Suraj Mall Mohta And Co vs A. V. Visvanatha Sastri And Another

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 28 May 1954

Coram: Mehar Chand Mahajan, Vivian Bose, Natwarlal H. Bhagwati

In this matter the Supreme Court of India considered an application filed by Suraj Mall Mohta and Co. against A. V. Visvanatha Sastri and another respondent. The judgment was delivered on 28 May 1954. The case was reported in the 1954 volume of the All India Reports at page 545 and in the 1955 Supreme Court Reporter at page 448. The opinion was authored by Justice Mehar Chand Mahajan, who sat on a bench together with Justices Vivian Bose and Natwarlal H. Bhagwati. The parties were identified respectively as the petitioner, Suraj Mall Mohta and Co., and the respondents, A. V. Visvanatha Sastri and another individual. The judgment also listed additional judges who were associated with the bench, namely Justice Das, Justice Sudhi Ranjan Bose, Justice Vivian Bhagwati, Justice Natwarlal H. Aiyy ar, and Justice T. L. Venkatarama, reflecting the full complement of the Court at the time of the decision. The citation record includes numerous references to subsequent reporting in the Supreme Court reports and other law journals, indicating that the decision was widely cited in later cases.

The substantive issue before the Court concerned the interpretation of sub‑section (4) of section 5 of the Taxation on Income (Investigation Commission) Act, 1947, and its relationship to sub‑section (1) of the same section as well as to section 34 of the Indian Income‑Tax Act, 1922. The petitioner argued that sub‑section (4) dealt with the same class of persons as those grouped under sub‑section (1), namely individuals who had substantially evaded payment of tax on income. The Court examined the plain language of the statutory provisions and concluded that sub‑section (4) was not limited solely to persons who had earned extraordinary profits, nor was it confined to individuals who had evaded tax only to a substantial degree. Rather, sub‑section (4) extended to all persons who might have evaded tax, whether the evaded amount was large or small. Consequently, the scope of sub‑section (4) differed both in extent and in range from the scope of sub‑section (1). The Court further observed that the persons falling within sub‑section (4) corresponded precisely to those covered by section 34 of the Indian Income‑Tax Act, which also deals with individuals whose income can be pursued through the procedures prescribed in that provision. Because the two statutes addressed the same class of persons with similar characteristics—namely, persons who had not fully disclosed their income and had thereby evaded tax—the Court held that sub‑section (4) could not be said to create a distinct group separate from those covered by section 34. The judgment noted, however, that the procedural mechanisms prescribed by the 1947 Act were more severe than those provided under the 1922 Income‑Tax Act, raising the question of whether the differential treatment amounted to discrimination prohibited by Article 14 of the Constitution. The Court indicated that it was not possible to treat all persons who evaded tax and failed to disclose material facts in the same manner as those against whom a report is made under sub‑section (4) of section 5 of the impugned Act, thereby setting the stage for further analysis of the constitutional validity of the provision.

The Court observed that persons who fail to disclose their true income and evade payment of tax constitute a class that is distinct from those who fall within the scope of section 34 of the Indian Income‑Tax Act. Both section 34 of the Indian Income‑Tax Act, 1922, and subsection (4) of section 5 of the Taxation on Income (Investigation Commission) Act, 1947, address every individual who possesses the same essential characteristics – namely, the failure to make a genuine disclosure of income and the consequent avoidance of tax liability. The Court noted that the procedure laid down by the Taxation on Income (Investigation Commission) Act, 1947, is considerably more prejudicial and far more drastic to the assessee than the procedure provided under the Indian Income‑Tax Act, 1922. Consequently, the Court held that subsection (4) of section 5, together with the procedural regime created by the impugned Act as it applies to persons proceeded against under that subsection, constitutes discriminatory legislation. Such discrimination violates the guarantee of equality before the law contained in article 14 of the Constitution, rendering the provisions void and unenforceable.

