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Daulatram Rawatmal v. Income-Tax Officer, Central Circle Vi, Calcutta, And Another
Structured Summary of the Judgment delivered by Sinha, J.
Factual and Procedural Background
The petition arises from notices issued under section 34(1A) of the Indian Income-Tax Act, 1922, to the partners of the firm "Daulatram Rawatmal", carrying on business at No. 178, Harrison Road, Calcutta. The firm had been assessed and had paid tax for the assessment years 1940-41 to 1945-46. The firm’s case was transferred to the Income-Tax Officer, Central Circle VI, Calcutta (respondent No.1) on or about 30 November 1954. On or about 21 March 1956 respondent No.1 issued notices under section 34(1A) for the assessment years 1940-41 to 1945-46 on the ground that the Income-Tax Officer had reasons to believe that income chargeable to tax for those years had partly or wholly escaped assessment and that the escaped income for the relevant previous years within 1 Sept 1939 to 31 Mar 1946 amounted, or was likely to amount, to Rs. 1,00,000 or more.
On 2 July 1956 the petitioner applied under article 226 of the Constitution seeking to quash proceedings under section 34(1A) on the ground that section 5(7A) and section 34(1A) were ultra vires Articles 14 and 19 of the Constitution. This court issued a rule and an interim stay, but on 9 January 1958 the application was dismissed and the rule discharged after the Supreme Court had held the sections intra vires and the Judge reached the same conclusion.
On 25 February 1958 the petitioner requested production or inspection of: (1) the order of satisfaction of the Central Board of Revenue as referred to in the notices; (2) the materials on which the Income-Tax Officer had reasons to believe that income escaped assessment; and (3) the basis for the Income-Tax Officer's opinion that the escaped income was likely to amount to Rs. 1,00,000 or more. The Income-Tax Officer refused to give these particulars to the petitioner but indicated willingness to make records available to the court.
A rule was issued on 8 July 1958 calling on the respondent to show cause why the notices should not be quashed or recalled. The narrow dispute before the court became whether, when the Income-Tax Officer is required to show the court that he had "reason to believe" the prescribed facts, the materials and reasons must be disclosed to the court only or must also be disclosed to the assessee at that stage.
Legal Issues Presented
- Whether, under section 34(1A) of the Income-Tax Act, the phrase "has reason to believe" makes the Income-Tax Officer's action justiciable and therefore requires the Income-Tax Officer to disclose to the court the reasons and materials on which that belief was founded when challenged by the assessee.
- If the court inspects the reasons and materials, whether those reasons and materials must also be disclosed at that stage to the assessee (i.e., whether the assessee is entitled to inspect the reasons before or without producing the books and documents called for by the Income-Tax Officer).
Arguments of the Parties
Petitioner's Arguments
- Section 34(1A) uses the expression "has reason to believe", which is a justiciable standard (distinct from unreviewable subjective satisfaction) and therefore the Income-Tax Officer must satisfy the court, with supporting materials, that reasonable grounds existed for his belief.
- Because the provision is justiciable, the petitioner argued that the Income-Tax Officer should be compelled to disclose in court the reasons and the materials (including the Central Board of Revenue's order of satisfaction) so that the court may determine whether a reasonable person could have arrived at the belief.
- The petitioner sought direct inspection/copies of the reasons and records (i.e., disclosure to the petitioner in court), arguing there should be no "half-way house" or ex parte procedure that denies the assessee inspection at this stage.
Respondents' Arguments
- The Income-Tax Officer contended that disclosure of the reasons and materials to the assessee before the assessee complied with the notice (i.e., before production of books and documents) would be highly detrimental to the revenue and would frustrate the purpose of initiating reassessment proceedings.
- The Income-Tax Officer stated that he had recorded reasons in writing and the Central Board of Revenue had been satisfied on those reasons, and provided copies for the court's inspection, but declined to hand them to the assessee at that stage.
