1970 (4) TMI 9 - SC - Income Tax

Income Tax Officer's notices invalidated for lack of evidence and failure to establish jurisdiction

Madhya Pradesh Industries Limited Versus Income-Tax Officer, Nagpur

The SC allowed the assessee's appeal against tax notices issued by the Income Tax Officer. The court found that the officer failed to file any affidavit ... Officer had not filed any affidavit in the proceedings - proceedings recorded by him before issuing the notices have not been produced - Hence, it is not possible to hold that the ITO had any reason to form the belief in question - ITO had no jurisdiction to issue the impugned notices - Assessee's appeal allowed Issues Involved:1. Competence of the respondent to initiate proceedings under Section 34 of the Indian Income-tax Act, 1922.2. Validity of the notices issued under Section 34(1)(a) for the assessment years 1953-54, 1954-55, and 1955-56.3. Jurisdiction of the Income-tax Officer to issue the notices.4. Requirement of 'reason to believe' for initiating reassessment under Section 34(1)(a).Issue-wise Detailed Analysis:Competence of the Respondent to Initiate Proceedings under Section 34The primary legal question was whether the respondent was competent to initiate proceedings under Section 34 of the Indian Income-tax Act, 1922. The respondent initiated proceedings by issuing notices on December 26, 1960, for the assessment years 1953-54, 1954-55, and 1955-56. The appellant challenged these proceedings through writ petitions under Articles 226 and 227 of the Constitution, which were initially dismissed by the High Court and later reconsidered upon special leave granted by the Supreme Court.Validity of the Notices Issued under Section 34(1)(a)The appellant, Madhya Pradesh Industries Ltd., argued that the notices issued under Section 34(1)(a) were invalid. The company contended that it had disclosed all material facts necessary for the assessment year 1953-54 and that the Income-tax Officer had no 'reason to believe' that income had escaped assessment due to non-disclosure of material facts. The Supreme Court noted that the facts for the assessment year 1953-54 would determine the validity of the proceedings for the other two assessment years.Jurisdiction of the Income-tax Officer to Issue the NoticesThe court examined whether the Income-tax Officer had jurisdiction to issue the notices under Section 34(1)(a). According to Section 34(1)(a), the officer must have 'reason to believe' that income had escaped assessment due to the assessee's omission or failure to disclose fully and truly all material facts. The court referenced the precedent set in Calcutta Discount Co. Ltd. v. Income-tax Officer, which established that the officer must have reasonable grounds for such belief, and the adequacy of these grounds is not open to judicial scrutiny. However, the existence of such grounds can be challenged.Requirement of 'Reason to Believe'The court reiterated that the term 'reason to believe' does not imply a purely subjective satisfaction of the Income-tax Officer. The belief must be based on evidence and must be held in good faith. The court cited previous judgments, including S. Narayanappa v. Commissioner of Income-tax, which held that the belief must have a rational connection to the formation of the belief and must not be based on extraneous or irrelevant factors.In this case, the company had denied any omission or failure to disclose material facts. The officer who issued the notices, Mr. Pandey, did not file an affidavit, nor were the proceedings or the Commissioner's sanction produced. Consequently, the court found no basis to conclude that the Income-tax Officer had the necessary jurisdiction to issue the notices.ConclusionThe Supreme Court allowed the appeals, set aside the High Court's order, and quashed the proceedings taken under Section 34(1)(a) of the Act. The respondent was ordered to pay the costs of the appeals, with a hearing fee for one set.Appeals AllowedThe judgment concluded with the appeals being allowed and the proceedings under Section 34(1)(a) being quashed. The respondent was directed to bear the costs of the appeals.