Tuesday, 10 April 2012

Show Cause Notice


Article 14 – Show Cause Notice – Must be issued with open mind – vitiate entire proceedings – 2011 (1) AIR Bom R 626 – Paras – 25, 28, 29, 36, 38, 39, 42, 44 – SLP (C) No. 27615/2008 – Judg date: 29.10.2010. 


Writ against RoC – Court directed to pass a speaking order after hearing the company – (2009) 152 Com Cases 13


Art.226 – Writ jurisdiction – failure of authority to decide grievance raised before it – Court to direct the Authority to decide representation within stipulated time – AIR 2013 SC 1226 (F)


AIR 1970 SC 1011

Para 1: In these appeals by special leave, the only question of law that arises for decision is whether the respondent was competent to initiate proceedings u/s. 34 of the Indian Income-tax Act, 1922 (which will hereinafter be referred to as the Act).

Para 2: The respondent initiated proceedings u/s. 34 of the Act against the appellant by issuing notices under that section on 26.12.1960 in respect of the assessment years 1953-54, 1954-55 and 1955-56. The appellant challenged the validity of those proceedings by means of writ petitions under Art. 226 and 227 of the Constitution in the High Court of Judicature at Bombay (Nagpur Bench). Those petitions were summarily dismissed. The appellant thereafter appealed to this Court after obtaining special leave from this Court. This Court allowed those appeals on 8.04.1965 holding that the High Court was not justified in summarily dismissing the writ petitions as the allegations made therein merited examination. Thereafter the High Court issued rule nisi in those petitions. The respondent opposed those petitions. After hearing the parties, the High Court again dismissed those writ petitions. Hence these appeals.

Para 7: In the writ petition, the plea taken by the company was that in issuing the notice u/s. 34 (1) (a) of the Act, the Income-tax Officer acted without jurisdiction and for a colourable purpose. Its case as set out in the writ petition is as follows:

Para 9: The case pleaded by the company in the writ petition is that it had placed before the Income-tax Officer all the material facts; the Income-tax Officer before making the assessment had examined those facts and was satisfied with the explanation given by the company. The company denied that the Income-tax Officer had any reasons to believe that by reason of the omission or failure on the part of the company to disclose fully and truly all material facts necessary for his assessment for the year in question income, profits or gains chargeable to income-tax have escaped assessment for that year or have been under-assessed. The company disputed that the Income-tax Officer had any reasons before him to have the required belief. It also denied the fact that it had omitted or failed to disclose full and truly all material facts necessary for the assessment in question or that any income, profits or gains chargeable to income-tax have escaped assessment in that year.

Para 10: Section 34 (1) of the Act as at the relevant time read:

"If-(a) the Income-tax Officer has reason to believe that by reason of the omission or failure on the part of an assessee to make a return of his income u/s. 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 excessive 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 assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income, profits or gains chargeable to income-tax 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 and in cases falling under clause (b) at any time within four years of the end of that year, serve on the assessee or if the assessee 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-sec. (2) of sec. 22 and may proceed to assess or re-assess such income, profits or gains or recompute 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 not 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;(ii) the tax shall be chargeable at the rate at which it would have been charged had the income, profits or gains not escaped assessment or full assessment, as the case may be; and (iii) where the assessment made or to be made is an assessment made or to be made on a persons deemed to be the agent of a non-resident persons u/s. 43, this sub-sec. shall have effect as if for the periods of eight years and four years a period of one year was substituted. Explanation.- Production before the Income-tax Officer of account-books or other evidence from which material facts could with due diligence have been discovered by the Income-tax Officer will not necessarily amount to disclosure within the meaning of this section."

Para 11: In Calcutta Discount Co. Ltd. V/s. Income-tax Officer, (1961) 2 SCR 241 ; this Court ruled that before an Income-tax Officer could issue a notice u/s. 34 (1) (a) of the Act, two conditions must co-exist, namely, that he must have reason to believe (1) that income, profits or gains had been under-assessed and (2) that such under-assessment was due to non-disclosure of material facts by the assessee. It was observed therein that where, however, the Income-tax Officer has prima facie reasonable grounds for believing that there has been a non-disclosure of a primary material fact, that by itself gives him the jurisdiction to issue a notice u/s. 34 of the Act and the adequacy or otherwise of the grounds of such belief is not open to investigation by the Court. It is for the assessee who wants to challenge such jurisdiction to establish that the Income-tax Officer had no material for such belief. Speaking for the majority Das Gupta, J., observed therein:

''To confer jurisdiction under this section to issue notice in respect of assessments beyond the period of four years, but within a period of eight years, from the end of the relevant year two conditions have therefore to be satisfied. The first is that the Income-tax Officer must have reasons to believe that income, profits or gains chargeable to income-tax have been under-assessed. The second is that he must have also reason to believe that such ''under-assessment'' has occurred by reason of either (I) omission or failure on the part of an assessee to make a return of his income u/s. 22, or (ii) omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment for that year. Both these conditions are conditions precedent to be satisfied before the Income-tax Officer could have jurisdiction to issue a notice for the assessment or re-assessment beyond the period of four years but within the period of eight years, from the end of the year in question.''