- It was asserted that the adequacy of the reasons for issuing the notice was not a matter for determination by the court at that stage (though the court should nevertheless be satisfied that the belief was based on reasonable grounds).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Emperor v. Vimalabai Deshpande, A.I.R. 1946 P.C. 123 | Distinction between requirements of "satisfied" (executive/Government) and "reasonable suspicion" (police); burden on arresting officer to show suspicion was reasonable. | Used to show that different formulations ("satisfied" v. "reasonable") have different legal effects and that when reasonable grounds are required the burden to justify them may rest on the executive actor. |
| Shearer v. Shields (House of Lords, Glasgow Police Act case) | When statute authorizes arrest on "reasonable grounds for suspicion", the burden rests on the constable to show that his suspicion was reasonable and must be discharged on proper evidence. | Relied upon to support the proposition that upon challenge an authority relied on must justify its suspicion/reason to believe by evidence; analogous to review of "reason to believe". |
| Liversidge v. Sir John Anderson [1942] A.C. 206 | Under wartime emergency Regulation using "reasonable cause to believe", the majority held courts could not inquire into the Secretary of State's reasonable grounds — matter of executive discretion (with Lord Atkin dissenting). | Referred to and distinguished as a wartime emergency decision; court noted its limited support because of emergency context and did not treat it as controlling here. |
| Commissioner of Income-Tax v. Mahaliram | For exercise of section 34, it is enough that the Income-Tax Officer had some information and in good faith considered he had good grounds for believing profits escaped assessment; no need for judicial inquiry or convening the assessee at the initial stage. | Cited to show that at the preliminary stage an Income-Tax Officer may act on information in good faith and a full inquiry is not required before issuing notices under section 34. |
| Panna Lal Binjraj v. Union of India, [1957] 31 I.T.R. 565 | Where reasons for an administrative transfer/decision are not known, the assessee may point to prima facie circumstances of arbitrariness, shifting burden to the authority to explain; the court will scrutinize bona fides. | Noted by the court but held to have no direct bearing on the narrow question before it; illustrates that authorities may be required to explain when prima facie arbitrary circumstances are shown. |
| Bhimraj Panna Lal v. Commissioner of Income-Tax (Patna High Court) | Interpretation that "has reason to believe" requires belief of an honest and reasonable person based on reasonable grounds; not mere suspicion, gossip or rumour. | Referred to as laying down conditions for the Income-Tax Officer's exercise of discretion; relevant to concept that "reason to believe" is not mere suspicion but not decisive on disclosure question. |
| Keshrichand v. Income-Tax Officer (Madhya Pradesh High Court, unreported) | Held that at the preliminary stage the assessee had no justiciable cause and that withholding reasons from the court was necessary to avoid ineffectuating the charging and machinery provisions. | Noted as directly addressing whether reasons may be withheld even from the court; the judge observed that authorities cited did not completely resolve the present issue. |
| Robinson v. State of South Australia (Privy Council) | Affirmed that a court has power to inspect State documents claimed to be privileged and may require indication of the injury to the State if produced; court may inspect to determine validity of privilege claim. | Relied upon to support the proposition that a judge may inspect privileged documents in camera to decide whether disclosure to the opposing party would be prejudicial and therefore properly withheld. |
| Marconi's Wireless Telegraph Company v. Commonwealth (cited) | Court power to inspect privileged documents discussed by Griffiths, C.J.; cited in Robinson to support inspection power. | Used as supporting authority for the court's power to inspect documents claimed to be privileged. |
| Beatson v. Skene (historical reference) | Historical context where examination of a document would have been in public and the Minister's word accepted without inspection. | Quoted in Robinson to show evolution of judicial practice; used to justify in-camera inspection rather than public disclosure. |
| Griffen's (Griffin's) case, 1925 36 C.L.R. 378 (dissent of Starke, J.) | Dissent stating "No one has suggested that the interests of the public are such that a Judge ought not to see the documents." — supporting judicial inspection of privileged documents. | Invoked to illustrate judicial support for the proposition that judges may view privileged documents even if others cannot. |
Court's Reasoning and Analysis
The court framed the dispute narrowly: the Income-Tax Officer had issued notices under section 34(1A) after recording reasons and obtaining the Central Board of Revenue's satisfaction; the officer refused to disclose those reasons and materials to the petitioner before the petitioner complied with the notice and produced books and documents. The petitioner contended that because section 34(1A) uses "has reason to believe" the belief is justiciable and the petitioner was entitled to have the reasons disclosed in court to the petitioner.
The court proceeded through the following analytical steps (relying only on materials and authorities stated in the opinion):
- Interpretation of "has reason to believe": The court accepted that the expression makes the matter justiciable (i.e., not an unreviewable subjective opinion). Authorities established that where "reason to believe" is the statutory standard, the Income-Tax Officer must be able to satisfy a court that his belief was based on facts which would induce a reasonable person to the same conclusion.
- What disclosure is required to the court: Because the matter is justiciable, the particulars of information and the reasons relied upon must be disclosed to the court so that the court can decide whether the officer's belief was founded on reasonable grounds. The respondents had already produced the reasons and the Central Board's sanction to the court for inspection.
- Whether disclosure must extend to the assessee at this stage: The court examined competing considerations and authorities. It noted the long-established rule that at the preliminary stage of reopening assessments under section 34 an assessee is generally not entitled to see the reasons, because disclosure at that stage would usually frustrate the purpose of re-assessment (books might be removed, altered or destroyed, or evidence lost). The court observed that allowing an indirect route (i.e., enabling an assessee to obtain the reasons by simply approaching the court) would impermissibly undercut the statutory restriction on direct disclosure. This would enable the assessee to achieve by litigation what the statute forbids at the preliminary stage.
- The court considered procedural safeguards and analogous rules: it referred to Order XI, rule 19(2) of the Civil Procedure Code and to Robinson v. State of South Australia (Privy Council) to support the proposition that a court may inspect documents claimed to be privileged or sensitive in camera and determine whether disclosure to the opposing party is permissible without destroying the privilege or causing the mischief the privilege protects.
