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TMI Blog1955 (12) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... he petitioners 1 and 2 are the legal representatives of the deceased M. Ct. M. Chidambaram Chettiar and also the representatives of their grandmother Devanai Achi. The Central Government, in exercise of its powers under section 5(1) of Act XXX of 1947, referred to the Income-tax Investigation Commission R.C. Nos. 516, 517 and 518 relating to M. Ct. M. Chidambaram Chettiar, M. Ct. M. Muthiah Chettiar, petitioner 3, and Devanai Achi. The Commission, after holding an enquiry in all the three cases, recorded their findings and held that an aggregate sum of Rs. 10,07,322-4-3 represented the undisclosed income during the investigation period and directed distribution of this sum over the several years in the manner indicated by them in Schedule A to their report. This report was submitted by the Commission to the Government on the 26th August, 1952. The Central Government considered the report and, purporting to act under section 8(2) of the Act, directed by their order No. 74 (26) I.T./52 dated the 16th September, 1952, that appropriate action under the Indian Income-tax Act be taken against the assessees with a view to assess or re-assess the income which had escaped assessment for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1947 and the Income-tax Act as amended in 1954 showed that they applied to the same category of persons and there was nothing in section 5(1) of the Act or any other provision of the said Act disclosing any valid or reasonable classification. The provisions of Act XXX of 1947 could not, therefore, be sustained on the ground of classification to avoid the mischief of article 14 of the Constitution. The petitioners obviously relied upon our decision in Shree Meenakshi Mills case, in support of this contention. The petitioners thereafter proceeded to set out their alternative contention based upon our decision in Suraj Mall Mohta's case, though it was not so stated in express terms. They contended that Act XXX of 1947 enabled the Central Government to discriminate between one person and another inasmuch as they were authorised to pick and choose cases of persons who fell within the group of those who had substantially evaded taxation on income, that the act of the Government in referring some evaders to the Commission was wholly arbitrary and there was nothing to eliminate the possibility of a favouritism or a discrimination against an individual by sending or not sending cases to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set out the events and circumstances under which Act XXX of 1947 came to be passed. In paragraph 4 of that affidavit he stated : " It was found that during the period of the last war large fortunes had been made by businessmen. Controls imposed by Government on prices and distribution were often evaded and secret profits were made and kept outside the books and often kept invested in shares and real property acquired in the names of benamidars or in cash purchases of gold, silver and jewellery. The machinery of income-tax administration was unable to cope with the large number of complex cases that had to be dealt with, during the war years and a few years after its termination. As there had been a large scale evasion of tax during this period, it became necessary in the public interests to investigate cases of evasion of income-tax and bring under assessment huge profit that had escaped assessment. As a preliminary step in this direction, a demonetisation Ordinance was passed in January, 1946, sterilising the high denomination notes in which secret profits earned during the war years had been partly kept and calling for a statement regarding the source of such profits. This was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose cases were to be referred by the Central Government for investigation to the Commission was left to the unguided and uncontrolled discretion of the executive or the administrative officials also has been dealt with in that judgment and we need not repeat our reasons for rejecting the same. If the provisions of section 34(1) of the Indian Income-tax Act as it stood unamended by Act XLVIII of 1948 (which corresponded with the provisions of section 47 of the Travancore Act XXIII of 1121 ) had been the only provisions to be considered we would have reached the same conclusion as we did in A. Thangal Kunju Musaliar v. M. Venkatachalam Potti and Another. The position, however, in the present case is materially affected by reason of the two amendments which were made in section 34 of the Indian Income-tax Act, one in 1948 by the enactment of Act XLVIII of 1948 and the other in 1954 by the enactment of Act XXXIII of 1954. Section 34 as amended by Act XLVIII of 1948 read as under : Section 34(1) : If-- (a) the Income-tax Officer has reason to believe that by reason of the omission or failure on the part of an assessee to make a return of his income under section 22 for any year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or, if the assessee is a company, on the principal officer thereof, a notice containing all or any of the requirements which may be included in a notice under sub-section (2) of section 22, and may proceed to assess or re-assess the income, profits or gains of the assessee for all or any of the years referred to in clause (i), and thereupon the provisions of this Act (excepting those contained in clauses (i) and (iii) of the proviso to sub-section (1) and in sub-sections (2) and (3) of this section) shall, so far as may be, apply accordingly : Provided that the Income-tax Officer shall not issue a notice under this sub-section unless he has recorded his reasons for doing so, and the Central Board of Revenue is satisfied on such reasons recorded that it is a fit case for the issue of such notice : Provided further that no such notice shall be issued after the 31st day of March, 1956." Amended section 34(1) of the Indian Income-tax Act was substantially different from the old section 34(1) which was in operation up to the 8th September, 