Lilooah Steel & Wire Co. Ltd. v. Income-Tax Officer

1. The firm of Vijay & Co. was assessed to income-tax under the provisions of the Indian Income-tax Act, 1922, for the assessment year 1947-48. The petitioner, Messrs. Lilooah Steel & Wire Co. (Private) Ltd., was a partner during the assessment year 1947-48 of the firm of Vijay & Co. The said firm used to be assessed as a registered partnership firm under Section 26A of the Indian Income-tax Act, 1922. The said firm, it has been stated, had discontinued the business with effect from the assessment year 1949-50. For the assessment year 1947-48 notice under Section 148 of the Income-tax Act, 1961, had been issued and it had been claimed that such notice had been duly served on the assessee. For the grounds which had led to the issue of the notice under Section 148, notice was also issued under Section 274 read with Section 271(1)(c) and another notice under Section 274 read with Section 271(1)(b) was issued. In this application under article 226 of the Constitution, the petitioner challenges the aforesaid proceedings initiated by the said notices. Two points were urged in support of this application, namely: (i) that there were no grounds or materials for reopening the assessment under Section 147 of the Income-tax Act, 1961; (ii) the notice under Section 148 of the Income-tax Act, 1961, had not been served properly and in accordance with law within the prescribed time. No separate argument was advanced challenging the penalty proceedings. The application first came up for hearing before me on the 16th January, 1971. Inasmuch as there was some controversy that all the documents referred to in the affidavit-in-opposition had not been given inspection I directed the income-tax department to give inspection to the petitioner of the following documents : (i) the copy of the reasons recorded for reopening ; (ii) the return alleged to have been filed on behalf of the petitioner; (iii) the return of service by affixation of the notice on the petitioner-firm referred to in the affidavit-in-opposition; (iv) postal acknowledgment of the registered letter ; (v) inspector's report. I directed that the parties after inspection should file fresh affidavits. The inspection was given and thereafter the parties filed their fresh affidavits. There was still some grievance that inspection of some of the documents had not been given. I directed that the said documents should be given inspection during the course of hearing and the same has been done.

2. The first contention that was urged by Dr. Pal appearing for the petitioner was that there were no reasons for reopening the assessment. According to Dr. Pal the reasons disclosed by the department in the affidavit-in-opposition and the copy of the reasons later on disclosed had not indicated any valid ground for reopening. In the premises, it was contended that the Income-tax Officer had no jurisdiction to initiate the proceedings by the issue of notice under Section 148 of the Income-tax Act, 1961. It is desirable that I should refer to the reasons appearing from the records and the reasons appearing in the proposal under Section 147(a) of the Income-tax Act, 1961. In the said reasons-the Income-tax Officer, Dist. II, Calcutta, by his note dated the 28th December, 1963, had noted that the first assessment on the firm was for the assessment year 1947-48. It was made under Section 34 of the Income-tax Act, 1922, on the 26th March, 1952. The next assessment for the year 1948-49 was also made under Section 34 of the Income-tax Act, 1922, on the 18th March, 1953. As the firm was dissolved with effect from the assessment year 1949-50, there was no assessment from the year 1949 onwards. It has been stated that the assessment for the year 1948-49 was reopened under Section 34 of the Income-tax Act, 1922, on receipt of information regarding several bank cards in the name Of the firm, Messrs. Vijay & Co., on the 23rd March, 1957. On enquiries it was found that the transactions noted in these bank cards were accounted for in the books of the firm and also considered at the time of the original assessment. Accordingly, the proceeding under Section 34 for the assessment year 1948-49 was dropped on the 20th March, 1958. While dropping the case it was observed that there were many bank cards in the name of the assessee relating to the assessment year 1947-48. There was subsequent investigation and during the course of subsequent investigation it was found out that the assessee had obtained large credits from the Bank of Bikaner and the Punjab National Bank during the financial year 1946-47, against the security of fixed deposits in various names. In fact the position was, it was asserted in the said note, that creditors of the firm were those persons in whose names the fixed deposits accounts amounting to Rs. 3,01,000 were credited in these two banks, and, therefore, the firm of Vijay & Co. was liable for those credits and was liable to explain them. In the reasons it has been recorded that the assessee had operated a loan. account with the Bank of Bikaner which was opened on the 18th October, 1946, and closed on the 31st August, 1947. The said loan made to the said firm amounted to Rs. 1,32,500 which was granted during the period. All these loans were advanced by the bank against the security of several fixed deposit accounts in several different names, details of which had been given in the reasons recorded. It has been stated in the reasons that these fixed deposits were made by a group of Ganesh Das Bajranglal for securing loan facilities for the firm instead of investing directly to the funds of the firm as they were bound to do as partners. Enquiries thereafter were made to find out the genuineness oi these bank credits and it was found that none of these persons was traceable at the