- Practical solution and in-camera inspection: The court concluded that the proper course is for the Income-Tax authorities to disclose the reasons to the court (which the authorities had done) and for the judge to inspect them in camera. The judge should then decide whether disclosure to the assessee at that stage would be prejudicial to the collection of revenue or destructive of the proceedings. If the judge deems prejudice likely, the reasons should be withheld from the assessee at that stage, subject to possible later disclosure (for example after production of the books and documents called for).
- Application of the solution to this case: The court inspected the reasons and the Board's sanction. On inspection the judge formed the view that disclosure at this stage would be "extremely prejudicial" to the respondents (i.e., the revenue) and would frustrate the reassessment. The court therefore accepted the Income-Tax Officer's apprehension that disclosure before production of books and documents would be damaging and concluded that limited disclosure (main headings without prejudicial particulars) was sufficient at this stage. The officer's affidavit (D.G. Prodhan, 23 March 1959) providing extract disclosure of main headings was accepted as adequate.
- Conclusion on sufficiency of grounds: Having inspected the records, the court found that the Income-Tax Officer had reasonable grounds to believe that income chargeable to tax had escaped assessment during the relevant years and that the notice issued under section 34(1A) was valid and proper. Consequently the petition seeking disclosure and quashing of the notices was dismissed.
Holding and Implications
Holding: The application of the petitioner is DISMISSED. The rule is discharged; interim orders (if any) are vacated; there is no order as to costs.
Implications (as derived from the opinion):
- Direct effect on the parties: The notices under section 34(1A) issued by the Income-Tax Officer remain in force. The petitioner is not entitled to disclosure of the Income-Tax Officer's recorded reasons or the Central Board of Revenue's sanction at this preliminary stage (i.e., before compliance with the notice and production of the books and documents). The court inspected the reasons in camera and accepted the Income-Tax Officer's position that disclosure to the petitioner at this stage would prejudice the revenue.
- Procedural principle applied: Where a statutory standard is "has reason to believe" the matter is justiciable and the Income-Tax Officer must be able to satisfy the court that his belief is based on facts which could induce a reasonable person to the same conclusion; however, disclosure of the reasons and materials to the court can properly be made in camera and the judge may withhold disclosure to the assessee if disclosure would frustrate the statutory object (e.g., jeopardise evidence or collection of revenue) — with possible later disclosure at a more appropriate stage.
- Broader precedent: The court relied on earlier authorities to develop and apply a limited, pragmatic rule (court inspection in camera; no disclosure to assessee where prejudice shown). The opinion itself applies that approach in the present dispute; it does not purport to displace the authorities cited but reconciles them: "reason to believe" is justiciable, the court may inspect reasons, but disclosure to the assessee may be withheld where disclosure would defeat the legislative purpose.
Application dismissed.
No information beyond what appears in the provided opinion has been added. Quotations and references in this summary are confined to the material explicitly cited in the judgment.
The Judgment of the Court was delivered by
Sinha, J.:— The facts in this case are shortly as follows:
For many years the petitioner's firm “Daulatram Rawatmal” (hereinafter referred to as the “firm”) has been carrying on business at No. 178, Harrison Road, Calcutta. For the assessment years 1940-41 to 1945-46 the firm has been assessed in the normal course and has paid the amount found due. On or about 30th November, 1954, the case of the petitioner firm was transferred under section 5(7A) of the Indian Income-Tax Act, 1922, to the Income-Tax Officer, Central Circle VI, Calcutta, being respondent No. 1 in this application. On or about 21st March, 1956, the respondent No. 1 issued notice under section 34(1A) of the Indian Income-Tax Act for the assessment years 1940-41 to 1945-46 upon the partners of the said firm, on the ground that the said Income-Tax Officer had reasons to believe that the income, profits or gains assessable to income-tax, for several years mentioned in the said notices have partly or wholly escaped assessment and the income, profits or gains of the previous years which fall wholly or partly within the period beginning from 1st September, 1939, and ending on 31st March, 1946, and which have escaped assessment, amount to or likely to amount to Rs. 1,00,000 or more. Copies of the said notices are annexed to the petition and marked with the letter “A”. By the aforesaid notices, the partners of the said firm were requested to deliver to the said Income-Tax Officer a return of the total income and the total world income assessable for the respective years mentioned in the notices. On or about 2nd July, 1956, the petitioner firm made an application to this court under article 226 of the Constitution, inter alia, for quashing the proceedings initiated by the said notices under section 34(1A), on the ground that section 5(7A) and section 34(1A) of the Indian Income-Tax Act were ultra vires the Constitution, particularly articles 14 and 19 thereof. Thereupon this court issued a rule and granted an interim stay of proceedings. The application came up for hearing before me and on the 9th January, 1958, the application was dismissed and the rule was discharged. In fact, what had happened was that in the meanwhile the Supreme Court held the said sections intra vires. I myself have decided similarly. Thereafter, on the 25th February, 1958, the petitioner wrote to the Income-Tax Officer, Central Circle VI, asking for production or inspection of the following documents:
“(1) The order of satisfaction of the Central Board of Revenue, as referred to in the said notices under section 34(1A).
(2) The materials on which the Income-Tax Officer had reasons to believe that income during the said period has escaped assessment.
