1971 (8) TMI 6 - SC - Income Tax

Notice for reassessment - two reasons given for the belief formed by the Income-tax Officer did not meet the requirements of s. 34(1A) - There was no material which had been stated on which any belief could be founded of the nature specified in s. 34(1A) - reassessment notices were not valid - Appeal of assessee is allowed

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court were:

(a) Whether the Income-tax Officer had jurisdiction to issue notices under section 34(1A) of the Income-tax Act, 1922, in the absence of any material constituting "reason to believe" that income had escaped assessment;

(b) Whether the conditions precedent under section 34(1A), namely the recording of reasons and satisfaction of the Central Board of Revenue, were fulfilled before issuing the notices;

(c) The validity and constitutionality of section 34(1A) of the Income-tax Act;

(d) Whether the assessee was precluded from invoking constitutional writ jurisdiction under article 226 after having availed statutory remedies;

(e) The sufficiency and adequacy of the reasons recorded by the Income-tax Officer to justify the issuance of notices under section 34(1A).

2. ISSUE-WISE DETAILED ANALYSIS

Jurisdiction under Section 34(1A) and "Reason to Believe"

The legal framework under section 34(1A) requires that before issuing a notice for reassessment, the Income-tax Officer must have "reason to believe" that income chargeable to tax has escaped assessment and that such escaped income amounts or is likely to amount to Rs. 1,00,000 or more. Additionally, the Officer must record reasons in writing and obtain the satisfaction of the Central Board of Revenue that the case is fit for issuing such notice.

The Court emphasized that "reason to believe" must be grounded on honest and reasonable grounds and cannot be based on mere suspicion, gossip, or rumour. The belief must be that of a reasonable person, supported by material evidence, either direct or circumstantial.

The Court examined the material produced by the Revenue, specifically the reasons recorded by the Income-tax Officer. These reasons were limited to two points: (1) a belief that the assessee made secret profits not offered for assessment, and (2) a belief that the Rs. 22 lakhs received from a third party represented income which escaped assessment. The reasons were vague, conclusory, and self-contradictory, merely stating beliefs without supporting factual basis.

In applying the law to facts, the Court found no material or fact in the reasons that could constitute a valid "reason to believe" as contemplated by section 34(1A). The Court drew on precedent where similar vague and unsupported reasons were held insufficient to confer jurisdiction on the Income-tax Officer to issue reassessment notices. The Court held that the notices issued were therefore wholly illegal and invalid for want of jurisdiction.

Validity and Constitutionality of Section 34(1A)

The constitutionality of section 34(1A) was raised but ultimately abandoned by the assessee's counsel. The Court noted that a series of prior decisions had settled the constitutionality of the provision and therefore did not find any merit in this challenge.

Invocation of Writ Jurisdiction under Article 226

The High Court had sustained a preliminary objection that the assessee could not maintain a writ petition under article 226 after having invoked statutory remedies under the Income-tax Act. The Supreme Court observed that while the High Court was correct in principle, it proceeded to decide the merits of the case on the jurisdictional question. Since the High Court's decision on the merits would be binding on the Appellate Assistant Commissioner, the Supreme Court also examined the question of jurisdiction under section 34(1A) and found in favour of the assessee.

Assessment of Evidence and Competing Arguments

The Revenue argued that the Income-tax Officer had obtained the sanction of the Central Board of Revenue after recording reasons in writing, which was a statutory requirement. However, the Court scrutinized the actual content of the reasons and found them insufficient and conclusory. The Court rejected the assessee's objection that the recorded reasons should not be looked into, holding that the Court can examine whether the preconditions for jurisdiction were satisfied, though it cannot investigate the sufficiency of the reasons beyond their existence.

The Court also noted that the Appellate Assistant Commissioner had remanded the case seeking further material to justify the reassessment, indicating that even the statutory appellate authority found the reasons inadequate. The Court found that the Revenue failed to produce any fresh or relevant material to support the belief that the sum previously treated as capital receipt should be treated as income.

3. SIGNIFICANT HOLDINGS

"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."

"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 section 34(1A). The so-called reasons are stated to be beliefs thus leading to an obvious self-contradiction."

"We are satisfied that the requirements of section 34(1A) were not satisfied and, therefore, the notices which had been issued were wholly illegal and invalid."

The Court conclusively held that the notices issued under section 34(1A) were invalid for want of jurisdiction due to the absence of any material constituting a "reason to believe" that income had escaped assessment. The Court set aside the judgment of the High Court and quashed the impugned notices, awarding costs to the assessee.