1989 (4) TMI 52 - HC - Income Tax

Summary

Issues Involved:

1. Legitimacy of capital investments in the partnership business.
2. Validity of proceedings under SAFEMA.
3. Application of mind and recording of "reasons to believe."
4. Breach of principles of natural justice.
5. Involvement of appellants in the alleged illegal activities.
6. Inordinate delay in reviving proceedings.

Detailed Analysis:

1. Legitimacy of Capital Investments in the Partnership Business:
The appellants, Chandan Kumar Saha and Gaur Chandra Saha, had introduced capital into the partnership business "Lakshmi Bhandar" in 1972. Their investments were Rs. 31,900 and Rs. 34,100, respectively. They had been assessed to income-tax since then, and the genuineness of these investments was not disputed by the Income-tax Officer. The assessment orders filed showed assessments under section 143(1) and later under section 143(3) of the Income-tax Act. They had explained their capital sources to the Income-tax Officer and provided statements of their state of affairs long before the enactment of SAFEMA.

2. Validity of Proceedings under SAFEMA:
The proceedings were initiated under SAFEMA because one of the partners, Gopal Chandra Saha, was detained under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act. The Competent Authority issued notices under section 6(1) of SAFEMA, believing the appellants fell within the definition of "person" under section 2(2)(b) of SAFEMA. However, no proper inquiry or investigation under section 18 of the Act was conducted before recording "reasons to believe" that the properties were illegally acquired.

3. Application of Mind and Recording of "Reasons to Believe":
The Competent Authority recorded "reasons to believe" on January 11, 1978, stating that the appellants were not assessed to income-tax and had no legal source of income prior to joining the partnership. This was incorrect, as the appellants were indeed assessees. The Competent Authority failed to conduct any inquiry under section 18, which is a crucial step to prevent reckless proceedings. The reasons recorded were mechanical and lacked genuine application of mind.

4. Breach of Principles of Natural Justice:
The appellants were denied the opportunity to inspect documents relied upon by the Competent Authority. Their request for inspection and copies of documents was rejected, materially prejudicing their defense. This constituted a breach of natural justice principles.

5. Involvement of Appellants in the Alleged Illegal Activities:
The penalties and confiscations against Gopal Chandra Saha under the Customs Act were later overturned by the Appellate Collector of Customs. There was no evidence that the other partners or the partnership firm were involved in those activities. The partnership did not deal with the items involved in the allegations, and the firm or its partners were not implicated in the proceedings under the Customs Act.

6. Inordinate Delay in Reviving Proceedings:
The proceedings were left in abeyance for over ten years and revived in May 1988 without any special reasons. The delay was unexplained, and the writ petition challenging the detention was still pending before the Supreme Court. The inordinate delay vitiated the proceedings under the impugned orders.

Conclusion:
The appeals were allowed, and the impugned orders were quashed due to the lack of proper application of mind, breach of natural justice, and unexplained inordinate delay in reviving the proceedings. The Competent Authority failed to consider material facts, and the satisfaction of "reasons to believe" was not genuine. The appellants' past assessments and disclosures established the existence of funds, and the proceedings under SAFEMA were invalid from the outset.