given address. The assessee was given opportunity; but he could not give any information about the whereabouts of these gentlemen. The partners of the firm of Ganesh Das Bajranglal were contacted and they also denied any knowledge of these persons and those fixed deposit accounts. In those circumstances, the Income-tax Officer thought that there was evidence that those amounts represented the undisclosed income of the assessee. It was further noted in the said reasons that there were fixed deposits of Rs. 55,000 and Rs. 45,000 and Rs. 60,000 in the Jaipur branch of the Punjab National Bank, and details of those amounts were given. These deposits were also made by a group of Ganesh Das Bajranglal with a view to arranging loan facilities of Rs. 1,52,000 in favour of the firm, Vijay & Co., at the Punjab National Bank. Enquiries were made and it was noticed that Sri Ramdeo Birla was an assessee and he was assessed on a total income of Rs. 55,000 representing the proceeds on the fixed deposits. On appeal, however, the said assessment was cancelled. A proposal was made to write off the arrear demand as irrecoverable. The same more or less was the position regarding the fixed deposit account in the name of B. Agarwalla, whose file number was given. It was in those circumstances that the Income-tax Officer had stated that there was reason to believe that these amounts represented the undisclosed income of the assessee and the same were liable to be included in the assessment. It has to be further remembered that notices were issued to the assessee prior to the initiation of the proceedings for the assessment year 1947-48 to explain this entry and to show cause why proceedings under Section 148 should not be initiated. The assessee did not render any co-operation and was unable to furnish any explanation of these credits. In those circumstances, the approval of the Board was sought for and obtained for reopening of the assessment under Section 147(a) for the assessment year 1947-48. From the reasons it appears to me that it can safely be said that there were some reasonable grounds for thinking that there had been some non-disclosure as regards primary facts which would have material bearing on the question of under-assessment. It has to be remembered that in an application under article 226 challenging a notice under Section 148, this court is not concerned with the sufficiency of the reasons. It is concerned to find out whether there were some reasonable grounds for thinking that there had been some non-disclosure as regards primary facts. Reliance may be placed for this proposition on the decision of the Supreme Court in the case of Calcutta Discount Co. Ltd. v. Income-tax Officer, Companies District I, Calcutta, the decisions of the Supreme Court in the case of S. Narayanappa v. Commissioner of Income-tax, and Kantamani Venkata Narayana and Sons v. First Additional Income-tax Officer, Rajahmundry, , [1957] 1 S.C.R. 984 (S.C.). Dr. Pal, however, placed a strong reliance on the decision of the Supreme Court in the case of Chhugamal Rajpal v. S. P. Chaliha, (Civil Appeal No. 1311 of 1967--judgment delivered on 21st January, 1971 (unreported)). The facts of that case, however, were entirely different. That was a case where the sanction accorded by the Commissioner under Section 151(2) of the Income-tax Act, 1961, had been challenged. It was contended in that case that there were no reasons for the Income-tax Officer to initiate proceedings for reopening the assessment and as such there were also no reasons for the Commissioner to accord sanction under section 151(2) of the aforesaid act. The Supreme Court noted that when this appeal came up for hearing their Lordships of the. Supreme Court found the affidavit filed by the Income-tax Officer to be vague and indefinite. Their Lordships directed the department to produce before them the records of the Income-tax Officer to show that the Income-tax Officer had complied with the requirements of Section 147 and Section 151(2) of the Income-tax Act, 1961. When the appeal was taken up for hearing only the report submitted by the Income-tax Officer to the Commissioner and the order of the Commissioner were produced. The order-sheet recording the reasons of the Income-tax Officer as required under Section 148(2) was not produced before the court. In the instant case before me the reasons have been produced. Furthermore, from the records produced before the Supreme Court, it appeared that certain persons were suspected to be name-lenders of the assessee in that case and the transactions were considered to be bogus ; but no reasons had been given why the transactions were considered to be bogus. There was no evidence of any investigation having been carried out. There was no evidence of the assessee being called upon to explain any of those items. The Supreme Court in those circumstances noted that there was no evidence of any investigation and no reason to verify the truth of the suspicion and that the reasons recorded indicated that there was only some suspicion in the mind of the Income-tax Officer. In those circumstances the Supreme Court was of the opinion that there was no reason for the Income-tax Officer to initiate proceedings and as such the proceedings were without jurisdiction. The facts of the instant case are entirely different. Here the reasons have been produced. They have rational nexus. They indicate that certain extensive investigations had been carried out before initiation of proceedings. In those circumstances the facts of this case cannot be treated on the same basis with the facts in the case before the Supreme Court. I am, therefore, of opinion that Dr. Pal is not entitled to get any assistance from the aforesaid Supreme Court decision. In that view of the matter, the first contention of Dr. Pal fails.

