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Petitioner: DAULATRAM RAWATMAL VS Respondent: INCOME-TAX OFFICER, CENTRAL CIRCLE VI, CALCUTTAHonorable Justice Sinha
1960 P T D 699
1960 P T D 699
[Calcutta (India)]
Before Sinha, J
DAULATRAM RAWATMAL
Versus
INCOME‑TAX OFFICER, CENTRAL CIRCLE VI, CALCUTTA AND ANOTHER
Matter No. 139 of 1958 decided on 21st May, 1959.
Income‑tax Act (XI of 1922), S. 34 (1‑A)‑Re‑assessment -Issue of notice Application by assessee to High Court for dis closure of materials and of order of Central Board of Revenue "Reason to believe"‑Justiciable‑Materials to be disclosed to Court and not to assessee.
The Income‑tax Officer served a notice of re‑assessment under section 34 (1‑A) of the Income‑tax Act, 1922 upon the partners of a firm on the ground that he had reason to believe that income of the previous year falling within September 1, 1939, and March 31, 1946, had escaped assessment and amounted or was likely to amount to Rs. one lakh or more. The petitioner firm requested the Income‑tax Officer asking for production or inspection of the materials on which he based his belief and the order of satisfaction of the Central Board of Revenue but the Income‑tax Officer refused :o comply with his request. The petitioner thereupon applied to the High Court for an order compelling the Income‑tax Officer to disclose the materials on which he believed that income had escaped assessment in the specified periods and that the amount thereof exceeded Rs. one lakh and the order of the Central Board of Revenue. The Income‑tax Officer contended that disclosure of the materials at that stage would frustrate the object of the initiation of the re‑assessment proceedings but agreed to produce all relevant reasons for inspection only by the Court:
Held, (i) that the expression " reason to believe " in section 34 (1‑A) made it clear that the matter whether the Income tax Officer had reason to believe that income amounting to Rs. one lakh or more had escaped assessment was justiciable it was not wholly dependent on the subjective satisfaction of the Income‑tax Officer and upon a challenge being thrown he should satisfy the Court that his belief was based upon facts which would induce a reasonable person to arrive at the conclusion which has been arrived at by him: therefore, the particulars of information upon which he had relied should be disclosed to the Court. The reasons, however, should in the first instance be looked at only by the Court and not by the assessee. If the Court considered that disclosure at that stage to the assessee would be prejudicial to the realisation of the revenue or destructive of the proceedings altogether then the particulars should not be disclosed to the assessee. The assessee was not entitled at that stage to look into the reasons recorded by the Income‑tax Officer. The Court may order that the reasons may be disclosed at a later stage, i.e., after the books and documents called for by the Income‑tax Officer have been produced ;
(ii) on the facts, that it would be extremely prejudicial to the revenue if the particulars contained in the reasons were produced to the petitioner and that therefore the Income‑tax Officer need only disclose the main headings of escaped income without giving away particulars and that no further disclosure should be permitted at that stage.
Beatson v. Skene (1860) 8 W R 544 ; Bhimraj Panna Lal v. Commissioner of Income‑tax (1957) 32 I T R 289 ; Commissioner of Income‑tax v. Mahaliram Ramjidas (1940) 8 I T R 442 ; Emperor v. Vimalabai Deshpande A I R 1946 P C 123 ; Griffen's case (1925) 36 C L R 378 ; Keshrichand v. Income‑tax Officer, Khandwa (unreported); Liversidge v. Sir John Anderson (1942) A C 206 ; Marconi's Wireless Telegraph Co. v. The Commonwealth (1913) 16 C L R 178 ; Pannalal Binjraj v. Union of India (1957) 31 I T R 565 ; Robinson v. State of South Australia A I R 1931 P C 254 and Shearer v. Shields (1914) A C 808 ref.