The judgment recorded that the original jurisdiction lay in Petition No. 196 of 1954, filed under article 32 of the Constitution of India for the enforcement of fundamental rights. Counsel for the petitioner comprised P. R. Das and K. P. Khaitan, assisted by B. Sen, A. K. Mukherjea and B. P. Maheswari. Representing the respondents were C. K. Daphtary, Solicitor‑General for India, with Porus A. Mehta and P. G. Gokhale. The judgment was delivered on 28 May 1954 by Chief Justice Mehr Chand Mahajan. The primary question for determination was whether certain sections of the Taxation on Income (Investigation Commission) Act, 1947 (referred to as Act XXX of 1947) became void from the commencement of the Constitution of India because they conflicted with article 14.

The petitioner, Suraj Mall Mohta & Co. Ltd., is a company incorporated under the Indian Companies Act, and its managing director, Suraj Mall Mohta, also serves as managing director of another firm, Messrs. Jute and Gunny Brokers Ltd. The Central Government, invoking section 5(1) of the Act, referred the case of Messrs. Jute and Gunny Brokers Ltd. to the Investigation Commission on or before 1 September 1948. During the commission’s inquiry, designated as case 831/30, and in the course of investigating other similar referrals, it was discovered that the petitioner company had derived secret profits which it had not disclosed, thereby evading tax. On 28 August 1953, the Commission submitted a report to the Central Government under section 5(4) of the Act, recommending that the petitioner’s case, together with those of Suraj Mall Mohta and members of his family, be referred to the Commission for further investigation. The Central Government acted on this recommendation on 9 September 1953, referring the matters to the Investigation Commission under the same statutory provision.

The Central Government referred the matters to the Investigation Commission under section 5(4) of the Act, and the commission recorded them as cases numbered 831/64‑69 in its register. On 15 September 1953 the Commission issued a notice to the petitioners informing them that their matters had been referred for investigation. The notice required the petitioners to furnish certain documents and information, the particulars of which were set out in Annexure B of the petition presented to the Commission. Subsequently, on 12 April 1954 the petitioners filed a petition under article 32 of the Constitution seeking appropriate writs to restrain the Commission from taking any action against them under Act XXX of 1947. The petitioners contended that sections 5(1), 5(4), 6, 7 and 8 of Act XXX of 1947 had become void because, after the Constitution of India came into force, those provisions were discriminatory in character.

In order to understand the arguments advanced by the petitioners and by the State, the Court found it necessary to set out the relevant provisions of the Act. The preamble of the Act declared that its purpose was to determine whether the actual incidence of income taxation in recent years conformed to existing law and whether the procedures for assessment and recovery of tax were sufficient to prevent tax evasion. Section 3 empowered the Central Government to constitute an Income‑Tax Investigation Commission. The duties of the Commission were described as follows: first, to investigate and report to the Central Government on all matters relating to income taxation, with particular reference to the adequacy of existing law and procedures for assessment and collection in preventing evasion; and second, to investigate, in accordance with the Act, any case or points in a case referred to it under section 5. The composition of the Commission was prescribed in section 4.

Section 5 of the Act provided that, before 1 September 1948, the Central Government could refer any case or points in a case to the Commission for investigation if it had prima facie reasons to believe that a person had substantially evaded income tax, and could also submit supporting material. The Government could also, before that date, request the withdrawal of any such reference. Sub‑section (3) of section 5 stipulated that any reference made by the Central Government before 1 September 1948 could not be called into question, nor could any court inquire into the sufficiency of the material on which the reference was based. Sub‑section (4) began to state that if, during the investigation of any case or points referred under sub‑section (1), the Commission developed reason to believe that another person, or additional points not originally referred, required investigation, it could make a report to the Central Government, which would then be required to refer the new matter for investigation.

The Commission was authorised, under the statutory scheme, to act when it formed a belief that either a person other than the one whose case was under investigation had evaded income tax, or that additional points, beyond those initially referred by the Central Government, required inquiry. In such a situation the Commission could prepare a report for the Central Government explaining the reasons for its belief. Upon receiving this report, the Central Government was required, notwithstanding the provisions of subsection (1), to promptly refer the case of the other person or the additional points identified by the Commission for further investigation.

