DESAI BROTHERS VS DEPUTY COMMISSIONER OF INCOME-TAX (ASSESSMENT)
2001 P T D 3044
[240 I T R 121]
[Gujarat High Court (India)]
Before R. Balia and A.R. Dave, JJ
DESAI‑ BROTHERS
Versus
DEPUTY COMMISSIONER OF INCOME‑TAX (ASSESSMENT).
Special Civil Application No.6710 of 1991, decided on 26/11/1998.
Income‑tax‑‑‑
Reassessment‑‑‑Condition precedent‑‑‑Reason to believe that income had escaped assessment‑‑‑Nexus essential between material on record and belie, that income had escaped assessment‑‑‑‑Belief of Assessing Officer that trading activities are not covered by S. 32AB and that concession granted under S.32AB was erroneous‑‑‑Trading activities are not outside purview S.32AB‑‑Reassessment proceedings were riot valid‑‑‑Indian Income Tax Act.
The requirement of recording of reasons before issuance of notice is to provide a safeguard against the arbitrary action that may be taken by reopening a completed assessment time and against on irrelevant considerations. Recording of reasons unfolds the process by which the Assessing Officer was led to the formation of his belief about escapement of income. If the action of the Assessing Officer is founded on some material or ground that has no nexus to the formation of reason to believe or is not founded on any existing material the same is liable to be interfered with. The correctness of his tentative opinion is not to be tested on the anvil of the final decision which may be reached after considering rival contentions and weighing them through the process of reasoning. But at the same time, if it appears from the reasoning which has been adopted by the Assessing Officer that no inference of escapement of income from assessment can at all be drawn therefrom, it must be held that the action is ultra vires the statute and does, not confer jurisdiction on the Assessing Officer:
Held, that in the instant case the fact on which the Assessing Officer had founded his belief was that the assessee was a trader in bidies and, accordingly, its activities fell under Item (2) of Schedule XI of the Income Tax Act, 1961, and, therefore, the activities did not come under "eligible business" to which the provisions of section 32AB of the Income Tax Act, 1961, applied. A perusal of section 32AB clearly postulates that the only businesses which have been left out of the definition of "eligible business" or profession are the business of construction, manufacture or production under clause (a) or business of leasing‑ or hiring of machinery or plant for an industrial undertaking. In order to attract the restrictive meaning of this term, business must be of construction, manufacture or production. Mere trading activity cannot come within the purview of business which is not eligible business for the purpose of the said section notwithstanding that the article'‑6r thing in which a person. is trading falls under the Eleventh Schedule. Hence, the action under section 147 had been initiated de hors the provisions of‑section 32AB of the. Act which made it ultra vires and void.
Barium Chemicals Ltd. v. Company Law Board (1966) 36 Comp, Cas. 639 (SC) ref.
J.P. Shah for the Assessee.
B.B. Desai with Manish R. Bhatt for the Department.
JUDGMENT
R. BALIA, J.‑‑‑Through this petition, petitioner challenges the notices issued under section 148 of the Income Tax Act, 1961, for the assessment years 1987‑88 and 1988‑89.
During the previous year, relevant to the assessment year 1987‑88, the assessee had claimed deduction under section 32AB of the Income Tax Act, 1961, and had deposited Rs.35 lakhs with the Industrial Development Bank of India referable to gross taxable income of Rs.1,81,23,723 before deduction under section 32AB . Likewise, for the previous year relevant to the assessment year 1988‑89, the assessee had deposited a sum of Rs..25,44,305 but claimed deduction, under section 32AB only at Rs.22,53,421 which was restricted 0 20 per cent. of the profits of the business. For both the relevant years, deduction was allowed.