3. The second contention of Dr. Pal was that notice under Section 148 had not been served upon the assessee within the prescribed period in accordance with law. Dr. Pal contended that service of notice upon the assessee within the prescribed period was a condition precedent for initiation of proceedings. As mentioned hereinbefore in the affidavit-in-opposi-tion originally filed on behalf of the respondents it had been stated that notice was posted by registered post on the 26th February, 1964; but it came lack unserved. Thereafter, service of the notice was effected by affixing a copy of the notice on the 12th March, 1964, at premises No. 5B, Muktaram Babu Street. A notice under Section 148 dated 21st March, 1964, was also addressed to the Lilooah Steel & Wire Co. Ltd., partner of M/s, Vijay & Co. An inspector, it has been asserted, tried to serve the aforesaid notice personally on two occasions; but he was unable to do so as none was willing to accept the service. In those circumstances it was asserted that the said notice was again affixed on the 23rd March, 1964. Another notice was also sent by registered post and the petitioner has filed a return in pursuance of the notice under Section 148 of the Income-tax Act, 1961. Now in this case notice is required to be served by 31st March, 1964. The postal authorities have informed the respondents that the registered letter was served on the 3rd April, 1964. The question is whether there has been proper service within 31st March, 1964, in accordance with law. Return of service and the report of the service of 12th March, 1964, and 23rd March, 1964, were produced before me. It appears that regarding the 12th March, 1964, there is a report by an inspector, Sudhendu Bhusan Patutundi. He has stated that he wanted to serve the notice on the partners, that is to say, M/s. Lilooah Steel & Wire Co., at No. 5B, Muktaram Babu Street. He further stated that he attempted to contact the assessee for personal service on 12th March, 1964, between 11 a.m. and 12 noon and again on 12th March, 1964, between 3 and, 4 p. m. and having failed in these attempts he had affixed the notice in the presence of Ahi Bhusna Nag. In the report it has been stated by the inspector that he visited the place and contacted an employee of M/s. Lilooah Steel & Wire Co. Ltd. The employee gave out his name as Sri Mohan Lal Ojha. He was requested to receive the notice; but he stated that since it was addressed to M/s. Vijay & Co. he was not in a position to receive the same. He had further stated that he would contact the directors of the company and if they agreed he would accept the notice. The inspector had further assented that he revisited the place and he was told by Ojha that he was instructed not to receive the notice. In those circumstances he had no other alternative but to affix the same. So far as the service on the 23rd March, 1964, is concerned the said Sudhendu Bhusan Patutundi has also made a report and from his affirmation it appears that he received the notice again and he tried to serve it on 21st March, 1964, between 4 and 5 p.m. in the afternoon and again on 23rd March, 1964, between 3 and 4 p.m. in the afternoon and having failed in these attempts he affixed the notice between the hours 4 p.m. and 5 p.m. His report more or less states the same thing. On 24th March, 1964, the Income-tax Officer as a matter of abundant caution sent the notice by registered post. The said notice was received by the assessee on the 3rd April, 1964. It has been alleged that a return has been filed in respect of the notice under Section 148. Dr. Pal contended that the aforesaid service indicated that there was no service in accordance with Order 5, Rule 17, of the Code of Civil Procedure. Dr. Pal submitted that under the Income-tax Act it was necessary to serve the notice of reopening as if it was a summons issued by a civil court and Order 5, Rule 17 of the Code of Civil Procedure, applied. He further urged that the fact that his client had filed a return would not cure the defect, if any, in the service of the notice. Dr. Pal placed strong reliance on the decision of this court in the case of Gopiram Agarwalla v. First Additional Income-tax Officer, [1959] 37 I.T.R. 493 (Cal.). There it was held that the mere fact that the serving officer did not find the party to be served with the notice at his address was not sufficient to establish that he could not be found. It must be shown not only that the serving officer went to the place at a reasonable time when the assessee would be expected to be present, but