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Issues involved: Challenge to validity of notice u/s 148/147(b) of Income-tax Act, 1961 based on withdrawal of approval for deduction u/s 35(1)(ii) for donation to institution.
Summary: The petitioners challenged the notice issued by the Income-tax Officer u/s 148/147(b) of the Income-tax Act, 1961, regarding the assessment year 1982-83, after the approval for deduction u/s 35(1)(ii) for a donation was withdrawn with retrospective effect. The key issue was whether the withdrawal of approval provided a valid basis for believing that income had escaped assessment. Referring to the Supreme Court decision in ITO v. Lakhmani Mewal Das, it was established that the material forming the basis of belief must have a rational connection with the formation of belief. The court examined whether the subsequent notification could be a valid basis for forming such belief, emphasizing the need for a direct nexus with the belief formation. Regarding the retrospective withdrawal of approval, it was noted that the prescribed authority's power to approve institutions did not explicitly include the power to withdraw approval with retrospective effect. The court highlighted the limitations on retrospective actions, as reiterated in previous Supreme Court decisions. It was concluded that the retrospective cancellation of approval was invalid and unreliable, rendering the belief of income escaping assessment unjustified based on such information. The court also considered the argument put forth by the Income-tax Department regarding the conditions for deduction u/s 35(1)(ii) and the impact of retrospective cancellation of approval. However, the court found these submissions lacking merit, as the fundamental issue was whether the withdrawn approval provided a valid basis for believing income had escaped assessment. As the answer was negative, the petition was allowed, and the rule was made absolute in favor of the petitioners.
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