Sheo Nath Singh Vs. Assistant
Commissioner of income Tax, Calcutta  INSC 192 (12 August 1971)
CITATION: 1971 AIR 2451 1972 SCR (1) 175
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 suspicionCourt 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.
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 incometax 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
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 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
[183 B] In the result the appeal must be
allowed and the impugned notices were quashed.
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 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 Associated 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, 194344,
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 Commissioner. This Writ Petition was dismissed on 6th
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 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 assessment,
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 Commission 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 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 thecase 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 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 directions 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.