also that if he was not found, proper and reasonable attempts were made to find him either at that address or elsewhere. If after such reasonable attempts the position still was that the party was not found, then and then only it could be said that the party could not be found. In the said case the officer who had served the notice of reassessment went to the party's address but found that he had gone out, offered the notice to a person who was pointed out as the appellant's son and on the latter's refusal to accept it affixed the notice on the premises. It was held that the service was not a good service. Reliance was also placed by Dr. Pal on the decisions in the cases of Ramendra Nath Ghosh v. Commissioner of Income-tax, [1967] 66 I.T.R. 414 (Cal.), Kassim Ebrahim v. Joburmull Khemka, [1916] 20 C.W.N. 173, [1916] 34 I.C. 799 (Cal.). Raja Pirthvi Chand Lal Chaudhury v. Rani Prabhabati Ji Saheba, A.I.R. 1944 Pat. 44 [F.B.] and the decision in the case of Commissioner of Income-tax v. Thayaballi Mulla Jeevaji Kapasi, . As has been noted by the Supreme Court in the last mentioned case, service had to be effected in case the petitioner was not found as if it was a summons, that is to say, it might be effected by affixation after reasonable and proper enquiries had been made by the serving officer to find out the person to be served. What is reasonable and diligent enquiry must depend upon the facts and circumstances of each case. It has to be noted that in the last mentioned case it was found that the process-server, to whom a notice under section 34(1)(a) was given, made enquiries about the presence of the respondent. He was informed on the first occasion that the respondent was in Bombay and that he was expected to return to Calicut within a week. On the second occasion the respondent was not in Calicut and the process-server was informed that the respondent was in Bombay 01 in Ceylon. On the third occasion the process-server affixed the notice on a conspicuous part of the business premises of the respondent in the presence of two persons and he made endorsement on the notice that at the above address on enquiry the assessee was said to be in Bombay or in Ceylon and as directed by the Income-tax Officer the no.tice was posted at the premises of the company of the assessee and the witness had also signed the notice. The Supreme Court held that the notice was duly served. In this case, Mr. Suhas Sen, learned counsel for the revenue, contended that each attempted service should not be separately considered, but the cumulative effect of all these attempts should be considered to find out whether reasonable and proper attempts had been made and it is only upon that that it can be held whether service was good or bad. In my opinion, Mr. Sen is right in his contention that when there was service by affixation on the ground that the person to be served could not be found, each attempt should not be judged separately. Considering here the entire course of attempts made to serve the notice I am of opinion that reasonable attempts had been made to find the petitioner and as such there was compliance of the requirements of Order 5, Rule 17, Mr. Sen has sought to argue that even if the service by affixation was not good, defect was cured by the fact that the notice was served on the 3rd April, 1964, by registered post. In view of the aforesaid decision of the Supreme Court I am, however, unable to accept the position. Service of notice must be within the time prescribed as a condition precedent for initiating the proceedings. Mr. Sen also drew my attention to the judgment of the Gujarat High Court in the case of Commissioner of Income-tax v. Bhanji Kanji's Shop, [1968] 68 I.T.R. 416 (Guj.). It was held by the Gujarat High Court that the two modes of service mentioned in Section 63(1) were not exhaustive and it was permissible to have a notice served in a way not mentioned in Section 63(1) of the Income-tax Act, 1922. It was further held that, in view of the fact that return had been filed by the assessee in that case in pursuance of the notice, it was clear that the notice had been received by the assessee. However, in view of the facts of this case and the view I have taken it is not necessary for me to rely on the aforesaid decision of the Gujarat High Court or to consider the said decision in detail. Mr. Sen also urged that in this case what was required was issuing the notice within time and that would be sufficient compliance. I am, however, unable to accept this position in view of the decision of the Supreme