TMI Blog1955 (12) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment orders of the Income-tax Officer for the years 1940-41, 1941-42 and 1943-44 to 194849 as being unconstitutional, null and void, and also to the issue of a writ of prohibition against the respondents from implementing the findings of the Investigation Commission referred to above with regard to the year 1942-43 and we do order that such writs do issue against the respondents accordingly. Appeal allowed. - W.P.(C) 646 OF 1954 - - - Dated:- 20-12-1955 - Judge(s) : BHAGWATI., DAS., JAGANNADHADAS., SINHA., VIVIAN BOSE JUDGMENT BHAGWATI J.--This petition under article 32 of the Constitution also raises the question about the constitutionality of section 5(1) of the Taxation on Income (Investigation Commission) Act, 1947 (XXX of 1947). The facts which led to the filing of this petition may be shortly stated. Sir M. Ct. Muthiah Chettiar who carried on a flourishing banking business in India and foreign countries died in or about 1929 leaving behind him two sons, M. Ct. M. Chidambaram Chettiar (since deceased) and M. Ct. M. Muthiah Chettiar, petitioner 3, and his widow Devanai Achi. M. Ct. M. Chidambaram Chettiar continued the ancestral banking business and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich were served on the 20th February, 1954, the petitioners preferred on the 18th May, 1954 applications to the Commissioner of Income-tax, Madras, under section 8(5) of the Act for references to the High Court on questions of law arising out of those re-assessment orders passed by the Income-tax Officer. Similar applications were preferred thereafter in respect of the reassessment orders which were served on the petitioners on the 12th May, 1954. These applications are still pending. On the 6th December, 1954, the petitioners filed the present petition contending that the provisions of the Act XXX of 1947 were illegal, ultra vires and unconstitutional mainly on the ground that they were violative of the fundamental right guaranteed under article 14 of the Constitution. The grounds urged in support of this contention were not felicitously expressed. The petitioners appear to have mixed up the contentions which could be urged as a result of our judgments in Suraj Mall Mohta v. A.V. Visvanatha Sastri and Another and Shree Meenakshi Mills Ltd. v. A. V. Visvanatha Sastri and Another. They contended in the first instance that after the amendment of section 34 of the Indian Income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 41, 1941-42, and 1943-44 to 1948-49 as being unconstitutional, null and void and also of a writ of prohibition calling upon the Commissioner of Income-tax, Madras, respondent 1, and the Income-tax Officer, City Circle 1, Madras, respondent 2, or their subordinate officers to forbear from implementing the findings of the Investigation Commission with regard to the year 1942-43. This petition was heard along with Civil Appeals Nos. 21 and 22 of 1954, A. Thangal Kunjit Musaliar v. M. Venkatachalam Potti and Another and M. Venkatachalam Potti and Another v. A. Thangal Kunju Musaliar, which also raised inter alia the cognate question about the constitutionality of section 5(1) of the Travancore Act XIV of 1124 which was in pari materia with section 5(1) of Act XXX of 1947. In regard to the question whether there is a rational basis of classification to be found in the enactment of section 5(1) of the Act, the preamble and the relevant provisions of Act XXX of 1947 are the same as were considered by us in considering this question in relation to the Travancore Act XIV of 1124. The words " substantial extent " also have been used in both the Acts and in the present case as in the cases o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d a class by themselves and there was a rational basis of classification in the enactment of section 5(1) of the Act. The argument that the terms of section 5(1) enabled the Central Government to pick and choose the cases of particular individuals falling within that category leaving the cases of other persons falling within the same category to be dealt with in accordance with the provisions of section 34(1) of the Indian Income-tax Act as it stood prior to the amendment of 1948 has been already dealt with in our judgment in A. Thangal Kunju Musaliar v. M. Venkatachalam Potti and Another, while dealing with the corresponding provisions of section 5(1) of the Travancore Act XIV of 1124 and section 47 of the Travancore Act XXIII of 1121 and we have pointed out that so far as the Indian Income-tax Act as it was in existence on the 18th April, 1947, (which was the date on which Act XXX of 1947 received the assent of the Governor-General), stood unamended by Act XLVIII of 1 948, the cases of persons who fell within the category of substantial evaders of income-tax within the meaning of section 5(1) of the Act could not have been dealt with under the provisions of section 34(1) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se (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-section (2) of section 2.2 