Section 6 set out the powers that the Commission could exercise while conducting an investigation. Subsection (1) allowed the Commission to compel any individual, banking institution, or other company to prepare and submit, by a specified date, written statements of accounts and affairs. These statements had to be verified in the manner prescribed by the Commission and, where the Commission so directed, also verified by a qualified auditor. The information required could relate to any matters that, in the Commission’s opinion, might be directly or indirectly useful or relevant to any case referred to it. Persons or entities required to comply were bound to do so regardless of any contrary legal provision. Subsection (2) granted the Commission the authority to administer oaths and to exercise all the powers of a civil court under the Code of Civil Procedure, 1908, for the purposes of taking evidence on oath, enforcing the attendance of witnesses and persons whose cases were being investigated, compelling the production of documents, and issuing commissions for the examination of witnesses. Subsection (3) provided that if, during an investigation, the Commission deemed it necessary to examine specific accounts or documents, to interrogate any person, or to obtain statements from any individual, it could authorize any income‑tax officer not below the rank of Income‑tax Officer to act on its behalf. Subsection (4) stipulated that the authorized official would, subject to the Commission’s direction, possess the same powers as the Commission under subsections (1) and (2). Moreover, any person who had charge or custody of the accounts or documents that needed examination was required, notwithstanding any contrary law, to produce them. Finally, subsection (5) addressed the situation where a person whose case or points were under investigation failed to attend in person after being duly served with a notice, or refused to give evidence, answer questions, produce documents, or prepare and furnish statements when called upon. If the Commission was satisfied that such refusal or failure was willful, it could close the investigation of that case and, at its discretion, draw up its report on the case or points to the best of its judgment, and could also consider further actions as it deemed appropriate.

The Court observed that, where a person refused or failed to comply with a notice issued under the Commission’s authority, the Commission was empowered to issue a direction specifying a sum to be recovered from that person as a penalty for the refusal or failure, and that such penalty could be imposed without prejudice to any penalty that might be imposed under the Indian Income‑Tax Act, 1922. The Court further explained that, if in the Commission’s opinion a person or a banking or other company was likely to possess information or documents that could be directly or indirectly useful or relevant to any case before the Commission, or any case that might be reported to the Central Government under sub‑section (4) of section 5, the Commission, subject to its own direction, could authorize an official to make enquiries in any manner deemed appropriate and to obtain from the person or company statements on oath or otherwise on the specified points or matters. For the purpose of such enquiries, the Commission and the authorised official were to enjoy all the powers conferred on them by sub‑sections (1), (2), (2A), (3) and (4) of the relevant provision. The Court noted that all material gathered by the Commission or the authorised official, as well as material accompanying the reference under sub‑section (1) of section 6, could be entered on the record at any stage the Commission considered appropriate. The procedure to be followed by the Commission was set out in section 7, which provided that, subject to the provisions of the Act, the Commission could regulate its own procedure and that the powers of the Commission under sub‑sections (1), (2), (3), (7) and (8) of section 6 and sub‑sections (2), (4) and (6) of section 7 could be exercised by any member authorised by the Commission. Sub‑section (2) of section 7 required that, in making an investigation under clause (b) of section 3, the Commission must act in accordance with the principles of natural justice, follow, as far as practicable, the principles of the Indian Evidence Act, 1872, and give the person whose case was being investigated a reasonable opportunity to rebut any evidence adduced against him. The power of the Commission to compel production of documents was held not to be limited by section 130 of the Indian Evidence Act, 1872, and the Commission was deemed to be a Court for the purposes of sections 5 and 6 of the Bankers’ Books Evidence Act, 1891. Sub‑section (3) of section 7 stipulated that any person whose case was being investigated could be represented by a pleader, a registered accountant or an employee duly authorised to act on his behalf, but that no person was entitled to be present or to be represented during the enquiry under sub‑sections (3) and (7) of section 6. The effect of these provisions, the Court concluded, was that when the Commission was collecting materials from various sources against the assessee, the assessee could not be present at those stages or take part in the enquiry; however, once the material was ready and placed on the record, the assessee could be present and was required to be given a reasonable opportunity to rebut any evidence that had been collected against him.

