1990 (1) TMI 32 - HC - Income Tax

Summary

Issues Involved:
1. Validity of notices issued under section 148 of the Income-tax Act.
2. Classification of firms as an association of persons.
3. Requirement of action under section 186 of the Income-tax Act before treating firms as an association of persons.

Detailed Analysis:

1. Validity of Notices Issued Under Section 148 of the Income-tax Act:

The petitioner argued that the notices under section 148 were ab initio void and without jurisdiction as they did not disclose any reason for the belief that income chargeable to tax had escaped assessment. The prerequisites for proceeding under clause (a) of section 147 were absent, as the petitioner had disclosed all material facts necessary for assessment. The court emphasized that the Income-tax Officer must have reasonable belief based on either omission or failure by the assessee to disclose material facts or information in possession indicating income escapement. The court found that the facts discovered in 1986 could not relate back to previous years, and there was no material indicating failure to disclose fully and truly all material facts necessary for assessment in the relevant years. Consequently, the notices under section 148 were deemed without jurisdiction.

2. Classification of Firms as an Association of Persons:

The Revenue contended that the firms were operating as an association of persons, citing common partners, similar business nature, and unidentifiable stock found during a raid. The court referred to Supreme Court rulings, stating that an association of persons requires two or more individuals joining in a common purpose to produce income, profits, or gains. The court concluded that merely having common partners and similar business activities did not constitute an association of persons. The firms were registered separately and assessed as distinct entities. The presence of unaccounted stock or cash did not automatically imply an association of persons, especially without evidence of suppressed facts or material leading to income escapement in previous years.

3. Requirement of Action Under Section 186 of the Income-tax Act:

The petitioner argued that before treating the firms as an association of persons, the Income-tax Officer should have canceled the registration of the firms under section 186. The court found merit in this argument, stating that section 186 requires the Income-tax Officer to cancel the registration if a genuine firm was not in existence. Since no action under section 186 was taken, the orders treating the firms as an association of persons were without jurisdiction.

Conclusion:

The court allowed all three petitions, quashing the notices issued under section 148 of the Income-tax Act. The court held that the Revenue had no material to show that income had escaped assessment due to failure to disclose material facts. Additionally, the lack of action under section 186 rendered the orders treating the firms as an association of persons invalid. There was no order as to costs, and the security deposit, if any, was to be returned to the petitioner after verification.