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Petitioner: MESSRS BURHAN ENGINEERING CO. LTD. VS Respondent: THE INCOME-TAX OFFICER, JUDGMENT
Court Name: Sindh High Court Judge(s): Ajmal Mian, Syed Haider Ali Pirzada Title:MESSRS BURHAN ENGINEERING CO. LTD. vs THE INCOME-TAX OFFICER,
JUDGMENT
Reported As: 1985 PTD 465 Result: Case remanded. Judgment JUDGMENT ' AJMAL MIAN, J.-The petitioner is a private limited company with 51% local equity and 49% of foreign participation. Their main business comprises of acting as an indenting house, but income is also earned from erection and service charges, consultancy fee and dealing in chemicals. The petitioner's income-tax assessm ent upto the assessment year 1975-76 (Accounting year ending on 31st December, 1974) were completed and everything was found in order by the Income-tax Officer and the same is reflected in the assessment orders for the years 1971-72 to 1975-76 (enclosures A-1 to A-5 to the petition). Mr. Iqbal Naeem Pasha Advocate has placed on record photostat copies of the assessm ent orders for the years 1976-77 to 1980-81 to indicate that the assessment for the above years have also been completed. It seems that on 12th November, 1976 respondents (i. e. Income-tax Officer, Company Circle II, Karachi, and the Income-tax Officer, Investigating Circle I, Karachi) took possession of the books of account belonging to the petitioner. After that the petitioner was served with the notices under section 34 of the Income-tax Act, 1922 (hereinafter referred to as the Act) dated 24th November, 1976 requiring the petitioner to resubmit the returns relating to the aforesaid assessm ent years 1971-72, 1972-73, 1973-74, 1974-75 and 1975-76 which was complied with by the petitioner under protest. It has been averred that in spite of the request made by the petitioner's legal adviser on 18th December 1976 and 31st January, 1977 to intimate the reason for issuing notices under section 34 of the Act for the five years, the respondents have not furnished the above information and they have been eversince 21st December, 1976 conducting hearings pursuant to the aforesaid notices. The petitioner therefore had filed the above petition on 9th June, 1977 arraigning the Income-tax Officer Company Circle II, Karachi as the only respondent
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but it seems that respondent No, 2 was impleaded on or about 22nd November, 1978. The petitioner has prayed for the following reliefs : "It is, therefore respectfully prayed that the Honourable Court be pleased : (a) to declare that the notices issued against the petitioner under section 34 of the Income-tax Act for the assessm ent years 1971-72 to 1975-76 was unjustified, illegal and without jurisdiction. (b) to order that the said notices issued under section 34 of the Income-tax Act be quashed." 2. Upon the filing of the above petition a Division Bench of this Court by its order dated 12th September, 1977 sent for parawise comments which were submitted on or about 21st September, 1977 in which inter alia it has been averred that the Income-tax Officer is not required to assign the reason in advance for re-opening of assessment. It has been further averred that at present the position of the case is that the Respondent has asked for various statements and information to be submitted in regard to commission earned by the petitioner and other items of income and when information in response to the queries is received, the same will be compared with the information in hand. It has been further averred that in case any concealment is thereby discovered, only then it will be aecessary to confront the assessee with the information otherwise it may be unnecessary and the proceedings under section 34 will be dropped. The petition was admitted to regular hearing by an order dated 27th October, 1977. 3. (a) In support of the above petition, Mr. Lqbal Naeem Pasha, learned counsel for the petitioner has urged as follows : "That from the averments contained inter alia in paras. 5 and 9 (iv) of the comments, it is evident that the Respondents had no material on the basis of which they could have reason to believe that the petitioner had for any year concealed the particulars of his income or deliberately furnished inaccurate particulars thereof or omitted or failed to disclose all material facts necessary for the assessm ent for such year and therefore the impugned notices under section 34 of the Act and the proceedings commenced in pursuance thereof are Without jurisdiction. (b) Otis the other hand Mr. Shaikh Haider learned counsel for the Respondents has contended as under : (i) That by virtue of section 125 of the Evidence Act the respondents are not obliged to convey the information to the petitioner as to the material on the basis of which the above notices under section 34 of the Act have been issued at the stage of issuance of notices. (ii) That there was sufficient material before the respondents to justify to have reason to believe that certain income has escaped assessment. 4. It may be pertinent to take up the first contention of Mr. Shaikh Haider, which is based on section 125 of the Evidence Act. It may be advantageous to reproduce hereinbelow above section, which reads as follows : "Section 125.-No Magistrate or police officer shall be compelled to say whence he got any information as to the commission of any offence, and no Revenue Officer shall be compelled to say whence he got any information as to the commission of any offence against the public revenue. ' Explanation.- "Revenue Officer" in this section means any officer employed in or about the business of any branch of the public revenue." It may be noticed that in the above-quoted section, it has been provided that no Magistrate or police officer shall be compelled to say whence he got an information as to the commission of any offence and that no Revenue Officer, that is officer employed in or about the business of any branch of the public revenue, shall be compelled to say whence he got any information of any offence against the public revenue. In our view, the above section does not provide a general privilege to withhold the material on the basis of which an accused is to be charged for the commission of an offence or a person is to be charged with the commission of an offence against the public revenue but the above section provides a limited privilege to the extent of refusal to