Proceeding further the learned Judge observed:

"The position therefore is that if there were in fact some reasonable grounds for thinking that there had been any nondisclosure as regards any primary 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 notices u/s. 34. Whether these grounds were adequate or not for arriving at the conclusion that there was a non-disclosure of material facts would not be open for the Court's investigation. In other words, all that is necessary to give this special jurisdiction is that the Income-tax Officer had when he assumed jurisdiction some prima facie grounds for thinking that there had been some non-disclosure of material facts''.

Para 12: Shah, J., (one of us) in his dissenting Judgement has observed that the expression ''has reason to believe'' in sec. 34 (1) (a) of the Indian Income-tax Act does not mean a purely subjective satisfaction of the Income-tax Officer but predicates the existence of reasons on which such belief has to be founded. That belief, therefore, cannot be founded on mere suspicion and must be based on evidence and any question as to the adequacy of such evidence is wholly immaterial at that stage. He further observed that where the existence of reasonable belief that there had been under-assessment due to non-disclosure by the assessee, which is a condition precedent to exercise of the power u/s. 34 (1) (a) is asserted by the assessing authority and the record prima facie supports its existence, any enquiry as to whether the authority could reasonably hold the belief that the under-assessment was due to non-disclosure by the assessee of material facts necessary for the assessment must, be barred.

Para 13: In S. Narayanappa V/s. Commr. of Income-tax, Bangalore, (1967) 63 ITR 219 this Court held that the two conditions must be satisfied in order to confer jurisdiction on the Officer to issue the notice u/s. 34 of the Income-tax Act in respect of assessments beyond the period of four years, but within a period of eight years, from the end of the relevant year, viz., (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 ''under-assessment'' had occurred by reasons of either (a) omission or failure on the part of the assessee to make a return of his income u/s. 22 or (b) omission or failure on the part of the assessee to disclose fully and truly all the material facts necessary for his assessment for that year. Both these conditions are conditions precedent to be satisfied before the Income-tax Officer acquires jurisdiction to issue a notice under the section. 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 u/s. 34. Whether these grounds are adequate or not is not a matter for the Court to investigate. In other words, the sufficiency of the grounds which induced the Income-tax Officer to act is not a justiciable issue. It is of course open for the assessee to contend that the Income-tax Officer did not hold the belief that there had been such non-disclosure. In other words, the existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. Therein it was observed that the expression ''reason to believe'' in sec. 34 does not mean purely subjective satisfaction on the part of the Income-tax Officer. The belief must be held in good faith: it cannot be merely a pretence. It is open to the Court to examine whether the reasons for the belief have a rational connection or a relevant bearing to the formation of that belief are not extraneous or irrelevant to the purpose of the section. To this limited extent, the action of the Income-tax Officer in starting proceedings u/s. 34 of the Act is open to challenge in a Court of law.

Para 14: The same view was again expressed by this Court in Kantamani Venkata Narayana and Sons V/s. First Venkata Narayana and Sons V/s. First Additional Income-tax Officer, Rajahmundry, (1967) 63 ITR 638 .

Para 15: In the cases, the company in its writ petitions had repudiated the assertion of the Income-tax Officer that he had reason to believe that due to the omission or failure on the part of the company to give material facts, some income had escaped assessment. Under those circumstances one would have expected the officer who issued the notices u/s. 34 (1)( (A) to file an affidavit setting out the circumstances under which he formed the necessary belief. We were told that one Mr. Pandey had issued the notices in question. That officer had not filed any affidavit in these proceedings. The proceedings recorded by him before issuing the notices have not been produced nor his report to the Commissioner or even the Commissioner's sanction has not been produced. Hence it is not possible to hold that the Income-tax Officer had any reason to form the belief in question or the reasons before him were relevant for the purpose. We have no basis before us to hold that the Income-tax Officer had jurisdiction to issue the impugned notices. Hence the proceedings taken by him have to be quashed.

Para 16: For the reasons mentioned above, we allow these appeals, set aside the order of the High Court and quash the proceedings taken u/s. 34 (1) (a) of the Act. The respondent shall pay the costs of these appeals - hearing fee one set.




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