1. This is an appeal from an order dismissing a writ application challenging the validity of three notices issued to the- appellant under Section 34(1A) of the Indian Income Tax Act 1922 and the subsequent proceedings thereunder. The notices relate to the assessment years 1945-46, 1946-47 and 1947-48. The three notices were originally issued by the Income Tax Officer, Companies District III, on 18-12-1954. Subsequently, on 8-7-1955, three revised notices under Section 34(1A) were issued by the Income-tax Officer, Central Circle XIII. Consequential notices under Section 22(4) of the Indian Income-tax Act, requiring the appellant to produce certain documents and books of account were issued on 25-7-1955 by the Income-tax Officer, Central Circle XIII, and served upon the appellant. The appellant refuses to file its return of income or to produce its books and documents.
2. The three notices under Section 34(1A) state that the Income-tax Officer has reason to believe that income, profits or gains assessable to income-tax for the assessment years ending 31-3-1946, 31-3-1947 and 31-3-1948 have partly escaped assessment and that the income, profits or gains of the previous years falling wholly or partly within the period beginning on September, 1939 and ending on 31-3-1948 which have so escaped assessment, amount to or are likely to amount to one lakh of rupees or more. The Income-tax Officer seeks to reopen the assessments of the appellant previously made in respect of the assessment years 1945-46, 1946-47 and 1947-48.
3. The validity of the notices under Section 34(1A) and of the subsequent proceedings thereunder was challenged in the petition on numerous grounds. Before us Mr. Mitra has confined his attack to two grounds and two grounds only.
4. The first ground of attack challenges the legislative competence of the Indian Legislature to pass Income-tax (Amendment) Act XXXIII of 1954 which introduced Sub-section (1A) to (1D) in Section 34 of the Indian Income-tax Act. Mr. Mitra argued that the tax payable by the appellant in respect of these three assessment years, including the tax in respect of the income if any which escaped assessment, became due from the appellant as and when the Finance Act for each of those years were passed. The tax became then vested in His Britannic Majesty for the purposes of the Governor General in Council. Subsequently the Indian Independence Act 1947 was passed, the Dominions of India and Pakistan were brought into existence and the Indian Independence (Rights, Properties and Liabilities) Order, 1947 provided for the distribution of the property vested in His Majesty. Mr. Mitra contended that the tax due from the appellant in respect of those assessment years was property which was neither laud nor a contractual right nor goods, coins, bank notes and currency notes and consequently by Section 7 of the Indian Independence (Rights, Properties and Liabilities) Order 1947 the tax so due became vested on the appointed day in His Majesty for the joint purposes of both the Dominions of India and Pakistan. The tax so due never became vested in the Dominion of India exclusively and the Dominion of India had no power to make laws with respect to such tax. Mr. Mitra argued that when the Constitution came into force the tax continued to be vested in His Britannic Majesty for the joint purposes of the two Dominions and the Constitution did not confer upon the Parliament the power to make any law with respect to such tax. Mr. Mitra argued that the Income Tax Amendment Act XXXIII of 1954 which introduced Sub-section (1A) to (1D) in Section 34 of the Indian Income-tax Act being a law with respect to tax vested in His Majesty for the joint purposes of the two Dominions is not a law 'for the whole or any part of the territory of India' and such law is invalid, for by Article 245 of the Constitution the Parliament has power only to make laws for the whole or any part of the territory of India. I am unable to accept these arguments of Mr. Mitra. Underlying these arguments there is a continuous string of fallacies.
5. The tax in respect of the income of the appellant for the assessment years 1945-46, 1946-47 and 1947-48, which is said to have escaped assessment never became due and payable to His Majesty for the purposes of the Governor General in Council. The tax in respect of the escaped income, it any, will become due and payable by the appellant after the income is assessed and the tax, if any, payable by the appellant on the basis of Such assessment is determined. The debt, which may become due from the appellant as a result of the proceedings under Section 34(1 A) was not in existence when the Indian Independence Act was passed.