By the impugned notices under section 148 read with section 147, the assessee was required to furnish returns for the two assessment years. Section 147 which empowers the Assessing Officer to assess or reassess the income which has escaped assessment, is required under section 148 to issue notice to the assessee requiring him to furnish returns for the assessment years before making assessment, reassessment or recomputation under section 147 section 148(2) further enjoins a duty upon the Assessing Officer to record his reason before issuing any notice under section 148 to initiate the proceedings. On receipt of notice, the assessee demanded from the Assessing Officer, the reasons that have been recorded for initiating proceedings under section 147 to which the Assessing Officer replied that reasons could be supplied only after he submits to the jurisdiction by filing a return. Aggrieved, the assessee has filed this petition challenging the issuance of the notice alleging that the Income‑tax Officer had no jurisdiction to initiate action under section 147 as the condition necessary for the same did not exist. In pursuance of the notice, learned counsel for the Revenue has placed on record the reasons that have been recorded by the Assessing Officer for entertaining the belief that income of the assessee for the relevant assessment year has escaped assessment, before issue of notice which are reproduced hereinbelow:
Dersai Brothers, Chakalsi Bhagol, Nadiad
Assessment year 1987‑88
Reasons recorded under section 148 of the Act:
A perusal of the records shows that the assessee‑firm has claimed deduction under section 32AB of the Income‑tax Act in respect of the amount deposited by at with the Industrial Development Bank of India for the above assessment year.
The assessee is a trader in bidis and accordingly its activities fall under item (2) of the Eleventh Schedule of the Income‑tax Act and, therefore, the activities do not come under 'eligible business' to which the provisions of section 32AB of the Act apply. Since the claim in respect of the amount deposited by the assessee with the Industrial Development Bank of India has been allowed to the assessee under the provisions of section 32B of the Income‑tax Act, the assessment' has resulted in under assessment to the extent the claim of the assessee has been allowed.
Issue notice under section 148 of the Income‑tax Act for default under section 147 of the Act in respect of the above assessment year. "
Notices were issued on August 7, 1991. It is urged by learned counsel for the petitioner that reasons disclosed as per the record do not provide any foundation to hold a reason to believe that income has escaped assessment in the case of the petitioner for the relevant assessment year.
On the other hand, learned counsel for the Revenue urges that the condition for issuing notice is holding of belief that income chargeable to tax has escaped assessment for any assessment year in the case of the assessee. This process of entertaining belief is subjective satisfaction of the Assessing Officer and is not amenable to judicial scrutiny on weighing the reasons for holding such belief on objective yardstick. As the condition for vesting the assessing authority with necessary jurisdiction to issue notice has been satisfied inasmuch as notice has been issued within limitation, the Assessing Officer has recorded his reason to hold the belief that income chargeable to tax has escaped assessment and that the belief has been held in good faith.
Undoubtedly, the words "reason to believe" relate to process of entertaining an opinion which is subjective in nature and is not liable to be scrutinised by the objective test of judicial scrutiny as in appeal. However, even in the case where an action is founded on subjective satisfaction, tile process of entertaining such belief is not bereft of any minimum safeguard against arbitrariness.
The limitation of judicial review where the act is to be founded on subjective opinion on the part of the authority has been succinctly stated by the apex Court in Barium Chemicals Ltd: v. Company Law Board (1966) 36 Comp Cas 639; AIR 1967 SC 295. The Court did not approve the unbridled and unguided operation, of the freedom from judicial scrutiny of acts which are founded on formation of subjective satisfaction of the authority empowered to take such action. Sheiat, J., in his opinion stated (pages 688‑89):
The words 'reason to believe' or 'in the opinion of do not always lead to the construction that the process of entertaining 'reason td believe' or 'the opinion' is an 'altogether subjective process rift lending itself even to a limited scrutiny by the Court that such 'a reason to believe' or 'opinion' was not formed on relevant facts or within the limits or ...restraints of the statute as an alternative safeguard to rules of natural justice where the function is `administrative ....It is hard to contemplate that the Legislature could have left to the , subjective process both the formation of opinion and also the existence of circumstances on which it is to be founded. It is also not 'reasonable to say that the clause permitted the authority to say that it has formed the opinion on circumstances which in its opinion exist and which in its opinion suggest an intent to defraud or a fraudulent or unlawful purpose. It is equally unreasonable to think that the Legislature could have abandoned even the small safeguard o f requiring the opinion to be founded on existent circumstances which suggest the things for which an investigation‑can be ordered and left the opinion and even the existence of circumstances from which it is to be formed to a subjective process ....If it is shown that the circumstances do not exist or that they are such that it is impossible for any one to form an opinion therefrom suggestive of the aforesaid things, the opinion is challengeable on the ground of non application of mind or perversity or on the ground that it was formed on collateral grounds and was beyond the scope of the statute.
