The time-limit of eight years for cases falling under clause (a) of sub-section (1) was removed and the following provisions were substituted for the existing proviso in sub-section (1) :-

'PROVIDED that the Income-tax Officer shall nto issue a notice under clause (a) of sub-section (1) -

(I) for any year prior to the year ending on the 31st day of March, 1941,

(II) for any year, if eight years have elapsed after the expiry of that year, unless the income-profits or gains chargeable to Income-tax which have escaped assessment or have been under-assessed or assessed at too low a rate or have been made the subject of excessive relief under this Act, or the loss or depreciation allowance which has been computed in excess, amount to, or are likely to amount to one lakh of rupees, or more in the aggregate, either for that year, or for that year and any other year or years after which or after each of which eight years have elapsed, nto being a year or years ending before the 31st day of March, 1941;

(III) for any year, unless he has recorded his reasons for doing so, and, in any case falling under clause (ii), unless the Central Board of Revenue, and, in any other case, the Commissioner is satisfied on such reasons recorded that it is a fit case for the issue of such notice.

The Act of 1961 came into force on April 1962. Sub-Section (1) of Section 297 of the Act of 1961 repealed the Act of 1922. Clause (d) of sub-section (2) of that Section provided :

'297(2) Nto with standing the repeal of the Indian Income- tax Act, 1922 (XI of 1922) (hereinafter referred. to as the repealed Act), -

(D) where in respect of any assessment year after the year ending on the 31st day of March, 1940

-

(I) a notice under section 34 of the repealed Act had been issued before the commencement of this Act, the proceedings in pursuance of such notice may be continued and disposed of as if this Act had nto been passed;

(II)any income chargeable to tax had escaped assessment within the meaning of that expression in section 147 and no proceedings under Section 34 of the repealed Act in respect of any such income are pending at the commencement of this Act, a notice under Section 148 may, subject to the provisions contained in section 149 or section 150, be issued with respect to that assessment year and all the provisions of this Act shall apply accordingly;'.

(5) Section 34 of the Act of 1922 has been split up into Sections 147 to 153 in the Act of 1961. Section 147 provides:

'If

(A) the Income-tax Officer has reason to believe that, by reason of the omission or failure on the part of an assessed to make a return under Section 139 for any assessment year to the Income-tax Officer to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, or

(B) nto with standing that there has been no omission or failure as mentioned in clause (a) on the part of the assessed, the Income-tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year,

He may, subject to the provisions of Sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereinafter in Sections 148 to 153 referred to as the relevant assessment year)'.

Explanationn 2 of that Section reads as under :-

'PRODUCTION before the Income-tax Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Income-tax Officer will nto necessarily amount to disclosure within the meaning of this section.'

According to section 148 the Income-tax Officer before making the assessment, reassessment or recomputation under section 147, shall serve a notice on the assessed containing all or any of the requirements which may be included in a notice under sub-section (2) of section 139; and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section.Sub-Section (1) of Section 149 has a material bearing and reads as under :-

'149(1) No notice under section 148 shall be issued, (a) in cases falling under clause (a) of section 147(i) for the relevant assessment year, if eight years have elapsed form the end of that year, unless the case falls under sub-clause (ii);

(II) for the relevant assessment year, where eight years, but nto more than sixteen years, have elapsed from the end of that year, unless the income chargeable to tax which has escaped assessment amounts to or is likely to amount to rupees fifty thousand or more for that year.

(B)in cases falling under clause 1 (a) of Section 147 at any time after the expiry of four years from the end of the relevant assessment year.'

Section 151 is in the following terms:--

(1) No notice shall be issued under Section 148 after the expiry of eight years from the end of the relevant assessment year, unless the Board is satisfied on the reasons recorded by the Income-tax Officer that it is a fit case for the issue of such notice.

(2) No notice shall be issued under Section 148 after the expiry of four years from the end of the relevant assessment year, unless the Commissioner is satisfied on the reasons recorded by the Income-tax Officer that it is a fit case for the issue of such notice.'

(6) The first contention which has been advanced on behalf of the petitioner is that the Act of 1922 prescribed a period of eight years for the isssue of notice under Section 34 of that Act for cases fa.lling under clause (a) of sub-section (1) of that section and as that period for the assessment year 1949-50 expired on March 31, 1958, the Income-tax Officer cannto take the benefit of extended period of limitation of sixteen years as prescribed by Sec. 149 of the Act of 1961. It is urged that Section 297(2)(d)(ii) should nto be construed as might have the effect of reviving rights of Income-tax Officer to reopen assessment which rights had become extinguished and barred under the old Act. Reference in this context is made to the case of Shri J. P. Jam, Income Tax Officer, v. Induprasad Dev- Shankar Bhatt (1) decided by the Supreme Court on August 20, 1968. In this case their lordships affiirmed the judgment of Gujarat High Court where by a notice under Section 148 of the Act of 1961 issued by the Income-tex Officer had been quashed. Reference on behalf of the petitioner has also been made to the case of Darshan Singh Chawla v. Income-Tax Officer and others (2) Civil Writ No'. 65-D of 1966, decided by Kapur, J. on August 12, 1966. In the case of Induprasad Devshankclr Bhatt, the amount of escaped income was determined by the Income-tax Officer to be Rs. 89,000.00 while in the case of Darshan Singh Chawla it was decided to be Rs. 72,136,11.00. As the notice under section 148 of the Act of 1961 in the above two cases was issued after the expiry of eight years, it was held that the notice was illegal and liable to be quashed. To quote the words of their Lordships of the Supreme Court :-