6. It is true that before the Indian Independence Act came into force, the escaped income attracted the quality of taxability by reason of Section 3 of the Indian Income-tax Act, and also the liability to be charged with income tax by reason of the Finance Acts which were passed from time to time. Never the less the tax in respect of that income did not become a debt due to the Crown before the Indian Independence Act came into force. The income tax becomes a debt due from the assessee when the tax is determined upon assessment of the income and demand is made under Sections 29 and 46 of the Income-tax Act. In Doorga Prosad v. Secretary of State Sir John Beaumont observed :
'In their Lordships' opinion, although income-tax may be popularly described as due for a certain year, it is not in law so due. It is calculated and assessed by reference to the income of the assessee for a given year, but it is due when demand is made under Section 29 and Section 45. It then becomes a debt due to the Crown, but not for any particular period'.
7. The escaped income of the appellant was taxable and the liability of the appellant to be charged with tax in respect of that income accrued before the Indian Independence Act came into force. But in respect of that liability no property became vested in His Majesty for the purposes of the Governor General in Council.
8. Before the Indian Independence Act came into force the income-tax officer had the power to assess the escaped income as also the power to reopen the assessments, already made, under Section 34 (1) of the Indian Income Tax Act as it then stood. The exercise of that power might have created a debt due from the appellant to the Crown, and thereby vested a property in the shape of that debt in the Crown; but that power was not exercised before Independence. The un-exercised power was not property within the meaning of Section 7 of the Indian Independence Rights, Properties and Liabilities, Order 1947 and was not by that section vested in His Majesty for the joint purposes of the two Dominions.
9. By Section 18 (3) of the Indian Independence Act, the Indian Income Tax Act continued to remain in force with suitable adaptations made by the Adaptation of Income Tax Profits Tax and Revenue Recovery Order 1947, and the Income Tax Officer continued to retain the power conferred by Section 23 of the Income Tax Act to assess the incomes chargeable to tax as also the power conferred by Section 34, as it then stood, to re-open the assessments.
10. By the Income Tax and Business Profits Tax (Amendment) Act XLVIII of 1948 which came into force on the 8th September, 1948, the new Section 34 was substituted in the Income Tax Act with effect from the 30th March, 1948. In Income Tax Officer, Companies District I, Calcutta v. Calcutta Discount Co. Ltd., : 23ITR471(Cal) , this Court decided that under the newly substituted section, action could be taken in respect of assessment years prior to 1948-49. This Court repelled an argument that the Dominion of India could not legislate with regard to the pre-1947 income of the assessee. The attack on Act XLVIII of 1948 on the ground that it was a law with respect to tax which belonged to the outgoing British Indian Government, did not succeed.
11. The Constitution of India came into force on 26-1-1950. By Article 372 of the Constitution, the Indian Income Tax Act continued to remain in force and the Income Tax Officer continued to retain his old power and jurisdiction. Suitable adaptations were made in the Indian Income Tax by the Adaptations of Laws Order 1950.
12. By sections 3 and 4 of the Income Tax Act as adapted, the income so chargeable includes the income of a resident in the taxable territories during the previous year. By Sub-section (14A) of Section 2 which was inserted by the Adaptation of Laws Order 1950 and subsequently substituted by the Finance Act 1950 'Taxable territories' means in respect of any period before August 15, 1947 the territories then referred to as British India but including Berar. The Income-tax Officer, therefore, continued to retain the power to reopen assessments in respect of the income of residents in British India during the period prior to August 15, 1947.
13. On 25-5-1954 the Supreme Court declared in the case of Surajmall Mohta and Co. v. A.V. Viswanath Shastri, : 26ITR1(SC) , that Section 5 (4) of the Taxation of Income (Investigation Commission) Act XXX of 1947 was invalid. This decision led to the passing of the Indian Income Tax (Amendment) Ordinance VIII of 1954 and the Indian Income Tax (Amendment) Act XXXIII of 1954 and the insertion of Sub-section (1A) to (1D) in Section 34 of the Income Tax Act. These new Sub-section of Section 34 have materially amended the law relating to the reopening of assessments of income chargeable to income tax for any previous year falling wholly or partly within the period September 1939 to March 31, 1946. The Income Tax Officer is now empowered in certain cases to re-open the assessments even though the limitation of time specified in Sub-section (1) of Section 34 has expired.
