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Petitioner: Sardar HARVINDER SINGH SEHGAL and others VS Respondent: ASSISTANT COMMISSIONER JUDGMENT
Court Name: Gauhati High Court Judge(s): J. N. Sarma Title:Sardar HARVINDER SINGH SEHGAL and others vs ASSISTANT COMMISSIONER
JUDGMENT
Reported As: 1999 PTD 1946 Result: Petitions dismissed Judgment JUDGMENT ' J. N. SARMA, J.---All the writ petitions raise common questions of law and are based on the same factual matrix and as such as agreed to are taken up for hearing together and this judgment shall cover all of them. ' The four petitioners, residents of Imphal and carrying on business at Imphal and belonging to the same family, along with the four others, residents of Calcutta, claimed to have purchased a lottery ticket worth Rs,5 of the Government of Nagaland. It is claimed that they were the joint purchasers of the ticket and were entitled to the prize money equally. The draw was held on October 31, 1983, and the ticket won the first prize of rupees one crore. The four -other persons are: (i) Muhammad Ayub, (ii) Muhammad Anwar, (iii) Muhammad Elyas and (iv) Muhammad Abbas, all of 4, Achambit Show Road, Calcutta-22. ' Claim was made for the share of each and accordingly it was paid by deducting tax at the source from individual claims and the necessary certificate of deduction was given in 1984. ' The four petitioners filed income-tax returns wherein this income was shown as winnings from lottery. But the Assessing Officer treated it as a "protective measure" only. The petitioners claim that they are ignorant of what has happened to the other four persons in Calcutta. ' Appeals were filed before the Commissioner of Income-tax (Appeals) challenging the aforesaid order. The contention with regard to the lottery money was dismissed. This is the order, dated September 15, 1987, and Annexure III to the writ applications. ' Appeals were filed before the Income-tax Appellate Tribunal, Gauhati Bench. On January 18, 1990, the Tribunal set aside the order, dated September 15, 1987, and sent back the matters for fresh
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disposal after bringing the basic facts and other materials on record. This is Annexure IV to the writ petitions. ' On remand by order, dated March 27, 1991, the Commissioner of Income-tax (Appeals) held the protective assessm ents made in the four cases to be substantive assessments and allowed the appeals. This is Annexure-V to the writ applications. ' Thereafter, on November 14, 1991, a notice under section 148 of the Income-tax Act (hereinafter called the "Act") was issued to Mahender Singh Sehgal and seven others in the C/o of the persons mentioned in the notice. That notice in its entirety is quoted below to appreciate the rival contentions put forward by the parties. "Whereas I have reason to believe that................... Your/the income of. Income chargeable to tax for the assessm ent year 1984-85 has escaped assessment within the meaning of section 147 of the Income Tax Act, 1961. ' I, therefore, propose to assess the income for the said assessment year and I hereby require you to deliver to me within 30 days from the date of service of this notice, a return in the prescribed form of your income...In respect of which you are assessable for the said assessment year. ' This notice is being issued after obtaining the necessary satisfaction of the Deputy Commissioner of Income-tax, Silchar Range, Silchar." ' It is the legality and validity of this notice which is challenged in the writ applications. A prayer is made to quash/cancel this notice. On December 23, 1993, rule was issued and stay was granted. The admitted position is this notice was received by the four petitioners. We are not concerned with the other four persons as the petitioners feign ignorance about them. ' Heard Shri J.P. Bhattacharjee, the learned Advocate for the petitioners, and Dr.A.K. Saraf, the learned Advocate for the Revenue. Affidavit-in-opposition has been filed and record has been produced. A large number of decisions have been cited at the Bar. But I have considered below only the cases which are relevant for disposal of the matter. ' Broadly two submissions have been made on behalf of the petitioners---- (a) Notice is a condition precedent for initiation of proceedings for reassessment. (b) The impugned notice under section 148 of the Income-tax Act is invalid in the eye of law for reason as elaborated by learned counsel at the time of hearing. ' Regarding the first contention, Dr. Saraf fairly submits that it is the correct proposition of law, but he contends in the case in hand, notice was issued, it is a valid notice and there is no infirmity in the notice. The notice as admitted was duly served. This being the position, there is no necessity to consider the first contention and it is decided in favour of the petitioners. ' Before we proceed further let us have a look at McDowell & Co. Ltd. v. Commercial Tak Officers (1985) 154 ITR 148; (1985) 59 