1955 (12) TMI 2 - SC - Income Tax

Whether section 5(1) of the Act was discriminatory and violative of article 14 of the Constitution? Held that - The only relief which the petitioners would have been entitled to in that event would have been one in regard to the re-assessment proceedings for the year 1942-43 which were pending before the Income-tax Officer by virtue of the notice under section 34 issued by him to the petitioners on the 19th March 1954. The petitioners are however entitled to succeed on the alternative contentions which were raised by them as the result of the conclusion which we have reached above in regard to the proceedings pending before the Commission having become discriminatory after the 26th January 1950 by reason of section 5(1) of the Act having become unconstitutional after the inauguration of the Constitution on that date. In the result the petitioners will be entitled to the issue of a writ of certiorari quashing the report of the Income-tax Investigation Commission dated the 29th August 1952 and the assessment orders of the Income-tax Officer for the years 1940-41 1941-42 and 1943-44 to 194849 as being unconstitutional null and void and also to the issue of a writ of prohibition against the respondents from implementing the findings of the Investigation Commission referred to above with regard to the year 1942-43 and we do order that such writs do issue against the respondents accordingly. Appeal allowed.

Issues Involved:
1. Constitutionality of Section 5(1) of the Taxation on Income (Investigation Commission) Act, 1947.
2. Alleged violation of Article 14 of the Constitution.
3. Discriminatory application of the law.
4. Validity of reassessment orders based on the Commission's findings.

Issue-wise Detailed Analysis:

1. Constitutionality of Section 5(1) of the Taxation on Income (Investigation Commission) Act, 1947:
The petition under Article 32 of the Constitution questioned the constitutionality of Section 5(1) of the Taxation on Income (Investigation Commission) Act, 1947. The petitioners argued that the provisions of the Act were illegal, ultra vires, and unconstitutional, primarily on the grounds that they violated the fundamental right guaranteed under Article 14 of the Constitution. The petitioners contended that the Act enabled the Central Government to discriminate between individuals by selectively referring cases to the Commission, which was arbitrary and lacked reasonable classification.

2. Alleged Violation of Article 14 of the Constitution:
The petitioners argued that after the amendment of Section 34 of the Indian Income-tax Act by Act XXXIII of 1954, the provisions of Section 5(1) of the Act became discriminatory. They claimed that both the 1947 Act and the amended Income-tax Act applied to the same category of persons, and there was no valid or reasonable classification disclosed in Section 5(1) or any other provision of the Act. The petitioners relied on the Supreme Court's decision in Shree Meenakshi Mills Ltd. v. A.V. Visvanatha Sastri to support their contention.

3. Discriminatory Application of the Law:
The petitioners contended that the Act enabled the Central Government to discriminate between individuals by selectively referring cases to the Commission, which was arbitrary and lacked reasonable classification. They argued that the procedure prescribed under the impugned Act was substantially more prejudicial and drastic to the assessee than the procedure prescribed under the Indian Income-tax Act. The petitioners claimed that there was no justification for why one person should have the advantage of the procedure prescribed by the Indian Income-tax Act while another person similarly situated should be deprived of it.

4. Validity of Reassessment Orders Based on the Commission's Findings:
The petitioners sought the issue of a writ of certiorari or any other appropriate writ, direction, or order quashing the report of the Income-tax Investigation Commission dated 29th August 1952, and the assessment orders of the Income-tax Officer for the years 1940-41, 1941-42, and 1943-44 to 1948-49. They argued that these orders were unconstitutional, null, and void. The petitioners also sought a writ of prohibition calling upon the Commissioner of Income-tax, Madras, and the Income-tax Officer, City Circle 1, Madras, to forbear from implementing the findings of the Investigation Commission with regard to the year 1942-43.

Judgment:

On the Constitutionality of Section 5(1):
The Supreme Court held that the substantial evaders of payment of income-tax whose cases were referred by the Central Government to the Commission formed a class by themselves, and there was a rational basis for classification in the enactment of Section 5(1) of the Act. The Court found that the background and surrounding circumstances at the time of the Act's enactment justified the classification.

On the Alleged Violation of Article 14:
The Court noted that after the amendment of Section 34 of the Indian Income-tax Act in 1948 and 1954, the provisions of Section 5(1) of the Act could stand comparison with the amended Section 34(1). The Court observed that after the 8th September 1948, there were two procedures simultaneously in operation: one under Act XXX of 1947 and the other under the Indian Income-tax Act. This resulted in different persons, though falling under the same class or category of substantial evaders of income-tax, being subject to different procedures, which violated the fundamental right guaranteed under Article 14 of the Constitution.

On the Discriminatory Application of the Law:
The Court held that the provisions of Section 5(1) of the Act became unconstitutional after the inauguration of the Constitution on 26th January 1950. The Court reasoned that the persons whose cases were referred for investigation by the Central Government to the Commission up to the 1st September 1948 could, after the 26th January 1950, ask why they were being dealt with by the discriminatory and drastic procedure of Act XXX of 1947 when those similarly situated could be dealt with under the amended provisions of Section 34 of the Act.

On the Validity of Reassessment Orders:
The Court concluded that the reassessment orders for the years 1940-41, 1941-42, and 1943-44 to 1948-49, which were based on the findings of the Commission, were unconstitutional, null, and void. The Court issued a writ of certiorari quashing the report of the Income-tax Investigation Commission dated 29th August 1952, and the assessment orders of the Income-tax Officer for the specified years. The Court also issued a writ of prohibition restraining the respondents from implementing the findings of the Investigation Commission with regard to the year 1942-43.

Separate Judgment by Jagannadhadas, J.:
Justice Jagannadhadas dissented, holding that Section 5(1) of the Investigation Commission Act did not violate Article 14 and continued to be valid. He emphasized that the classification of substantial evaders was distinct and justified, and the selective application of the law was guided by the objective set out in Section 5(1) itself. He argued that the Investigation Commission Act provided a comprehensive and effective procedure for investigating substantial evasion, which was different from the procedure under Section 34 of the Income-tax Act.

Conclusion:
The majority judgment allowed the petition, quashing the report of the Income-tax Investigation Commission and the reassessment orders for the specified years. The Court restrained the respondents from implementing the findings of the Investigation Commission for the year 1942-43. The respondents were ordered to pay the petitioners' costs of the petition. Justice Jagannadhadas dissented, arguing that Section 5(1) of the Investigation Commission Act was valid and did not violate Article 14.

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