In this case, the Court explained that when the Commission gathers material from various sources against the assessee, the assessee is not allowed to be present during those stages of collection or to participate in the enquiry at that time. However, once the material has been compiled and placed on the record, the assessee may be present and must be afforded a reasonable opportunity to rebut any evidence that has been collected against him. Sub‑section (4) of section 7, which attracted considerable criticism, states that no person shall be entitled to inspect, call for, or obtain copies of any documents, statements, papers or materials furnished to, obtained by, or produced before the Commission or any authorized official in any proceedings under this Act. The provision further provides that the Commission, and after the Commission has ceased to exist any authority appointed by the Central Government for this purpose, may at its discretion allow such inspection and furnish copies to any person. The provision adds that, for the purpose of enabling the person whose case is under investigation to rebut any evidence brought on record against him, the person may, upon making an application and paying such fees as may be prescribed by rules made under this Act, be furnished with certified copies of the documents, statements, papers and materials placed on the record by the Commission. Sub‑section (5) of section 7 reads that, except in cases where the Commission may exercise its powers under section 195 and Chapter XXXV of the Code of Criminal Procedure, 1898, (a) no suit, prosecution or other legal proceeding shall be instituted against any person in any civil or criminal court for any evidence given or produced by him in any proceeding before the Commission, and (b) no such evidence shall be admissible against that person in any suit, prosecution or other proceeding before such court, unless the Central Government has previously sanctioned it. The provision that attracted objection, section 8, provides in subsection (1) that, save as otherwise provided in the Act, the materials brought on record shall be considered by all three members of the Commission sitting together and the report of the Commission shall reflect the opinion of the majority. Subsection (2) directs that after considering the report, the Central Government shall, by written order, direct that such proceedings as it thinks fit under the Indian Income‑tax Act, 1922, the Excess Profits Tax Act, 1940, or any other law, shall be taken against the person whose case the report relates to with respect to the income of any period commencing after the thirty‑first day of December, 1938; and that, notwithstanding the restrictions contained in section 34 of the Indian Income‑tax Act, 1922, or section 15 of the Excess Profits Tax Act, 1940, or any other law, and notwithstanding any lapse of time, such proceedings may be taken and completed.

In any assessment or reassessment proceeding that was launched pursuant to a direction issued under sub‑section (2), the findings recorded by the Commission—whether on the entire case or on the particular points referred to it—were to be treated as final, subject only to the modifications provided in sub‑sections (5) and (6). Nevertheless, such proceedings did not bar the government from commencing separate proceedings under section 34 of the Indian Income‑tax Act, 1922. Regarding any order made during the course of proceedings taken under the direction of sub‑section (2), the provisions of sections 30, 31, 33 and 33‑A of the Indian Income‑tax Act, 1922, together with the corresponding provisions of the Excess Profits Tax Act, 1940, were held not to apply to matters that had been declared final by sub‑section (4). Yet, the affected person retained a right to challenge the order: within sixty days of being served with a copy of the order, the person could file an application in the prescribed form, accompanied by a fee of one hundred rupees, requesting the appropriate Commissioner of Income‑tax to refer any question of law arising from the order to the High Court. When such a reference was made, the provisions of sections 66 and 66‑A of the Indian Income‑tax Act, 1922, were to apply as far as possible, with the modification that the reference must be heard by a bench consisting of not fewer than three High Court judges. Moreover, sub‑section (7) declared that, notwithstanding any contrary provision in this Act or any other law then in force, any evidence admitted before the Commission or an authorized official would be admissible as evidence in any proceeding undertaken under sub‑section (2). The Court observed that it could not be denied that the powers vested in the Commission and the procedure prescribed by the impugned Act were considerably more comprehensive and drastic than those contained in the Indian Income‑tax Act. At the time the impugned statute was enacted, no constitutional objection could plausibly be raised to its provisions, and the powers conferred upon the Commission, as well as the procedure it was authorized to follow, fell well within the legislative authority of the Central Legislature. The statute was therefore regarded as good law until the Constitution came into force. When India became a sovereign democratic Republic on 26 January 1950, every existing law had to be examined in light of the new Constitution, and all statutes enacted prior to that date were required to satisfy the validity test laid down in Part III of the Constitution. Consequently, the matters that required consideration in the present case were whether the provisions of section 5(1), sections 5(4), 6, 7 and 8, or any part thereof, contravene the guarantee

