1979 (1) TMI 71 - HC - Income Tax

Summary

Issues Involved:
1. Jurisdiction and authority of the Income Tax Officer (ITO) under Section 170(3) of the Income Tax Act, 1961.
2. Validity of the notice issued to the petitioner treating him as a successor to the business of M/s. Kalyanji Dhanji & Co.
3. Compliance with principles of natural justice.

Issue-Wise Detailed Analysis:

1. Jurisdiction and Authority of the Income Tax Officer (ITO) under Section 170(3) of the Income Tax Act, 1961:
The petitioner challenged the notice issued by the respondent under Section 179(1) and (3) of the Income Tax Act, 1961, calling upon the petitioner to show cause why he should not be treated as a successor to M/s. Kalyanji Dhanji & Co. The court noted that the relevant question for the exercise of jurisdiction under sub-section (3) is whether there was any succession to the business of the said firm. The court emphasized that "succession to business" involves a change of ownership where the successor takes over the whole or substantially the whole business of the predecessor, continuing the same business. The court held that there was no prima facie evidence to suggest a transfer of the whole or substantially the whole business by the firm to the petitioner, which is a prerequisite for initiating proceedings under Section 170(3).

2. Validity of the Notice Issued to the Petitioner Treating Him as a Successor to the Business of M/s. Kalyanji Dhanji & Co.:
The court scrutinized the circumstances relied upon by the respondent to issue the notice. The respondent's affidavit-in-reply cited three broad circumstances: (1) the agreement dated November 5, 1960, appointing the petitioner as a stockist of cement, (2) the petitioner's undertaking to discharge the liability of the previous dealer, and (3) taking over of stock-in-trade of the said firm. The court found these circumstances insufficient to justify the action. The agreement appointing the petitioner as a stockist was between the petitioner and the Cement Marketing Company of India, not between the firm and the petitioner. Additionally, the court noted that the firm's business involved multiple agencies, not just cement. The court concluded that these circumstances did not establish an identity and continuity of business, thus failing to justify treating the petitioner as a successor.

3. Compliance with Principles of Natural Justice:
The petitioner contended that the ITO had no jurisdiction to initiate proceedings under Section 170(3) without providing specific information and records. The court observed that the respondent's replies to the petitioner's requests for information were vague and evasive, failing to comply with the principles of natural justice. The court emphasized that the respondent's reliance on the petitioner's knowledge of the business particulars was inadequate. The court held that the three broad circumstances cited by the respondent did not constitute prima facie evidence to warrant the action, and initiating proceedings without such evidence amounted to a "fishing inquiry."

Conclusion:
The court allowed the petition, quashing the impugned notice of December 10, 1973, and preventing the respondent from proceeding further. The court issued a writ of certiorari, setting aside the notice, and made the rule absolute with no order as to costs. The judgment underscores the necessity of prima facie evidence and adherence to principles of natural justice before initiating proceedings under Section 170(3) of the Income Tax Act, 1961.