Electro House v. Commissioner Of Income Tax — 1968 DIGILAW 75 (CAL)

JUDGMENT BANERJEE, J. 1. THIS reference, under s. 66(1) of the Indian IT Act, 1922, has been made in circumstances hereinafter related. 2. THE assessment years, which are involved in this reference, are 1959- 60 and 1960-61, corresponding to accounting years ended on December 31, 1958, and December 31, 1959. In or about August, 1949, one Baidyanath Gorai commenced business as an electrical contractor, under the trade name of M/s Electro House. Up to the asst. yr. 1958-59, he was assessed as the sole proprietor of the business. On January 2, 1958, a deed purporting to convert the said business into a partnership came into existence between Baidyanath Gorai, his mother-in- law, Srimati Gouribala Dasi, and his son-in-law, Nemaichand Saha. According to the deed, the three partners were given the following shares in the partnership : 3. THE ITO accorded registration to the firm, under section 26A, for the successive two assessment years under appeal. THE CIT of Income-tax, West Bengal, Calcutta, however, found on examination of the records that the orders of the ITO granting registration to the firm for the asst. yr. 1959-60 and the renewal of registration for the asst. yr. 1960-61 were erroneous and prejudicial to the interests of revenue. THE CIT thereupon issued a notice to the assessee-firm to show cause why the registration granted by the ITO should not be cancelled. THE material portion of the notice reads as follows : Baidyanath Gorai 40per cent Nemaichand Saha 30per cent Gouribala Dasi 30 per cent "On a perusal of the orders under s. 26A passed by Income-tax Officer, 'A' Ward, Asansol, on 5th October, 1960, and 25th February, 1961, for the asst. yrs. 1959-60 and 1960-61, respectively, in the above case and the connected records, I consider that the said orders are erroneous and prejudicial to revenue inasmuch as registration under s. 26A of IT Act, 1922, for the asst. yr. 1959- 60 and renewal of registration under s. 26A of the said Act for the asst. yr. 1960-61 should not have been granted, as there are prima facie reasons and grounds to hold that the partnership brought into existence by the partnership deed dated 2nd January, 1958, is not a genuine one. 4. I, therefore, propose to cancel the orders under s. 26A of the IT Act, 1922, for the asst. yrs. yr. 1960-61 should not have been granted, as there are prima facie reasons and grounds to hold that the partnership brought into existence by the partnership deed dated 2nd January, 1958, is not a genuine one. 4. I, therefore, propose to cancel the orders under s. 26A of the IT Act, 1922, for the asst. yrs. 1959-60 and 1960-61 under powers vested in me under s. 33B of the IT Act, 1922, unless you show cause why the orders should not be so cancelled. I am prepared to hear your objections, if any, at 11 a.m. on 3rd August, 1962, at my office as noted above. Objections in writing, if any, submitted on or before the above date will also be duly considered." 5. THE notice bears the date July 18, 1962. 6. IN response to the notice, the assessee's representative attended before the CIT and showed cause. The CIT was not, however, satisfied that the assessee was a genuine firm. He, therefore, made an order, under s. 33B, cancelling the registration and directing the ITO to assess the business as the sole proprietary concern of Baidyanath Gorai for each of the assessment years in question. Aggrieved by the order of the CIT, the assessee appealed before the Tribunal. Before the Tribunal the validity of the notice under s. 33B and the correctness of the order cancelling registration were both challenged. We are not concerned, in this reference, with that part of the Tribunal's order which deals with the correctness or otherwise of the CIT's order directing cancellation of the registration, because that part of the order is the subject-matter of a separate reference. In this reference, we need confine ourselves to the point whether the notice under s. 33B was illegal and insufficient and whether the exercise of the jurisdiction by the CIT was proper. The validity of the notice under s. 33B was challenged before the Tribunal on the following grounds : (a) that the notice was not in conformity with law inasmuch as the notice did not indicate the grounds on which the CIT of Income-tax intended to take action under s. 33B ; (b) that it was incumbent upon the CIT to indicate in the notice the point or points upon which he would like to be satisfied before making an order under s. 33B. In the absence of such particulars in the notice, it was not possible for the assessee to know what points he had to meet before the CIT; (c) that the notice was defective and the CIT had no jurisdiction to pass the orders as he did. 7. THE Tribunal repelled the contentions with the following observations : "THE notice dated the 18th July, 1962, issued by the CIT is on record. THE CIT clearly states therein that he considers that the orders of the ITO, A-Ward, Asansol, dated 5th October, 1960, and 25th February, 1961, for the asst. yrs. 1959-60 and 1960-61, are erroneous and prejudicial to revenue, inasmuch as registration and renewal of registration should not have been granted 'as there are prima facie reasons and grounds to hold that the partnership brought into existence by the partnership deed dated 2nd January, 1958, is not a genuine one'. THE CIT then recited that he proposed 'to cancel the orders under s. 26A of the IT Act, 1922, for the asst. yrs. 1959-60 and 1960-61', unless the assessee showed cause to the contrary. Sec. 33B provides that the CIT, if he considers that any order passed by the ITO is erroneous in so far as it is prejudicial to the interests of the Revenue, he may, 'after giving the assessee an opportunity of being heard' and 'after making or causing to be made such enquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment'. It would be seen that section 33B does not provide for the issue of a statutory notice to the assessee. All that s. 33B requires is that the assessee should be given a reasonable opportunity of being heard. There is, therefore, no foundation for the assessee's contention that the CIT was bound to give the assessee notice of the grounds on which he proposes to base his order for cancellation of the registration. Having regard to the terms of the notice issued by the CIT to the assessee in the present case, we are of the opinion that it sufficiently meets the requirements of s. 33B. In our opinion, the CIT validly assumed jurisdiction to proceed to take action under s. 33B by the issue of the said notice." 