TaxTMI 
TaxTMI 
1997 (5) TMI 45
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....urce 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 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 assessments 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....
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....further let us have a look at McDowell and Co. Ltd. v. Commercial Tax Officer [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 : " 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 : " 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....
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....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 a....
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....ffidavit-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 assessment, 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 assessment under sub-section (3) of section 143 or section 147 has been made for the relevant assessment 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 Comm....
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....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 underassessment, 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 n....
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.... 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 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 scrutinise the reasons. I have perused the reasons and I am satisfied that there are valid reasons to initiate the proceeding. This matter can be considered also on the basis of the decision in STO v. Uttareswari Rice Mills [1973] 89 ITR 6 (SC)....
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....l 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 and 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 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 n....
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....come-tax Officer in starting proceedings in respect of income escaping assessment is open to challenge in a court of law (see observations of this court in the cases of Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC)) and S. Narayanappa v. CIT [1967] 63 ITR 219 (SC), while dealing with the corresponding provisions of the Indian Income-tax Act, 1922. The next attack on the validity of this notice are : (i) That the notice is vague, as it cannot be ascertained who is the assessee. (ii) In what capacity the notice was served ? (iii) Does not indicate particular item or business or activity regarding which fresh assessment is sought to be made. (iv) There is no association of persons in existence in the eye of law. Regarding notice under section 148 no standard form is prescribed, all that the section requires is that notice must be served with particulars as may be prescribed. In Jawala Prasad Chobey v. CIT [1935] 3 ITR 295 (Cal), a Division Bench of the Calcutta High Court considered this aspect of the matter construing section 34 of the Indian Income-tax Act, 1922, and the question which arose before the court was as follows : " (i) Whether, having regard to the fac....
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....submits that no person or entity in the aforesaid name does exist. Such a person or entity was never constituted or formed for the purpose of carrying on any business or adventure jointly in order to earn any income or profit. It may be mentioned that joint purchasing of a single lottery ticket only once does not bring into existence any entity like association of persons or body of individuals liable to tax as an entity within the meaning of the word 'person' under the Income-tax Act, 1961. 9. That your petitioner submits that for forming an 'association of persons' the members of the association must join together for the purpose of producing an income. An 'association of persons' can be formed only when two or more than two persons voluntarily combine together for a certain purpose. Mere purchase of a lottery ticket once jointly by a few persons does not by itself go to show that these persons acted as an association of persons liable to tax under the provisions of the Income-tax Act, 1961. 10. That your petitioner submits that the joint purchasers of the lottery ticket in the instant case did not join in common purpose with the object of producing any income, profits or gains....
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....ined joint as owners of this property from the date of the purchase down to the present time. Thirdly, they have joined together, as the power of attorney show, for the purpose of holding this property and of using it for the purpose of earning income to the best advantage of them all. Under these circumstances, it seems to me that looking at the position and construing the words of the Act in their ordinary common meaning, the four persons named are an 'association of individuals'. In arriving at the conclusion, I am fortified by the words of Lord Justice Cotton in the case of Smith v. Anderson, [1880] 15 Ch. 247, at page 282). There, the learned Lord Justice is discussing the meaning of the word 'association' as used in section 4 of the Companies Act of 1862. The word occurs along with the words 'company or partnership'. Cotton L.J., says at page 282 : 'I do not think it very material to consider how far the word 'association' differs from company or partnership, but I think we may say that if 'association' is intended to denote something different from a company or partnership, it must be judged by its two companions between which it stands, and it must denote something where th....
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....Pitale [1937] 5 ITR 716 (Bom). In In re B. N. Elias [1935] 3 ITR 408 (Cal), Derbyshire C.J., rightly pointed out that the word 'associate' means, according to the Oxford Dictionary, 'to join in common purpose, or to join in an action.' " Therefore, an association of persons must be one in which two or more persons join in a common purpose or common action, and as the words occur in a section which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains. This was the view expressed by Beaumount C.J., in CIT v. Laxmidas Devidas [1937] 5 ITR 584 (Bom), at page 589 and also in In re Dwarakanath Harischandra Pitale [1937] 5 ITR 716 (Bom). In In re B. N. Elias [1935] 3 ITR 408 (Cal), Costello J., put the test in more forceful language. He said : 'It may well be that the intention of the Legislature was to hit combinations of individuals who were engaged together in some joint enterprise but did not in law constitute partnerships... When we find... that there is a combination of persons formed for the promotion of a joint enterprise... then I think no difficulty arises whatever in the way of saying that... these persons did constitut....
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....siness or continuous existence. Even association of persons may come into existence for a single venture. When an income results from a joint venture or joint act, the assessment can be made in the status of association of persons. In order to constitute an association of persons, they must join in a common purpose or common action and the object of the association must be to produce income. In the case in hand, 8 persons joined together in purchasing a lottery ticket worth Rs. 5 and it earned income of Rs. 1 crore (one crore). The lottery ticket was purchased by the eight persons joining together out of their own volition, they had a common purpose in view, that is the expectation of prize money and the object was to produce income. So definitely these 8 persons must be held to be an association of persons in the eye of law. Before we leave this point let us have a look at the case in CIT v. O. K. Arumugham Chettiar [1997] 224 ITR 391 (Mad), cited by the learned advocate for the petitioners. The first respondent in that case worked in a cycle shop on daily wage of Rs. 2. He purchased a lottery ticket of Rs. 2. He agreed to share 25 per cent. of the prize money with the second re....
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....chase the ticket for the purpose of producing income. The other observation that if there is a single activity, that will not constitute an association of persons was not accepted by the High Court. Even otherwise I hold that this observation of the Tribunal is not the correct proposition of law. To bring to an end this judgment, it is necessary to take note of another submission of Dr. Saraf. He submits that in view of section 292B of the Act, there is no necessity to look to the technicalities of notice as urged on behalf of the petitioners. Section 292B of the Act is quoted below : " 292B. No return of income, assessment, notice, summons or other proceeding furnished or made or issued or taken or purported to have been furnished or made or issued or taken in pursuance of any of the provisions of this Act shall be invalid or shall be deemed to be invalid merely by reason of any mistake, defect or omission in such return of income, assessment, notice, summons or other proceeding if such return of income, assessment, notice, summons or other proceeding, is in substance and effect in conformity with or according to the intent and purpose of this Act. " This section was inserted b....
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....direction given by the Appellate Assistant Commissioner to the Income-tax Officer to make fresh assessment on Aruna Devi in accordance with the provisions of the Act. This decision, in our opinion, is sufficient to reject the assessee's contention herein. If an assessment made with notice to Shankar Lal (who was not really the legal representative of the deceased Rangalal), and without serving notice upon the lawful legal representatives (Aruna Devi, the other executor or Aruna Devi's children) that too, despite the objection of Shankar Lal that he is not the legal representative and that notice must be sent to Aruna Devi, etc., who are the legal representatives of the deceased Rangalal---is only 'defective' and not null and void, it would be rather odd to contend that assessments made on the basis of the returns filed by one of the legal representatives (disclosing the total income received by the deceased) is null and void on the ground that notices were not sent to the other legal representatives. The principle that emerges from the above decision is that an omission to serve or any defect in the service of notices provided by procedural provisions does not efface or erase the l....