1948. The words " if in consequence of definite information which has come into his possession the Income-tax Officer discovers that income, pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and revision and ultimate scrutiny by the Income-tax Appellate Tribunal which was denied to those persons whose cases had been referred by the Central Government for investigation by the Commission under section 5(1) of Act XXX of 1947. The juxtaposition of dates is also very instructive. It may be noted that in Act XXX of 1947 as it was originally enacted, the period up to which the Central Government could make the references to the Commission for investigation was laid down in section 5(1) of the Act to be 30th June, 1948. This period was extended to the 1st September, 1948, by the Taxation on Income (Investigation Commission) (Second Amendment) Act, 1948 (XLIX of 1948). Act XLIX of 1948 was passed by the Central Legislature and received the assent of the Governor-General on the 8th September, 1948, the same day on which Act XLVIII of 1948 which amended section 34(1) of the Indian Income-tax Act also received the assent of the Governor-General. Both these Acts, viz., Act XLVIII of 1948 and Act XLIX of 1948, were passed simultaneously and obviously with a view to bring the provisions of section 5(1) of Act XXX of 1947 and section 34(1) of the Indian Income-tax Act in tune with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officers concerned would take the requisite proceedings under section 34(1) of the Indian Income-tax Act as amended after the 8th September, 1948, against all persons whose income, profits or gains had escaped assessment including substantial evaders of income-tax who cases would certainly have been referred by the Central Government for investigation to the Commission if it had been possible for them to do so before the 1st September, 1948. After the 8th September, 1948, there were two procedures simultaneously in operation, the one under Act XXX of 1947 and the other under the Indian Income-tax Act with reference to persons who fell within the same class or category, viz., that of the substantial evaders of income-tax. After the 8th September, 1948, therefore, some persons who fell within the class of substantial evaders of income-tax were dealt with under the drastic and summary procedure prescribed under Act XXX of 1947, while other persons who fell within the same class of substantial evaders of income-tax could be dealt with under the procedure prescribed in the Indian Income-tax Act after service of notice upon them under the amended section 34(1) of the Act. Different pers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion Commission under the drastic procedure of Act XXX of 1947, while section 34 of the Indian Income-tax Act as amended empowered the Income-tax Officer to deal with cases other than those whose cases had been referred under section 5(1) to the Investigation Commission ........ Mahajan, C.J., who delivered the judgment of the Court, dealt with this argument at page 719 as under : " As regards the first contention canvassed by the learned Attorney-General it seems to us that it cannot stand scrutiny. The class of persons alleged to have been dealt with by section 5(1) of the impugned Act was comprised of those unsocial elements in society who during recent years prior to the passing of the Act had made substantial profits and had evaded payment of tax on those profits and whose cases were referred to the Investigation Commission before 1st September, 1948. Assuming that evasion of tax to a substantial amount could form a basis of classification at all for imposing a drastic procedure on that class, the inclusion of only such of them whose cases had been referred before 1st September, 1948, into a class for being dealt with by the drastic procedure, leaving other tax evaders to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... answer can be returned to this query because the field on which the amended section 34(1) operated from and after the 26th January, 1950, included the strip of territory which was also occupied by section 5(1) of Act XXX of 1947 and two substantially different laws of procedure, one being more prejudicial to the assessee than the other, could not be allowed to operate on the same field in view of the guarantee of article 14 of the Constitution. The result, therefore, is that barring the cases of persons which were already concluded by reports made by the Commission and the directions given by the Central Government under section 8(2) of Act XXX of 1947 culminating in the assessment or re-assessment of the escaped income, those cases which were pending on the 26th January, 1950, for investigation before the Commission as also the assessment or re-assessment proceedings which were pending on the 26th January, 1950, before the Income-tax Officers concerned in pursuance of the directions given by the Central Government under section 8(2) of the Act would be hit by article 14 of the Constitution and would be invalidated. The R.C. Cases 516, 517 and 518 relating to M. Ct. M. Chidambar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich would require a revision of those findings or if any clerical or arithmetical mistakes were found or errors were detected arising from accidental slip or omission within the meaning of sub-section (6) which also required some alterations in the findings, these findings would be divested of their finality and would have to be revised accordingly. The assessment or reassessment orders made by the Income-tax Officers based upon those findings would also be binding on the assessees subject only to the result of the reference, if any, made to the High Court on questions of law arising out of such orders. If this was the true position, it could not be urged that by reason of the pendency of the applications for reference to the High Court the proceedings under Act XXX of 1947 had not been concluded against the petitioners and it could not also be urged that when Act XXXIII of 1954 was enacted introducing section 34(1-A) in the Income-tax Act with effect from the 19th