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disclose from what place or source the information as to the commission of the offence referred to in the section has been received. ' Mr. Shaikh Haider has referred to the case of Government of West Pakistan and another v. Begum Agha Abdul Karim Shorish Kashmiri (1), in which case the erstwhile Government of West Pakistan filed an appeal against the judgment and order of the erstwhile High Court of West Pakistan, whereby the Government's objection to the jurisdiction of the Court either to examine the sufficiency or reasonableness of the grounds of detention was overruled. The Supreme Court dismissed the appeal and Hamoodur Rahman, S (as he then was) observed as follows inter alia on the question of privilege under section 123 of the Evidence Act :- "The contention that the detaining authority may avoid doing so by claiming privilege under section 123 of the Evidence Act omits to take into account that even where such a claim is preferred section 162 of the Evidence Act gives to the Court abundant power to inspect the document in order to determine the validity of the claim of privilege. The privilege is indeed a narrow one, as pointed out by Lord Blanesburgh in the case of Henry Greer Robinson v. State of South Australia AIR 1931 P C 254 and it is lawful for the Court to inspect the document for the purpose of deciding that the privilege is not being claimed inadvisedly or lightly or as a matter of routine." ' It may be noticed that even in a case of detention under the Defence of Pakistan Rules the honourable Supreme Court has held that the privilege is very narrow one and the Court is entitled to examine the material on the basis of which the detention order was passed. It may further be observed that the instant case cannot be equated with a detention order under the Defence of Pakistan Rules as the detention orders are passed under the Defence of Pakistan Rules to prevent the detenu from indulging in anti-State activities. We intend to dilate on the question, whether the respondent can withhold the material on the basis of which the impugned notices have been issued, from the petitioner, while {{FOOT NOTE}} (1) PLD 1969 SC 14 (2) {{FOOT NOTE}} dealing with the remaining contentions of the learned counsel for the parties. 5. Mr. Lqbal Naeem Pasha in furtherance of his above submission has invited our attention to the above paras. 5 and 9 (Iv) of the comments, which read as follows : "5. That with regard to the contents of para. 5 it is submitted that the Income-tax Officer is not required to assign the reason in advance for re-opening of assessment. The present position of the case is that the Respondent has asked for various statement and information to be submitted in regard to commission earned by the petitioner and other items of income. When information in response to the queries is received, the same will be compared with the information in hand. In case any concealment is thereby discovered, only then will it be necessary to confront the assessee with the information otherwise it may be unnecessary and the proceedings under section 34 will be dropped. At the present stage the investigations are proceeding and the respondent is proceeding according to law. Section 34 does not provide that the Income-tax Officer must furnish the information in his hand to the assessee in advance. It is, however, submitted that there is a vast volume of information before the respondent against which the new returns of the petitioner will be checked. It is submitted that at the appropriate time when any difference is discovered between the information in the Respondent's hand and that submitted by the petitioners now, the relevant information will be confronted to the petitioners. Such is the ordinary course and the intent and procedure in this behalf. Advance information will lead to malpractices, approaching the informant, in advance and causing dislocation, separation and distortion of the same. 9, (iv) the constitutional jurisdiction of this Hon'ble Court cannot be invoked for obtaining something which according to law will be available to the petitioners as and when necessary
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otherwise the proceedings under section 34 shall be dropped." ' It may be noticed that from the contents of the above-quoted paras, it is evident that the respondents have not disclosed the material on the basis of which they have reason to believe that the assessee has for any year in question concealed the particulars of his income or deliberately furnished inaccurate particulars thereof or omitted or failed to disclose all material facts necessary for the assessm ent for the years in question. It is also apparent that the respondents are not sure whether the materials with them are sufficient to justify the re-assessment as they have stated that in case of any concealment is discovered after comparing the information in hand with the further information sought from the petitioner, the same will be confronted to the petitioner otherwise it may be unnecessary and the proceedings under section 34 will be dropped. 6. Before taking up the case-law cited by the learned counsel for the parties, it may be pertinent to quote hereinbelow section 34 (I) (1-A) of the Act which reads as follows :- "34. Income escaping assessment :- (1) If for any reason income, profits or gains chargeable to income-tax have escaped assessme nt in any year, or have been under-assessed, or have been assessed at too low a rate, or have been the subject of excessive relief or refund under this Act, "or the total income and the total world income and the tax payable has been determined under subsection (1) of section 23" the Income-tax Officer may, serve on the person liable to pay tax on such income, profits or gains, or in the case of a company on the principal officer thereof, 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 re-assess such income, profits or gains, and the provisions of this Act, shall, so far as may be, apply accordingly as if the notice were a notice issued