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Rajabally Hirji Meghani v. S.H Sahane, I.T.O Central Circle Xxii, Bombay

Bombay High Court
Jun 30, 1987
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Structured Summary of the Opinion (Bharucha, J.)

Factual and Procedural Background

The appellant was assessed to income tax for the assessment year 1971–1972 by an assessment order dated March 27, 1974. A notice under section 148 of the Income-tax Act, 1961, proposing re-opening of that assessment was issued (the opinion contains two different dates for the notice as stated in the source: September 30, 1974 in one paragraph and September 30, 1975 in another). On November 29, 1975 the appellant wrote to the Income-tax Officer (I.T.O.) protesting the proposed re-opening, requesting the grounds for it, and on that day filed a return under protest in compliance with the notice.

No substantive response was given until January 17, 1980, when the I.T.O. wrote stating that the re-opening was under section 147(a) because loans shown by the appellant (notably a Rs. 50,000 loan allegedly from J.K. Thakkar) were not genuine and that the amounts represented the appellant's own unexplained money; notices under sections 143(2) and 142(1) and a summons under section 141 were enclosed. The appellant repeated his request for the recorded grounds on February 15, 1980; on February 23, 1980 the I.T.O. furnished the grounds, citing letters dated February 7, 1975 and April 20, 1974 from fellow I.T.Os. These letters suggested that J.K. Thakkar had facilitated bogus "havala" loans and had merely lent his name.

The appellant filed a writ petition on March 4, 1980, challenging the notice under section 148, the notices under sections 143(2) and 142(1), and the summons under section 141. The writ petition was heard and disposed of by a learned single Judge on December 22, 1983. The single Judge quashed the notices under sections 143(2) and 142(1) and the summons under section 141, but dismissed the challenge to the section 148 notice on the ground of delay. The present appeal attacks the part of that order upholding the section 148 notice.

Legal Issues Presented

  1. Whether the notice issued under section 148 could be struck down because the re-opening was said to have been made under clause (a) of section 147 when, on the material, clause (a) was not in fact applicable.
  2. Whether the information received by the I.T.O. (the letters of February 7, 1975 and April 20, 1974) constituted definite information giving the I.T.O. a "reason to believe" that income chargeable to tax had escaped assessment.
  3. Whether a court exercising writ jurisdiction under Article 226 should decline to quash a notice for technical or procedural delay where quashing would defeat the interests of justice and prevent an inquiry that the information justifies.
  4. Whether, where proceedings have been initiated under clause (a) of section 147 but the facts could sustain re-opening under clause (b), the validity of a section 148 notice may be upheld by reference to clause (b) of section 147.

Arguments of the Parties

Appellant's Arguments

  • The appellant challenged the validity of the notice under section 148 — in particular contending that clause (a) of section 147 did not apply and that he had been prejudiced by delay in furnishing the grounds.
  • Learned counsel for the appellant (Mr. Rahimtoola) drew the court's attention to the Allahabad High Court judgment in Raghubar Dayal Ram Kishan v. Commissioner of Income-tax, U.P., which held (in that context) that the Tribunal could not convert an assessment made under one clause to another clause of the same section; this was relied upon as supporting the position that proceedings initiated under one clause should not be sustained under another.

Revenue's Arguments

  • The Revenue relied on the letters and information possessed by the I.T.O. (the February 7, 1975 and April 20, 1974 letters from fellow I.T.Os) as supplying definite information sufficient to give the I.T.O. a reason to believe that income had escaped assessment.
  • Learned counsel for the Revenue (Mr. Jetly) referred to the Division Bench decision in Ganga Saran & Sons (HUF) v. Income-tax Officer, Company Circle-IV, New Delhi, which held that where facts can sustain re-opening under clause (b) of section 147, the validity of a notice under section 148 may be supported on that basis even if the initiating notice referred to clause (a).

