Case: Madhya Pradesh Industries Ltd Vs. The Income-Tax Officer, Nagpur

2. The respondent initiated proceedings under Section 34 of the Act against the appellant by issuing notices under that section on December 26, 1960 in respect of the assessment years 1953-54, 1954-55 and 1955-56. The appellant challenged the validity of those proceedings by means of writ petitions under Article 226 and 227 of the Constitution in the High Court of Judicature at Bombay (Nagpur Bench). Those petitions were summarily dismissed. The appellant thereafter appealed to this Court after obtaining special leave from this Court. This Court allowed those appeals on April 8, 1965 holding that the High Court was not justified in summarily dismissing the writ petitions as the allegations made therein merited examination. Thereafter the High Court issued rule nisi in those petitions. The respondent opposed those petitions. After hearing the parties, the High Court again dismissed those writ petitions. Hence these appeals.3. The facts of the case material for deciding these appeals have been set out in detail in this Courts order dated April 8, 1965. We shall briefly refer to them.4. The above appeals relate to proceedings under Section 34 of the Act in respect of three assessment periods. It would be sufficient if we set out the facts relating to the assessment year 1953-54. There is no dispute that if the proceedings relating to that year are held to be invalid, similar would be the position regarding the proceedings relating to the other two assessment periods. On the other hand, if they are held to be valid, the same would be true in respect of the other assessment periods.5. The appellant, Madhya Pradesh Industries Ltd. (hereinafter referred to as the company), is engaged in the business of mining manganese ore. On March 18, 1952, the Company appointed M/s. J. K. Alloys Ltd., (hereinafter called Alloys) as its settling agents. In the account year relating to the assessment year 1953-54, the company paid as commission, Rupees 1,13,052/8/9 to the selling agents and claimed that amount as a revenue outgoing in the computation of its profits for that year. The Income-tax Officer made the order of assessment without expressly referring to the said deduction but proceeding on the basis that it is a permissible deduction. On December 26, 1960, the Income-tax Officer issued a notice to the Company in exercise of his powers under Section 34 of the Act reciting therein that he having reasons to believe that the income of the company assessable to income-tax for the assessment year 1953-54 had (a) escaped assessment and (b) under-assessed, he proposes to reassess the income that had escaped assessment or had been under-assessed. He called upon the company to deliver a return of the total income of the company assessable for the said assessment year 1953-54. In response to a letter sent by the company, the Income-tax Officer informed the company that the notice issued by him was under Section 34 (1) (a). Thereafter there was some correspondence between the Income-tax Officer and the company. The Income-tax Officer required the company to give him the information called for in the questionnaire issued by him. The company did not send any reply to the said questionnaire. On December, 21, 1961, the Income-tax Officer informed the company that since the questions asked were not replied to, he presumed that no correspondence with Alloys existed and the payment of commission had been made without any justification, Alloys having rendered no service as selling agents.6. On April 2, 1962, the company moved the High Court of Judicature of Bombay (Nagpur Bench) praying for the issue of a writ of certiorari under Article 226 of the Constitution or an appropriate direction or order under Article 227 of the Constitution calling for the record of the case and for the issue of writs in the nature of Prohibition or Mandamus restraining the Income-tax Officer from taking any action or proceeding in enforcement or implementation of the notice dated December 26, 1960. This petition, as mentioned earlier, was rejected in limine.7. In the writ petition, the plea taken by the company was that in issuing the notice under Section 34 (1) (a) of the Act, the Income-tax Officer acted without jurisdiction and for a colourable purpose. Its case as set out in the writ petition is as follows:8. In its return the company disclosed for the year ending March 31, 1953 Rs. 15,70,587/- as its total profits according to its books of account. In the statement under Section 38 (3) of the Act filed with the return, the company disclosed that it had paid Rs. 1,13,052/8/9 as commission sales on different dates by cheques to Alloys and Rs. 6,091/4/- to J. S. Williams on October 4, 1952 by cheque as commission on sales. In the profit and loss account of the company filed with the return, the amount of Rs. 29,76,067/10/8 was disclosed as received by sales less commission. On December 7, 1953, R. K. Gupta, a Director of the Company made a statement before the Income-tax Officer stating that the commission was paid to Williams on the sales accounted for during the year ended March 31, 1953 and that the same should be allowed as deduction and that similar was the case with the commission payable to J., K. Alloys Ltd., which had already been paid subsequently. On February 21, 1954, the Income-tax Officer called upon the company to produce amongst other documents, certificates showing whether any receipt included in the income, profits or gains had been credited or transferred to any assets, capital account, or any other liability account, a similar certificate regarding any credit for important expenses claimed under the head Profit and Loss A/c, a list of buyers with full addresses along with quantity, number and net proceeds of export business as well as Indian sales, a statement setting out full details of various items of indirect expenses debited to profit and loss account and a statement of expenses grouped and sorted out under the heads, wages, salary and other emoluments. On June 21, 1954, the company filed the certificates and the statements demanded together with the statement showing that out of the sale proceeds, commission paid to Alloys and J. S. Williams was deducted. In the course of the assessment proceedings, R. S. Agarwal, a representative of the company appeared before the Income-tax Officer and agreed that the commission debited as paid to Williams may be added back and about alloys he said that the commission had already been paid. Thereafter on February 14, 1955, the assessment of the company was completed by the Income-tax Officer. The Income-tax Officer rejected the commission said to have been paid to Williams and added back that amount to the gross profits of the company. He took no objection to the commission paid to the Alloys.9. The case pleaded by the company in the writ petition is that it had placed before the Income-tax Officer all the material facts; the Income-tax Officer before making the assessment had examined those facts and was satisfied with the explanation given by the company. The company denied that the Income-tax Officer had any reasons to believe that by reason of the omission or failure on the part of the company to disclose fully and truly all material facts necessary for his assessment for the year in question income, profits or gains chargeable to income-tax have escaped assessment for that year or have been under-assessed. The company disputed that the Income-tax Officer had any reasons before him to have the required belief. It also denied the fact that it had omitted or failed to disclose full and truly all material facts necessary for the assessment in question or that any income, profits or gains chargeable to income-tax have escaped assessment in that year.

Court's reasoning:
15.In the cases, the company in its writ petitions had repudiated the assertion of the Income-tax Officer that he had reason to believe that due to the omission or failure on the part of the company to give material facts, some income had escaped assessment. Under those circumstances one would have expected the officer who issued the notices under Section 34 (1)( (A) to file an affidavit setting out the circumstances under which he formed the necessary belief. We were told that one Mr. Pandey had issued the notices in question .That officer had not filed any affidavit in these proceedings. The proceedings recorded by him before issuing the notices have not been produced nor his report to the Commissioner or even the Commissioners sanction has not been produced. Hence it is not possible to hold that the Income-tax Officer had any reason to form the belief in question or the reasons before him were relevant for the purpose. We have no basis before us to hold that the Income-tax Officer had jurisdiction to issue the impugned notices. Hence the proceedings taken by him have to be quashed.