(3) The basis on which the Income-Tax Officer came to be of the opinion that the amount of the escaped income was likely to amount Rs. 1,00,000 or more.”
2. On the 28th February, 1958, the respondent No. 1 informed the petitioner that the reasons recorded for starting the proceedings under section 34(iA) could not be given to the petitioner, and the Income-Tax Officer could not also grant inspection of the records as requested. Thereafter, there was correspondence between the petitioner and the respondent No. 1, but the said respondent persisted in expressing his inability to grant copies of the reasons or inspection of the records as requested. This rule was issued on the 8th July, 1958, upon the respondent to show cause why an order should not be made quashing and/or cancelling the said notices and/or directing the respondent No. 1 to withdraw or recall the said notices and to forbear from giving any further effect thereto. The point that has been taken in this case by the learned standing counsel on behalf of the petitioner is a very short one. In order to appreciate it, it would be necessary to set out the relevant part of section 34(iA) of the Indian Income-Tax Act (hereinafter referred to as the “Act”).
“(1A) if, in the case of any assessee, the Income-Tax Officer has reason to believe—
(i) that income, profits or gains chargeable to income-tax have escaped assessment for any year in respect of which the relevant previous year falls wholly or partly within the period beginning on the 1st day of September, 1939, and ending on the 31st day of March, 1946; and
(ii) that the income, profits or gains which have so escaped assessment for any such year or years amount, or are likely to amount, to one lakh of rupees or more;
he may,…serve on the assessee,…a notice containing all or any of the requirements which may be included in a notice under subsection (2) of section 22, and may proceed to assess or reassess the income, profits or gains of the assessee for all or any of the years referred to in clause (i) …:
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.”
3. The learned standing counsel argues that the condition precedent for issuing notice under section 34(1A) of the Act is that the Income-Tax Officer has “reason to believe” that certain facts exist which have been set out above. He must have reason to believe that income, profits or gains chargeable to income-tax within a specified period have escaped assessment and that the income, profits or gains which have so escaped assessment amount to, or are likely to amount to Rs. 1,00,000 or more. Another condition precedent is that the Income-Tax Officer before issuing the notice must record his reasons for doing so and the Central Board of Revenue must be satisfied on such reasons recorded that it is a fit case for the issue of such notice. The argument is that the expression “reason to believe” is a well-known expression in law and it means that the assessee can come to court and require the Income-Tax Officer to satisfy the court upon sufficient evidence that in fact, there did exist reasons which would induce a reasonable man to believe that the conditions precedent for the issue of a notice under section 34(1A) had been satisfied. In other words, if the expression used is “if in the opinion of the Income-Tax Officer” certain facts existed, then the matter would be left to the subjective satisfaction of the Income-Tax Officer and would not be justiciable, and the court could not go into the matter. On the other hand, where the expression used is “has reason to believe”, it means that such reason must exist objectively. It is conceded that if the Income-Tax Officer honestly came to the belief that the conditions precedent, as set out in section 34(1A), were satisfied, then the court cannot hold that he should not have done so. It is, however, argued that the assessee is entitled to ask the court to compel the Income-Tax Officer to disclose the reasons and the materials upon which it is based, so that the court may consider whether upon such materials, a reasonable man could arrive at that conclusion. The object in making this application is, therefore, quite plain, namely, to compel the Income-Tax Officer to disclose the reasons which induced him to arrive at the opinion that income, profits and gains etc., had escaped assessment during the specified period and/or that the amount thereof would exceed Rs. 1,00,000 or more. It is an attempt also to have an inspection of the order of the Central Board of Revenue. The attitude taken on behalf of the respondents as disclosed in the affidavit originally filed was that the petitioners have no right to inspect the records or any evidence produced before the Income-Tax Officer. This was stated in an affidavit in opposition filed by S.K Sarin a, Income-Tax Officer, Central Circle XXII, Calcutta, who had no personal knowledge of the facts of the case and was not the Income-Tax Officer who issued the notices or obtained sanction for the issue thereof. Indeed, the affidavit was partly based on information derived from the records and the rest being submissions to the court. Subsequently, however, the Income-Tax Officer who actually issued the impugned notices and obtained sanction thereof from the Central Board of Revenue has affirmed an affidavit dated 28th January, 1959, and an affidavit dated 23rd March, 1959. In the said affidavits he has stated as follows:
(1) That at the material time he had in his possession considerable materials which led him to believe that income, profits, and gains of the petitioner firm amounting to several lakhs of rupees chargeable to income-tax, had escaped assessment for the years 1940-41 to 1945-46.
(2) That he recorded his reasons for the aforesaid belief in writing and on the said reasons the Central Board of Revenue was satisfied that the present case was a fit case for issue of notice under section 34(1A) of the Income-Tax Act. A copy of the relevant memorandum regarding the satisfaction of the Central Board of Revenue dated March 9, 1956, is annexed to the affidavit affirmed on the 28th January, 1959.