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Raghubar Dayal Ram Kishan v. Commissioner of Income-tax, U.P. (Allahabad High Court) Held (in that context) that the Appellate Tribunal has no jurisdiction to convert or alter an assessment made under one clause of the relevant section to an assessment under another clause. The court distinguished this case: it arose in the Tribunal's context and on a reference. The present matter is a writ petition under Article 226; therefore the principle in that case did not mandate quashing the notice here in the interests of justice.
Ganga Saran & Sons (HUF) v. Income-tax Officer, Company Circle-IV, New Delhi (Delhi High Court, Division Bench) Holds that where the facts sustain re-opening under clause (b) of section 147, the validity of a notice under section 148 may be supported by reference to clause (b), even if proceedings were initiated under clause (a). The court expressed respectful agreement with this view and applied it to hold that a notice should not automatically be struck down where the facts sustain re-opening under clause (b) even though clause (a) was invoked by the I.T.O.
Avtar Singh Sandhu v. WTO (referred) Referred to for the proposition that an I.T.O. may entertain alternative beliefs under clause (a) or clause (b) of section 147. Cited (via the Delhi High Court's reasoning) as supporting the principle that alternate beliefs may be entertained; the court noted these authorities in agreeing with the view that clause (b) may validate a notice where facts so warrant.
Smt. Nirmala Birla v. WTO (Calcutta High Court, referred) Referred to as part of a line of cases supporting the view that alternative beliefs under clause (a) or (b) of section 147 can be entertained by the I.T.O. Noted by the court as part of the jurisprudence underpinning the Delhi High Court's approach; the court expressed respectful concurrence with that approach in the context of writ petitions under Article 226.

Court's Reasoning and Analysis

The court proceeded in a sequence of steps:

  1. Establishment of the statutory framework: the court reproduced clauses (a) and (b) of section 147 to frame the legal tests for re-opening an assessment (omission/failure to disclose fully and truly all material facts under clause (a), and possession of information giving reason to believe under clause (b)).
  2. Assessment of which clause was actually invoked: the court found that the re-opening could not have been under clause (a) of section 147 (and this was not seriously disputed).
  3. Examination of the information supplied to the I.T.O.: the court reviewed the letters of February 7, 1975 and April 20, 1974 from fellow I.T.Os. Those communications suggested that J.K. Thakkar had listed parties for whom he arranged "havalas" and that entries in the appellant's books showed an alleged Rs. 50,000 cash advance from J.K. Thakkar which, on enquiry, appeared to be a name-lender arrangement for a bogus loan. The court characterized this as definite information, not "wholly vague, indefinite, far-fetched and remote."
  4. Conclusion on the I.T.O.'s state of mind: the court held that the information could reasonably have led the I.T.O. to the belief that income chargeable to tax had escaped assessment in the appellant's hands.
  5. Consideration of competing authorities and forum differences: the court addressed the appellant's reliance on the Allahabad judgment (Raghubar Dayal) but distinguished that decision as one concerning the powers of the Tribunal on a reference. The court emphasized that where a writ court (Article 226) considers that quashing an order on technical grounds would defeat the interests of justice, it may decline to issue a writ.
  6. Adoption of the principle from Delhi High Court authority: the court considered the Division Bench decision in Ganga Saran & Sons and related authorities which allow the Revenue to rely on clause (b) where the facts support it even if the proceedings were initiated under clause (a). The court expressed respectful agreement with that line of authority in the context of writ jurisdiction.
  7. Discretion in the interests of justice: synthesizing the above, the court concluded that the information justified re-opening and further inquiry, and that striking down the section 148 notice solely on the ground that clause (a) was invoked (or for delay in the disclosure of grounds) would not serve the interests of justice. Accordingly, the court declined to quash the notice under section 148.

Holding and Implications

Holding: The appeal is dismissed. The court declined to quash the notice issued under section 148 in respect of the assessment year in question and dismissed the appeal (the order records "Appeal dismissed" and states there is no order as to costs).

Implications (as expressed in the opinion):

  • The court recognized that where the I.T.O. is furnished with definite information giving a reason to believe that income chargeable to tax has escaped assessment, re-opening and further inquiry are justified even if the initial invocation referred to a different clause of section 147.
  • In writ jurisdiction under Article 226, a court may refuse to quash a notice on purely technical grounds (for example, an initial invocation of clause (a) that is not strictly applicable) when to do so would defeat the interests of justice and prevent a legitimate inquiry based on the information available to the I.T.O.
  • The court expressed respectful agreement with the view (as articulated by the Delhi High Court in Ganga Saran & Sons and supporting authorities) that the Revenue may seek to support the validity of a section 148 notice by reference to the appropriate clause of section 147 (notably clause (b)) when the facts sustain such a belief.
  • The order disposed of the appeal by dismissal and recorded no order as to costs. The opinion did not purport to lay down a broader binding precedent beyond the application of the reasoning to the facts of this case; it expressly engaged with existing High Court authorities and distinguished the Allahabad decision on the basis of forum and circumstance.
Show all summary ...