In this case the Court examined whether the provisions of the Act complied with the constitutional guarantee of equal protection of the laws and equality before the law, and whether the provisions were based on a classification that was rational in light of the objects of the Act. A further question was whether section 6(5) of the Act infringed article 20(3) of the Constitution. The petitioner was represented by counsel who challenged section 5(1) of the Act on two main grounds. First, the counsel argued that the provision did not rest on any valid classification because the word “substantial” was vague, uncertain and lacked a fixed meaning, thereby offering no basis for distinguishing any class of persons. Second, the counsel contended that the Central Government, under the authority of section 5(1), could arbitrarily discriminate between individuals who belonged to the same class, choosing to refer the case of one individual to the Commission while showing favoritism to another by refraining from referral, even though both individuals fell within the group that had substantially evaded tax. Regarding sub‑section (4) of section 5, the counsel submitted that this sub‑section could not exist independently and would necessarily be subordinated to sub‑section (1) if the latter were held invalid. Alternatively, assuming sub‑section (1) to be valid, the counsel asserted that sub‑section (4) should still be declared void because it conferred arbitrary discretion on the Commission to select cases and because it was highly discriminatory; the clause encompassed both substantial and insubstantial evasion, which also fell within the scope of section 34 of the Indian Income‑tax Act.

The learned Solicitor‑General responded to all of these submissions by maintaining that the Act was founded on a broad and rational classification that dealt exclusively with persons who had evaded income‑tax from 1 January 1939 to 1 September 1948 as a result of wartime controls, black‑marketing activities and the consequent large profits. In other words, the Solicitor‑General explained that the Act targeted a distinct class of “war‑profiteers,” a class that required special legislative treatment, and therefore the law did not violate the constitutional guarantee of equal protection. The Solicitor‑General further argued that persons falling under sub‑section (4) of section 5 also belonged to the same “war‑profiteer” class, and consequently, on the same grounds, that sub‑section could not be declared void. Additionally, the Solicitor‑General asserted that there was no substantial difference between the procedure prescribed under section 34 of the Indian Income‑tax Act and that prescribed by the impugned Act, and that, in any event, the procedure established by the Act served as a suitable substitute for the procedure set out in the Income‑tax Act.

The Court observed that the procedure prescribed by the Act served as an adequate replacement for the procedure laid down in the Indian Income‑tax Act. In the present matter, the Court held that it was unnecessary to consider every argument advanced by Mr P R Das and opposed by the learned Solicitor‑General. The Court reasoned that for the purpose of disposing of the case it was sufficient to focus on the specific disputes concerning the validity of sub‑section (4) of section 5 of the Act. This approach was justified because the petitioner’s case had been referred to the Commission under the provisions of sub‑section (4), and not referred to the Commission by the Central Government under the provisions of section 5(1). Consequently, a detailed inquiry into the validity of section 5(1) lay beyond the issues that needed to be resolved in this proceeding.

Proceeding on the premise that section 5(1) of the Act was based on a proper classification, the Court noted that the provision targeted a group of individuals identified as war‑profiteers, a class that the legislature had deemed deserving of special treatment. The Court accepted, without expressing any definitive view, that the classification was rational and that reasonable grounds existed for distinguishing between persons who fell within that class and those who did not. With that assumption in place, the Court turned to the question of whether sub‑section (4) of section 5, under which proceedings had been initiated against the petitioner, violated the guarantee of equal protection of the laws guaranteed by article 14 of the Constitution.