(3) That disclosure of the said reasons to the assessee at any stage prior to his compliance with the notice under section 22(4) and section 23(2) of the Indian Income-Tax Act would be highly detrimental to the interests of the Income-Tax Department and will completely frustrate the very object underlying the initiation of proceedings under the aforesaid impugned notices.
(4) That the relevant records relating to the petitioner will be made available only to the court for inspection of the said records if the court so desires.
(5) That the adequacy, of the said reasons for the purpose of issuing the said notice is not a matter for consideration of the court.
(6) That he had formed his belief on the basis of the reasons aforesaid as an honest and reasonable person and not arbitrarily, illegally or mala fide.
4. In his second affidavit dated 23rd March, 1959, he has stated in paragraph 5 as follows:
“I say that for the reasons recorded by me as required by the first proviso to section 34(1A) of the Indian Income-Tax Act and on which the Central Board of Revenue expressed its satisfaction that the present case was a fit case for the issue of a notice under section 34(1A) of the said Act, the facts are enumerated which show that there has been a concealment of assets by the petitioner and non-disclosure of income by a benami transaction entered into by the petitioner. I had, therefore, reasons to believe that income, profits and gains of the petitioner firm has escaped assessment for assessment years 1940-41 to 1945-46.”
5. Before I deal with the legal aspect of the case, I must record certain events as they transpired during the course of the hearing of this application. As will appear from what has been stated above, the dispute between the parties is now within a very small compass. The position at present is that the Income-Tax Officer has asked for production of books of account and other documents. The assessee wishes to compel the Income-Tax Officer to disclose the reasons upon which he has based his belief, which is a condition precedent for issue of the notice, and upon the basis of which the Board of Revenue has sanctioned the same. It is not that the Income-Tax Officer is unwilling to disclose the reasons altogether. He is, however, unwilling to disclose the reasons before the books and documents are produced. On behalf of the respondents Mr. Meyer has frankly informed me that his apprehension is that if the reasons are disclosed, the whole proceedings will be rendered infructuous because the books and documents will be removed and/or altered and most of them will not see the light of day. I therefore, tried my best to see whether a solution could be reached. On the 27th February, 1959, the parties agreed to my giving certain directions. I directed that the respondents will send a list of the papers, documents and books of account which they require to be produced to the solicitor for the petitioner, and on the next day for hearing, the petitioner should inform the court as to which of the books, papers and documents mentioned in the list they are in a position to produce in court. The idea was that these books, papers and documents were to be produced in court and when produced the Income-Tax Officer would.be willing to hand over the particulars asked for. In other words, if the books and documents were produced, then the authorities were willing to give inspection of all the records, including the reasons recorded in writing by the Income-Tax Officer and the sanction of the Board thereon. Pursuant to the directions given, the respondents sent a list to the solicitor for the petitioner. At the adjourned hearing, however, the learned standing counsel informed the court on behalf of the petitioner that his instructions were that the petitioner was not willing to produce the books and documents. The learned standing counsel said that the books and documents required were voluminous and indeed they relate to the books and documents of the petitioner's branches all over India and it would be physically impossible to produce them in Calcutta. It is quite true that the books and documents that have been asked for are likely to be voluminous and it might be that some of them are not in the possession or power of the petitioner. I, therefore, suggested that only such books and documents may be produced as were in the possession, custody or control of the petitioner and the petitioner may state in an affidavit as to the books and documents which were not in their possession, custody or control. Further, that sufficient time should be allowed for the petitioner to have the books and documents brought to Calcutta. Upon both these points the respondents agreed. The learned standing counsel stated on instructions that nevertheless his clients were unwilling to follow the course suggested and his instructions were further to rest on the legal rights of the parties. This, of course, brought the matter back to the stage where we started, and it, therefore, remains for me to consider the legal position. I have already stated the position in law which has been taken by the petitioner. The argument is that section 34(1A) of the Act uses the words “has reason to believe” and this makes the matter justiciable. According to the learned standing counsel, if the matter is justiciable then inasmuch as the petitioner has made an application to the court, the respondents are bound to disclose all the reasons in court. I have already stated that the respondents are willing to produce all the records in court and give inspection to the court but they are unwilling to disclose the same to the petitioner at this stage. The learned standing counsel argues that if the matter is justiciable then the law is that the reasons must not only be disclosed to court but also to the petitioner, in court, and that there was “no half-way house I shall now proceed to consider the position. The expression “reason to believe” has been interpreted in various decisions. The first case cited is Emperor v. Vimalabai Deshpande A.I.R 1946 P.C 123.. Rules 26 and 129 of the Defence of India Rules, 1939, in so far as they are relevant run as follows:
Rule 26(1). “The Central Government or the Provincial Government, if it is satisfied with respect to any particular person that with a view to preventing him from acting in any manner prejudicial to the defence of British India, the public safety, the maintenance of public order, His Majesty's relations with foreign powers or Indian States, the maintenance of peaceful conditions in tribal areas or the efficient prosecution of the war” it is necessary so to do, may make an order:…
(b) directing that he be detained.”
6. Rule 129(1). “Any police officer,… may arrest without warrant any person whom he reasonably suspects of having acted, … (a) … in a manner prejudicial to the public safety or to the efficient prosecution of the war.”