JUDGMENT
SINHA, J.‑The facts in this case are shortly as follows:
For many years the petitioner's firm "Daulatram Rawatmal" (hereinafter referred to as the "firm") has been carrying on business at No. 178, Harrison Road, Calcutta. For the assess ment years 1940‑41 to 1945‑46 the firm has been assessed in the normal course and has paid the amount found due. On or about 30th November, 1954, the case of the petitioner firm was transferred under section 5(7‑A) of the Indian Income‑tax Act, 1922, to the Income‑tax Officer, Central Circle VI, Calcutta, being respondent No. 1 in this application. On or about 21st March, 1956, the respondent No. 1 issued notice under section 34 (1‑A) of the Indian Income‑tax Act for the assess ment years 1940‑41 to 1945‑46 upon the partners of the said firm, on the ground that the said Income‑tax Officer had reasons to believe that the income, profits or gains assessable to income -tax, for several years mentioned in the said notices have partly or wholly escaped assessment and the income, profits or gains of the previous years which fall wholly or partly within the period beginning from 1st September, 1939, and ending on 31st March, 1946, and which have escaped assessment, amount to or likely to amount to Rs. 1,00,000 or more. Copies of the said notices are annexed to the petition and marked with the letter "A". By the aforesaid notices, the partners of the said firm were requested to deliver to the said Income‑tax Officer a return of the total income and the total world income assessable for the respective years mentioned in the notices. On or about 2nd July, 1956, the petitioner firm made an application to this Court under Article 226 of the Constitution, inter alia, for quashing the proceedings initiated by the said notices under section 34 (1‑A), on the ground that section 5 (7‑A) and section 34 (1‑A) of the Indian Income‑tax Act were ultra vires the Constitution, particularly Articles 14 and 19 thereof. There upon this Court issued a rule and granted an interim stay of procee dings. The application came up for hearing before me and on the 9th January, 1958, the application was dismissed and the rule was discharged. In fact, what had happened was that in the meanwhile the Supreme Court held the said sections intra vires. I myself have decided similarly. Thereafter, on the 25th February, 1958; the petitioner wrote to the Income‑tax Officer, Central Circle VI, asking for production or inspection of the following documents:
"(1) The order of satisfaction of the Central Board of Revenue, as referred to in the said notices under section 34 (1‑A).
(2) The materials on which the Income‑tax Officer had reasons to believe that income during the said period has escaped assessment.
(3) The basis on which the Income‑tax Officer came to be of the opinion that the amount of the escaped income was likely to amount of Rs. 1,00,000 or more."
On the 28th February, 1958, the respondent No. 1 informed the petitioner that the reasons recorded for starting the procee dings under section 34 (1‑A) could not be given to the petitioner, and the Income‑tax Officer could not also grant inspection of the records as requested. Thereafter, there was correspondence between the petitioner and the respondent No. 1, but the said respondent persisted in expressing his inability to grant copies of the reasons or inspection of the records as requested. This rule was issued on the 8th July, 1958, upon the respondent to show cause why an order should not be made quashing and/or cancelling the said notices and/or directing the respondent No. 1 to withdraw or recall the said notices and to forbear from giving any further effect thereto. The point that has been taken in this case by the learned standing counsel on behalf of the petitioner is a very short one. In order to appreciate it, it would be necessary to set out the relevant part of section 34 (1‑A) of the Indian Income‑tax Act (hereinafter referred to as the "Act").
"(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 likely to amount, to one lakh of rupees or more;
he may, . . serve on the assessee, . . . a notice containing all or any of the requirements which may be included in a notice under subsection (2) of section 22, and may proceed to assess or reassess the income, profits or gains of the assessee for all or any of the years referred to in clause (i) . . ;
Provided that the Income‑tax Officer shall not 'issue a notice under this subsection unless he has recorded his reasons for doing so, and the Central Board of Revenue is satisfied on such reasons recorded that it is a fit case for th6 issue of such notice:
Provided further that no such notice shall be issued after the 31st day of March 1956."