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 :.......................... " Act XXXIII of 1954 introduced into section 34 sub-sections (1-A) to (1-D). Section 34 (1-A) which is material for our purposes provides : " Section 34 (1-A) : If, in the case 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 wholly or partly within the period beginning on the 1st day of September, 1939, and ending on the 31st day of March, 1946 ; and (ii) that the income, profits or gains which have so escaped assessment for any such year or years amount, or are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d assessment for a particular year. Whereas before this amended section 34(1) came to be substituted for the old section 34(1) there was no comparison between the provisions of section 5(1) of Act XXX of 1947 and section 34(1) of the Indian Income-tax Act as it then stood, the provisions of section 34(1) as amended after the 8th September, 1948, could stand comparison with the provisions of section 5(1) of Act XXX of 1947 and the cases which were covered by section 5(1) of Act XXX of 1947 could be dealt with under the procedure laid down in section 34(1) of the Indian Income-tax Act. After the 8th September, 1948, therefore, even in the case of substantial evaders of income-tax who were a distinct class by themselves intended to be treated by the drastic and summary procedure laid down by Act XXX of 1947, some cases that were already referred by the Central Government for investigation by the Commission could be dealt with under that Act and other cases, though falling within the same class or category, could be dealt with under the procedure prescribed in the amended section 34(1) of the Indian Income-tax Act. The persons who were thus dealt with under section 34(1) of the Indian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in section 34 and the cognate sections of the Indian Income-tax Act. As section 34(1) then stood, the requisites of definite information coming into the possession of the Income-tax Officer in consequence of which he discovered that income, profits or gains chargeable to income-tax had escaped assessment would certainly not have availed the Government in tracking down these substantial evaders of income-tax and it appears, therefore, to have been thought necessary that section 34(1) of the Indian Income-tax Act should be amended so as to enable the Income-tax Officer to take proceedings thereunder if he had reason to believe that by reason of omission or failure on the part of the assessee income, profits or gains chargeable to income-tax had escaped assessment for the relevant period. An amendment of section 34(1) in this manner would enable Government to pass on the requisite information which they had obtained in regard to the substantial evaders of income-tax to the Income-tax Officers concerned and ask the Income-tax Officers to take proceedings against those evaders of income-tax under the amended section 34(1) of the Indian Income-tax Act. That appears to have been the real ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were subjected to the summary and drastic procedure prescribed in Act XXX of 1947 and others were subjected to the normal procedure prescribed in section 34 and the cognate sections of the Indian Income-tax Act, the procedure prescribed in Act XXX of 1947 being obviously discriminatory and, therefore, violative of the fundamental right guaranteed under article 14 of the Constitution. It would be no answer to suggest that those substantial evaders whose cases were referred by the Central Government for investigation by the Commission before the 1st September, 1948, formed a class by themselves leaving others though belonging to the same class or category of substantial evaders of income-tax to be dealt with by the ordinary procedure prescribed in the Indian Income-tax Act without infringing the fundamental right guaranteed under article 14 of the Constitution. A similar argument had been advanced before us by the learned Attorney-General appearing for the Commission in Shree Meenakshi Mills' case. The ground which he had urged was " that the class of persons dealt with under section 5(1) of Act XXX of 1947 was not only the class of substantial tax-dodgers but it was a class of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the period fixed by the new section 34(1-A) of the Indian Income-tax Act, viz., 31st day of March, 1956, was not a necessary attribute of the class of substantial evaders of income-tax but was merely an accident and a measure of administrative convenience and was not an element in the formation of the particular class of substantial evaders of income-tax. It follows, therefore, that after the inauguration of the Constitution on the 26th January, 1950, the persons whose cases were referred for investigation by Central Government to the Commission up to the 1st September, 1948, could, to use the words of Mahajan, C.J., in Sree Meenakshi Mills' case at page 718 ask : " why are we now being dealt with by the discriminatory and drastic procedure of Act XXX of 1947 when those similarly situated as ourselves can