STC 277; (1985) 3 SCC 230. It is a decision of five Judges. There, in the judgment by Misra, J. (as he then was) for the four Judges in paragraphs 45 and 46, it has been laid down as follows (page 171): "Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. ' On this aspect, one of us., Chinnappa Reddy, J., has proposed a separate and detailed opinion with which we agree." ' Chinnappa Reddy, J., in his concurring judgment, in paragraphs 17 and 18, after considering a large volume of authorities has laid down the law as follows (page 160): "We think that time has come for us to depart from the Westminster (1936) AC 1 principle as emphatically as the British Courts have done and to dissociate ourselves from the observations of Shah, J., and similar observations made elsewhere. The evil consequences of tax avoidance are
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manifold. First, there is substantial loss of much needed public revenue, particularly in a welfare state like ,ours. Next, there is the serious disturbance caused to the economy of the country by the piling up of mountains of black money, directly causing inflation. Then there is 'the large hidden loss' to the community (as pointed out by Master Wheat croft in 18 Modern Law Review 209) by some of the best brains in the country being involved in the perpetual war waged between the tax avoider and his expert team of advisers, lawyers, and accountants on the one side and the tax- gatherer and his perhaps not so skillful advisers on the other side. Then again there is the 'sense of injustice and inequality which tax avoidance arouses in the breasts of those who are unwilling or unable to profit by it.' Last, but not the least is the-ethics (to be precise, the lack of it) of transferring the burden of tax liability to the shoulders of the guideless, good citizens from those of the 'artful dodgers'. It may, indeed, be difficult for lesser mortals to attain the state of mind of Mr. Justice Holmes, who said, 'Taxes are what we pay for civilized society. I like to pay taxes. With them I buy civilization.' But, surely, it is high time for the judiciary in India too to part its ways from the principle of Westminster (1936) AC 1 and the alluring logic of tax avoidance. We now live in a welfare State whose financial needs, if backed by the law, have to be respected and met. We must recognize that there is behind taxation laws as much moral sanction as behind any other welfare legislation and it is a pretence to say that avoidance of taxation is not unethical and that it stands on no less a moral plane than honest payment of taxation. In our view, the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it. A hint of this approach is to be found in the judgment of Desai, J., in Wood Polymer Ltd., In re and Bengal Hotels Ltd., In re (1977) 47 Comp Cas 597 (Guj.) where the learned Judge refused to accord sanction to the amalgamation of companies as it would lead to avoidance of tax. ' It is neither fair nor desirable to expect the Legislature to intervene and take care of every device and scheme to avoid taxation. It is up to the Court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and consider whether the situation created by the devices could be related to the existing legislation with the aid of 'emerging' techniques of interpretation as was done in Ramsay's case (1982) AC 300 (HL), Burmah Oil's case (1982) Simon's Tax Cases 30, and Dawson's case (1984) 1 All ER 530 (HL), to expose the devices for what they really are and to refuse to give judicial benediction." ' This matter must be looked at from another angle. The rule of construction does not permit the taxpayer to take the benefit of an illegality. An interpretation must be avoided which will lead to evasion taking shelter under the umbrella of the right to avoid tax by proper planning. An attempt to prevent fraud by a taxpayer should not be ordinarily quashed by the Court as it is not the function/business of the Court to protect fraud and fraudulent transactions. It cannot be accepted as gospel truth that all is fair in love, war, also tax evasion. This as a principle cannot be acclaimed in the field of love and tax evasion. I leave the war from any comments. The machinery provisions in a taxing Act and the provisions enacted to suppress tax evasion are to be construed liberally to effectuate their object. Sections 147 and 148 of the Act are machinery provisions and must receive a construction which will effectuate the purpose of the Act. Any and every omission should not be frowned upon and must not be utilised as a tool to quash the notice. ' The story of a lottery ticket worth Rs,5 being purchased by eight persons jointly being residents of two different places and there being no relationship between the four persons at Imphal and the other four in Calcutta is hard to digest and no reasonable person can accept the genuineness of such a claim. Be that as it may, for the decision of this case, we are not so much concerned with it.
