1963 (3) TMI 55 - HC - Income Tax

Issues Involved:
1. Validity of the notice issued under section 34 of the Indian Income-tax Act, 1922.
2. Applicability of the limitation period under section 34.
3. Constitutionality of the second proviso to section 34(3) under Article 14 of the Constitution.
4. Applicability of sub-section (4) of section 34.
5. Applicability of section 4 of the Amending Act, 1959.

Issue-wise Detailed Analysis:

1. Validity of the notice issued under section 34 of the Indian Income-tax Act, 1922:
The petitioner challenged the notice issued under section 34 of the Indian Income-tax Act, 1922, on the grounds of it being barred by limitation. The notice was issued following observations made by the Appellate Assistant Commissioner of Income-tax, which led to the issuance of the impugned notice under section 34. The petitioner contended that the notice was illegal as it was issued beyond the prescribed limitation period.

2. Applicability of the limitation period under section 34:
The court examined the various amendments to section 34 and the relevant provisos. Initially, section 34 allowed the Income-tax Officer to issue a notice within one year of the end of the assessment year. The Amending Act of 1939 introduced a distinction between assessees who concealed income and others, setting an eight-year limitation for the former and four years for the latter. The 1948 amendment required the Income-tax Officer to have "reason to believe" for issuing a notice, with the same limitation periods. The 1956 amendment introduced new provisos, including the second proviso which limited the issuance of notices to cases where the escaped income was one lakh rupees or more. The court found that the notice in question did not meet these requirements, as the escaped income was less than one lakh rupees, and the notice was issued beyond the eight-year limitation period.

3. Constitutionality of the second proviso to section 34(3) under Article 14 of the Constitution:
The petitioner argued that the second proviso to section 34(3) was unconstitutional under Article 14 of the Constitution. The Supreme Court in Prashar v. Vasantsen Dwarkadas held that the second proviso to section 34(3) was ultra vires Article 14, as it created an arbitrary distinction between assessees. The court noted that the proviso allowed for unequal treatment of similar classes of persons, which was not based on any rational ground. The decision was binding on the court, and thus, the second proviso could not be relied upon by the department to justify the notice.

4. Applicability of sub-section (4) of section 34:
The department argued that sub-section (4) of section 34, introduced by the 1959 amendment, allowed for the issuance of a notice at any time, notwithstanding the expiration of the eight-year period. However, the court found that sub-section (4) only applied to cases where the escaped income was one lakh rupees or more. Since the escaped income in the present case was less than one lakh rupees, sub-section (4) did not apply.

5. Applicability of section 4 of the Amending Act, 1959:
The department also relied on section 4 of the Amending Act, 1959, which saved notices issued before the commencement of the Act. However, the court found that this provision only applied to notices issued before March 12, 1959. Since the notice in question was issued on January 5, 1962, section 4 did not apply.

Conclusion:
The court concluded that the notice issued on January 5, 1962, was illegal and not justified under the provisions of section 34 of the Indian Income-tax Act, 1922, as amended. The notice was quashed, and the petition was allowed. There was no order as to costs.

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