be dealt with by the Income-tax Officer under the amended provisions of section 34 of the Act ? Even if we once bore a distinctive label that distinction no longer subsists and the label now borne by us is the same as is borne by persons who can be dealt with under section 34 of the Act as amended; in other words, there is nothing uncommon either in properties or in chara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t XXX of 1947 had not become final and the petitioners were, therefore, entitled to relief on the ratio of our judgment in that case. Reliance was placed in support of this position on the provisions of section 8(4) of the Act : " In all assessment or re-assessment proceedings taken in pursuance of a direction under sub-section (2), the findings recorded by the Commission on the case or on the points referred to it shall, subject to the provisions of sub-sections (5) and (6), be final ; but no proceedings taken in pursuance of such direction shall be a bar to the initiation of proceedings under section 34 of the Indian Income-tax Act, 1922 (XI of 1922)." Sub-section (5) has reference to the application made by the assessee to the Commissioner of Income-tax to refer to the High Court any question of law arising out of the assessment or reassessment orders and sub-section (6) has reference to the power of the Commission either of their own motion or on the application of the person concerned or of the Central Government to correct clerical or arithmetical mistakes in their report or errors therein arising from any accidental slip or omission. These provisions contained in sub-s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 954 came into operation and the only further procedure which they would be subjected under the provisions of Act XXX of 1947 would be that of a reference to the High Court on questions of law arising out of the orders of re-assessment if these applications were granted either by the Commissioner of Income-tax, Madras, or by the High Court on further application. In the event of such reference being made, the petitioners had the additional advantage of having their references heard by the High Court in a Bench constituted of not less than three Judges as contrasted with the normal procedure obtaining under sections 66 and 66-A of the Indian Income-tax Act under which the references could be heard by a Division Bench of the High Court. Whatever was, therefore, the procedure to which the petitioners would be subjected to under Act XXX of 1947, after the coming into operation of Act XXXIII of 1954 it was, instead of being prejudicial to them, really advantageous to them, and following our decisions in the cases of Syed Qasim Razvi v. The State of Hyderabad and Others, and Habeeb Mohamed v. The State of Hyderabad, we are of the opinion that the further proceedings, if any, which could b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal as offending article 14 of the Constitution and has therefore become void on the coming into force of the Constitution on the 26th January, 1950. This question was specifically left open in the two previous decisions of this Court, viz., Suraj Mall Mohta Co. v. A. V. Visvanatha Sastri, and Shree Meenakshi Mills Ltd. v. A. V. Visvanatha Sastri. Almost the identical question arose in the Travancore Appeals, in which judgment has just now been delivered. The provision with which we were concerned in those appeals is section 5(1) of Travancore Act XIV of 1924 which is almost in identical terms as section 5(1) of the Investigation Commission Act. We have held that this section of the Travancore Act did not, on the coming into operation of the Constitution, violate article 14 thereof and that it accordingly continued to be valid. This result was based on the following conclusions : (a) The expression " a person who has to a substantial extent evaded payment of taxation on income " has to be interpreted having regard to the background or the circumstances that preceded at the time the section came to be enacted and which were disclose in the affidavit filed in this Court by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al extent evaded payment of taxation on income. " This is quite different from the criterion applicable under the amended section 34 of the Income-tax Act. In the first place, section 34 of the Income-tax Act relates to cases of evasion however small, while section 5(1) of the Investigation Commission Act relates only to largescale evaders comprised within the term " substantial evasion ". Secondly, the belief of the Government as to the existence of evasion need not satisfy any rigorous standard because it need not be based on any material directly connected with the suspected evasion. It is enough if it is a " prima facie reason to believe " which having regard to the scheme of the Act would cover cases in which tell-tale appearances may call for probing and effective investigation. This may well be no more than " well-grounded reason to suspect. " This is quite different from the standard of " reason to believe " required of the Income-tax Officer under section 