19 February 1964
Supreme Court


Case number: Appeal (civil) 37 of 1963






DATE OF JUDGMENT: 19/02/1964


CITATION:  1964 AIR 1190            1964 SCR  (6) 826  CITATOR INFO :  R          1972 SC2617  (9)

ACT: Income-tax-Proceedings  under  s.  34(1A)-Applicability   of other relevant provisions of the Act-Section 34(1A)  whether contravenes  Art. 14 of the  Constitution-Indian  Income-tax Act,  1922  (11 of 1922), ss.34(1),  34(1A)-Constitution  of India, Art. 14.

HEADNOTE: The  validity  of  s.  34(1A)  of  the  Income-tax  Act  was challenged  by the assessees as contravening Art. 14 of  the Constitution.  It was ,,contended, that the remedy by way of appeals and revisions available in cases under s. 34(1)  was denied to the assessees against whom proceedings were  taken under  s.  34(1A), and that while under s. 34(1)(a),  as  it then  stood, the assessing authority could not act beyond  8 years,  this  protection  was  not  available  to  assessees against, whom action was taken under s. 34(1A).  827 Held:     Section  34(1A) was valid and did  not  contravene Art. 14 of the Constitution. It could not have been the intention of the legislature when it  enacted s. 34(1A) that the procedure prescribed  by  the relevant  provisions of the Act beginning with s. 22  should not be applicable to proceedings taken under s. 34(1A),  and that  the procedure to be followed in the  said  proceedings and  the powers to be exercised by the  Income-tax  Officers dealing  with them should be, what is vaguely  described  as "the  inherent or incidental powers" of such officers.   The words  "thereupon" and "accordingly" in s. 34(1A)  seems  to emphasise  the applicability of the relevant  provisions  of the Act to the proceedings taken under s. 34(1A). The  object of the legislature being to catch income  which’ had  escaped  assessment,  it would be  legitimate  for  the legislature  to  deal with the class of assessees  in  whose cases  the  income  which had escaped  assessment  was  much larger,   because  that  would  be  a  basis  for   rational classification which has an intelligible connection with the



object intended to be achieved by the statute. Jai Kishan Srivastava v. Income-tax Officer, Kanpur,  I.L.R. [1959] II All. 451, approved. Suraj Mull Mohta v. A. V. Viswanatha Sastri, [1955]1  S.C.R. 448  and  Shree Meenakshi Mills Ltd., Madurai v. Sri  A.  V. Viswanatha  Sastri, [1955]1 S.C.R. 787 referred to.

JUDGMENT: CIVIL  APPELLATE JURISDICTION: Civil Appeals Nos.  37-40  of 1963. Appeals  from the judgment and decree dated August  13,  11, 1959  of  the  Allahabad High Court  in  Civil  Misc.   Writ Petitions Nos. 870 to 873 and 349 of 1956 respectively.                             WITH Petitions Nos. 335 to 345 of 1960. Petition under Art. 32 of the Constitution of India for  the enforcement of Fundamental Rights. G.   S.  Pathak,  S.  N. Andley, Rameshwar Nath  and  P.  L. Vohra, for the appellants (in C.As. Nos. 37-40 of 1963). M. C. Setalvad, Rameshwar Nath,S. N. Andley and P.   L. Vehra, for the appellant (in C.A. No. 589/63). C.   K.  Daphtary, Attorney-General, K. N. Rajagopal  Sastri and R. N. Sachthey, for the respondents (in all the  appeals and petitions). 828 February 19, 1964.  The Judgment-of the Court was, delivered by GAJENDRAGADKAR, C.J.-These civil appeals and writ  petitions have been placed before us for hearing in a group,.  because all  of  them  raise  a common question  of  law  about  the validity of section 34(1A) of the Income-tax Act (No.  XI of 1922) (hereinafter called ’the Act’).  M/s.  K. S. Rashid  & Son,  and its partner, Rashid Ahmad, are the  appellants  in Civil  Appeals Nos. 37 to 40/1963, and petitioners in  W.Ps. Nos.  335-345/1960.  The appeals arise out of the four  writ petitions  (Nos. 870-873 of 1956) filed by the firm and  its partner  in  the  High Court of  Allahabad  challenging  the validity of the notices served upon them under s. 34(1A)  of the Act in respect of their income for the years 1941-42  to 1946-47.   These writ petitions have been dismissed  by  the said High Court and it is with the certificate issued by  it that  the  firm and its partner have come to this  Court  in appeal.   The  writ petitions Nos.  335-345/1960  have  been filed by the same parties in this Court under Art. 32 of the Constitution in respect of the notices served on them on the 19th  March. 1956 and the order of excess profit tax  levied on them.  In these petitions, the same point is urged by the parties;  and that is that the notices are invalid,  because s.  34(1A)  is itself ultra vires.  The respondents  to  the appeals are : the Commissioner of Income-tax, U.P., Lucknow, and  the Income-tax Officer, Central Circle IV, Delhi.   The respondents  to  the  writ petitions are  :  the  Income-tax Officer,  Central  Circle - IV, New  Delhi,  the  Income-tax Officer,  ’A’ Ward, Meerut, the-Commissioner of  Income-tax, U.P., Lucknow, and the Central Board of Revenue, New Delhi. Civil Appeal No. 589 of 1963 has been brought to this  Court in  similar  circumstances by the appellant,  M/s.   Bhawani Prasad   Girdharlal.   The  appellant  had  challenged   the validity  of  the notices issued to it on the  16th  August, 1955 under s. 3 4 (1A) of the Act.  The writ petition  filed by  the appellant has been dismissed by the  Allahabad  High Court and it is with the certificate issued by the said High Court that the present appeal has been brought to



