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SUPREME COURT OF INDIA
K. Subba Rao, J.C. Shah, S.M. Sikri, JJ.
Madhya Pradesh Industries Ltd., Kingsway, Nagpur - Appellant
Versus
Income Tax Officer, Special Investigation Circle B', Nagpur - Respondent
Civil Appeal No. 161 of 1964
Decided On : 08-04-1965
INCOME TAX - Reassessment - Notice under Section 34(1)(a) of the Indian Income Tax Act, 1922 - Jurisdiction of the Income Tax Officer - Conditions precedent - Disclosure of material facts - Full and true disclosure - Exercise of power for a colourable purpose - Interference by the High Court under Article 226 of the Constitution.
Fact of the Case:
The Company, engaged in the business of mining manganese ore, appointed Alloys as its selling agent. In the assessment year 1953-54, the Company paid commission to Alloys and claimed it as a revenue outgoing. The Income Tax Officer completed the assessment without expressly referring to the claim. Later, the Income Tax Officer issued a notice under Section 34(1)(a) of the Income Tax Act, alleging that the income had escaped assessment due to the Company's failure to disclose fully and truly all material facts. The Company challenged the notice, asserting that it had made full and true disclosure and that the notice was issued for a colourable purpose.
Finding of the Court:
The Court held that the Income Tax Officer has power to issue a notice under Section 34(1)(a) only if he has reason to believe that income has escaped assessment due to non-disclosure of material facts by the assessee. The Court found that the Company had made full and true disclosure of all material facts necessary for the assessment and that the impugned notice was issued in colourable exercise of power.
Issues: 1. Whether the Income Tax Officer had jurisdiction to issue the notice under Section 34(1)(a) of the Income Tax Act, 1922. 2. Whether the Company had made full and true disclosure of all material facts necessary for the assessment. 3. Whether the impugned notice was issued for a colourable purpose.
Ratio Decidendi: 1. The Court held that the Income Tax Officer has power to issue a notice under Section 34(1)(a) only if he has reason to believe that income has escaped assessment due to non-disclosure of material facts by the assessee. 2. The Court found that the Company had made full and true disclosure of all material facts necessary for the assessment by referring to the course of proceedings as set out in the petition, including the return filed by the Company, the statements and certificates submitted, and the appearance of the Company's representative before the Income Tax Officer. 3. The Court held that the impugned notice was issued for a colourable purpose, as the Income Tax Officer was seeking to change his earlier opinion that the commission to Alloys was allowable and to review the previous order passed in favour of the Company.
Final Decision: The Court set aside the order of the High Court and remanded the proceeding with the direction that Rule be issued to the Income Tax Officer and the petition be tried.
JUDGMENT :
J.C. Shah, J.
Madhya Pradesh Industries Ltd. hereinafter called "the Company" is engaged in the business of mining manganese ore. On March 18, 1952 the Company appointed Messrs. J.K. Alloys Ltd. hereinafter called "Alloys" as its selling agent. In the account year relating to Assessment Year 1953-54 the Company paid Rs. 1,13,052/8/9 to the selling agents and claimed it as a revenue outgoing in the computation of its profits for that year. The Income Tax Officer made an order of assessment without expressly referring to the claim for allowance to Alloys.
2. On December 26, 1960 the Income Tax Officer issued a notice to the Company in exercise of the power under Section 34 of the Indian Income Tax Act reciting that having "reason to believe that" the income of the Company assessable to income tax for Assessment Year 1953-54 had "(a) escaped assessment, (b) been under assessed", he proposed to reassess the said income that had;"(a) escaped assessment, (b) been under-assessed" and directed the Company to deliver a return of the total income of the Company assessable for the said Assessment Year 1953-54. The Company by letter dated January 30, 1961 called upon the Income Tax Officer to disclose whether the notice was issued under clause (a) or clause (b) of sub-section (1) of Section 34. It was asserted in the letter that all facts necessary for the purpose of assessment had been fully and truly disclosed in the original assessment, and the notice was misconceived. In reply to this letter the Income Tax Officer on February 16, 1961 informed the Company that the notice was issued under Section 34(1)(a). The Income Tax Officer also issued "a questionnaire" demanding information about the commission paid together with copies of the agreement with Alloys and correspondence relating to sales through Alloys. On December 21, 1961 the Income Tax Officer informed the Company that since the questions were not replied to, he presumed that no correspondence with Alloys existed and that the payment of commission had been made without any justification, Alloys having rendered no service as selling agents.
3. On April 2, 1962 the Company presented a petition in the High Court of Judicature of Bombay (Nagpur Bench) praying for the issue of a writ of certiorari under Article 226 of the Constitution or an appropriate direction or order under Article 227 of the Constitution, calling for the records of the case, and for the issue of writs in the nature of prohibition or mandamus restraining the Income Tax Officer from taking any action or proceedings in enforcement or implementation of the notice dated December 26, 1960. This petition was rejected in limine by the High Court by order dated April 7, 1962. With special leave, the Company has appealed to this Court against the order of the High Court.
4. The sole question for determination is whether the High Court acted improperly in refusing to investigate a plea raised by the Company that in issuing a notice under Section 34(1)(a) of the Income Tax Act the Income Tax Officer acted without jurisdiction and for a colourable purpose. It is necessary, in dealing with that question, to refer in the first instance to the case of the Company setting out the course of proceedings which culminated in the original order of assessment. In its return the Company disclosed for the year ending March 31, 1953 Rs. 15,70,587 as its total profits according to its books of account. In the statement under Section 38(3) of the Act filed with the return the Company disclosed that it had paid Rs. 1,13,052/8/9 as "commission sales" on "different dates" by cheques to Alloys, and Rs. 6091/4 to J.S. Williams on October 4, 1952 by cheque as commission on sales. In the profit and loss account of the Company filed with the return an amount of Rs. 29,76,067/10/8 was disclosed as received "By sales less commission". On December 7, 1953 R.K. Gupta a Director of the Company made a statement before the Income Tax Officer stating
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