1989 (4) TMI 335 - HC - Income Tax

Summary

Issues Involved:
1. Jurisdiction under Article 226.
2. Validity of ex parte assessment orders.
3. Compliance with statutory requirements for assessment.
4. Best judgment assessment principles.
5. Determination of agricultural income from tea.
6. Constitutional limitations on state taxation of agricultural income.
7. Procedural fairness and natural justice.
8. Validity of revenue recovery proceedings.

Issue-wise Detailed Analysis:

1. Jurisdiction under Article 226:
The learned single judge dismissed O.P. No. 6985 of 1984, declining to exercise jurisdiction under Article 226 of the Constitution due to the petitioner's default at all stages of the impugned assessment proceedings and his default in discharging other liabilities. The petitioner appealed against this decision.

2. Validity of Ex Parte Assessment Orders:
The original petition sought a writ of certiorari to quash the assessment orders (Exhibit P-8 series) for the years 1977-78 to 1981-82, the revisional order (Exhibit P-13), and revenue recovery proceedings culminating in the sale notice (Exhibit P-7). The assessments were completed ex parte under Section 18(4) of the Agricultural Income Tax Act due to the petitioner's failure to respond to notices and file returns.

3. Compliance with Statutory Requirements for Assessment:
The petitioner did not respond to notices issued under Section 35 of the Act, nor did he produce accounts and records. The assessments were completed on a best judgment basis under Section 18(4) of the Act. The assessment orders referred to pre-assessment notices proposing assessments based on details from previous assessments and sales tax authorities.

4. Best Judgment Assessment Principles:
The court emphasized that a best judgment assessment must be honest and fair, not capricious or vindictive. It must have a reasonable nexus to available material and circumstances. The assessment must be based on some relevant material, not arbitrary or at the sweet will of the authorities. The court cited precedents to support this principle.

5. Determination of Agricultural Income from Tea:
The assessment orders showed that agricultural income was assessed based on sales tax assessments. The taxable turnover for each year was taken as agricultural income from tea. The court found this method incorrect as it did not conform to Section 3 of the Agricultural Income Tax Act, which requires the assessment of income from the previous year. The admissible deductions for expenses were not allowed, resulting in erroneous assessments.

6. Constitutional Limitations on State Taxation of Agricultural Income:
Under Article 246(1) of the Constitution, Parliament has exclusive power to legislate on taxes on income other than agricultural income. The state can levy tax only on 60% of the income derived from the sale of tea, as per Rule 8 of the Income Tax Rules. The court held that the state legislature cannot levy tax on the entire income from tea, and the assessments were in violation of constitutional provisions.

7. Procedural Fairness and Natural Justice:
The court found that the assessee was given only six days to file objections to the pre-assessment notice, and the assessment orders were passed before the expiry of this period. This resulted in a denial of natural justice, as the petitioner had no opportunity to meet the case against him.

8. Validity of Revenue Recovery Proceedings:
The petitioner sought to quash the revenue recovery proceedings culminating in Exhibit P-7. The counter-affidavit showed that proceedings were taken for recovery of amounts due under various heads, including sales tax, basic tax, plantation tax, and employees' provident fund. The court held that the state could bring properties to sale for recovery of amounts due, other than agricultural income tax for the years 1977-78 to 1981-82, which needed fresh determination.

Conclusion:
The court quashed the assessment orders (Exhibits P-8(a) to P-8(e)) and the revisional order (Exhibit P-13) and directed the Agricultural Income Tax Officer to pass fresh orders of assessment in light of the observations and directions contained in the judgment, after affording the petitioner sufficient opportunity to substantiate his objections. The writ appeal was allowed, and parties were to bear their respective costs.