'ITmust be held that on a proper construction of Section 297(2)(d)(ii) of the new Act, the Income-tax Officer cannto issue notice under Section 148 in order to reopen the assessment of an assessed in a case where the right to re-open the assessment was barred under the Old Act at the date when the new Act came into force.'

In my opinion, the petitioner cannto derive much assistance from the above two authorities, because, according to the affidavit filed on behalf of the respondents the escaped income in the case of the petitioner was more than one lakh of rupees for the assessment year 1949-50. So far as the escaped income of over a lakh of rupees is concerned, the Act of 1922 prescribed no period of limittation. It, thereforee, cannto be said that the Income- tax Officer by issuing notice under Section 148 to the petitioner, is trying to reopen an assessment in a case where the right to reopen the assessment has become barred under the old Act. The dictum laid down in the above two cases, in the circumstances, would clearly be nto applicable.

(7) It has next been argued on behalf of the petitioner that there is no cogent material on the record to indicate that income had escaped assessment by reason of omission or failure on the part of the assessed to disclose fully and truly all material facts necessary for assessment relating to the assessment year 1949-50. In this respect I find that before the Income-tax Officer can exercise jurisdiction under clause (a) of Section 147 of the Act of 1961 or its corresponding provision under clause (a) of sub-section (1) of Section 34 of the Act of 1922 and issue notice under the provisions of the Act, two conditions must be satisfied : (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 an under-assessment had occurred by reason of either (a) omission or failure on the part of the assessed to make a return of his income (under Section 139 of the Act of 1961 or Section 22 of the Act of 1922 as the case may be), or (b) omission or failure on the part of the assessed to disclose fully and truly all the material facts necessary for the assessment for that year. Both these conditions are conditions precedent to be satisfied before the Income-tax Officer acquires jurisdiction to issue notice under Sec. 148 of the Act of 1961 or Section 34 of the Act of 1922. Ramaswami J. speaking for the Court observed in the case of S. Narayanappa and others vs. Commissioner of Income-fax, Bangalore, (3)

'BUT the legal position is that 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 Section 34. Whether these grounds are adequate or nto is nto a matter for the Court to investigate. In other words, the sufficiency of the grounds which induced the Income- tax Officer to act is nto a justiciable issue. It is of. course open for the assessed to contend that the Income-Tax Officer did nto hold the belief that there had been such nondisclosure. In other words, the existence of the belief can be challenged by the assesses but nto the sufficiency of the reasons for the belief. Again the expression 'reason to believe' in Section 34 of the Income-tax Act does nto mean a purely subjective satisfaction on the part of the Income- tax Officer. The belief must be held in good faith; it cannto be merely a pretence. To put it differently, it is open to the Court to examine the question whether the reasons for the belief have a rational connection or a relevant bearing to the information of the belief and are nto extraneous or irrelevant to the purpose of the section. To this limited extent, the action of the Income-tax Officer in starting proceedings under Section 34 of the Act is open to challenge in a court of law.' (See Calcutta Discount Co. Ltd. vs. Income-tax Officer Companies District, Calcutta (4).

In the present case I find that although Shri V. S. Rastogi, Income- tax Officer in his affidavit has asserted that 'notice under Section 148 was validly issued on the basis of information coming to the possession of the Income-tax Officer that by reason of omission or failure on the part of the assessed to disclose fully and truly all material facts necessary for the assessment income chargeable to tax had escaped assessment for the assessment year 1949-50,' he has nowhere indicated the material on the basis of which he could form the belief that there had been omission or failure on the part of the assessed to disclose fully and truly all material facts necessary for the assessment for the year 1949- 50. The affidavit filed on behalf of the respondents is absolutely silent in this respect and in the absence of such a material it is difficult to hold in favor of the respondents about the existence of such a belief. In any case it cannto be said that the belief was held by the Income-tax Officer in good faith and was nto merely a pretence, because the Court can go into this matter only if the reasons for such a belief are placed before the Court. As stated in S. Narayanappa's case, it is open to the Court to examine the question whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are nto extraneous or irrelevant to the purpose of the Section. Although the Income-tax Officer in the present case seeks to reopen the assessment of the assessment year 1949-50 by means of a notice issued in 1966, he has in his affidavit given no inkling of the reasons for his belief that there has been omission or failure on the part of the assessed to disclose fully and truly all material facts necessary for the assessment for that year.