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' Dr. Saraf, learned counsel, argues that the writ applications are to be thrown out on the ground of existence of adequate alternative remedy. He submits that the Act provides adequate, alternative, efficacious remedy and without resorting to them the petitioners cannot seek remedy in the writ forum. On the other hand, the learned advocate for the petitioners submits that when the action is without jurisdiction, the petitioners need not wait or pursue the long drawn dilatory remedies. For this case, I am not deciding it as I have heard the matter at length and so I shall decide it on the merits. ' The first ground urged by Shri Bhattacharjee is that in the case in hand the assessment was made on March 31, 1987, and a notice was issued on November 14, 1991, it is beyond four years and section 151(2) of the Income-tax Act requires that no notice shall be issued under section 148 after the expiry of four years from the end of the relevant assessment year (in the case in hand it is 1984-85) unless the Commissioner is satisfied on the reasons recorded by the Income-tax Officer that it is a fit case for the issue of such notice. Shri Bhattacharjee submits that the impugned notice itself will show that it was issued with the satisfaction of the Deputy Commissioner of Taxes and not the Commissioner. There is no specific challenge on this score in the writ applications, so the Revenue did not have the opportunity to meet this point in their affidavit-in-opposition. The matter was argued only at the time of hearing. But on scrutiny it is found that this point has no merit. Under section 116(d) of the Act, the Deputy Commissioner of Income-tax is an income-tax authority. (the Act as it stood at the relevant time). Under section 119(2)(a) the Board may also issue directions with regard to assessm ent, etc., by way of relaxation of any of the provisions of the sections mentioned therein. Section 148 is specifically mentioned there. Further, section 151 itself has undergone a change with effect from April 1, 1989, by the Direct Tax Laws (Amendment) Act, 1987, and it is quoted below: "151. (1) In a case where an assessm ent under subsection (3) of section 143 or section 147 has been made for the relevant assessm ent year, no notice shall be issued under section 148 by an Assessing Officer, who is below the rank of Assistant Commissioner, unless the Deputy Commissioner is satisfied on the reasons recorded by such Assessing Officer that it is a fit case for the issue of such notice: ' Provided that, after the expiry of four years from the end of the relevant assessment year, no such notice shall be issued unless the Chief Commissioner or Commissioner is satisfied, on the reasons recorded by the Assessing Officer aforesaid, that it is a fit case for the issue of such notice. (2) In a case other than a case falling under subsection (1), no notice shall be issued under section 148 by an Assessing Officer, who is below the rank of Deputy Commissioner, after the expiry of four years from the end of the relevant assessment year, unless the Deputy Commissioner is satisfied, on the reasons recorded by such Assessing Officer, but it is a fit case for the issue of such notice." ' This is not a case where an assessment of persons sought to be made now, has been made earlier under section 143(3) or section 147. The Revenue now wants these persons to be taxed as "association of persons". So, the case is covered by subsection (2) and not subsection (1) of section 151 and as such the sanction given by the Deputy Commissioner is valid. ' It is urged by Shri Bhattacharjee that non-dislcosure of the reasons recorded and non- communication of the same will invalidate the initiation of the proceedings. Under section 148(2), the Assessing Officer is bound to record his reasons in every case before issuing notice under subsection (1) of section 148, and it is on the basis of the reasons recorded that the prior sanction of the higher authority must be obtained under section 151. In the reasons to be recorded, the authority should at least state the basic facts which according to him constitute the concealment. If the reasons are mechanically recorded or are extraneous to the statutory conditions for taking action or are factually incorrect or misguiding, the notice and all the subsequent action would be vitiated. But the question is whether such reasons are to be communicated to the assessee?