July, 1954, the R.C. Cases 516 to 518 were pending and the whole proceedings under Act XXX of 1947 against the petitioners were invalidated. As a matter of fact the report. had been made by the Commission against the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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. Reliance was placed upon a decision of the Allahabad High Court reported in Ganagadhar Baijnath and Others v. Income-tax Investigation Commission, etc., in support of this position. The learned Solicitor-General did not contest this position but undertook on behalf of the Income-tax authorities that they will not proceed against the petitioners for the reassessment for the year 1942-43 in pursuance of the notice under section 34 served upon them in that behalf. This would have been the only relief to which the petitioners would have become entitled on the main contention urged by them in their petition. 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 unconstitut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... persons in this class cannot be considered invalid since the selection is guided by the very objective set out in section (1) itself. (c) The fact that some persons may escape the application of the law is not necessarily destructive of the efficacy of the provision. It was also held, on a comparison with section 47 of the Travancore Act XXIII of 1121, corresponding to section 34 of the Indian Income-tax Act, 1922 (XI of 1922) as it stood prior to its amendment in 1948, that the persons who fall under the class of substantial evaders of income-tax within the meaning of section 5(1) of the Investigation Commission Act were not intended to be and could not have been dealt with under the provisions of section 47 of the Travancore Act XXIII of 1121 and that therefore there would be no discriminatory application of two parallel statutory provisions. In the present case, however, the majority of the Court has taken the view that section 5(1) of the Investigation Commission Act has become unconstitutional by the date of the Constitution in comparison with section 34 of the Income-tax Act as amended in 1948. It was pointed out that section 47 of the Travancore Act XXIII of 1121 whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Income-tax Officer under section 34 of the Income-tax Act have this in common that both have reference to " reason to believe ", the standard of belief and the basis of belief is expressed in such different terminology that it is not possible to compare the two and equate the two as being the same. Nor indeed can it be posited that every case of the class comprised in section 5(1) of the Investigation Commission Act must necessarily fall within section 34 of the Income-tax Act. Apart, however, from any question as to the comparison between the two sections and as to the standards and basis of the belief required, once it is accepted [as has been done in the Travancore Appeals (A. Thangal Kunju Musaliar v. M. Venkatachalam Potti, Authorised Official and Income-tax Officer and Another)] that substantial evasion is a definite legal standard determinative of a distinct class, it is clear that the class comprised thereunder is not identical with the class comprised under section 34 of the Income-tax Act. In the alternative, it is a select group of a wider class. If the smaller grouping is on a rational basis relevant to the policy of the Act, it would form a distinct class by itsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Investigation Commission Act cannot be the same. The only provisions in the income-tax law for the purpose are sections 37, 38 and 39 of the Income-tax Act. The primary scheme of the Income-tax Act is that the basic materials for the assessment are the returns and the accounts or other evidence to be furnished by the assessee himself (sections 22 and 23 of the Income-tax Act) or the checking material that may be available from the returns and the accounts of other assessees who have transactions with this assessee. It may also consist of information received from other public authorities, etc., as well as the examination of persons appearing to have inter-connected transactions. The Income-tax Officer has not the power to probe into suspicious features or obtain and seize material in verification or support thereof. All that normally he can do, where there is room for grave suspicion is to reject the accounts and make his assessment on the basis of " best judgment " (see section 23(4) of the Income-tax Act) which cannot be sustained if it is a wild guess based on mere suspicion. Now, the whole scheme of the Investigation Commission Act is obviously inspired by the realisati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... course of arguments that no objection could be taken to Government taking only sufficient powers for investigation in appropriate cases, without any question arising as to discrimination or classification but that this cannot justify discriminatory procedure as regards actual reassessment. That raises a different aspect of the matter which will be presently dealt with. Assuming however that substantial evaders contemplated under section 5(1) of the Investigation Commission Act fall also within the larger class of evaders who fall within the class contemplated by section 34 of the Income-tax Act as it stands, what follows ? The selective group under section 5(1) of the Investigation Commission Act is determined with reference to the criteria (1) that they are substantial evaders of income-tax, and (2) that they are assessees within the period 1939 to 1948 which is well-known to be the period of war profits and black-marketing and in respect of whom the Government get information before 1st September, 1948, justifying investigation. This is by itself a well-defined class and the classification has a reasonable relation to the object to be achieved, viz., the catching up of the esca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in all embracing terms." It is substantially the above view of permissible classification for the purposes of article 14 that has