The first issue for consideration was whether sub‑section (4) of section 5 dealt with the same category of persons as those grouped under sub‑section (1) of the same section—namely, persons who had, to a substantial extent, evaded payment of tax on income. In other words, the Court examined whether sub‑section (4) merely allowed the Commission to add to the list of persons already covered by section 5(1) or whether it conferred a broader authority on the Commission. The Court found that the wording of sub‑section (4) did not incorporate the limitations expressed in sub‑section (1), as contended by the Solicitor‑General. Sub‑section (4) plainly states that when the Commission “has reason to believe that some person other than the person whose case is being investigated has evaded payment of taxation on income… it may make a report to the Central Government.” The provision does not repeat the phrase “to a substantial extent” that appears in section 5(1). On a plain reading, and in accordance with established principles of statutory construction, the term “substantial extent” cannot be read into sub‑clause (a) of section 5(4). Therefore, the Court concluded that sub‑section (4) is not limited solely to individuals who obtained extraordinary profits or who evaded tax to a substantial degree, but applies more broadly to any person suspected of tax evasion, irrespective of the amount involved.

The Court observed that subsection 4 applies to every person who may have avoided paying income tax, regardless of whether the amount evaded is large or small. The language used in this subsection differs from that of subsection 1 of section 5. Subsection 1 of section 5 states that the Central Government may act when it "has prima facie reasons for believing that a person has to a substantial extent evaded payment of taxation on income." In contrast, clause (a) of section 5(4) provides that the Commission may act when it "has reason to believe that some person other than the person whose case is being investigated has evaded payment of taxation on income." Thus the phrase “prima facie belief” of the Central Government is replaced by the expression “the Commission has reason to believe.” Because of this substitution, the scope of subsection 4 is broader than that of subsection 1, both in extent and in range.

The Court further explained that subsection 4 is not confined to profits earned within any particular time frame. It reaches all individuals—whether traders, businessmen, professionals, or any other persons—who at any time have avoided paying income tax for any reason. According to this construction, subsection 4 deals with the same class of persons who fall within the ambit of section 34 of the Indian Income‑Tax Act and are covered by subsection 1 of that section, whose income can be pursued under that provision. Taxpayers who have failed to fully and truthfully disclose all material facts required for assessment under section 34 can therefore be treated as persons discovered during an investigation under section 5(1) as having evaded income tax.

Consequently, some of these persons may be dealt with under the provisions of Act XXX of 1947 at the Commission’s discretion, although they could also be pursued under section 34 of the Income‑Tax Act. The Court rejected the contention that all persons who evade income tax, do not disclose all necessary particulars, and against whom a report is made under subsection 4 of section 5, form a distinct class separate from those who fall within section 34 of the Income‑Tax Act. It reaffirmed the well‑settled principle that Article 14 requires the same rules of evidence and procedure to apply to everyone in similar circumstances. While this principle does not demand that every law apply universally to all persons regardless of their nature, attainment, or circumstance, the State may classify individuals for legislative purposes, provided the classification rests on a real and substantial distinction that bears a rational relation to the legislative objective.

The Court explained that any classification made in relation to a law must rest on a real and substantial distinction that has a just and reasonable connection to the purpose of the legislation; such a classification cannot be arbitrary or unfounded. Classification, as defined, involves separating persons into groups that share systematic relations, typically reflected in common properties and characteristics. The Court observed that there is no material difference in either the properties or the characteristics of individuals who are identified as income‑tax evaders during an enquiry conducted under section 5(1) and those who are identified by the Income‑Tax Officer as having evaded tax. Both categories possess identical attributes and therefore merit identical treatment. Consequently, the Court held that both section 34 of the Indian Income‑Tax Act and sub‑section (4) of section 5 of the impugned Act address persons who share the same essential features – namely, the failure to truthfully disclose income and the consequent evasion of tax liability. The Court then turned to the question of whether the procedure laid down in Act XXX of 1947 for uncovering concealed profits of tax evaders is substantially different and prejudicial to the assessee when compared with the procedure prescribed by section 34 of the Indian Income‑Tax Act. The learned Solicitor‑General argued that the procedure under the impugned Act constituted a fair and adequate substitute for that under the Indian Income‑Tax Act and asserted that no substantial difference existed between the two processes. He further maintained that full justice could be achieved, and indeed would be better served, by applying the new procedure instead of the one provided by the Indian Income‑Tax Act. The Court found that this argument presupposes the very issue that must be resolved in such cases. It was made clear that if persons dealt with under the impugned Act are denied the significant privileges available under the Indian Income‑Tax Act, it cannot be shielded by claiming that the discriminatory procedure advances justice. The assessment must be made from the standpoint of an ordinary reasonable person, not from the Government’s perspective. A reasonable person confronted with serious charges of tax evasion would question why one similarly situated individual should benefit from the procedural safeguards of the Indian Income‑Tax Act while another, in the same position, is deprived of those safeguards. This consideration is essential to the application of article 14 to the facts, and the Court proceeded to examine whether the procedure prescribed by the impugned Act, as applied to persons similarly situated to those dealt with under section 34, is materially different and operates to the prejudice of those persons.