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Whether the reasons are to be disclosed at the time of filing the affidavit-in-opposition? Dr. Saraf joins issue with the learned Advocate for the petitioners that there is no such statutory requirement, he of course submits that the reasons must be disclosed to the Court and that he has done by producing the record. In support of the rival contention, the following cases are cited at the Bar: ' S. Narayanappa v. CIT (1967) 63 ITR 219 (SC). That was a case under the Indian Income-tax Act, 1922. The Supreme Court pointed out as follows (pages 221 and 222): "But the legal position is that if there are in fact some reasonable grounds for the Income-tax Officer to believe that there had been any non-disclosure as regards any fact, which could have a material bearing on the question of under assessment, that would be sufficient to give jurisdiction to the Income-tax Officer to issue the notice under section 34. Whether these grounds are adequate or not is not a matter for the Court to investigate. In other words, the sufficiency of the grounds which induced the Income-tax Officer to act is not a justiciable issue. It is of course open for the assessee to contend that the Income-tax Officer did not hold the belief that there had been such non-disclosure. In other words, the existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. Again the expression 'reason to believe' in section 34 of the Income-tax Act does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The belief must be held in good faith: it cannot be merely a pretence. To put it differently, it is open to the Court to examine the question whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section. To this limited extent, the action of the Income-tax Officer in starting proceedings under section 34 of the Act is open to challenge in a Court of law (see Calcutta Discount Co. Ltd. v. ITO (1961) 41 ITR 191 (SC).... ' It was also contended for the appellant that the Income-tax Officer should have communicated to him the reasons which led him to initiate the proceedings under section 34 of the Act. It was stated that a request to this effect was made by the appellant to the Income-tax Officer, but the Income-tax Officer declined to disclose the reasons. In our opinion, the argument of the appellant on this point is misconceived. The proceedings for assessment or reassessment under section 34(1)(a) of the Income-tax Act start with the issue of a notice and it is only after the service of the notice that the assessee, whose income is sought to be assessed or reassessed, becomes a party to those proceedings. The earlier stage of the proceeding for recording the reasons of the Income- tax Officer and for obtaining the sanction of the Commissioner are administrative in character and are not quasi-judicial. The scheme of section 34 of the Act is that, if the conditions of the main section are satisfied, a notice has to be issued to the assessee containing all or any of the requirements which may be included in a notice under subsection (2) of section 22. But before issuing the notice, the proviso requires that the officer should record his reasons for initiating action under section 34 and obtain the sanction of the Commissioner who must be satisfied that the action under section 34 was justified. There is no requirement in any of the provisions of the Act or any section laying down as a condition for the initiation of the proceedings that the reasons which induced the Commissioner to accord sanction to proceed under section 34 must also be communicated to the assessee. In Presidency Talkies Ltd. v. First Addl. ITO (1954) 25 ITR 447, the Madras High Court has expressed a similar view and we consider that that view is correct. We accordingly reject the argument of the appellant on this aspect of the case." ' Jatindra Nath Sarmah v. ITO (1978) 113 ITR 898 (Gauhai). This is a decision of a Division Bench of our High Court wherein, relying on an earlier decision of the apex Court, this Court pointed out that it is not the necessity of law to state the reason in the notice nor is there any necessity to disclose and/or communicate it to the assessee. The learned Advocate for the petitioners contended that non-disclosure will cause prejudice to the assessee as in such a case he cannot avail of the opportunity to challenge the validity of the reasons or their non-existence. As the sufficiency or