7. On 21st August, 1944, the detenue Purushottam Yeshwant Deshpande was arrested pursuant to an order given by the Deputy Inspector-General of Police, under rule 129. A report of the arrest was made to the Provincial Government which had directed that the detenue be detained in police custody for a period expiring on 4th September, 1944. This period was subsequently enlarged. In the meantime, the detenue's wife made an application to the High Court under section 491 of the Criminal Procedure Code complaining that the detention of the detenue was illegal and improper. The High Court ordered that the detenue be set at liberty. One of the questions that arose was the interpretation of rule 129(1) of the Defence of India Rules. The question was as to whether a police officer who makes an arrest, was bound to prove to the satisfaction of a court before whom the arrest was challenged, that he had reasonable grounds of suspicion, and what would happen if he failed to discharge the burden laid upon him. Their Lordships of the Privy Council pointed out the difference in the language of rule 26 and rule 129. It was held that the burden rested upon the police officer to show to the court that his suspicion was reasonable and his act was, therefore, justified. So far as rule 26 is concerned, it was for the Government to be satisfied and there existed no qualifying adverb such as “reasonably” or “honestly” attached to the word “satisfied”. It was held that in the case of Government, mere suspicion was not enough, but it was for the Government to be satisfied. On the other hand, a police officer under rule 129 could arrest on mere suspicion, but the suspicion must be reasonable. The onus was on the police officer to prove to the satisfaction of the court that the suspicion was reasonable. The decision of the High Court was upheld and the appeal dismissed. ‘Reliance was placed on a judgment in an English case, Shearer v. Shields. This is a decision of the House of Lords which had to construe a provision in the Glasgow Police Act authorising constables to arrest if they had “reasonable grounds for suspicion” and it was held that the burden rested upon the constable concerned to show that his suspicion was reasonable and his act therefore justified. It was held that the burden must be discharged upon proper evidence. At this stage I might refer to another English case which is always cited in a case like this, namely, Liversidge v. Sir John Anderson [1942] A.C 206.. In that case, the Secretary of State, acting under Regulation 18B of the Defence (General) Regulations, 1939, made an order in which he had stated that he had “reasonable cause to believe” a person to be of hostile association, and by reason thereof it was necessary to exercise control over him, and directed that the person should be detained. It was held that a court of law could not enquire whether in fact the Secretary of State had reasonable grounds for his belief. The matter was one for executive discretion of the Secretary of State. In the Regulation concerned, there were two kinds of expressions used. In several places the Secretary of State was only required to be “satisfied” by something before he could take action. On the other hand, he could take action under Regulation 1A or 18B if he had “reasonable cause to believe” that a person was a member of a certain organisation and that it was necessary to exercise control over him. In his dissenting judgment which has become classical Lord Atkin pointed out that these two different expressions would not have been used if they meant the same thing. The majority judgment admitted that the argument was not without weight, but decided in the manner set out above. It has subsequently been pointed out that Liversidge's case was a war-time decision and could only be supported because of the existence of an emergency. In Commissioner of Income-Tax v. Mahaliram, the Judicial Committee was dealing with the point as to what circumstances should exist to enable the Income-Tax Officer to initiate proceedings under section 34 of the Income-Tax Act. It was held that it was enough that the Income-Tax Officer had before him some information and in good faith he considered that he had good grounds for believing that the assessee's profits have escaped assessment, or had been assessed at too low a rate. It is not necessary for the Income-Tax Officer to hold a judicial enquiry at this stage nor is it necessary to convene the assessee or to intimate to him the nature of the alleged escapement or to give him an opportunity of being heard. In Panna Lal Binjraj v. Union of India [1957] 31 I.T.R 565., the Supreme Court was dealing with sub-section (7A) of section 5 of the Income-Tax Act. That subsection enabled the Commissioner to transfer pending cases from one file to another. It was pointed out that it would be next to impossible for the assessee to challenge an order made by the Commissioner and the Central Board of Revenue, because the reasons for making the order will not be known to the assessee not having been recorded in the body of the order or communicated to the assessee. It was held that the assessee may point out the circumstances which prima facie, and without anything more, would make out the exercise of the power as arbitrary. It will then be incumbent on the authority to explain the circumstances under which the order has been made. The court will in that event scrutinise the circumstances, regard being had to the object sought to be achieved by the enactment, and come to its own conclusion as to the bona fides of the order, and if not satisfied will certainly quash the same. This case has really no bearing on the point I am called upon to determine. There is no question of mala fides raised in this case. The only point to be determined is as to whether at this stage the Income-Tax Officer should disclose his reasons for issuing notice under section 34. The next case cited is Bhimraj Panna Lal v. Commissioner of Income-Tax. In this Divisional Bench judgment of the Patna High Court, Prasad, J., said as follows:
“By the amendment in 1948, the words ‘definite information’ and ‘discovers’ have been deleted, and have been substituted by the words ‘has reason to believe’ in section 34(1) and by the words ‘in consequence of information in his possession’ in clause (b) of section 34(1). These words in the amended section 34(1) suggest that the belief must be that of an honest and reasonable person based upon reasonable grounds, and that the Income-Tax Officer may act under this section on direct or circumstantial evidence but not on mere suspicion, gossip or rumour. The powers in the present section are wide, but they are not plenary, the words of the section are ‘reason to believe’, and not ‘reason to suspect’.”