Court in the case of Banarsi Debi v. Income-tax Officer, District IV, Calcutta, . There is, however, another aspect of the question. Mr. Sen argued that the question of limitation was essentially a question to be decided by the income-tax authorities. The petitioner was not entitled to take this point in a writ petition under article 226 of the Constitution. Mr. Sen drew my attention to the decision in the case of Pilani Investment Corporation v. Income-tax Officer, 'A' Ward, Companies District II, [1968] 69 I.T.R. 847 (Cal.). The facts of that case, in my opinion, were different from the facts in the instant case, and it is not necessary to deal with the aforesaid case in considering the aforesaid contention of Mr. Sen. Mr. Sen, however, drew my attention to the decision of the Supreme Court in the case of Lalji Haridas v. R. H. Bhatt, . There it was held that the jurisdiction conferred on the High Court under article 226 of the Constitution was not intended to supersede the jurisdiction and authority of the Income-tax Officer to deal with the merits of all the contentions that the assessee might raise before them and so it would be entirely inappropriate to permit an assessee to move the High Court under article 226 of the Constitution and contend that the notice issued against him was barred by time. It was held that the income-tax authorities should consider the merits of such contention in the light of the relevant evidence. It has to be remembered in the instant case, admittedly, one notice was served oh the 3rd April, 1964. The question is whether the service of the notice prior to 3rd April was good and the further question is whether the notice had been served in accordance with law. Mr. Sen drew my attention to the decision of the Kerala High Court in the case of Income-tax Officer, Kottayam v. R. M. Subtamania Iyer, [1970] 77 I.T.R. 453 (Ker.). Dr. Pal, on the other hand, contended that it had been held by the Supreme Court that where the Income-tax Officer initiated proceedings without jurisdiction the same was liable to be quashed in writ proceedings. He drew my attention to the relevant decisions of the Supreme Court. In my opinion, the proper and harmonious way of judging this question would be, where on admitted facts it is established that the notice was not served in accordance with the Code of Civil Procedure or as enjoined by law within the time prescribed, then, inasmuch as the service of the notice was a condition precedent for initiation of proceedings under Section 148, such a contention could be raised in a proper writ proceeding, but where the question whether notice has been properly served or not is itself a question to be decided by adjudication upon the facts and upon such adjudication of facts it can be contended that the notice is barred by limitation it would not be proper for the court in a writ application to entertain such a contention. The court should in such a case direct the parties to proceed in accordance with the procedure of the Income-tax Act. If, on undisputed facts, it is apparent to the court that reasonable and diligent efforts had not been made to serve the notice or such notice had not been served within time, the court can entertain an application under article 226 of the Constitution in respect of the proceedings initiated by such notice. Where, however, what is reasonable and diligent depends upon the evaluation of circumstances and evidence, it is not proper that the court should embark upon such an evaluation in writ proceedings. On that view of the matter and in the facts and circumstances of the case, the petitioner is also not entitled to move this application under article 226 of the Constitution. In any event, however, I have held in this case that there was proper service.

4. Mr. Sen further contended that the petition was not maintainable, because the petitioner did not make free and frank disclosure of all facts. In the view I have taken in this application I do not propose to discuss or decide this contention in this application,

5. Inasmuch as both the contentions urged on behalf of the petitioner fail in this case, this application also fails. The application is, therefore, dis-missed. The Rule nisi is discharged. Interim order, if any, is vacated. There will be no order as to costs. There will be a stay of operation of this order for a period of six weeks. This stay will not prevent the respondent from proceeding with the penalty proceedings or from causing the notice in respect of the penalty proceedings to be served by the Income-tax Officer.