14. The Parliament had clearly power to enact Act XXXIII of 1954. That Act is a law relating to tax on non-agricultural income. By Article 246 of the Constitution read with item No. 82 of List I the Parliament has exclusive power to pass such a law. Within the ambit of the power conferred by the Constitution the Parliament is sovereign. The Parliament may pass retroactive legislation. It may even pass laws charging to tax income which arose before the Constitution came into force. In Union of India v. Madan Gopal Kabra, : 25ITR58(SC) , their Lordships of the Supreme Court decided that the Finance Act of 1950 which authorised the levy of tax on income accruing in the territory of Rajasthan in the year 1949-50 was a valid piece of legislation. Patanjali Sastri. C. J., observed at page 555 (of SCR): (at p. 162 of AIR):
'Our Constitution, as appears from the Preamble, derives its authority from the people of India, and learned counsel conceded that it was open to the people to confer on the legislatures established by the Constitution, which they framed through their representatives., power to make laws having operation in relation to periods prior to the commencement of the Constitution.' This case was followed in Madhavakrishnaiah v. Income-tax Officer. Bangalore, : 25ITR72(SC) , where the Supreme Court decided that Parliament had power to make laws authorising officers, authorities and tribunals appointed or constituted under the Indian Income Tax Act, 1922, to levy, assess and collect income-tax and super-tax payable under the Mysore law prior to the commencement of the Constitution of India. Similarly, the Parliament has full, exclusive and sovereign power to legislate with respect to assessment and re-assessment of income chargeable to tax by reason of the laws existing prior to the coming into force of the Constitution.
15. The Parliament has sovereign and plenary powers of legislation with respect to tax on non-agricultural income past, present and future. The Parliament can pass laws for the whole or any part of the territory of India. The Indian Income Tax Amendment Act (XXXIII of 1954) is such a law. There is sufficient territorial connection between that law and the territory of India. The law does not cease to be a law 'for the whole or any part of the territory of India' because it is with respect to income arising before the Constitution came into force.
16. The Indian Income Tax Amendment Act (XXXIII of 1954) has no extra-territorial operation. Even, if that law had extra-territorial operation, by the express words of Article 245(2) of the 'Constitution, the law cannot be pronounced to be invalid on the ground that it would have extraterritorial operation.
17. Assuming for a moment that the Act XXXIII of 1954 is a law with respect to income tax which is still vested in His Majesty for the purposes of the two Dominions, Article 245 of the Constitution can in no sense be said to be a limitation on the legislative power of the Union of India to legislate with regard to such tax. Article 245 of the Constitution defines the geographical extent of the laws made by the Parliament. That Article is in no sense a limitation of the subject-matters with regard to which the Parliament can legislate. The subject-matters with regard to which the Parliament can legislate are specified in Article 246 of the Constitution read with the Union List and the Concurrent List. Assuming that the un-assessed tax in question, is vested in His Majesty for the purposes of the two Dominions the tax is still income tax within the meaning of item 82 of the Union List and Parliament has power to legislate with respect to the tax. Furthermore Act XXXIII of 1954 is not a law with respect to any matter enumerated in the Concurrent List or the State List. Assuming that the Act is not a law with respect to Income Tax, the Parliament has power to make the law under the residuary powers of legislation conferred on it by article 248 of the Constitution.
18. In my opinion the Parliament was competent to enact the Income Tax Amendment Act XXXIII of 1954 which introduced Sub-section (1A) to (1D) in Section 34 of the Indian Income Tax-Act. The competence of the Parliament must be judged by reference to the Constitution and not by reference to fanciful arguments. Act XXXIII of 1954 is not rendered invalid by any provision of the Constitution. That Act is a valid piece of legislation.
19. In Sree Rajendra Mills Ltd. v. Income Tax Officer, Central Circle I, Madras : 32ITR439(Mad) , the Madras High Court rejected the contention that Section 34 (1A) introduced by the Act XXXIII of 1954 was beyond the legislative power of the Parliament. The attack on the legislative competence was based on grounds similar to those advanced by Mr. Mitra but the attack did not succeed. I agree that Act XXXIII of 1954 is within the legislative power of the Parliament. I am, however, unable to agree with the entire reasoning in that judgment. The judgment seems to assume that the unassessed tax in respect of the escaped income, accruing prior to the passing of the Indian Independence Act 1947, was a sum due to the Government of British India, and was property vested in His Majesty for the purposes of the Governor General in Council (see pages .442, 453-56 of the Report (ITR)): (at pp. 221-222; 226-227 of AIR). I am unable to agree that the unassessed tax in respect of the escaped income was a debt due to or a property vested in His Majesty. On the assumption that such tax was property, the Madras High Court relying chiefly on the Indian Arbitral Tribunal Order 1947 and the Indian Independence Income Tax Proceedings Order 1947 came to the conclusion that the property vested in the Dominion of India (pages 453-54 of the Report) (ITR): (at p. 226 of AIR). As at present advised, however, I am not inclined to hold that property which was initially vested in His Majesty for the purposes of the two Dominions by Section 7 (2) of the Indian Independence (Rights, Properties and Liabilities) Order, 1947, became subsequently vested exclusively in the Dominion of India even in the absence of an agreement between the two Dominions, and in the absence of any award by an Arbitral Tribunal set up under the Arbitral Tribunal Order, 1947.
