1954 Supreme(SC) 113

SUPREME COURT OF INDIA
28th May, 1954
M.C. MAHAJAN, C.J.I., S.R. DAS, BOSE, BHAGWATI AND VENKATARAMA AYYAR, JJ
Suraj Mall Mohta and Co., Petitioner
Versus
A. V. Visvanatha Sastri and another , respondents.
Petn. No. 196 of 1954. 546
Advocates appeared
Messrs. P. R. Das and K. P. Khaitan, Senior Advocates, (Mr. B. P. Maheshwari, Advocate, with them), for Petitioner; Mr. C. K Daphtary, Solicitor-General for India, (Messrs. Porus A. Mehta and P. G. Gokhale, Advocates, with him), for Respondents.

Headnote:Section 34- Taxation of Income (Investigation Commission) Act, (1947) S. 5(4)- Validity-Constitution of India, Art, 14. - Article 14-Taxation on Income (Investigation Commission) Act (XXX of 19(7), S. S(4)-Validity-Income-Tax Act, 1912, S. 3 -Constitution of India-retrospective effect. Section 5(4) of the Taxation on Income (Investigation Commission) Act, 1947, read:

       "If in the course of investigation into any case or points in a case referred to it under sub-section (I), the Commission has reason to believe-

       (a) that some person other than the person whose case is being investigated has evaded payment of taxation on income, or

       (b) that some points other than those referred to it by the Central Government in respect of any case also require investigation, it may make a report to the Central Government stating the reasons for such belief and, on receipt of such report, the Central Government shall notwithstanding anything contained in sub-section (I), forthwith refer to the Commission for investigation the case of such other person or such additional points as may be indicated in that report."

       Held: (1) Section 5(4) and the procedure prescribed by the impugned Act in so far as it affects the persons proceeded against under that sub-section being piece of discriminatory legislation offends against the provisions of Art. l4 of the Constitution and is thus void and unenforceable.

       (2) The impugned statute was admittedly good law till the coming into force of the Constitution. When India became a sovereign democratic Republic on 26-1-1950 the validity of all laws had to be tested on the touchstone of the new Constitution and all laws made before the coming into force of the Constitution have to stand the test for their validity on the provisions of Part III of the Constitution.

       Per Mailajan C.J.: "It is well settled that in its application to legal proceedings Article 14 assures to everyone the same rules of evidence and modes of procedure; in other worlds, the same rule must suit for all in similar circumstances. It is also well settled that this principle does not mean that every law must have universal application for all persons who are not by nature, attainment or circumstance, in the same position. The State can by classification determine who should be regarded as a class for purposes of legislation and in relation to law enacted On a particular subject, but the classification permissible must be based on some real and substantial distinction bearing a just and reasonable relation to the objects sought to be attained and cannot be made arbitrary and without any substantial basis."

       "On no principle of construction of statutes can the words to a substantial extent be read in sub clause (a) of section 5 (4). On a plain reading of the section it is clear that the sub-section is not limited only to persons who made extraordinary profits and to a substantial extent evaded payment of taxation on income, but applies to all persons who may have evaded payment of taxation on income, irrespective of whether the evaded profits are substantial or insubstantial."

       "The scope of the section is thus different from the scope of section 5(1) of the Act, both in its extent and range. It is necessarily limited to profits made within any particular period and brings within its range all persons, whether traders, businessmen, professional people, whoever they may be, who may have at any time evaded payment of taxation on income for whatever cause. That being the true scope or construction of subsection (4), it obviously deals with the same class of persons who fall within the ambit of section 34 of the Indian Income-Tax Act and are dealt with in sub-section (1) of that section and whose income can be caught by proceeding under that section. Assesses who have failed to disclose fully and truly all material facts necessary for the assessment under section 34 can be equated with persons who are discovered in the Course of the investigation conducted under section 5(1) to have evaded payment of income-tax on their incomes. The result is that some of these persons can be dealt with under the provisions of Act XXX of 1947, at the choice of the Commission, though they could also be proceeded with under the provisions of section 34 of the Indian Income-tax Act. It is not possible to hold that all such persons who evade payment of income-tax and do not truly disclose all particulars of material facts necessary for their assessment and against whom a report is made under sub-section (4) of section 5 of the impugned Act by themselves form a class distinct from those who evade payment of income-tax and come within the ambit of section 34 of the Indian Income-tax Act."

       "Classification means segregation in classes which have a systematic relation, usually found in common properties and characteristics. There is nothing uncommon either in properties or in characteristics between persons who are discovered as evaders of income-tax during an investigation conducted under section 5 (1) and those who are discovered by the Income-tax Officer to have evaded payment of income-tax. Both these kinds of persons have Common properties and have common characteristics and therefore require equal treatment. We thus hold that both section 34 of the Indian Income-tax Act and sub-section (4) of section 5 of the impugned Act deal with all persons who have similar characteristics and similar properties, the common characteristics being that they are persons who have not truly disclosed their income and have evaded payment of taxation on income."