Bharucha, J.:— The appellant was assessed to income tax for the Assessment Year 1971-1972 by Assessment Order dated March 27, 1974. On September 30, 1974 the appellant was given notice under s. 148 of the Income Tax Act, 1961, of the proposed re-opening of his assessment for the said Assessment Year. On November 29, 1975 the appellant wrote to his I.T.O protesting against the proposed re-opening. He asked I.T.O to furnish him with the grounds for the same. On that day he also filed a return as required by the notice under s. 148, but under protest.

2. Nothing transpired until January 17, 1980 when the I.T.O wrote to the appellant on the subject of the re-opening of his assessment under s. 147(a) for the said Assessment Year. He stated that after the assessment for that year had been made, the Income-tax Department came to know that loans shown by the appellant were not genuine; that one J.K Thakkar had merely lent his name to show that a loan had been received from him though he had not given it. The Department had, therefore, reason to believe that the amount of the loans represented the appellant's own unexplained money and that his income had escaped assessment because he had failed to furnish full, true and correct particulars of his income at the time of the original assessment. Accordingly, the assessment had been re-opened under s. 147(a) by issue of a notice under s. 148. Along with the letter, the I.T.O enclosed notices under ss. 143(2) and 142(1) and a summons for personal attendance under s. 141. On February 15, 1980 the appellant wrote to the I.T.O a long letter in which he again asked to be furnished with the grounds recorded by the I.T.O before the notice under s. 148 was issued. On February 23, 1980 the I.T.O informed the appellant of the grounds. They were recorded thus:

“The assessee had for this year shown a loan of Rs. 50,000/- taken from one Jethalal K. Thakkar which has been accepted in the original assessment made. As per intimation letter dated April 20, 1974, on record from the 2nd I.T.O, B.S.D (West) this person has given havalas. There is also an intimation from the 3rd I.T.O, X-Ward, Bombay that one J.K Nathwani had arranged bogus havala loans in the name of Jethalal Karsondas & Mohanlal & Sons, during the year 1971 & 1972 for the assessee.

I have, therefore, reason to believe that on account of the assessee's omission to disclose fully and truly all the material facts necessary for assessment for this year, income chargeable to tax of Rs. 50,000/- has accepted assessment. Issue notice u/s. 148.

I.T.O”

3. Along with the letter dated February 23, 1980 the I.T.O enclosed copies of letters dated February 7, 1975 and April 20, 1974 which were referred to in the grounds. On March 4, 1980 the appellant filed a writ petition impugning the notice under s. 148, the notices under ss. 143(2) and 142(1) and the summons under s. 141. The writ petition was heard and disposed of by the learned single Judge on December 22, 1983. The learned Judge dismissed the writ petition in so far it concerned the notice under s. 148 on the ground of delay. He quashed the notices under ss. 143(2) and 142(1) and the summons under s. 141. This appeal, filed by the original petitioner, assails the judgment and order of the learned Judge in so far as they rejected his contentions in regard to the notice under s. 148.

4. The notice under s. 148 was issued on September 30, 1975. Soon thereafter, on November 29, 1975, the appellant wrote to the I.T.O calling for the grounds for the proposed re-opening. There was no reply to this communication. Nothing was heard of the proposed re-opening until the I.T.O wrote to the appellant on January 17, 1980, even then he did not set out the grounds which he had recorded before he issued the notice under s. 148. It was, however, for the first time that the I.T.O then stated that the re-opening was proposed under s. 147(a). It was only when, once again, the assessee required the I.T.O to furnish him with the grounds that they were given to him on February 23, 1980. The writ petition was thereafter filed on March 4, 1980. In these circumstances, it does not appear to us equitable that the appellant's writ petition should be dismissed in regard to the notice under s. 148 only upon the ground of delay.

5. To appreciate what follows clauses (a) and (b) of Section 147 must be set out.

(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 under section 139 for any assessment year to the Income-tax Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, or

(b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year,

he may, subject to the provisions of sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereafter in sections 148 to 153 referred to as the relevant assessment year).”

6. It is apparent from the grounds, which are quoted above, that the re-opening could not have been under cl. (a) of s. 147, and this is not seriously disputed. It is equally apparent from the grounds that the re-opening was proposed because of the information received by the I.T.O by the letters dated February 7, 1975 and April 20, 1974 from fellow I.T.Os The first of the letters was written by the I.T.O of the aforementioned J.K Thakkar (also called J.K Nathwani). The letter stated that J.K Thakkar had filed an affidavit in which he had listed the names of parties for whom he had arranged ‘havalas’ on commission basis. The appellant was shown in the list as having received in the Assessment Year 1971-1972 a ‘havala of Rs. 50,000/-’. The second letter was also from the I.T.O of J.K Thakkar. It referred to an entry in the account of J.K Thakkar maintained in the appellant's books which showed that the former had advanced Rs. 50,000/- in cash to the latter on March 31, 1971. Information gathered, the letter said, showed that J.K Thakkar acted only as name-lender passing bogus havalas for the alleged loans.

