1965 (4) TMI 23 - SC - Income Tax

Whether the High Court acted improperly in refusing to investigate a plea raised by the company that in issuing a notice under section 34(1)(a) of the Income-tax Act the Income-tax Officer acted without jurisdiction and for a colourable purpose? Held that - As in the present case, the claim made is that the Income-tax Officer had no power to issue the notice under section 34, and that the power is exercised not for any legitimate purpose for which it may be used, but for the purpose of making a fishing enquiry and to review a previous order passed in favour of the company, a rule upon the Income-tax Officer to show cause why the order should not be set aside and an opportunity to the authority whose action was challenged either to accept or deny the facts alleged and to set out such other material facts as have a bearing on the question, was at least called for. The order of the High Court ought to be set aside and the proceeding remanded with the direction that rule be issued to the Income-tax Officer and the petition be tried

Issues Involved:
1. Whether the High Court acted improperly in refusing to investigate the plea raised by the company regarding the jurisdiction of the Income-tax Officer under section 34(1)(a) of the Indian Income-tax Act.
2. Whether the Income-tax Officer had jurisdiction to issue the notice under section 34(1)(a) based on the company's alleged failure to disclose fully and truly all material facts.
3. Whether the notice issued by the Income-tax Officer was for a legitimate purpose or a "colourable exercise of power" for a fishing enquiry.

Issue-wise Detailed Analysis:

1. High Court's Refusal to Investigate:
The Supreme Court scrutinized whether the High Court acted improperly in dismissing the company's petition in limine without investigating the plea that the Income-tax Officer acted without jurisdiction. The company contended that it had disclosed all necessary information during the original assessment and that the notice under section 34(1)(a) was issued without proper jurisdiction. The Supreme Court highlighted that the High Court must consider whether the act or omission complained of resulted in grave injustice and whether the party had another adequate remedy. The High Court's failure to provide reasons for rejecting the petition necessitated a remand for proper consideration.

2. Jurisdiction of the Income-tax Officer:
The Supreme Court examined the conditions under section 34(1)(a) of the Indian Income-tax Act, which allows the Income-tax Officer to issue a notice if there is "reason to believe" that income has escaped assessment due to the assessee's failure to disclose fully and truly all material facts. The company argued that it had disclosed all relevant facts, and the notice was unjustified. The Supreme Court noted that jurisdiction arises when the Income-tax Officer has such reason to believe, and if the company challenges this on oath, an enquiry is warranted. The facts alleged by the company, if proven, could invalidate the notice, necessitating an investigation by the High Court.

3. Legitimacy of the Notice:
The company claimed that the notice was a "colourable exercise of power" intended for a fishing enquiry rather than a legitimate reassessment. The Supreme Court emphasized that the High Court should have issued a rule upon the Income-tax Officer to show cause and provided an opportunity for both parties to present their facts. The absence of an affidavit from the Income-tax Officer and the company's assertion of full disclosure required an enquiry to determine the legitimacy of the notice. The Supreme Court underscored that the High Court's jurisdiction is discretionary but should be exercised judiciously, especially when the petition prima facie suggests a need for investigation.

Conclusion:
The Supreme Court concluded that the High Court erred in dismissing the petition without an enquiry and set aside the order. The case was remanded to the High Court with directions to issue a rule to the Income-tax Officer and conduct a trial to determine the merits of the company's claims. The appeal was allowed, and the proceedings were remanded with no order as to costs.

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