(8) Mr. Kirpal on behalf of the respondents 1 to 3 .has urged that it was nto necessary for the Income-tax Officer to refer to the material in his affidavit because as such material is indicated by notices dated July 15, 1966, August 3/4, 1966 and August 22/27, 1966 which were issued by the Income-tax Officer to the petitioner. The last two of them purported to be under Section 143(3) of the Act of 1961. The provision under which notice dated July 15, 1966 was issued has nto been specified but it is stated by Mr. Kirpal that notice too was under Section 143(3) of the above-mentioned Act. In these notices the Income-tax Officer called upon the petitioner to furnish information and Explanationn in respect of a number of matters. Although there are indications in these notices that certain income had escaped assessment, there is nothing in these notices to show that the income had escaped assessment by reason of omission or failure on the part of the assessed to disclose fully and truly all material facts necessary for the assessment of the assessment year 1949-50. The mere fact that income had escaped assessment would nto a!so lead to the conclusion that this was due to omission or failure on the part of the assessed to disclose fully and truly all material facts necessary for the assessment. In case this view was accepted in a case like the present only one condition would have to be satisfied, namely, that income chargeable to tax had escaped assessment, and the second condition that the above escapement was due to omission or failure on the part of the assessed to disclose fully and truly all material facts necessary for the assessment for that year would be rendered unnecessary. This view, as would appear from the above, is nto warranted by law. Indeed their Lordships of the Supreme Court in a recent case Modi Spinning and Weaving Mills Co. Ltd., v. Income-tax Officer, Specia1 Investigation Circle (B) Meerut (5) had to remand the case to the High Court because the High Court, while dismissing writ petitions praying for the quashing of notices under Section 148 of the Act of 1961, considered the question as to whether the income had escaped assessment but did nto consider whether the income had escaped assessment by reason of omission or failure on the part of the assessed to disclose fully and truly all material facts necessary for assessment.

(9) Mr. Kirpal on behalf of the respondents has argued that the facts of the present case are similar to those of S. Narayanappa (supra). This contention, in my opinion, is nto well founded, because in the cited case it was discovered that the item of house property acquired long before the relevant accounting year had been suppressed by the assessed. No such suppression or omission on the part of assessed has been shown in the present case.

(10) The respondents had to show that there was material with the Income Tax Officer at the time he issued notice dated March 21, 1948 under Section 148 of the Act of 1961, on the basis of which he could have reasonably formed the belief that the income in the assessment year 1949-50 had escaped assessment by reason of omission or failure on the part of the assessed to disclose fully and truly all material facts necessary for the assessment. Notice under Section 143(3) would normally nto contain such material as the object of issuing such notice is only to ask for further evidence on specified points for making proper assessment. The Income Tax Officer at the stage of issuing notice under Section 143(3) is nto concerned with past failure or omission on the part of the assessed to disclose material facts. Keeping in view the scope and object of notice under Section 143(3) of the Act of 1961 as well as the contents of the notices under that Section referred to by Mr. Kirpal I am of the view that the respondents have failed to show on any material on the basis of which the Income Tax Officer could have formed the belief that the income had escaped assessment because of the omission or failure on the part of the assessed to disclose fully and truly all material facts.

(11) During the pendency of the writ petition the petitioner filed application for admission of additional evidence consisting of three documents. One of those documents is an order dated February 17, 1966 made by the Income Tax Officer under Section 132(5) of the Act of 1961, while the other is an order dated August 9/11, 1966 under Section 132(12) of the Act made by the Member, Central Board of Direct Taxes. The third document constitutes objections filed by the petitioner under Section 132(11) before the Central Board of Direct Taxes.

(12) The admission of the above documents is objected to by Mr. Kirpal on behalf of the Revenue. As I am of the view that the present petition can be duly disposed of without reference to the additional documents, I make no order for their admission. Further, as I find, that the petition is being accepted on the ground that the Revenue has failed to show any material on the basis of which the Income Tax Officer could form a belief that it was due to omission or failure on the part of the petitioner to disclose fully and truly all material facts necessary for the assessment that income had escaped assessment during the assessment year 1949-50, it is nto necessary for me to deal with other contentions raised on behalf of the petitioner.

(13) I, thereforee, accept the petition and quash the notice dated March 21, 1966 under Section 148 of the Income Tax Act issued by respondent No. 1. The petitioner, in the circumstances, would be entitled to recover costs of the petition from respondents 1 to 3.


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