The learned standing counsel argues that the condition prece dent for issuing notice under section 34 (1‑A) of the Act is that the Income‑tax Officer has " reason to believe " that certain facts exist which have been set out above. He must have reason to be lieve that income, profits or gains chargeable to income‑tax within a specified period have escaped assessment and that the income, profits or gains which have so escaped assessment amount to, or are likely to amount to Rs. 1,00,000 or more. Another condition precedent is that the Income‑tax Officer before issuing the notice must record his reasons for doing so and the Central Board of Revenue must be satisfied on such reasons recorded that it is a fit case for the issue of such notice, The argument is that the ex pression " reason to believe " is a well‑known expression in law and it means that the assessee can come to Court and require the Income‑tax Officer to satisfy the Court upon sufficient evidence that in fact, there did exist reasons which would induce a reasonable man to believe that tile conditions precedent for the issue of a notice under section 34 (1‑A) had been satisfied. In other words, if the expression used is " if in the opinion of the Income‑tax Officer " certain facts existed, then the matter would be left to the subjective satisfaction of the Income‑tax Officer and would not be justiciable, and the Court could not go into the matter. On the other hand, where the expression used is " has reason to believe ", it means that such reason must exist objectively. It is conceded that if tire Income‑tax Officer honestly came to the belief that the conditions precedent, as set out in section 34 (1‑A), were satisfied, then the Court cannot hold that he should not have done so. It is, however, argued that the assessee is entitled to ask the Court to compel the Income‑tax Officer to disclose the reasons and the materials upon which it is based, so that the Court nay consider whether upon such materials, a reasonable man could arrive at that conclusion. The object if, making this application is, therefore, quite plain, namely, to compel the Income‑tax Officer to disclose the reasons which induced him to arrive at the opinion that income, profits and gains etc., had escaped assessment during the specified period and/or that the amount thereof would exceed Rs. 1,00,000 or more. It is an attempt also to have an inspection of the order of the Central Board of Revenue. The attitude taken on behalf of the respon dents as disclosed in the affidavit originally filed was that the petitioners have no right to inspect the records or any evidence produced before the Income‑tax Officer. This was stated in an affidavit in opposition filed by S. K. Sarma, Income‑tax Officer, Central Circle XXII, Calcutta, who had no personal knowledge of the facts of the case and was not the Income‑tax Officer who issued the notices or obtained sanction for the issue thereof. Indeed, the affidavit was partly based on information derived from the records and the rest being submissions to the Court. Subsequently, however, the Income‑tax Officer who actually issued the impugned notices and obtained sanction thereof from the Central Board of Revenue has affirmed an affidavit dated 28th January 1959, and an affidavit dated 23rd March, 1959. In the said affidavits he has stated as follows:
(1) That at the material time he had in his possession considerable materials which led him to believe that income, profits, and gains of the petitioner firm amounting to several lakhs of rupees chargeable to Income‑tax, had escaped assess ment for the years 194041 to 1945‑46.
(2) That he recorded his reasons for the aforesaid belief in writing and on the said reasons the Central Board of Revenue was satisfied that the present case was a fit case for issue of notice under section 34 (1‑A) of the Income‑tax Act. A copy of the relevant memorandum regarding the satisfaction of the Central Board of Revenue dated March 9, 1956, is annexed to the affidavit affirmed on the 28th January 1959.
(3) That disclosure of the said reasons to the assessee at any stage prior to his compliance with the notice under section 22(4) and section 23 (2) of the Indian Income‑tax Act would be highly detrimental to the interests of the Income‑tax Department and will completely frustrate the very object underlying the initia tion of proceedings under the aforesaid impugned notices.
(4) That the relevant records relating to the petitioner will be made available only to the Court for inspection of the said records if the Court so desires.
(5) That the adequacy of the said reasons for the purpose of issuing the said notice is not a matter for consideration of the Court.
(6) That he had formed his belief on the basis of tire reasons aforesaid as an honest and reasonable person and not arbitrarily, illegally or mala fide.
In his second affidavit dated 23rd March 1959, he has stated in paragraph 5 as follows:
"I say that for the reasons recorded by me as required by the first proviso to section 34 (1‑A) of the Indian Income‑tax Act and on which the Central Board of Revenue expressed its satisfaction that the present case was a fit case for the issue of a notice under section 34 (1-A) of the said Act, the facts are enumerated which show that there has been a concealment of assets by the petitioner and non‑disclosure of income by a benami transaction entered into by the petitioner. I had, therefore, reasons to believe that income, profits and gains of the petitioner firm has escaped assessment for assessment years 1940‑41 to 1945‑46."