7. The question now is whether, in these circumstances, we should strike down the notice under s. 148 because s. 147(a), which the I.T.O invoked, is not applicable. There is in our mind no doubt that the letters dated February 7, 1975 and April 20, 1974 furnished to the I.T.O definite information. This was no case of “wholly vague, indefinite, far-fetched and remote” information. The information could not but have led to the reasonable belief that income chargeable to tax in the appellant's hands had escaped assessment.

8. Our attention was drawn by Mr. Rahimtoola, learned counsel for the appellant, to the judgment of Allahabad High Court in Raghubar Dayal Ram Kishan v. Commissioner of Income-tax, U.P The judgment was delivered on a reference. The question that was answered read thus:—

“Where an Income-tax Officer assesses the income under section 34(1)(a) and the Appellate Tribunal, on appeal, comes to the conclusion that it should have been assessed under section 34(1)(b), the Tribunal has no jurisdiction to convert or alter the assessment made by the Income-tax Officer under section 34(1)(a) to an assessment under section 34(1)(b) and maintain it as such.”

9. Desai, C.J and Manchanda, J. having differed, the question was referred to Pathak, J. Pathak, J. agreed with Desai, C.J in answering the question in negative. He referred to the powers conferred upon the Income Tax Appellate Tribunal and held that the Tribunal did not have the jurisdiction to convert an assessment made under one clause of s. 147 to an assessment under the other clause.

10. The Allahabad case, as we have noticed, was concerned with the powers of the Tribunal and was delivered on a reference. The matter before us is an appeal filed from a judgment and order on a writ petition under art. 226 of the Constitution. If a court exercising powers under art. 226 is of the view that the interests of justice will be defeated if some order or notice is quashed for technical reasons, it may decline to issue the necessary writ. It is our view that the information conveyed as aforesaid to the I.T.O of the appellant required a re-opening of the appellant's assessment and further inquiry. The interests of justice will not be served if such inquiry does not take place by reason of the striking down of the notice under s. 148. We, therefore, decline to issue that writ.

11. Mr. Jetly, learned counsel for the Revenue now draws our attention to the judgment of a Division Bench of the Delhi High Court in Ganga Saran & Sons (HUF) v. Income-tax Officer, Company Circle-IV, New Delhi A notice under s. 148 was issued to an assessee after his assessment was sought to be re-opened by invoking the provisions of cl. (a) of s. 147. The assessee challenged the notice by filing a writ petition. The court came to the conclusion that the provisions of cl. (a) of s. 147 were not attracted. It then considered the question as to whether a notice issued under cl. (a) of s. 147 could be validated by reference to cl. (b) thereof. The facts before the court were such that the provisions of cl. (b) of s. 147 were applicable. The principle objection raised by the assessee was, however, that the I.T.O had initiated the action not under cl. (b) but under cl. (a) of s. 147 and that, therefore, the Revenue could not be permitted to seek the aid of cl. (b) of s. 147 for sustaining proceedings initiated under cl. (a) thereof. The court held that it was open to the Revenue to do so notwithstanding the fact that cl. (b) of s. 147 had not been specifically pleaded and had for the first time been referred to in the course of argument. The court referred to its own earlier judgment in Avtar Singh Sandhu v. WTO and to judgments of the Calcutta High Court (the latest in Smt. Nirmala Birla v. WTO) and concurred with the view therein expressed that it was possible for the I.T.O to entertain on the same set of facts alternate beliefs under cl. (a) or cl. (b) of s. 147 and there was nothing to prevent the I.T.O from seeking to support the Validity of a notice by reference to the appropriate provision in the statute. The court said that the Revenue had, no doubt, purported to re-open the assessment under cl. (a) of s. 147 but, if the facts could sustain the re-opening of the assessment under cl. (b) thereof, it did not see why the validity of the notice under s. 148 could not be supported. We are in respectful agreement with the view taken by the Delhi High Court in the context of writ petitions to strike down notices issued under s. 148 in exercise of powers under cl. (a) of s. 147. Where the facts may sustain the proposed re-opening under cl. (b) of s. 147 but not under cl. (a) thereof, the court may not strike down the notice under s. 148.

12. In the result, we dismiss the appeal but with no order as to costs.

13. Appeal dismissed.