Income-tax Reference No. 63 of 1965

Decided on May 2, 1968

The Judgment of the Court was delivered by

Banerjee, J.:— This reference, under section 66(1) of the Indian Income-tax 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 Messrs. Electro House. Up to the assessment year 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:

Baidyanath Gorai … 40% Nemaichand Saha … 30% Gouribala Dasi … 30%

3. The Income-tax Officer accorded registration to the firm, under section 26A, for the successive two assessment years under appeal. The Commissioner of Income-tax, West Bengal, Calcutta, however, found on examination of the records that the orders of the Income-tax Officer granting registration to the firm for the assessment year 1959-60 and the renewal of registration for the assessment year 1960-61 were erroneous and prejudicial to the interests of revenue. The Comimssioner of Income-tax thereupon issued a notice to the assessee-firm to show cause why the registration granted by the Income-tax Officer should not be cancelled. The material portion of the notice reads as follows:

“On a perusal of the orders under section 26A passed by Income-tax Officer, ‘A’ Ward, Asansol, on 5th October, 1960, and 25th February, 1961, for the assessment years 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 section 26A of Income-tax Act, 1922, for the assessment year 1959-60 and renewal of registration under section 26A of the said Act for the assessment year 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.

I, therefore, propose to cancel the orders under section 26A of the Income-tax Act, 1922, for the assessment years 1959-60 and 1960-61 under powers vested in me under section 33B of the Income-tax 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.”

4. The notice bears the date July 18, 1962.

5. In response to the notice, the assessee's representative attended before the Commissioner of Income-tax and showed cause. The Commissioner was not, however, satisfied that the assessee was a genuine firm. He, therefore, made an order, under section 33B, cancelling the registration and directing the Income-tax Officer to assess the business as the sole proprietary concern of Baidyanath Gorai for each of the assessment years in question.

6. Aggrieved by the order of the Income-tax Commissioner, the assessee appealed before the Appellate Tribunal. Before the Tribunal the validity of the notice under section 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 Commissioner'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 section 33B was illegal and insufficient and whether the exercise of the jurisdiction by the Commissioner was proper. The validity of the notice under section 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 Commissioner of Income-tax intended to take action under section 33B;

(b) that it was incumbent upon the Commissioner to indicate in the notice the point or points upon which he would like to be satisfied before making an order under section 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 Commissioner;

(c) that the notice was defective and the Commissioner 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 Commissioner is on record. The Commissioner clearly states therein that he considers that the orders of the Income-tax Officer, A-Ward, Asansol, dated 5th October, 1960, and 25th February, 1961, for the assessment years 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 Commissioner then recited that he proposed ‘to cancel the orders under section 26A of the Income-tax Act, 1922, for the assessment years 1959-60 and 1960-61’, unless the assessee showed cause to the contrary. Section 33B provides that the Commissioner, if he considers that any order passed by the Income-tax Officer 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 section 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 Commissioner 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 Commissioner to the assessee in the present case, we are of the opinion that it sufficiently meets the requirements of section 33B. In our opinion, the Commissioner validly assumed jurisdiction to proceed to take action under section 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 section 33B of the Indian Income-tax Act, 1922, met the requirements of the law and whether the Commissioner of Income-tax validly exercised jurisdiction under section 33B of the Indian Income-tax Act, 1922?”

9. Dr. Pal, learned counsel for the assessee, did not argue that section 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 Chanel v. Union of India [1958] S.C.R 1080, 1095, 1096; 1958 S.C.A 222. 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………”

10. 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 Commissioner 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”. On reading the notice one might wonder what was the particular reason which induced the Commissioner 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?

11. Now, the Commissioner in making an order under section 33B of the Indian Income-tax 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 v. Commissioner of Income-tax [1963] 48 I.T.R S.C 34, 40. Hidayatullah J. (as the Chief Justice then was) observed:

“The authorities acting under the Indian Income-tax 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, Commissioners of Inland Revenue v. Hood Barrs 1961 39 Tax Cas. 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 Commissioners, 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 Commissioners 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 v. Deputy Chief Controller of Imports and Exports. It is more so in this case where the proviso to section 35 itself makes it incumbent upon the Income-tax Officer to give notice and a hearing to an assessee when the effect of the rectification would be the enhancement of the assessment.”

12. It is true that section 33B does not specifically provide for the giving of a notice as the proviso to sub-section (1) of section 35 of the Indian Income-tax Act does. Nevertheless, a proceeding under section 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.

13. In a decision of this court in Bagsu Devi Bafna v. Commissioner of Income-tax, this court observed:

“That in a notice, under section 33B of the Indian Income-tax Act, the Commissioner must disclose to the assessee the grounds on which he proposed to revise, to enable the assessee to show cause.”

14. 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 Commissioner, when he issues a notice upon the assessee for starting proceedings under section 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.

15. Our attention was drawn, on behalf of the revenue, to a recent Supreme Court decision in Rampyari Devi Saraogi v. Commissioner of Income-tax, 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 assessment years 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 Income-tax Officer, ‘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 Income-tax Officer 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 section 33B of the Income-tax Act, 1922…”

16. This notice was criticized before the Commissioner 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 Commissioner overruled the contention and made an order cancelling the assessment and directing the Income-tax Officer to do fresh assessment according to law. The assessee challenged the order of the Income-tax Commissioner before the High Court, under article 226 of the Constitution, but failed to get any relief. Thereupon, the assessee took the matter before the Supreme Court. The Supreme Court decided against the assessee with the following observation I

“The order of the Commissioner 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 section 33B were passed by the Commissioner. There was ample material to show that the Income-tax Officer made the assessments in undue hurry…………The assessee, in our view, has not in any way suffered from the failure of the Commissioner to indicate the results of the enquiries, mentioned above. Moreover, the assessee will have full opportunity of showing to the Income-tax Officer whether he had jurisdiction or not and whether the income assessed in the assessment orders which were originally passed was correct or not.”

17. The above judgment of the Supreme Court is vastly distinguishable. We have quoted the language of the notice, issued by the Commissioner, in Rampyari Devi's case. That notice indicated to the assessee the basic materials on which the Commissioner intended to take action against the assessee under section 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 asessee would have full opportunity of showing to the Income-tax Officer 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. We have already indicated that on reading the notice one may be guessing and wondering as to why the Commissioner of Income-tax considered the partnership to be not a genuine one. Thus, the basic materials were absent in the notice. Then again, the Commissioner 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 Income-tax Officer. We do not, therefore, think that the circumstances which went against the assessee in Rampyari Devi Saraogi's case are present in this case. If the notice starting the proceedings under section 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 Commissioner under section 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.

18. 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.

K.L Roy, J.:— I agree.

19. Question answered in the negative.