under that subsection. ' Provided that the tax shall be charged at the rate at which it would have been charged had the income, profits or gains not escaped assessment or full assessment, as the case may be. ' Provided further that except in case in which an order has been made under subsection (1) of section 23 unless definite information has come into his possession the Income-tax Officer shall not initiate proceeding under this subsection without obtaining the previous approval of the Inspecting Assistant Commissioner of Income-tax in writing. (1-A) Notice under subsection (1) may be served by the Income-tax Officer. (a) in any case in which he has reason to believe that assessee or any other person on his behalf has not filed any return under subsection (1) or subsection (2) of section 22, at any time ; (b) in any case in which he has reason to believe that the assessee has for any year concealed the particulars of his income or deliberately furnished inaccurate particulars thereof or omitted or failed to disclose all material facts necessary for the assessment for such year, within six years from the end of the year in which the assessment for such year was first made and where no assessm ent has been made, within six years from the end of the last year in which assessment for such year could be made, had clause (c) been applicable to such case : ' Provided that in a case where a fresh assessment is made for any year in pursuance of an order under section 31, section 33, section 33-A or section 34-A the period of six years referred to in this clause shall commence from the end of the year in which the fresh assessment is made ; (c) in any other case, within four years from the end of the year for which assessment is to be made." ' It may be noticed that subsection (1) of section 34 of the Act deals with the different situation than subsection (1-A) thereof. In order to invoke subsection (1) except in the case in which an order has been made under subsection (1) of section 23, the Income-tax Officer is not entitled to initiate proceedings unless definite information has come into his possession without obtaining the previous approval of the Inspecting Assistant Commissioner of Income-tax in writing. It may further be noticed that subsection (1-A) deals with two categories of the cases namely, the first category
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covered by clause (a) which can be pressed into service at any time in any case in which the Income-tax Officer has reason to believe that the assessee or any other person on his behalf has not filed any return under subsection (1) or subsection (2) of section 22, whereas clause (b) can be invoked in any case within a period of six years from the end of the year in which the assessment for such year was first made and where no assessment has been made within six years from the end of the last year in which assessment for such year should be made had clause (c) of above subsection (1-A) been applicable to such case or within six years of the making of fresh assessm ent order under section 31, section 33, section 33-A, and section 34-A, if the Income-tax Officer has reason to believe that the assessee has for any year falling within the above period concealed the particulars of his income or deliberately furnished inaccurate particulars thereof or omitted or failed to disclose all material facts necessary for the assessment of such year. ' It is a common ground that the respondents have invoked clause (b) of above subsection (1-A). 7. (a) Mr. Lqbal Naeem Pasha learned counsel for the petitioner has referred to the following cases in support of his contention :- (i) Sheo Nath Singh v. Appellate Assistant Commissioner of Income-tax (Central) Calcutta and others (1971) 821 T R 147, in which the facts were that the appellant was at all material times a shareholder of a number of companies doing hotel business. He had also been a Director and the Managing Director of various companies. In 1944 M. S. Oberoi purchased from the appellant his shareholding in the Associated Hotels of India Limited for an amount of Rs, 20.65,705-13-0, whereas in or about 1949 the appellant's holding in a Company known as Hotels (1938) Limited was purchased by said M. S. Oberoi. During the relevant assessment year and during the assessment for the year 1945-46 the appellant had disclosed to the Income-tax Officer, District II (2), Calcutta that he had received the aforesaid amount for the sale of the shares of the Associated Hotels, that amount was held to be a capital receipt on which no income-tax was payable. During the subsequent years the appellant assessee continued to show in his returns the interest received on the above amount of Rs, 20,65,705-13-0. It seems that the case of M. S. Oberoi was referred to the Investigation Commission set up under the Taxation on Income (Investigation Commission) Act, 1947. The appellant assessee was also served with a notice by the Commission under section 5 (4) of the aforesaid Act which was challenged by the appellant through a writ petition. The above notice was dropped on the basis of the undertaking given by the Solicitor-General before the High Court. After that the Income-tax Officer had issued seven notices dated 5th November 1954 to the appellant assessee under section 34 (1A) of the Income-tax Act in respect of assessment years 1940-41 to 1946-47. In spite of the objection of the appellant assessee that the Income-tax Officer had no jurisdiction, he proceeded with the assessment. Eventually the appellant assessee filed a writ petition in the Calcutta High Court which was dismissed. Upon an appeal, the Supreme Court of India allowed the same and while allowing the appeal observed as follows :- "In our judgment, the law laid down by this Court in the above case is fully applicable to the facts of the present case. There can be no manner of doubt that 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. The Court can always examine this aspect though the declaration or sufficiency of the reasons for the belief cannot be investigated by the Court. ' 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 (I-A) were not satisfied and, therefore, the notices which had been issued were wholly illegal and invalid."