829 this Court.  That is how the only question which arises  for our  decision  in  this  group of  matters  relates  to  the validity of s. 34(1A) of the Act. The  argument  urged  in support of  the  challenge  to  the validity of the impugned section is that it suffers from the vice  of  contravening Art. 14 of the Constitution.   It  is urged  that whereas under s. 34(1) which deals with  similar cases  of  assessees,  the  remedy by  way  of  appeals  and revisions  under  the  relevant provisions  of  the  Act  is available  to  the assessees, that remedy is denied  to  the assessees  against  whom  proceedings are  taken  under  the impugned  section.  Section 34(1) thus gives a  preferential treatment to the assessees who are similarly placed with the assessees  dealt with under s. 34(1A); and that  amounts  to unconstitutional  discrimination.  It is also urged that  in regard  to cases falling under s. 34(1) (a) as it  stood  at the  relevant  time, a period of limitation of 8  years  had been  prescribed beyond which the assessing authority  could not  act,  and this protection of the prescribed  period  of limitation  is not available to the assessees  against  whom action is taken under the impugned section.  It is on  these two grounds that the validity of s.     34(1A) is challenged before us. Section  34 deals with income which has escaped  assessment. Section  34(1) (a) deals with cases where income has,  inter alia,  escaped assessment, owing to the omission or  failure on  the part of the assessee to make a return of his  income under s. 22 for any year, or to disclose fully and truly all material  facts necessary for his assessment for that  year, whereas  s.  34(1)  (b) refers to  cases  where  income  has escaped  assessment notwithstanding that there has  been  no omission  of failure as mentioned-in clause (a) on the  part of the assessee.  In respect of the first category of cases, s. 34(1) had provided at the relevant time that the  Income- tax Officer may, in cases falling under cl. (a) at any  time within eight years, and in cases falling under clause (b) at any time within four years of the end of that year, serve on the  assessee  "a  notice  containing  all  or  any  of  the requirements which may be included in the notice under  sub- section (2) of s. 22, and may proceed to assess or re-assess such income, profits or gains, or recompute the loss or 830 depreciation  allowance;  and  the provisions  of  this  Act shall, so far as may be, apply accordingly as if the  notice were a notice issued under that sub-section". Let  us  now read the relevant portion of s.  34(1A).   This provision lays down, inter alia, that if, in any case of  an assessee. the Income-tax Officer has reason to-believe:               (i)   that  income has 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  said income  amounts,  or  is               likely  to amount, to Rs. 1 lakh or  more,  he               may, notwithstanding that the period of  eight               years  or,  as  the case may  be,  four  years               specified  in subsection (1) has  expired,  in               respect thereof, serve on the assessee, or, if               the  assessee is a company, on  the  principal               officer  thereof, a notice containing  all  or               any of the requirements which may be  included               in  a notice under sub-section (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), and thereupon the provisions of this  Act               excepting  those contained in clauses (i)  and               (iii) of the proviso to sub-section (1) and in               sub-sections (2) and (3)  of   this    section               shall, so far as may be, apply accordingly :               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.  831 It  is urged that whereas in cases falling under  s.  34(1), the  Income-tax Officer has to deal with the matter  on  the footing  that  the notice issued against the assessee  is  a notice under s. 22(2), that obligation is not imposed on the Income-tax  Officer while he deals with cases falling  under s. 34(1A), because the words "as if the notice were a notice issued  under that sub-section" which are found in s.  34(1) are omitted in s. 34(1A).  It is not seriously disputed that if  the notice issued under s. 34(1A) is not deemed to be  a notice  under s. 22 (2), the remedies by way of appeals  and revisions  which are prescribed by sections 30, 31, 32,  33, 33A  and  33B  of  the Act would not  be  available  to  the assessee, and so, the main basis for the attack against  the validity  of  s.  34(1A) rests on the  hypothesis  that  the omission  of  the relevant words in s. 34(1A)  in  substance deprives the assessee of the said remedies prescribed by the relevant provisions of the Act.  If the assumption on  which this  challenge  proceeds  is well-founded.  s.  34(1A)  may suffer  from  the  infirmity that it  contravenes  Art.  14. Though,  as  we will later point out, there  is  a  rational classification between the assessees falling under s. 34(1), and   those   falling  under  s.   34(1A),   that   rational classification would not justify the denial of the right  of appeal  to the persons included in s. 34(1A).  The  question thus presented is one of construction. Before dealing with the construction of s. 34(1A), it  would be necessary to refer very briefly to the background of  the enactment of the said section.  This section was  introduced by an amendment in the Act on the 17th July, 1954, and  that was   because   s.  5  (4)  of  the   Taxation   on   Income (Investigation  Commission) Act (No. 30 of 1947) was  struck down  by this Court as unconstitutional on May 28, 1954,  in Suraj Mall Mohta and Another v. A. V. Viswanatha Sastri  and Another(1).   In that case, while examining the validity  of s. 5(4) of the Investigation Commission Act, this Court held that  the  persons brought within the mischief of  the  said section belong to the same class of persons who fall  within the  ambit  of  s. 34 of the Act and are dealt  with  by  s. 34(1), and in view of the (1)  [1955] 1 S. C. R. 448. 832 fact  that  the  procedure  prescribed by  s.  5(4)  of  the Investigation  Commission Act was very much less  favourable to  the assessees than the one available to them  if  action was  taken  against  them under  s.  34(1),  the  conclusion reached      was   that   the   impugned   s.    5(4)    was unconstitutional.  It is unnecessary to refer to the several grounds mentioned by Mahajan C.J. who spoke for the Court in