The Court observed that persons who were similarly situated with those who were proceeded against under section 34 of the Indian Income‑tax Act were treated in a substantially different manner under the impugned Act, and that this difference operated to the prejudice of those persons. It noted that the assessors whose matters were referred to the Commission under section 5(1) of the Act received merely a prima facie belief of the Government as the basis for the referral, after which the Commission investigated the matter and formed an opinion. By contrast, for persons falling within sub‑section (4) of section 5, the Commission itself gathered evidence and formed a belief that the persons had evaded income‑tax, and on the Commission’s report the Government was bound to refer the cases back to the same Commission, which had already reached a prima facie conclusion of tax evasion. Consequently, the roles of investigator and judge were merged into a single entity in the section 5(4) process, a situation that did not arise in cases referred under section 5(1). The Court further identified several substantial differences between the two procedures, inter alia, the manner in which cases were initiated and the procedural safeguards that applied.

In particular, the Court held that under section 8 of the impugned Act the factual findings made by the Commission concerning the nature and extent of the alleged evasion were final and conclusive. As a result, persons against whom proceedings were instituted under section 5(4) were denied the rights of appeal, second appeal and revision that were available to assessors under sections 31, 32 and 33 of the Indian Income‑tax Act when their cases were dealt with under the procedure of section 34. The Court explained that a taxpayer proceeded against under section 34 who was found to have escaped income‑tax possessed a right of appeal to the Appellate Assistant Commissioner of Income‑tax and could contest all factual findings of the Income‑tax Officer. If relief was not granted by the Appellate Assistant Commissioner, the taxpayer could further approach the Appellate Tribunal under section 33 and again challenge the factual findings. By contrast, a person dealt with under section 5(4) of the impugned Act enjoyed none of these appellate rights. The learned Solicitor‑General argued that the composition of the Commission—consisting of a High Court Judge and two other responsible persons—served as an adequate substitute for the appellate mechanisms provided by the Income‑tax Act, asserting that the Commission functioned as a tribunal equivalent to the combined roles of the Income‑tax Officer, the Appellate Assistant Commissioner and the Appellate Tribunal. The Court disagreed, concluding that the mere constitution of the Commission could not be deemed a sufficient safeguard or an adequate replacement for the rights of appeal, second appeal and revision conferred by the Income‑tax Act.

In this case, the Court observed that the Indian Income‑tax Act provides a person with the rights of appeal, second appeal and revision to challenge factual determinations made by the first‑instance Judge. The Court said that the procedure created by the impugned Act removes those valuable rights for a person who is dealt with under that Act. Because the statutory scheme in the impugned Act does not furnish any mechanism for appeal, second appeal or revision, the Court concluded that there is a material and substantial difference between the procedure laid down by the impugned Act and the procedure provided by the Indian Income‑tax Act.