34 of the Income-tax Act. " Prima facie reason to believe " and " reason to believe " are as different from each other as " prima facie proof " and " proof. " Therefore " reason to believe " is something definitely higher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hence no reassessment starts in such a case. (3) An effective procedure for investigation is provided to bring out all the necessary and relevant facts and material to substantiate the evasion and quantum thereof. (4) Proceedings for reassessment are taken only on the emergence of such material and on a report to that effect and that too on a further direction by the Government as to the exact nature of the proceedings to be taken and as to the exact period to be covered falling within the limits of 31st December, 1938, and 1st September, 1948. (See sections 8(2) and 5(3) of the Investigation Commission Act.) (5) A reference could be made by the Government to the Commission only up to a specified date line statutorily determined. If all these facts which are essential part of the scheme under the Investigation Commission Act are borne in mind it becomes apparent that the class contemplated under section 5(1) of the Investigation Commission Act for re-assessment is totally different from that which could be got at either under section 34 of the Income-tax Act as it stood between 1939 and 1948 or as it stands since 1948. One has only to compare the provisions in the Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l evaders whose evasion appeared to the Government to call for a high-powered machinery for effective investigation, not available to an ordinary Income-tax Officer functioning under section 34 of the Income-tax Act. So understood it is quite clear, to my mind, that section 5(1) of the Investigation Commission Act relates to a class totally different from what can be brought in under section 34 of the Income-tax Act as it either stood before, or stands after, 1948. That this class was really contemplated to be distinct is also indicated by the following provision of section 8(4) of the Investigation Commission Act. " No proceedings taken in pursuance of such direction (direction made under section 8(2) for reassessment) shall be a bar to the initiation of proceedings under section 34 of the Indian Income-tax Act. " This seems to indicate the possibility of concurrent assessment proceedings as against any particular assessee under section 34 of the Income-tax Act as also under section 8(2) of the Investigation Commission Act. The idea appears to be that section 34 proceedings may go on in respect of such income of the assessee the escaping of which comes to the knowledge of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... valid classification. It is well-recognised that a classification otherwise reasonable is not invalid by reason of the classification not being comprehensive. In Joseph Patsone v. Commonwealth of Pennsylvania the Supreme Court of the United States of America laid down that " a state may classify with reference to the evil to be prevented, and that if the class discriminated against is or reasonably might be considered to define those from whom the evil mainly is to be feared, it properly may be picked out. A lack of abstract symmetry does not matter. The question is a practical one dependent upon experience ................... It is not enough to invalidate the law that others may do the same thing and go unpunished, if, as a matter of fact, it is found that the danger is characteristic of the class named." Again in West Coast Hotel Co. v. Ernest Parrish the same Court stated : " This Court has frequently held that the legislative authority, acting within its proper field, is not bound to extend its regulation to all cases which it might possibly reach. The legislature 'is free to recognize degrees of harm and it may confine its restrictions to those classes of cases where th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the application of the Act. Hence it is also an attribute of the class contemplated by the Act. I am aware that there are observations in Suraj Mall Mohta's case, and Shree Meenakshi Mills case, which appear not to have accepted the idea of the class being with reference to date-line. But the actual decision in Suraj Mall Mohta's case was based on the distinction between section 5(4) and section 5(1) of the Investigation Commission Act and the consequential parallelism between the class falling under section 5(4) of the Investigation Commission Act and section 34(1) of the Income-tax Act. In Meenakshi Mills' case, the decision was rested on the parallelism between section 5(1) of the Investigation Commission Act and section 34(1) of the Income-tax Act as amended in 1954. The decision in neither of these cases was based on any final determination of the scope of the class contemplated by section 5(1) of the Investigation Commission Act. The actual decisions in those cases are of course binding but not necessarily all the reasoning therein. Besides, with great respect, the relevancy of the date-line in section 5(1) as having been