8. Having regard to the terms of the notice issued by the CIT to the assessee in the present case, we are of the opinion that it sufficiently meets the requirements of s. 33B. In our opinion, the CIT validly assumed jurisdiction to proceed to take action under s. 33B by the issue of the said notice." 8. THEREUPON, the assessee obtained reference of the following question of law to this Court : "Whether, on the facts and in the circumstances of the case, the notice issued under s. 33B of the Indian IT Act, 1922, met the requirements of the law and whether the CIT validly exercised jurisdiction under s. 33B of the Indian Income-tax Act, 1922 ?" Dr. Pal, learned counsel for the assessee, did not argue that s. 33B prescribed a form of notice to be served upon the assessee and that the notice, in the instant case, was bad because it did not conform to the form of the notice. All that the section required was that the assessee should be given "an opportunity of being heard". This opportunity, Dr. Pal submitted, must not be a token opportunity, but a reasonable opportunity. In our opinion, Dr. Pal is right in this submission. As far back as in the year 1958, the Supreme Court laid down in the case of Khem Chand vs. Union of India (1958) SCR 1080 what should be the measure of opportunity to be given. The Supreme Court observed : "He must not only be given an opportunity but such opportunity must be a reasonable one . . . . he should be informed about the charge or charges levelled against him and the evidence by which it is sought to be established . . . . . ." 9. THE above observation was no doubt made in the context of a disciplinary proceeding. We are, however, of the opinion that the measure of opportunity is the same, be it a disciplinary proceeding or a taxation proceeding. THE question that we need decide, in this reference, is whether the opportunity given by the CIT to the assessee, by the impugned notice, was a reasonable opportunity. All that was said in the notice was that "there were prima facie reasons and grounds to hold that the partnership brought into existence by the partnership deed dated January 2, 1958, was not a genuine one". All that was said in the notice was that "there were prima facie reasons and grounds to hold that the partnership brought into existence by the partnership deed dated January 2, 1958, was not a genuine one". On reading the notice one might wonder what was the particular reason which induced the CIT to think that the deed was not a genuine one. Was it because the other partners were benamidars of Biswanath Gorai ? Was it because the deed was a forged one ? Was it because the partnership was a show bottle and a window dressing and was never intended to be acted upon ? 10. NOW, the CIT in making an order under s. 33B of the Indian IT Act acts judicially. When a person or authority is required to act judicially, he must conform to certain principles of civilised jurisprudence which go by the name of natural justice. In the case of M. Chockalingam and M. Meyyappan vs. CIT (1963) 48 ITR (SC) Hidayatullah J. (as the Chief Justice then was) observed : "The authorities acting under the Indian IT Act have to act judicially and one of the requirements of judicial action is to give a fair hearing to a person before deciding against him. In a recent case of the House of Lords, IRC vs. Hood Barrs (1961) 39 Tax Cases 683, it was held that such proceedings were quasi-judicial and if the section required a notice and notice was not given, there was a breach of the principles of natural justice and certiorari lay to quash the order made. Lord Reid at page 706 observed : 'I do not think it necessary in this case to decide what degree of formality, if any, is required in proceedings before General CIT, for this at least is clear : no Tribunal, however informal, can be entitled to reach a decision against any person without giving to him some proper opportunity to put forward his case. It may well be that these CITs acted in good faith and with the best intentions, but that is not enough.' A similar view was also expressed by this Court in Sinha Govindji vs. Deputy Chief Controller of Imports and Exports (1962) 1 SCR 540 . It may well be that these CITs acted in good faith and with the best intentions, but that is not enough.' A similar view was also expressed by this Court in Sinha Govindji vs. Deputy Chief Controller of Imports and Exports (1962) 1 SCR 540 . It is more so in this case where the proviso to s. 35 itself makes it incumbent upon the ITO to give notice and a hearing to an assessee when the effect of the rectification would be the enhancement of the assessment." 