8. It will be observed that in this case conditions have been laid down for the exercise of the discretion provided in section 34 by the Income-Tax Officer in issuing a notice thereunder. It is however of no direct assistance on the point, namely, as to whether and if so to what extent the reasons must be disclosed if an assessee comes to court and challenges the exercise of such discretion. In an unreported decision of the Madhya Pradesh High Court, Keshrichand v. Income-Tax Officer, Khandwa, delivered by Bhutt, J., (judgment dated March 10, 1958), the point arose directly as to whether, even though an assessee may not be entitled to know the reasons for issuing the notice, it could be withheld from the court. It was held that at that stage the assessee had no justiciable cause and that any other interpretation would ineffectuate the charging section, and the machinery sections of the Act. These being the authorities cited before me, it appears to me that none of them have completely decided the issue that has arisen in this case. Most of them have decided the conditions that must exist for the issue of a notice under section 34(1) of the Indian Income-Tax Act. It has been decided that the Income-Tax Officer must have certain information before him and cannot act on mere suspicion, that if upon the facts before him, he bona fide believed that it was necessary to issue a notice, then the court will not interfere, and would not take upon itself the task to decide as to whether upon such facts the Income-Tax Officer should have come to that belief. These are propositions which are not contested by either party. The short point raised in this case is as to whether the petitioners having come to court, the Income-Tax Officer could be compelled to disclose the reasons to the court at this stage. As I have stated above, the respondents have in fact produced all records in court, including the reasons recorded by the Income-Tax Officer and the sanction of the Board of Revenue, and have no objection to the court looking into it. The sole question for determination is as to whether, if the court looks into it, the assessee must also be given an opportunity to look into the same. From the decisions cited above, it is clear that the expression “reason to believe” makes the matter justiciable. It is not wholly dependent on the subjective satisfaction of the Income-Tax Officer, and he must, upon a challenge being thrown, satisfy the court that his belief is based upon facts which would induce a reasonable person to arrive at the conclusion which had been arrived at by the Income-Tax Officer. It inevitably follows that the facts, that is to say, the particulars of information upon which the Income-Tax Officer has relied, must be disclosed to the court. The next question that arises, and a question which is not free from difficulty, is as to whether if the court looks into it, it must also be disclosed to the assessee. The learned standing counsel has strongly argued that in such a matter there cannot be a procedure, which he picturesquely described as a “hole-and-corner” policy. He argues that the English case regarding the police constable, Shearer v. Shields, shows that upon a challenge being thrown, the constable would have to prove by evidence adduced in court that his suspicion was reasonable. Similarly, it is argued that upon a challenge being thrown, the Income-Tax Officer must adduce evidence in court to show that his belief was based on reasonable grounds. If it is a question of adducing evidence in court it cannot be ex parte evidence because that procedure would be violative of the rules of natural justice. Plausible as this argument sounds, let us see the implication thereof. After the assessment is complete, a notice could only be issued under section 34(iA), if the Income-Tax Officer has reasons to believe that income, profits and gains have escaped assessment and it amounts or is likely to amount to a sum of Rs. 1,00,000 or more. Normally, this would mean that the assessee had suppressed disclosure of his real income. The Income-Tax authorities might have various sources of knowledge and without an investigation it would be impossible to determine finally as to how the matter stood. If, at this stage, the available information had to be disclosed to the assessee, it might be disastrous for the proceedings and would defeat the very object for which the notice was given. It has been constantly held that at this stage the assessee is not entitled to look at the reasons recorded by the Income-Tax Officer or compel the Income-Tax Officer to disclose to him the reasons. Re-opening of an assessment under section 34 is always a very serious affair. Therefore, the Income-Tax Act has not left the matter entirely to the discretion of the Income-Tax Officer but has provided for certain safeguards. It has laid down that the Income-Tax Officer must record his reasons in writing and get the sanction of the Commissioner or the Board of Revenue as the case may be. But if at this stage of the proceedings, these reasons have to be disclosed to the assessee, then he will be put on his guard and in most cases the very object of re-assessment will be frustrated. The books will be removed and/or destroyed, and evidence generally, which would enable the Income-Tax Officer to establish that the original assessment was not complete, would disappear. If the law is that at this stage the assessee is not entitled to such information or disclosure, then it is obvious that in this application the assessee wishes to achieve the same end by an indirect process. If by merely coming to the court and challenging the notice, it would be incumbent on the Income-Tax Officer to make public the reasons and the documents relating to it, then indeed, there is no point in saying that the assessee was not entitled to know the same at this stage. That object could be achieved in any case by simply making an application to court. In my opinion the law cannot possibly enable the assessee to do something indirectly which he cannot do directly, and no such interpretation should be given to a provision of law which would entirely destroy the object for which it was promulgated. I have therefore come to the conclusion that the matter being justiciable, and the Income-Tax authorities having been called upon to satisfy the court that facts existed which would make the order or the belief upon which it is based reasonable, they should disclose