related to the then contemplated date for the laps ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h respect that there is no basis for this inference. On the other hand it appears to me (if what I have said above as being the scheme of the Investigation Commission Act is correct) that the Legislature deliberately limited the application of the Investigation Commission Act by a date-line, realising the seriousness of its continued operation. It, did not want to perpetuate the drastic provisions thereof to any new cases in view of the fact that the official war period ended and controls had been lessened by the above date-line, if not totally abolished. It may be mentioned that by proclamation the war situation was formally terminated as from the 1st April, 1946, and that the Control Orders under the Defence of India Act ceased to be operative from the 1st October, 1946, and that the Essential Supplies (Temporary Powers) Act, 1946, was passed in substitution thereof. This 1946 Act was intended originally to be in operation only until March, 1948. (See Joylal Agarwala v. The State.) The date-line of 1st September, 1948, in section 5(1) seems to be related to this situation. It appears to me that with the full consciousness that any new cases of the same category, if any, are no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... placed in the hands of one authority and the fact-finding on the material so gathered in the hands of another authority or that at least there might have been provided one appeal on facts also to a high placed authority like the High Court. It may also appear somewhat disquieting that the same body is invested both with the power of investigation and the power of fact finding and that there is no appeal provided as against its findings on facts. But these are all matters of policy and cannot be said to be either unreasonable or unrelated to the purpose and policy of the classification. Investigation is a comprehensive term and it will be seen that the investigation procedure itself under the Act is in two stages, one before the authorised official at which the assessee is not entitled to be represented and the other before the Investigation Commission at which the assessee is entitled to be represented by a pleader, a registered accountant or an authorised employee (vide section 7(3) and the proviso thereto). These two stages may be taken roughly, though not necessarily, to indicate two parts of the investigation, (1) the process of probing into the evasion and collecting the mate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eedings under this Act ; but the Commission, and after the Commission has ceased to exist such authority as the Central Government may in this behalf appoint, may, in its discretion, allow such inspection and furnish such copies to any person ", and section 6(8) of the Investigation Commission Act says : " All material gathered by the Commission or the authorised official and materials accompanying the reference under sub-section (1) of section 5 may be brought on record at such stage as the Commission may think fit." But these provisions have to be read subject to the proviso to section 7(4) and to the opening part of section 7(2) of the Investigation Commission Act. The proviso to section 7(4) is as follows : " Provided that, for the purpose of enabling the person whose case or points in whose case is or are being investigated to rebut any evidence brought on the record against him, he shall, on application made in this behalf and on payment of such fees as may be prescribed by Rules made under this Act, be furnished with certified copies of documents, statements, papers and materials brought on the record by the Commission." Further, the opening part of section 7( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her hand there are counter-balancing features with reference to the composition of the Commission and the statutory standards by which the judicial part of its proceedings have to be governed. I am, therefore, unable to feel that the discrimination brought about in the procedure relating to assessment calls for any such adverse reaction as to be a reasonable basis for founding thereon an inference of unconstitutional inequality. However, as I have already said above, this appears to be ultimately a question of policy. Once the classification is found to be justified and reasonably related to the clearly underlying policy of the Investigation Commission Act, I am unable to feel that section 5(1) of the Investigation Commission Act can be struck down as ultra vires in relation to its supposed concurrent operation with section 34 of the Income-tax Act as amended in 1948. I hold, therefore, that section 5(1) of the Investigation Commission Act was not hit by article 14 of the Constitution notwithstanding amendment of section 34 of the Income-tax Act in 1948 and that it continued to be valid. On all other points urged on behalf of the petitioners, I agree with the view expressed in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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