The Court then explained the procedure that applies when an assessment is made on escaped or evaded income under section 34 of the Indian Income‑tax Act. It held that, in such a situation, all the provisions that govern the assessment under section 23(3) become operative. Accordingly, the assessment must be based on all relevant material and on evidence, and the assessee normally enjoys the fullest right to inspect the record and to examine every document and material that is to be used against him. The Court further noted that, under section 37 of the Indian Income‑tax Act, proceedings before the Income‑tax Officer are judicial proceedings, and every incident of a judicial proceeding must be observed before a conclusion is reached. In practical terms, this means that the assessee has a right to inspect the record and all relevant documents before he is required to present evidence in rebuttal. The Court remarked that no provision of the Income‑tax Act withdraws this right of inspection. By contrast, the Court pointed out that the impugned Act contains a specific provision in sub‑section (4) of section 7 which states that no person shall be entitled to inspect, call for, or obtain copies of any documents, statements, papers or materials furnished to, obtained by, or produced before the Commission or any authorised official in any proceedings under that Act. The Court examined the proviso to that sub‑section, which allows a person, on applying and paying fees prescribed by the rules, to receive certified copies of documents, statements, papers and materials that have been placed on the record by the Commission for the purpose of enabling the person to rebut any evidence brought against him. The Court characterised this limited concession as a mere mercy and not a substitute for the full right of inspection that ordinarily exists under law, the Code of Civil Procedure, and the requirements of a judicial proceeding. The Court stressed that under the impugned Act the assessee is entitled only to obtain copies of the portion of material that has actually been placed on the record and is to be used against him. Consequently, any material that is favourable to the assessee but has not been placed on the record may be withheld, and the assessee is not even permitted to see the books of account that may have been impounded by the Act.

The Commission had taken possession of the books of account. It was possible that some entries in those books might contain evidence that could rebut the Commission’s case, yet the assessee was not permitted to obtain copies of such entries. Moreover, the assessee was not even allowed to inspect his own books while they were in the Commission’s custody, nor could he obtain copies of any entries that were favourable to him and that could potentially destroy the case that the Commission had assembled against him. The procedure laid down by the impugned Act was therefore substantially more prejudicial to the assessee than the procedure provided under the Indian Income‑tax Act. The learned Solicitor‑General did not dispute that the provisions of sections 6 and 7 of the impugned Act were far more drastic than the procedures prescribed in sections 37 and 38 of the Indian Income‑tax Act. In addition, the method of reference provided in subsection (4) of section 5 was also, to a certain extent, prejudicial to the assessee. While at the initial stage there was some similarity between the process for detecting evaded income under section 34 of the Indian Income‑tax Act and the process under subsection (4) of section 5 of the impugned Act, the overall comparison revealed a stark difference. Under the Indian Income‑tax Act, the same officer who initially forms a tentative conclusion both hears and decides the case, but his decision is not final because it is subject to appeal. In contrast, under subsection (4) of section 5, the Commission’s tentative decision made in the absence of the assessee becomes final when it is communicated to him, and there is no opportunity for appeal. This distinction is the essential difference between the two procedures. If the Investigation Commission were provided with a mechanism to review its own conclusions when acting both as investigator and as judge, the substantial discrimination between the two procedures might be avoided, and the situation would be less likely to fall foul of article 14 of the Constitution. However, as noted earlier, the impugned Act contains no such provision. Another point of difference is that section 34 limits the investigation of escaped or evaded income to a maximum period of eight years, whereas subsection (4) of section 5 imposes no time limit on the investigation, a circumstance that operates to the disadvantage of persons dealt with under that subsection as well as those covered by section 34 of the Indian Income‑tax Act. For the reasons stated above, the opinion was formed that subsection (4) of section 5 and the procedure established by the impugned Act for persons proceeded against under that subsection constitute discriminatory legislation that violates article 14 of the Constitution, rendering the provisions void and unenforceable. In reaching this conclusion, no further opinion was expressed.

In its discussion, the Court explained that it had not addressed the issue of whether section 5(1) of the Act was constitutionally valid, nor had it examined the question of whether section 6(5) of the impugned Act contravened article 20, sub‑clause (3) of the Constitution. Accordingly, the Court ordered that a writ of prohibition be issued directed to the Investigation Commission. The writ was to command the Commission to refrain from initiating any proceedings against the petitioner under any provision of the impugned Act. The order further directed that the petitioner be awarded the costs incurred in the present proceedings. The Court therefore directed that the appropriate writ be prepared, signed, and dispatched to enforce the prohibition. By this direction, the Court sought to prevent the Commission from taking any further action that might prejudice the petitioner under the challenged statutory provisions. The costs award was intended to reimburse the petitioner for expenses incurred in defending the petition. The Court’s order was concluded by the statement that the writ had been issued. This outcome reflected the Court’s decision to intervene without expressing any opinion on the substantive constitutional validity of the contested sections of the Act.