Seksaria Biswan Suga... v. Inspecting Assistant...

1. By this Petition under Article 226 of the Constitution of India, the Petitioners have challenged the validity of notice issued by the Income-Tax Officer under section 148/147(b) of the Income-Tax Act, 1961. The proceedings relate to assessment year 1982-1983.

2. The assessment was originally completed allowing the petitioners' claim for deduction under section 35(1)(ii) of the Income-Tax Act, 1961, in respect of donation of Rs. 12,00,000/- paid to K.M Scientific Research Centre, an Institution then approved under that section by the prescribed authority.

3. The said approval, it appears, was withdrawn by the prescribed authority by a Notification dated 2nd January 1986 with retrospective effect. It further appears that on the basis of this information the Income-Tax Officer is stated to have formed the belief that the petitioners' income chargeable to tax had escaped assessment and issued the impugned notice under section 148/147(b) requiring the petitioners to file its return of income for the assessment year 1982-1983.

4. The pertinent question is whether this information which is, of course, subsequent to the completion of assessment constitutes a sound basis for the formation of belief that the assessee's income chargeable to tax had escaped assessment. For this purpose, it is desirable to refer to the Supreme Court decision in the case of I.T.O v. Lakhmani Mewal Das, 103 ITR 437. In the context of the provisions of section 147(a) the question in that case had arisen whether the material available to the Income-Tax Officer provided a good ground for formation of belief that the income chargeable to tax had escaped assessment. It was held that while sufficiency of the material which induced the Income-Tax Officer was not justiciable, the question whether the material at all existed could be challenged by an assessee. Observing that the expression “reason to believe” does not mean a purely subjective satisfaction on the part of the Income-Tax Officer, the reason must be held in good faith and it cannot be merely a pretence, it was further held that it was open to the Court to examine whether the reasons for the formation of belief had a rational connection with or a relative bearing on the formation of belief and were not extraneous or irrelevant for this purpose. To this limited extent, the action of the Income-Tax Officer in starting proceedings in respect of income escaping assessment was held to be open to challenge in a Court of Law.

5. The question whether the latter Notification dated 2nd January 1986 can be a sound basis for the formation of belief is to be examined naturally in the light of the above decision. No doubt, so far as that decision is concerned, the question was whether the material had direct nexus or live-link with the formation of belief. And in this case the question posed is whether the material (in this case the subsequent Notification) was apparently invalid and unreliable. However, to my mind, there is no material difference in the situation particularly as the Petition has already been admitted. If the petitioner can show that the information is not worth placing reliance on the face of it, it may be open to him to contend that formation of belief that income had escaped assessment was without justification.

6. In this context, it is necessary to bear in mind that section 35(1)(ii), as it then stood, provided for 100 percent deduction of the amount donated by an assessee to institutions approved for the time being by the prescribed authority by a Notification in the Official Gazette for the purpose. Rule 6 of the Income-Tax Rules provided that in relation to research in the fields of agriculture, animal husbandry and fisheries, the Indian Council of Agricultural Research was the prescribed authority. The prescribed authority had admittedly approved the institution to which the donation was made by the assessee during the previous year. That is why the donation was allowed as deduction. The Supreme Court held in the case of Income-Tax Officer, Alleppey v. M.C Ponnoose, 75 ITR 174 (SC) at page 177, that the power to issue rules or Notifications by way of subordinate legislation was prospective unless the rule making authority was specially given the power to frame rules and/or issue Notifications retrospectively. This view was reiterated by the Supreme Court in another decision of the case of Bakul Cashew Co. v. Sales Tax Officer, Quilon, 159 ITR 565. In the present case, as stated earlier, the prescribed authority is required to approve the concerned institution under section 35(1)(ii) of the Act. It can, of course, refuse to do so. But the question herein is whether it can withdraw the approval already granted and that too with retrospective effect. Section 35 as well as Rule 6 are silent in this regard. For the present it may be assumed that an authority empowered to approve is empowered to disapprove or refuse to approve by necessary implication. But the further question is about its doing so with retrospective effect. Section 295(4) of the Act, no doubt, empowers the Board (C.B.D.T) to make rules with retrospective effect. Even there the rules can be amended retrospectively not to the prejudice of the assessees. That apart, that is in connection with the power to make rules as distinct from the power to issue Notifications and that too not by the Board but by the prescribed authority other than the Board. Under the circumstances, it has to be held that the information in the form of retrospective cancellation of the approval of the concerned institution as an Agricultural Institute within the meaning of section 35(1)(ii) by Notification dated 2nd January 1986 was apparently invalid and unreliable. The formation of belief that income chargeable to tax had escaped assessment on the basis thereof was, thus, without any material.

7. It may not be out of place to mention here that the Department had not filed an affidavit in reply and, therefore, whatever averments were made by the petitioner in this Petition had to be accepted as correct.

8. Dr. Balasubramanian, the learned counsel for the Income-Tax Department, contended that in order to be entitled to deduction under section 35(1)(ii) an assessee had to satisfy certain conditions. The conditions are in clause (ii) of sub-section (1) of section 35 as well as in the proviso. In practice, however, where the proviso is satisfied, i.e, approval is granted, it is assumed that the condition in the main section is also satisfied. When the Income-Tax Officer came to know that the approval to the Institution was cancelled with retrospective effect so that it did not exist during the previous year, he has to independently consider whether the condition in the clause itself is satisfied or not. The Income-Tax Officer can certainly form the belief that income had escaped assessment when even one condition is satisfied. Questions such as whether the Government can retrospectively cancel the approval, whether promissory estoppel applies etc. are not relevant at that stage. They are also not relevant in the case of the present petitioners but only in the case of the institution whose approval is cancelled.

9. In my judgment, the submissions are without any merit inasmuch as the Petition herein is being allowed on a preliminary question, viz., whether the Notification dated 2nd January 1986 provided sound basis for the formation of belief that the assessee's income chargeable to tax had escaped assessment. Answer to the question being in the negative, Rule is made absolute in terms of prayer clause (a). No order as to costs.

Petition allowed.