striking down the impugned section. After   this  judgment  was  pronounced,   the   legislature intervened  and enacted s. 34(1A).  That, however,  was  not the end of the matter.  When s. 34(1) was introduced in  the Act,  there remained two statutory provisions  dealing  with substantially  the same subject-matter, section 5(1) of  the Investigation  Commission  Act and s. 34(1) of the  Act.  In Shree Meenakshi Mills Ltd., Madurai v. Sri A. V.  Viswanatha Sastri and Another(1), a point was raised before this  Court as  to whether it was open to the Income-tax  Department  to invoke s. 5(1) of the Investigation Commission Act after  s. 34(1A) of the Act was enacted, and, this Court held that  it was  not, because on comparing the two relevant  provisions, s.   5(1),  according  to  the  decision  of   this   Court, contravened  Art. 14 of the Constitution.  That is  how,  s. 5(1) became a dead letter and the Investigation  Commission, in  consequence,  ceased to function.  The cases  which  had been  referred  to that Commission and which  had  not  been completed had, therefore, to be taken up under s. 34(1A)  of the  Act.   Thus,  it  would be  noticed  that  the  present controversy has had a somewhat chequered career.  The  first challenge  was  to s. 5(4) of the  Investigation  Commission Act;  when the challenge succeeded and the said section  was struck  down  in  the  case  of  Suraj  Mall  Mohta(2)   the legislature  intervened and s. 34(1A) was added in the  Act. Nevertheless,  the  cases pending before  the  Investigation Commission  were  sought  to be continued  before  the  said Commission under s. 5(1) and this section was struck down in the  case of Shree Meenakshi Mills Ltd.(1); and,  now,  that proceedings  against the same class of assessees are  sought to be continued under s. 34(1A), it is urged that s.  34(1A) of the Act itself is invalid.  It is in (1) [1955] 1 S.C.R. 787. (2) [1955] 1. S.C.R. 448.  833 the  light of this background that the  controversy  between the parties in the present proceedings has to be judged. Reverting  then to the question of construction, the  narrow point  which needs to be examined is, what is the effect  of the omission to include in s. 34(1A) the clause " as if  the notice were a notice issued under that sub-section" which is to be found in s. 34(1)?  In dealing with this ,question, we think it would not be unreasonable to bear in mind that when the  legislature enacted s. 34(1A), it must have desired  to remove  the  infirmities which had rendered s. 5(4)  of  the Investigation  Commission Act invalid.  In other words,  the legislature  must  have presumably wanted to afford  to  the assessees  in respect of whom s. 34(1A) was intended  to  be invoked,  the  same  remedies that  were  available  to  the assessee  covered  by s. 34(1).  Though  the  importance  or significance   of  this  consideration  cannot   be   unduly emphasised,  it  cannot be said that this  consideration  is altogether irrelevant. We  have already read the relevant portion of s. 34(1A)  and we  have seen that it requires that a notice containing  all or  any  of "he requirements which may be  included  in  the notice  under  s. 22, sub-section (2) has to be  issued,  In other  words, the notice which is required to be issued  is, in  terms,  in a sense referable to s.  22(2),  because  the legislature has provided that it must contain all or any  of the  requirements which would be included in such a  notice. Then,  s. 34(1A) provides that after issuing ;the notice  on the assessee in the manner prescribed by it, the  Income-tax Officer  may  proceed  to assess  or  reassess  the  income, profits or gains of the assessee for the relevant years.  In