Before I deal with the legal aspect of the case, I must record certain events as they transpired during the course of the hearing of this application. As will appear from what has been stated above, the dispute between the parties is now within a very small compass. The position at present is that the Income‑tax Officer has asked for production of books of account and other documents, The assessee wishes to compel the Income‑tax Officer to disclose the reasons upon which he has based his belief, which is a condition precedent for issue of the notice, and upon the basis of which the Board of Revenue has sanctioned the same. It is not that the Income‑tax Officer is unwilling to disclose the reasons altogether. He is, however, unwilling to disclose the reasons before the books and documents are produced. On behalf of the respondents Mr. Meyer has frankly informed me that his apprehension is that if the reasons are disclosed, the whole proceedings will be rendered infructuous because the books ants documents will be removed and/or altered and most of then will not see the light of day. I therefore, tried my best to see whether a solution could be reached. On the 27th February 1959, the parties agreed to my giving certain directions. I directed that the respondents will send a list of the papers, documents and books of account which they require to be produced to the solicitor for the petitioner, and on the next day for hearing, the petitioner should inform the Court as to which of the books, papers and documents mentioned in the list they are in a position to produce in Court. The idea was that these books, papers and documents were to be produced in Court and when produced the Income‑tax Officer would be willing to hand over tie particu lars asked for. In other words, if the books and documents were produced, then the authorities were willing to give inspection of all the records including the reasons recorded in writing by the Income‑tax Officer and the sanction of the Board thereon. Pur suant to the directions given, the respondents sent a list to the solicitor for the petitioner. At the adjourned hearing, however, the learned standing counsel informed the Court on behalf of the petitioner that his instructions were that the petitioner was not willing to produce the books and documents. The learned standing counsel said that the books and documents required were voluminous and indeed they relate to the books and documents of the petitioner's branches all over India and it would be physically impossible to produce them in Calcutta. It is quite true that the books and documents that have been asked for are likely to be voluminous and it might be that some of them are not in the possession or power of the petitioner. I, therefore, suggested that only such books and documents may be produced as were in the possession, custody or control of the petitioner and the petitioner may state in an affidavit as to the books and documents which were not in their possession, custody or control. Further, that sufficient time should be allowed for the petitioner to have the books and documents brought to Calcutta. Upon both these points the respondents agreed. The learned standing counsel stated on instructions that nevertheless his clients were unwilling to follow the course suggested and his instructions were further to rest on the legal rights of the parties. This, of course, brought the matter back to the stage where we started, and it, therefore, remains for me to consider the legal position. I have already stated the position in law which has been taken by the petitioner. The argument is that section 34 (1‑A) of the Act uses the words " has reason to believe" and this makes the matter justiciable. According to the learned standing counsel, if the matter is justici able then inasmuch as the petitioner has made an application to the Court, the respondents are bound to disclose all the reasons in Court. I have already stated that the respondents are willing to produce all the records in Court and give inspection to the Court, but they are unwilling to disclose the same to the petitioner at this stage. The learned standing counsel argues that if the matter is justiciable then the law is that the reasons must not only be disclosed to Court but also to the petitioner, in Court, and that there was " no half‑way house". I shall now proceed to consider the position. The expression " reason to believe " has been interpreted to various decisions. The first case cited is Emperor v. Virnalabai Deshpande (A I R 1946 P C 123). Rules 26 and 129 of the Defence of India Rules, 1939, in so far as they are relevant run as follows:
Rule 26 (1).‑" The Central Government or the Provincial Government, if it is satisfied with respect to any particular person that with a view to preventing him from acting in any manner prejudicial to the defence of British India, the public safety, the maintenance of public order, His Majesty's relations with foreign powers or Indian States, the maintenance of peaceful conditions in tribal areas or the efficient prosecution of the war " it is necessary so to do, may make an order : . . .
(b) directing that he be detained."