to the court the reasons, but these reasons should in the first instance be looked at by the Judge and not by the assessee. If the Judge thinks that the contention of the Income-Tax authority, namely, that disclosure at this stage to the assessee would be prejudicial to the realisation of the revenue, or destructive of the proceedings altogether, then it should not be disclosed to the assessee at this stage, although the court may order that such reasons may be disclosed at a subsequent stage, that is to say, after the books and documents called for have been produced, or any other stage. As regards the point as to whether the court at this stage could look into the records without disclosing them to the assessee, I see no insuperable objection. There are many instances in which the court is entitled to do so. Reference may be made to the provisions of Order XI, rule 19(2), of the Civil Procedure Code. That provision lays down that where, on an application for an order for inspection, privilege is claimed for any document, it shall be lawful for the court to inspect the document for the purpose of deciding as to the validity of the claim of privilege. This power has been explained in a Privy Council case, Robinson v. State of South Australia. In that case the plaintiff asked for discovery and inspection of certain State documents in the court of Australia, for which the State claimed privilege. Lord Blanesburgh said as follows:
“The power of the court to call for the production of documents for which this privilege is claimed and to determine the validity of the claim for itself was much discussed in argument. The result of the discussion has been, as their Lordships think, to confirm the view of Griffiths, C.J, in Marconi's Wireless Telegraph Company v. Commonwealth, where in effect he concludes that the court has in these cases always had in reserve the power to inquire into the nature of the document for which protection is sought, and to require some indication of the nature of the injury to the State which would follow its production. The existence of such a power is in no way out of harmony with the reason for the privilege, provided that its exercise be carefully guarded so as not to occasion to the State the mischief which the privilege, where it exists, is designed to guard against.
In the time of Beatson v. Skene any examination of a document would apparently have had to take place in public, and the mischief resulting from such publicity is the reason given by the Chief Baron for his acceptance there of the Minister's word without making it … The existence of the power, nevertheless, is affirmed and its exercise encouraged … not only by judicial pronouncement, but by widespread practice and may it not be added by the reason of the thing? … There seems little, if any reason why the courts in relation to this privileged class of its documents, should have any less power than it has to inspect any other privileged class of its documents, provided of course that such power be exercised so as not to destroy the protection of the privilege in any case in which it is found to exist … They are much impressed by the observations of Starke, J., in his dissenting judgment in Griffen's case 1925 36 C.L.R 378., in the course of which at page 402, he says, speaking of the papers now again in question, ‘No one has suggested that the interests of the public are such that a Judge ought not to see the documents’…
In these circumstances it only remains to consider whether the circumstances here are such that the power should now be exercised.”
9. In the present case, it cannot be denied that the law has firmly established that at this stage the assessee is not entitled to look into the reasons recorded by the Income-Tax Officer. The reason why the assessee is not entitled to do so is that the powers invoked relate to a machinery section and if the assessee is able to look at the reasons at this stage, the whole proceedings would be frustrated. If that be so, it is certainly not in the public interest that the reasons should be disclosed to the assessee by an indirect method, simply because the court has been given power to see as to whether these reasons exist or could justify the issue of a notice. After all, the court is not deciding the matter for itself. If the Income-Tax Officer has come to a conclusion bona fide the court will not interfere. But simply because it is necessary for the court to satisfy itself in this behalf it does not follow that such reasons should be disclosed to the assessee. Such a course would destroy the very object and the provision of law in question, and therefore cannot be a reasonable interpretation of it. In this case I must record that the reasons and the sanction of the Board of Revenue have both been produced before me and I have looked into them. Having looked into them, I arrived at the opinion that it would be extremely prejudicial to the respondents if the particulars contained therein, are disclosed to the assessee at this stage. I might mention here that the Income-Tax authorities have not totally refused to disclose the reasons but object to doing so before the books and documents are disclosed. They apprehend that the books and documents will disappear if the particulars are disclosed at this stage. In my opinion it is a reasonable apprehension. I, therefore, suggested that the respondents should disclose the main headings, without giving away particulars which would prejudice them and this suggestion has been accepted and carried out by filing an affidavit of D.G Prodhan affirmed on the 23rd March, 1959. The deponent in this affidavit is the Income-Tax Officer who recorded his reasons and issued the notice. An extract from his affidavit has been set out above. In my opinion, this is a sufficient disclosure to the assessee, and no further disclosure should be permitted at this stage. In my opinion, the Income-Tax Officer had reasonable grounds to believe that the income, profits and gains chargeable to income had escaped assessment during the relevant years and that the notice issued by him under section 34(iA) of the Income-Tax Act was valid and proper and that the petitioner is not entitled to any further disclosure at this stage.
10. The application is, therefore, dismissed. The rule is discharged. Interim orders, if any, are vacated. There will be no order as to costs.
Application dismissed.
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