the context, it would, we think, be reasonable to hold  that the assessment or reassessment which has to follow the issue of  the  notice,  must  be  assessment  or  reassessment  in accordance with the relevant provisions of the Act, and this is made very clear by :the clause that follows, because  the said clause begins with the word "thereupon" which indicates that   when  the  process  of  assessment  or   reassessment commences,  the clause beginning with the  word  "thereupon" comes  into  operation  and this clause  requires  that  the ’Provisions of the 134-159 S.C.-53 834 Act  shall, so far as may be, apply accordingly.   The  word "accordingly"  like the word "thereupon" seems to  emphasise the  applicability of the relevant provisions of the Act  to the proceedings taken under s. 34(1A); otherwise there is no particular  reason  which would have justified  the  further provision in the section excepting certain provisions of the Act  which  are held to be inapplicable to  the  proceedings under s. 34(1A). It is true that s. 34(1) uses the clause "as if the  notice. were  a notice issued under that sub-section" and s.  34(1A) does  not; but the two provisions were not inserted  in  the Act  at  the  same time; s. 34(1) in the  present  form  was enacted in 1948, whereas s. 34(1A) was enacted in 1954.   It is  quite  likely that the draftsman who drafted  s.  34(1A) took  the  view  that  the last  clause  in  question  which occurred  in  s. 34(1) was really superfluous and  that  may account  for  its omission in s. 34(1A).   In  our  opinion, therefore,  construing the relevant words in s.  34(1A),  it would  be difficult to accede to the argument that the  said omission was deliberate and significant, and its consequence is  that  the provisions of s. 22 and all  other  provisions consequent  upon the application of s. 22 become  irrelevant in dealing with cases under s. 34(1A). If s. 22 is held to be inapplicable to proceedings under  s. 34(1A),  the  consequence would be entirely  irrational  and fantastic.   The powers conferred on the Income-tax  Officer under s. 23 (2) to take evidence would then not be available to  him,  and,  indeed, all the powers  prescribed  and  the procedure  laid  down  by s.  23  would  become  irrelevant. Likewise, the provisions in regard to appeals and  revisions contained in sections 30, 31, 33, 33A and 33B would also  be inapplicable.  As we have already seen, the  inapplicability of  these  provisions is the main foundation of  the  attack against  the validity of s. 34(1A).  It is,  however,  urged that  though the specific powers conferred by s. 23 may  not be   available   to   the  Income-tax   Officer,   he   may, nevertheless, exercise similar powers, because the authority to  assess must itself include such powers as incidental  to assessment.    The   best  judgment  assessment   which   is authorised  by s. 23 (4) may, it is suggested, be made  even in cases falling under  835 s.   34(1A)  under the inherent authority of the  Income-tax Officer.   In our opinion, this approach is  wholly  miscon- ceived.   We are satisfied that it could not have  been  the intention of the legislature when it enacted s. 34(1A)  that the procedure prescribed by the. relevant provisions of  the Act  beginning with s. 22 should not be applicable  to  pro- ceedings taken under s. 34(1A), and that the procedure to be followed  in  the  said proceedings and  the  powers  to  be exercised  by  the  Income-tax Officers  dealing  with  them should  be  what is vaguely described as  ’the  inherent  or incidental powers’ of such officers.  Therefore, we have  no