been recognised by this Court in Sakhawat Ali v. The State of Orissa where this Court laid down as follows : " Legislation enacted for the achievement of a particular object or purpose need not be all embracing. It is for the legislature to determine what categories it would embrace within the scope of legislation and merely because certain categories which would stand on the same footing as those which are covered by the legislation are left out would not render legislation which has been enacted in any manner discriminatory and violative of the fundamental right guaranteed by article 14 of the Constitution." Even if therefore section 34 of the Income-tax Act as amended in 1948 is wide enough in its ambit to catch up any and every case which could be dealt with under section 5(1) of the Investigation Commission Act, it is still a distinctive and selective group out of a larger group and is a class by itself determined with reference to the criteria above indicated. It is no objection to the constitutionality of that classification that some out o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven if the date-line is not an essential part of the classification under section 5(1) of the Investigation Commission Act, the other four essential features of the scheme of the class contemplated in section 5(1) as set out by me above are by themselves enough to constitute a complete and rational differentiation of the class comprised under section 5(1) of the Investigation Commission Act from that under section 34(1) of the Income-tax Act as amended in 1948. If on such a classification some cases of substantial evasion happen to have escaped the machinery of the Investigation Commission Act, that would not invalidate the classification on the principle accepted in Sakhawat Ali's case. I am in any case unable to visualise the reasonable possibility of any person falling within the category contemplated under section 5(1) of the Investigation Commission Act, being taken up for reassessment under section 34 of the Income-tax Act as amended in 1948 and consequently of two parallel reassessment proceedings relating to such persons remaining pending by the 26th January, 1950, so as to bring about discriminatory operation between them and to render section 5(1) of the Investigation Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Investigation Commission, with reference to section 34 as it stood between 1939 to 1948. (See paragraph 22 of the General Report of the Income-tax Investigation Commission issued in 1948 making its recommendations for. the improvement of the machinery at page 8 of that report and Appendix A thereto which would show that amendment of section 34 was not connected with the extension of the date for making references under section 5(1) of the Investigation Commission Act). I am unable, therefore, to assume that the simultaneous enactment of section 34 of the Income-tax Act and the amendment of the Investigation Commission Act in 1948 have a bearing on the question at issue. Undoubtedly the reassessment proceedings under the Investigation Commission Act appear to deprive the assessee of certain procedural advantages. He is deprived of an appeal on facts to the Appellate Assistant Commissioner and to the Income-tax Appellate Tribunal. He is given the right of appeal only on points of law by means of a reference to the High Court. But such reference is to be heard by a Bench of not less than three Judges. Now, once there is a valid classification the nature and extent of the actual di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a reasonable opportunity of rebutting evidence and generally to act in accordance with the principles of natural justice. The procedure relating to this stage is assimilated to a judicial enquiry in a larger measure than is the procedure before the Income-tax Officer or the Appellate Assistant Commissioner, in respect of whose proceedings there is no provision that they must follow as far as practicable the principles of the Indian Evidence Act. (See section 23 of the Income-tax Act). It is well-settled that the assessment proceedings by the Income-tax Officer under section 23 of the Income-tax Act--and hence also under section 34 thereof--are not regulated by the technical standards of evidence though of course they cannot be based on caprice or suspicion. It would, therefore, appear that according to the scheme of the Investigation Commission Act, the judicial part of it approximates much more to judicial standards than the assessment proceedings by the Income-tax authorities and that though in theory there is a combination of the functions of an investigator and the Judge in the Investigation Commission, in normal practice it is likely to be kept distinct by the appointment of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stigated a reasonable opportunity of rebutting any evidence adduced against him .............." The above provisions preclude the possibility of the Commission pushing in into the final record on which the report is to be based any ex parte material to which the assessee has had no access. These also preclude the possibility of depriving him of the use of any relevant material in the Commission's possession which the assessee may call for. All that section 7(4) implies is that the assessee is not entitled to a roving inspection of the material gathered by the Investigation Commission in the course of investigation, which may relate to the affairs of various other persons. Such a provision is not opposed to natural justice for even in the matter of criminal judicial trials the accused is not entitled to a roving inspection of the material gathered by the police during investigation. (I may notice, with very great respect, that the observation in Suraj Mall Mohta's case at page 13 that the proceedings before the Income-tax Officer are judicial proceedings and that therefore all the incidents of such judicial proceedings have to be observed, i.e., in other words, the assessee should ..... X X X X Extracts X X X X X X X X Extracts X X X X
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