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(ii) Income-tax Officer, I Ward, District VI, Calcutta, and others v. Lakhmani Mewal Das (1976) 103 IT R 437. In the above case the assessee was allowed deduction of a sum of Rs, 10,494 towards the interest paid by him to certain creditors during the assessment year 1958-59. Thereafter by a notice under section 148 of the Income-tax Act, 1961, dated 8th March, 1967 served on the respondent the Income-tax Officer sought to re-open the assessment after 4 years under section 147 (a) of the above Income-tax Act, 1961, on the two grounds namely, (i) that M. K. Who was shown to be one of the creditors has since confessed that he was doing only name lending and (ii) N. M., D. K. N., B. S. And others whose names were also mentioned in the names of the creditors of the respondent were known name-lenders. The respondent challenged the above notice through a Writ Petition in the Calcutta High Court which was heard by a Full Bench and the majority view held that the notices were without jurisdiction as there was no sufficient material to justify to have reason to believe. The Income-tax Department went in appeal before the Supreme Court in India which was dismissed. While dismissing the above appeal it was observed by the Supreme Court that the grounds or reasons which led to the formation of believe contemplated by section 147 (a) of the Act must have a material bearing on the question of escapement of income of the assessee from assessm ent because of his failure or omission to disclose fully and truly all material facts. It was further observed that once there exists reasonable grounds for the Income-tax Officer to form the above belief, that would be sufficient to clothe him with jurisdiction to issue notice and that whether the grounds are adequate or not is not a matter for the court to investigate nor the grounds which induce the Income-tax Officer is a justiciable It was also held that the existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. It was further held that the expression "reason to believe" does not mean a purely subjective satisfaction on the part of the Income-tax Officer but the reason must be held in good faith. It cannot be merely a presence and that it is open to the Court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose. It may be pointed out that the above ruling is on sections 147 and 148 of the Indian Income-tax Act, 1961 but since expression "reason to believe" has been used in subsection (1-A) (b) of section 34 of the Act as well as in section 147 (a) of the Indian Income-tax Act. 1961, the above ruling has direct bearing on the question of construction of the above expression. (iii) Income-tax Officer, I-Ward, Hundi Circle Calcutta and others v. Madnani Engineering Works Ltd. (1979) 118 I T R 1, in which the facts were that the respondent's assessment for the year 1959-60 was completed on 23rd August, 1960. The assessee had claimed certain interests paid by him to the creditors on Hundis as a revenue expenditure which was allowed. However, subsequently on 25th January, 1968 after a lapse of four years of the assessment order a notice was issued by the I.-T. 0. To re-open the assessm ent of the respondent on the ground that the transaction of loan represented by the Hundis was bogus and no interest was paid by the respondent to any of the creditor, thereupon the respondent challenged the validity of the notice by filing a writ petition in the Calcutta High Court. The Income-tax Officer in his first counter-affidavit declined to disclose the facts on the ground that if such facts were disclosed it would cause great prejudice to the interests of the revenue and would frustrate the object of reopening the assessment but in his further affidavit it was stated that in the course of assessment of the respondent for the assessm ent year 1963-64 it was discovered that various items shown as loans against the security of Hundis in the respondent's books of account for the year 1959-60 were in fact fictitious and credits against the names of certain persons namely Amarlal Moolchand, Girdharidas, Raghoomal, Murlidhar, Kanhaiyalal and Deudaram Basdeo were found not to be genuine. The writ petition was dismissed by a learned Single Judge but upon an appeal a Division Bench of the High Court allowed the petition and quashed the notices. The department went in appeal before the Supreme
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Court of India which dismissed the appeal. It was held by the Supreme Court that the respondent had produced all the Hundis on the strength of which it had obtained loans from creditors and also entries in the books of account showing payment of interest and it was for the I.-T. 0. To investigate and determine whether these documents were genuine or not. It was further held that the respondent could not be said to have failed to make a true and full disclosure of the material facts by not confessing before the I.-T. 0. That the Hundis and the entries in the books of account produced by it were bogus. It was held that the Court do not see any distinction at all between Burlop Dealear's case (1971) 79 I T R 609 (SC) and the present one and the language of section 147 (a) being identical with that of section 34 (1) (a) and the ratio of the decision in Burlop Dealer's case must govern the decision of the present case. (iv) Union of India and others v. Rai Singh Deb Singh Bist and another (1973) 88 I T R 200. In above case the facts were that the assessee was the Hindu undivided family.…
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