Rule 129 (1).‑" Any police officer, . . . may arrest without warrant any person whom he reasonably suspects of having acted, . . . (a) . . . in a manner prejudicial to the public safety or to the efficient prosecution of the war."
On 21st August, 1944, the detenue Purushottam Yeshwant Deshpande was arrested pursuant to an order given by the Deputy Inspector‑General of Police, under rule 129. A report of the arrest was made to the Provincial Government which had directed that the detenue be detained in police custody for a period expiring on 4th September, 1944. This period was subsequently enlarged. In the meantime, the detenue's wife made an application to the High Court under section 491 of the Criminal Procedure Code complaining that the detention of the detenue was illegal and improper. The High Court ordered that the detenue be set at liberty. One of the questions that arose was the interpretation of rule 129 (1) of the Defence of India Rules. The question was as to whether a police officer who rakes an arrest, was bound to prove to the satisfaction of Court before whom the arrest was challenged, that he had reasonable grounds of suspicion, and what would happen if he failed to discharge the burden laid upon him. Their Lordships of the Privy Council pointed out the difference in the language of rule 26 and rule 129. It was held that the burden rested upon the police officer to show to the Court that his suspicion was reasonable and his act was, therefore, justified. So far as rule 26 is concerned, it was for the Government to be satisfied and there existed no qualifying adverb such as " reasonably " or " honestly " attached to the word "satisfied". It was held that in the case of Government, mere suspicion was not enough, but it was for the Government to be satisfied. On the other hand, a police officer under rule 129 could arrest on mere suspicion, but the suspicion must be reasonable. The onus was on the police officer to prove to the satisfaction of the court that the suspicion was reasonable. The decision of the High Court was upheld and the appeal dismissed. Reliance was placed on a judgment in an English case, Shearer v. Shields ((1914) A C 808). This is a decision of the House of Lords which had to construe a provision in the Glasgow Police Act authorising constables to arrest if they bad "reasonable grounds for suspicion " and it was held that the burden rested upon the constable concerned to show that his suspicion was reasonable and his act therefore justified. It was held that the burden must be discharged upon proper evidence. At this stage I might refer to another English case which is always cited in a case like this, namely, Liversidge v. Sir John Anderson ((1942) A C 206). In that case, the Secretary of State, acting under Regulation 18B of the Defence (General) Regula tions, 1939, made an order in which he had stated that he had "reasonable cause to believe " a person to be of hostile associa tion, and by reason thereof it was necessary to exercise control over him, and directed that the person should be detained. It was held that a court of law could not enquire whether in fact the Secretary of State had reasonable grounds for his belief. The matter was one for executive discretion of the Secretary of State. In the Regulation concerned, there were two kinds of expressions used. In several places the Secretary of State was only required to be " satisfied " by something before he could take action. On the other hand, he could take action under Regulation 1A or 18B if he had "reasonable cause to believe " that a person was a member of a certain organisa tion and that it was necessary to exercise control over him. In his dissenting judgment which has become classical Lord Atkin pointed out that these two different expressions would not have been used if they meant the same thing. The majority judgment admitted that the argument was not without weight, but decided in the manner set out above. It has subsequently been pointed out that Liversidge's case was a war‑time decision and could only be supported because of the existence of an emergency. In Commissioner of Income‑tax v. Mahaliram ((1940) 8 I T R 442) the Judicial Committee was dealing with the point as to what circumstances should exist to enable the Income‑tax Officer to initiate proceedings under section 34 of the Income-tax Act. It was held that it was enough that the Income‑tax Officer had before him some information and in good faith he considered that he had good grounds for believing that the assessee's profits have escaped assessment, or had been assessed at too low a rate. It is not necessary for the Income‑tax Officer to hold a quasi- judicial enquiry at this stage nor is it necessary to convene the assessee or to intimate to him the nature of the alleged escape ment or to give him an opportunity of being heard. In Panna Lal Binjraj v. Union of India ((1957) 31 I T R 565), the Supreme Court was dealing with sub‑section (7A) of section 5 of the Income‑tax Act. That sub‑section enabled the Commissioner to transfer pending cases from one file to another. It was pointed out that it would be next…
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