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adequacy of the reasons even cannot be scrutinised by the Court, this does not cause prejudice; further at the time of hearing when reasons are disclosed by production of the record, the assessee always can avail of the opportunity to address the Court on the limited ground available to him, that they have been mechanically recorded, extraneous or are factually incorrect or misguiding. When the reasons were shown to the learned Advocate for the petitioner he failed to make any such submissions not to speak of substantiating the basis on which the Court can scrutinize the reasons. I have perused the reasons and I am satisfied that there are valid reasons to initiate the proceedings. ' This matter can be considered also on the basis of the decision in STO v. Uttareswari Rice Mills (1973) 89 ITR 6 (SC), wherein the Supreme Court endorsed the previous decision of the Privy Council and earlier decisions of the Supreme Court. The Supreme Court pointed out as follows (pages 12, 14 and 16): "The Judicial Committee, while dealing with the language of section 34, observed: 'Section 34 is unhappily and even ungrammatically phrased. It is expressed impersonally, and it fails to state by whom and by what procedure it is to be established that income, profits or gains have escaped assessm ent or have been assessed at too low a rate. There is fortunately no dispute that the person who must make that decision is the Income-tax Officer, for, apart from the assessee, no one else is in a position to say whether income has been assessed or at what rate it has been assessed. The omission to prescribe expressly what the nature of the decision should be and by what procedure it must be reached is all the more surprising because in other sections of the Act the Legislature has been careful to define what is necessary in these respects. This circumstance was founded on by learned counsel for the respondents, who pointed out that where some fact had to be established merely prima facie to the satisfaction of the Income-tax Officer in the bona fide exercise of his discretion, this was expressed by such phraseology as 'when it appears to the Income-tax Officer' or 'if the Income-tax Officer has reasons to believe'. On the other hand, when the statute requires that the Income-tax Officer shall make a decision, which is final so far as he is concerned, upon a matter of fact, the usual expression is 'if he is satisfied' ." ' It was further observed: 'The section, although it is part of a taxing Act, imposes no charge on the subject, and deals merely with the machinery of assessm ent. In interpreting provisions of this kind the rule is that that construction should be preferred which makes the machinery workable, ut res valeat potius quam pereat.' ' In view of the criticism leveled against the wording of section 34 of the Indian Income-tax Act, the above section was amended by Amendment Act of 1939. Despite the amendment made in section 34 of the Indian Income-tax Act, the Orissa Legislature, it would appear, has used phraseology in section 12(8) of the Act similar to that of section 34 of the Indian Income-tax Act, 1922, as it existed before the said amendment. ' The above decision of the Judicial Committee is also an authority for the proposition that it is not necessary to intimate to the assessee the nature of the alleged escapement in the notice which is issued to him under section 34 (as it then existed) of the Indian Income-tax Act, 1922.... ' In the case of K.S. Rashid & Son v. ITO (1964) 52 ITR 355 (SC), this Court expressed the view that the assessee was not entitled to a copy of the reasons which were recorded by the Income-tax Officer when he issued the notice under section 34 of the Indian Income-tax Act, 1922. In the later case of S. Narayanappa v. CIT (1967) 63 ITR 219 (SC), an argument was advanced that the Income-tax Officer should have indicated to the assessee the reasons which led him to initiate the proceedings under section 34 of the Act. ' It was also mentioned that the details of the material which led to the initiation of proceedings under section 12(8) of the Act had been recorded in the relevant case file. The said file, it would
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appear from the affidavit of Shri Mohanty, was kept available for reference by the High Court at the time of hearing. No reference, it would seem, was, however, made to that file because the High Court did not feel the necessity of doing so." ' Further, income is said to have escaped under section 147 when it has not been charged in the hands of the assessee in the assessment year. It is immaterial that the income was charged or included in some other assessm ent (see CIT v. Ved Nath Singh (1940) 8 ITR 222 (Rang), or that the failure to charge the income was entirely due to oversight or inadvertence on the part of the Income-tax Authorities (see Harischandra v. Suraj (1960) 40 ITR 309 at page 313 (SC), as the income consists of dividend deemed to be distributed by fiction of laws (see Sardar Baldev Singh v. CIT (1960) 40 ITR 605, 613 (SC). The concept of income escaping assessment is wide enough to cover a claim of different varieties. Where income was assessed in the hands of a wrong person, proceedings may be subsequently taken under section 147 to assess the person properly chargeable in respect of the…
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