20. Before concluding this part of the judgment, I must note one argument of Mr. Meyer. Mr. Meyer contended that assuming that the tax, which may be due in future as a result of the reopening of assessments is by some process of reasoning property within the meaning of Section 7 of the Indian Independence (Rights, Properties and Liabilities) Order, and as such was initially vested in His Majesty for the joint purposes of the two Dominions by virtue of Sub-section (2) of Section 7 of the Indian Independence (Rights, Properties and Liabilities) Order, 1947 such property could subsequently be lawfully vested exclusively in the Dominion of India by an agreement between the two Dominions, as also by an award by an arbitral tribunal set up under the Arbitral Tribunal Order, 1947. He, therefore, contended that the question, whether the supposed property was vested in the Dominion of India and subsequently in the Union of India, is a mixed question of law and fact. He argued that the petition does not aver that there was no agreement between the two Dominions and no award by the Arbitral Tribunal, nor does it aver that the property continues to be vested in His Majesty for the purposes of the two Dominions. He, therefore, argued that Mr. Mitra ought not to be allowed to raise an argument which depends upon a question of fact not pleaded in the petition. We do not consider it necessary to express any opinion on this argument of Mr. Meyer. Our conclusion on the merits of the question is sufficient to dispose of the first ground of attack made by Mr. Mitra on the notices issued under Section 34 (1A) of the Indian Income Tax Act.
21. The second ground of attack was based upon a supposed violation of natural justice, Mr. Mitra has contended that, when an Income-tax Officer comes to believe that part of the assessee's income amounting to over a lac of rupees has escaped assessment and calls upon the assessee to make a return, justice demands that the Income-tax Officer should disclose to the assessee the materials upon which his belief is based before the assessee files his return and produces his books, so that in making a fresh return the assessee may consider his position and may not incur penalties for further non-disclosure. I am unable to accept this argument. The Income-tax Officer is entitled to initiate proceedings under Section 34 (1A). if he in good faith has reason to believe the matters specified in Section 34 (1A) (i) and (ii). He is not bound to disclose to the assessee the source of the information upon which he came to entertain that belief. The working of Section 34 (1A) will be wholly impossible if we arc to hold that the Income-tax Officer is bound to disclose the source of his confidential information or the name of the informant. The notice under Section 34 (1A) commences a quasi-judicial enquiry in which the assessee is entitled to appear and produce his evidence. In that enquiry the Income-tax Officer will be bound to disclose to the assessee the materials on the basis of which he seeks to find that the assessee's income to the extent of rupees one lakh or more has escaped assessment during the relevant years. Natural justice demands full disclosure of all the materials which the Income-tax Officer seeks to use against the assessee in course of that enquiry, so that the assessee has sufficient opportunity to meet the case made against him. That stage of the enquiry will arise after the assessee lies its return and produces its account books. It is not desirable that the assessee should be informed of those materials at this stage. If the assessees dishonest, the disclosure of the materials at this stage will be likely to lead to the manipulation of the books of account and other records. An honest trader who has not concealed his income has nothing to fear by submitting a fresh return and producing his account books pursuant to the notices issued by the Income-tax Officer. If the assessee is an honest trader, there is no likelihood of its incurring fresh penalties by filing a fresh return land by producing its account books. In my opinion there has been no violation of natural justice in this case and the proceedings under Section 34 (1A) up to this stage cannot be quashed on the ground of any alleged violation of natural justice.
22. Mr. Mitra confined himself to the two grounds of attack mentioned above. Although the petition mentions numerous other grounds of attack, those grounds were not pressed before us. The contentions advanced by Mr. Mitra in this Court have been embodied in the previous part of the judgment.
23. There is no merit in this appeal. I propose that the following order be passed:
24. The appeal be and is hereby dismissed with costs.
25. I agree.