hesitation  in  holding  that  the  challenge  made  to  the validity  of s. 34(1A) on the ground that the remedy by  way of appeals or revisions which is available to the  assessees against  whom  proceedings are taken under s. 34(1)  is  not available  to  the assessees who are covered by  s.  34(1A), cannot be sustained. The other contention raised against the validity of s.34(1A) is based on the fact that at the relevant time, g.  34(1)(a) dealt  with cases similar to those falling  under  s.34(1A), and yet, whereas in the former category of cases a period of limitation  was prescribed as eight years there is  no  such limitation  in regard to the latter, and that, it is  urged, means unconstitutional discrimination.  We are not impressed by this argument.  It is true that in a broad sense both  s. 34(1) (a) and s. 34(1A) deal with cases of income which  has escaped assessment. and in that sense, the assessees against whom  steps are taken in respect of their income  which  has escaped assessment can be said to form a similar class;  but the similarity between the two categories disappears when we remember  that s. 34(1A) is intended to deal with  assessees whose  income  has  escaped assessment  during  a  specified period between 1st of September, 1939 and the 31st of March, 1946.  It is well--known that that is the period in which as a result of the War, huge profits were made in business  and industry. The  second point which is very important is that in  regard to  the cases falling under s. 34(1A), action can  be  taken only where the income which has escaped assessment is likely to amount to Rs.  1 lakh or more.  In other words. 836 it is only in regard to cases where the escaped income is of a  high  magnitude  that the restriction of  the  period  of limitation has been removed.  It is difficult to accept  the argument that the legislature was not justified in  treating this  smaller class of assessees differently on  the  ground that  the  profits made by this class were  higher  and  the income which had escaped assessment was correspondingly of a much larger magnitude.  The object of the legislature  being to  catch income which had escaped assessment, it  would  be legitimate  for  the legislature to deal with the  class  of assessees  in  whose  cases the  income  which  had  escaped assessment  was much larger, because that would be  a  basis for  rational  classification  which  has  an   intelligible connection  with the object intended to be achieved  by  the statute. It  was  suggested that as a result of the  provisions  con- tained in s. 34(1)(a) and s. 34(1A) one year would  overlap; and  that may be true.  But the argument of overlapping  has no  significance  because  it makes  no  difference  whether action  is taken under s. 34(1), or s. 34(1A) in respect  of that  year.  Once the notice is served under s. 34(1) or  s. 34(1A),  the rest of the procedure is just the same and  all the  remedies available to the assessees are also  just  the same.   Therefore, we see no substance in the argument  that the  absence of the restriction as to period  of  limitation under  s.  34(1A)  introduces  any  infirmity  in  the  said provision.   In the result, we must hold that s.  34(1A)  is valid  and has not contravened Art. 14 of the  Constitution. That  is  the  effect  of the majority  view  taken  by  the Allahabad High Court in Jai Kishan Srivastava v.  Income-tax Officer, Kanpur and Another(1). There  is one minor additional point which has  been  argued before  us by Mr. Setalvad in Civil Appeal No. 589 of  1963, and  that point is based upon the requirement prescribed  by the  proviso to s. 34(1A) that the Income-tax Officer  shall



not  issue a notice 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.  The argument is that the require- (1)  I. L.  R. [1959] II All. 451.  837 ment  prescribed  by  the proviso  constitutes  a  condition precedent for the exercise of the authority conferred on the Income-tax  Officer by s. 34(1A) and since that  requirement is  not  shown  to  have been satisfied  in  his  case,  the appellant  in C.A. No. 589 of 1963 must succeed even  if  s. 34(1A)  is held to be valid.  We are not impressed  by  this argument.   What  was  urged before the High  Court  by  the appellant  was not that no reasons had been recorded by  the Income-tax Officer as required by the proviso; the  argument was that the appellant had not been given a copy of the said reasons and it appears to have been urged that the appellant was  entitled to have such a copy.  This latter part of  the case  has  not been pressed before us by Mr.  Setalvad,  and rightly.  Now, when we look at the pleadings of the parties, it  is  clear  that it was assumed  by  the  appellant  that reasons  had  been recorded and in fact, it  was  positively affirmed  by the respondent that they had been so  recorded; the  controversy being, if the reasons are recorded, is  the assessee   entitled  to  have  a  copy  of  those   reasons? Therefore,  we do not see how Mr. Setalvad can suggest  that no reasons had in fact been recorded, and so, the  condition precedent  prescribed by the proviso had not  been  complied with. The  result is, all the Civil Appeals and Writ Petitions  in this group fail and are dismissed.  There would be no  order as to costs.            Appeals and Writ Petitions dismissed.