Hidayatullah, J., in his concurring opinion stated (page 661):
No doubt, the formation of opinion is subjective but the existence of circumstances relevant to the inference as the sine qua non for action must be demonstrable. If the action is questioned on the ground that no circumstances leading to an inference of the kind contemplated by the section exists, the action might be exposed to interference unless the existence of the circumstances is made out We have to see whether the Chairman in 'his affidavit has shown the existence of circumstances leading to such tentative conclusions. If he has, his action cannot be questioned because the inference is to be drawn subjectively and even if this Court would not have drawn a similar inference that fact would be irrelevant. But if the circumstances pointed out are such that no inference of the kind stated in section 237(b) can at all be drawn, the action would be ultra vires the Act and void.
The principle equally applies to the formation of reason to believe that income has escaped the assessment. The requirement of recording of reason before issuance of notice is to provide a safeguard again the arbitrary action that may be taken by reopening the completed assessment time and again on irrelevant consideration. Recording of reasons unfolds the process by which the Assessing Officer was led to the formation of his belief about escapement of income. If the action, of the Assessing Officer is founded on some material or ground that has no nexus to the formation of reason to believe or is not founded on any existing material the same is liable to be interfered with. Recording of reasons opens the‑ window to the process by which the Assessing Officer reaches his belief, in case the action is challenged, to enable the Court to find out whether he has formed his belief on relevant material or grounds which have some nexus to the tentative opinion which he has formed. The correctness of his tentative opinion is not to be tested on the anvil of the final decision which may be reached after considering rival contentions and weighing them through the process of reasoning. But, at the same time, if it appears from the reasoning which has been adopted by the Assessing Officer that no inference of escapement of income from assessment can at all be drawn therefrom, it must be held that the action is ultra vires the statute and does not confer jurisdiction on the Assessing Officer to act on that basis.
The fact on which the Assessing Officer has founded his belief in this case is that the assessee is a trader in bidis and accordingly, its activities fall under item (2) of Schedule XI of the Income -tax Act and, therefore, the activities do not come under "eligible business" to which the provisions of section 32AB of the Act apply. The "eligible business" which has been defined under section 32AB at the relevant time reads as under,‑‑
"32AB.(2) For the purposes of this section,‑‑
(i)'eligible business or profession' shall mean business or profession,other than‑‑
(a)the business of construction, manufacture or production of any article or thing specified in the list in the Eleventh Schedule carried on by an industrial undertaking, which is not a small‑scale industrial undertaking as defined in section 80HHA; .
(b)the business of leasing or hiring of machinery or plant to anindustrial undertaking, other than a small‑scale industrial undertaking as defined in section 80HHA, engaged in the business of construction, manufacture or production of any article or thing specified the list in the Eleventh Schedule."
A perusal of this provision clearly postulates that the only business which has been left out of the definition of "eligible business or profession" is business of construction, manufacture or production under clause (a) or business of teasing or hiring of machinery or plant for an industrial undertaking. In order to attract the restrictive meaning of this term, the business must be of construction, manufacture or production. Mere trading activity by no stretch of imagination can come within the purview of business which i3 not eligible business for the purpose of the said section notwithstanding that article or thing in which a person is trading is falling under the Eleventh Schedule. In our opinion, reasons which have been recorded by the Assessing Officer clearly disclose that they cannot lead at all to the formation of such belief that a mere trader can fall outside the purview of section 32AB. His belief has been entertained without any material relevant for the purpose of formation of the belief and contrary to the plain language of section 32AB, no person informed of the provision of law, and as an Assessing Officer entrusted with implementation of the Act, the presumption is that he is aware about the provision at least for the breach of which he is seeking to initiate action under section 147, on the plain reading of section 32AB can hold a belief that a trader simpliciter is not carrying on eligible business. We are of the opinion that the impugned notice has been issued on mere pretext without having any ground for holding brief that income has escaped assessment without application of mind to the provision of law of which violation is assumed. Formation of subjective belief in such a case cannot be sustained. The conclusion is irresistible that action under section 147 has been initiated de hors the provisions of section 32AB of the Income‑tax Act which makes it ultra vires and void. As a result, the impugned notices are quashed. Rules is made absolute. There shall be no order as to costs.
M.B.A./305/FCRule made absolute.