1978 (9) TMI 23 - HC - Income Tax

Business Expenditure Expenditure Incurred Jurisdiction Of Court Jurisdiction Of High Court Jurisdiction To Reassess Notice Of Reassessment Reason To Believe Writ Jurisdiction

Summary

Issues Involved:
1. Jurisdiction under Article 226 of the Constitution to quash notices and issue prohibitory orders.
2. Whether observations by the internal audit party amount to "information" under Section 147(b) of the Income Tax Act.
3. Whether the Income Tax Officer had reason to believe that income had escaped assessment based on such information.

Issue 1: Jurisdiction under Article 226 of the Constitution to Quash Notices and Issue Prohibitory Orders

The court examined whether it is permissible under Article 226 of the Constitution to quash notices issued under Section 148 of the Income Tax Act and to issue an order restraining the Income Tax Officer (ITO) from taking further steps. The court referenced several precedents, including *Hari Vishnu Kamath v. Ahmad Ishaque* and *S. Govinda Menon v. Union of India*, which elucidated the distinction between writs of prohibition and certiorari. The court concluded that a writ of prohibition could be issued when proceedings are pending, while certiorari is applicable after a final decision. The court also noted that Article 226(3) does not preclude the High Court from issuing a writ, order, or direction prohibiting an illegal or unauthorized act, even if an alternative remedy exists. The court agreed with the views expressed in *Ahmedabad Cotton Manufacturing Co. Ltd. v. Union of India* and other similar cases, holding that the writ petitions were not barred by Article 226(3).

Issue 2: Whether Observations by the Internal Audit Party Amount to "Information" under Section 147(b) of the Income Tax Act

The court held that the opinion expressed by the audit party amounts to "information" within the meaning of Section 147(b) of the Income Tax Act, as supported by the Supreme Court decision in *R. K. Malhotra, ITO v. Kasturbhai Lalbhai*. This information can form the basis for exercising power under Section 147(b).

Issue 3: Whether the Income Tax Officer had Reason to Believe that Income had Escaped Assessment Based on Such Information

The court examined whether the ITO had sufficient reason to believe that income chargeable to tax had escaped assessment. The Supreme Court in *Calcutta Discount Co. Ltd. v. ITO* and *CIT v. A. Raman Co.* established that the court could investigate whether the ITO had reason to believe that under-assessment resulted from non-disclosure of material facts. The court found that the Tribunal had already concluded that the payments made by the assessee to its selling agents were neither excessive nor unreasonable. The court also analyzed the applicability of Section 40(c) and Section 40A(2)(a) of the Income Tax Act, concluding that the payments made to the selling agents did not fall under Section 40(c). Therefore, the ITO did not have jurisdiction to issue the impugned notices under Section 148 as he could not reasonably believe that any part of the assessee's income had escaped assessment.

Conclusion:

The court allowed the appeals, reversed the common order passed by the learned single judge, and quashed the notices issued under Section 148 of the Income Tax Act. The respondent was directed not to take any further proceedings pursuant to the impugned notices. Each party was ordered to bear its own costs.