11. IT is true that s. 33B does not specifically provide for the giving of a notice as the proviso to sub-s. (1) of s. 35 of the Indian IT Act does. Nevertheless, a proceeding under s. 33B cannot be started against an assessee unless he is called upon, by a notice, to appear and show cause against the action proposed to be taken against him. That being the position, the notice must be a revealing notice and not one on receipt of which an assessee may be left to speculate. In the instant case, the language used in the notice was not sufficiently revealing to the assessee as to which particular case he was called upon to meet. 12. IN a decision of this Court in Bagsu Devi Bafna vs. CIT (1966) 62 ITR 506 , this Court observed : "That in a notice, under s. 33B of the Indian IT Act, the CIT must disclose to the assessee the grounds on which he proposed to revise, to enable the assessee to show cause." This judgment has since been upheld by the appellate Court in 63 I.T.R. 333. Thus the authorities are unanimous that there must be sufficient disclosure made by the CIT, when he issues a notice upon the assessee for starting proceedings under s. 33B. In our opinion, the notice must be such as would not leave the assessee in doubt and speculating as to the nature of the charge he has to meet. 13. OUR attention was drawn, on behalf of the Revenue, to a recent Supreme Court decision in Rampyari Devi Saraogi vs. CIT (1968) 67 ITR 84 (SC), and on the authority of that decision it was contended that there was no denial of natural justice in the instant case, at least not to the extent which merited interference by the Court. OUR attention was drawn, on behalf of the Revenue, to a recent Supreme Court decision in Rampyari Devi Saraogi vs. CIT (1968) 67 ITR 84 (SC), and on the authority of that decision it was contended that there was no denial of natural justice in the instant case, at least not to the extent which merited interference by the Court. This argument necessitates a close examination of the Supreme Court judgment. The notice which was issued in that case read as follows : "On calling for and examining the records of your case for the asst. yrs. 1952-53, 1953-54, 1954- 55, 1955-56, 1956-57, 1957- 58, 1958-59, 1959-60 and 1960-61, and other connected records I consider that the orders of assessment passed by the ITO, 'D' Ward, Howrah, on 30th March, 1961, and 26th April, 1961, are erroneous in so far as they are prejudicial to the interests of revenue for the following reasons amongst others. 2. Enquiries made have revealed that you neither resided in nor carried on any business from the address declared in the returns. Also the ITO was not justified in accepting the initial capital, the gift received and sale of jewellery, the income from business, etc., without any enquiry or evidence whatsoever. 3. I, therefore, propose to pass such orders thereon as the circumstances of the cases justify after giving you an opportunity of being heard under the powers vested in me under s. 33B of the IT Act, 1922 . . ." 14. THIS notice was criticized before the CIT on the ground that the notice was vague and did not contain indications as to why the assessment orders were erroneous and prejudicial to the Revenue. The CIT overruled the contention and made an order cancelling the assessment and directing the ITO to do fresh assessment according to law. The assessee challenged the order of the CIT before the High Court, under Art. 226 of the Constitution, but failed to get any relief. Thereupon, the assessee took the matter before the Supreme Court. The Supreme Court decided againts the assessee with the following observation : "The order of the CIT is a detailed order. There is no doubt that he does mention some facts which were not indicated or communicated to the assessee and which the assessee had had no opportunity of meeting . . . . . . The Supreme Court decided againts the assessee with the following observation : "The order of the CIT is a detailed order. There is no doubt that he does mention some facts which were not indicated or communicated to the assessee and which the assessee had had no opportunity of meeting . . . . . . We agree with the High Court that all this material was supporting material and did not constitute the basic grounds on which the orders under s. 33B were passed by the CIT. There was ample material to show that the ITO made the assessments in undue hurry . . . . . . The assessee, in our view, has not in any way suffered from the failure of the CIT to indicate the results of the enquiries, mentioned above. Moreover, the assessee will have full opportunity of showing to the ITO whether he had jurisdiction or not and whether the income assessed in the assessment orders which were originally passed was correct or not." The above judgment of the Supreme Court is vastly distinguishable. We have quoted the language of the notice, issued by the CIT, in Rampyari Devi's case (supra). That notice indicated to the assessee the basic materials on which the CIT intended to take action against the assessee under s. 33B. If the basic materials were all there but the supporting materials were missing, that should not prove fatal to the notice. Then again, the Supreme Court was weighed by the consideration that the assessee would have full opportunity of showing to the ITO whether he had jurisdiction or not and whether income assessed in the assessment orders were correct or not. In the instant case, the notice is not as revealing as the notice in Rampyari Devi Saraogi's case (supra). We have already indicated that on reading the notice one may be guessing and wondering as to why the CIT considered the partnership to be not a genuine one. Thus, the basic materials were absent in the notice. Then again, the CIT made a final order against the assessee by cancelling the registration. Against that part of the order, the assessee would have no further opportunity of contesting when the matter would go back before the ITO. Thus, the basic materials were absent in the notice. Then again, the CIT made a final order against the assessee by cancelling the registration. Against that part of the order, the assessee would have no further opportunity of contesting when the matter would go back before the ITO. We do not, therefore, think that the circumstances which went against the assessee in Rampyari Devi Saraogi's case (supra) are present in this case. 15. IF the notice starting the proceedings under s. 33B did not meet the requirements of law, that is to say, was opposed to the principles of natural justice, then the exercise of the jurisdiction by the CIT under s. 33B should be struck down on the ground that the initiation of the proceeding being opposed to the principles of natural justice, the subsequent proceedings could not be taken. 16. IN the result, we answer the question referred to this Court in the negative and in favour of the assessee. IN the circumstances of this case, we make no order as to costs.