       "It is clear that if persons dealt with by the impugned Act are deprived of the substantial and valuable privileges which they would otherwise have if they were dealt with under the Indian Income-tax Act, in that situation it is no defence to say that the discriminatory procedure also advances the course of justice. The matter has to be judged from the point of the ordinary reasonable man and not from the point of view of the Government."

       "The ordinary reasonable man would say, when the stakes are heavy and serious charges of evasion of income-tax are made against him, why one person similarly placed should have the advantage substantially of the procedure prescribed by the Indian Income-tax Act, while another person similarly situated be deprived of it."

       "So far as we can see these assessees1 have been given discriminatory treatment even from those whose cases are referred to under section 5 (1) of the Act to the Commission inasmuch as in the case of persons whose cases are referred to under section 5 (1) of the Act it is the prima facie belief of the Government that enables the reference to be made to the Commission and the Commission has after investigation to form an opinion; while in the case of persons coming within the ambit of subsection (4) of section 5 the Commission itself finds and gathers reason to believe that these persons have evaded income-tax and on its report the Government is bound to refer their cases to the same Commission who has already arrived at the prima facie conclusion that they have evaded payment of income-tax. The investigator and the judge in this situation are rolled into one. That is not so in cases coming under section 5 (1)."

       "Apart from this circumstance, there are substantial differences between the two procedures Under the provisions of section 8

       of the impugned Act, the findings of fact given by the Commission as to factum and extent of the evasion are final and conclusive and thus the persons against whom proceedings are taken under section 5 (4) are deprived of the rights of appeal, second appeal and revision conferred by sections 31, 32 and 33 of the Indian Income-tax Act on asses sees whose cases are dealt with under the procedure of section 34 of the Indian Income-tax Act in our opinion, the constitution of the Commission

       1. Under S. 5 (4) of the impugned Act.

       by itself cannot be held to be a sufficient safeguard and a good substitute for the rights of appeal and second appeal and revision given by the Indian Income-tax Act and there can thus be no doubt that the procedure prescribed by the impugned Act deprives a person who is dealt with under that Act of these valuable rights of appeal, second appeal and revision to challenge questions of fact decided by the judge of first instance. There is thus a material and substantial difference between the two procedures, one prescribed by the impugned Act and the other prescribed by the Indian Income-tax Act.

       "Under the provisions of section 37 of the Indian Income-tax Act the proceedings before the Income-tax Officer are judicial proceedings and all the incidents of such judicial proceedings have to be observed before the result is arrived at. In other words, the assessee would have a rig veto inspect the record and all relevant documents before he is called upon to lead evidence in rebuttal. This right has not been taken away by any express provisions of the Income-tax Act but the impugned Act contains a mandate in sub-section (4) of section 7 to the effect that:

       No person shall be entitled to inspect, call for, or obtain copies of, any documents, statements or papers or materials furnished to, obtained by or produced before the Commission or any authorized official in any proceedings under this Act.

       There is a proviso to sub-section (4) which says 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 be furnished with certified copies of documents, statements, papers and materials brought on the record by the Commission. This little mercy shown to the person whose case is being investigated by the Commission is no substitute for the fullest right of inspection which under ordinary law and the Code of Civil Procedure and in a judicial proceeding a person would have in order to meet the case made against him. The procedure thus prescribed in this matter by the impugned Act is substantially prejudicial the assessee than the procedure prescribed under the Income-tax Act.

       "Again, so far as the procedure for reference under sub-section (4) of section 5 is concerned, it is also to a certain extent prejudicial to the assessee. There is no doubt that there is in this matter in the first stages some similarity in the procedure to be followed for catching evaded income both under section 34 of the Indian Income-tax Act and under the provisions of sub-section (4) of section 5 of the impugned Act; but the overall picture is that though under the Indian Income-tax Act the same officer who first arrives at a tentative conclusion hears and decides the case, his decision is not final but is subject to appeal while under the provisions of sub-section (4) of section 5 the decision of the Commission tentatively arrived at in the absence of the assessee becomes final when taken in his presence, and that makes all the difference between the two procedures.

       "It may also be pointed out that under the provisions of S. 34, Income-tax Act investigation into escaped income or evaded income is limited to a maximum period of eight years, which under the provisions of sub-section (4) of section 5 it is not "limited to any period and that certainly operates to the detriment of those dealt with under subsection (4) of section 5 of the impugned Act and those dealt with under section 34 of the Income-tax Act." - TAXATION OF INCOME (INVESTIGATION COMMISSION) ACT, 1947

        Taxation on Income (Investigation Commission) Act (1947) S.5(4)-Validity.