K. S. Rashid and Sons And Another vs Commissioner Of Income-Tax, U.P.

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

Court: Supreme Court of India

Case Number: Civil Appeals Nos. 37-40 of 1963

Decision Date: 19 February 1964

Coram: K.N. Wanchoo, K.C. Das Gupta, J.C. Shah, N. Rajagopala Ayyangar

In the matter titled K. S. Rashid & Sons and Another versus Commissioner of Income‑Tax, U.P., the Supreme Court rendered its judgment on 19 February 1964. The bench comprised Chief Justice Bhuvneshwar P. Sinha together with Justices K. N. Wanchoo, K. C. Das Gupta, J. C. Shah, N. Rajagopala Ayyangar. The case is reported in 1964 AIR 1190 and 1964 SCR (6) 826, and it has subsequently been cited in R 1972 SC 2617 (9). The petitioners, K. S. Rashid & Sons and another, challenged the validity of section 34(1A) of the Indian Income‑Tax Act, 1922, on the ground that the provision contravened Article 14 of the Constitution. Their contentions were that the procedural safeguards of appeal and revision available under section 34(1) were denied to assessors against whom proceedings were instituted under section 34(1A), and that while section 34(1)(a) limited the assessing authority to act within eight years, that limitation was not applicable to proceedings under section 34(1A). The Court held that section 34(1A) was constitutionally valid and did not offend Article 14. It observed that the legislature could not have intended to exempt the procedure prescribed in the Act, beginning with section 22, from application to proceedings under section 34(1A), nor could it have meant that the powers of the income‑tax officers in such proceedings were limited to vague “inherent or incidental” powers. The Court pointed to the words “thereupon” and “accordingly” in section 34(1A) as emphasizing that the relevant provisions of the Act were intended to apply to those proceedings as well. The legislative purpose, namely to capture income that had escaped assessment, justified a rational classification of assessors whose escaped income was substantially larger, thereby establishing an intelligible connection with the statutory objective. The Court referred to the earlier decisions in Jai Kishan Srivastava v. Income‑Tax Officer, Kanpur, I.L.R. [1959] II All. 451, which it approved, and also cited 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. The matter was instituted as civil appeals Nos. 37‑40 of 1963, arising from the judgment and decree dated 13 August 1959 of the Allahabad High Court in Civil Miscellaneous Writ Petitions Nos. 870‑873 and 349 of 1956, together with petitions Nos. 335‑345. The Court’s detailed reasoning affirmed the validity of section 34(1A) and rejected the petitioners’ constitutional challenge.

The Court recorded that a petition had been filed in 1960 under Article 32 of the Constitution of India for the enforcement of Fundamental Rights. Counsel for the appellants, comprising the firm M/s K. S. Rashid & Son and its partner Rashid Ahmad, appeared in Civil Appeals Nos 37‑40 of 1963. Counsel for the appellant in Civil Appeal No 589 of 1963 also appeared, as did counsel for the respondents, which included the Commissioner of Income‑Tax, Uttar Pradesh, Lucknow, and the Income‑Tax Officer, Central Circle IV, Delhi. The judgment was delivered on 19 February 1964 by the Chief Justice.

The Court explained that the civil appeals and writ petitions were grouped together because they all raised a single question of law concerning the validity of section 34(1A) of the Income‑Tax Act, 1922. The appellants in the civil appeals, M/s K. S. Rashid & Son and Rashid Ahmad, were also petitioners in writ petitions Nos 335‑345 of 1960. Their appeals originated from four writ petitions (Nos 870‑873 of 1956) that had been filed in the Allahabad High Court, challenging notices issued under section 34(1A) for the assessment years 1941‑42 to 1946‑47. The High Court dismissed those writ petitions, issued certificates of appeal, and the parties then approached this Court. The writ petitions filed in this Court under Article 32 concerned notices served on 19 March 1956 and an order of excess‑profit tax, and the parties contended that the notices were invalid because section 34(1A) was ultra vires. The respondents to the appeals were the Commissioner of Income‑Tax, Uttar Pradesh, Lucknow, and the Income‑Tax Officer, Central Circle IV, Delhi; the respondents to the writ petitions were the Income‑Tax Officer, Central Circle IV, New Delhi, the Income‑Tax Officer, “A’’ Ward, Meerut, the Commissioner of Income‑Tax, Uttar Pradesh, Lucknow, and the Central Board of Revenue, New Delhi. In a similar case, Civil Appeal No 589 of 1963 was filed by M/s Bhawani Prasad Girdharlal, challenging notices dated 16 August 1955 under the same section; the corresponding writ petition had also been dismissed by the Allahabad High Court, and a certificate of appeal had been obtained. Consequently, the sole issue before the Court was whether section 34(1A) of the Act was constitutionally valid, and the argument advanced in support of the challenge was that the provision suffered

In this matter, the petitioners maintained that section 34(1A) of the Income‑Tax Act contravened Article 14 of the Constitution. They asserted that, unlike section 34(1) which dealt with similar cases of assessees and provided for appeals and revisions under the appropriate provisions of the Act, the impugned section denied those procedural remedies to the assessees against whom proceedings were initiated. The petitioners therefore argued that section 34(1) granted a preferential advantage to assessees who were similarly situated, while those falling within the scope of section 34(1A) were subjected to discriminatory treatment that violated the guarantee of equality before law. Additionally, they contended that at the relevant time section 34(1)(a) prescribed a limitation period of eight years, after which the assessing authority could no longer act, and that this statutory protection was unavailable to the assessees against whom action was taken under section 34(1A). On the basis of these two contentions – the alleged denial of appellate and revisionary remedies and the absence of a prescribed limitation period – the validity of section 34(1A) was challenged before the Court. Section 34 of the Act concerned income that had escaped assessment. Sub‑section 34(1)(a) addressed situations where income escaped assessment because the assessee either failed to file a return under section 22 for any year or failed to disclose fully and truly all material facts necessary for assessment for that year. Sub‑section 34(1)(b) covered cases in which income escaped assessment despite the absence of any omission or failure of the sort described in clause (a). For the first category of cases, section 34(1) at the time authorized the Income‑Tax Officer, in cases falling under clause (a), to serve a notice at any time within eight years, and in cases falling under clause (b) to serve a notice at any time within four years of the end of the relevant year. Such a notice could contain any of the requirements that might be included in a notice under sub‑section (2) of section 22, and it empowered the officer to assess, reassess, or recompute the income, profits, gains, loss, or depreciation allowance as if the notice had been issued under that sub‑section. The Court then examined the operative portion of section 34(1A), which provided, inter alia, that if the Income‑Tax Officer had reason to believe (i) that income had escaped assessment for any year whose preceding year fell wholly or partly between 1 September 1939 and 31 March 1946, and (ii) that such income amounted or was likely to amount to one lakh rupees or more, the officer could, notwithstanding the eight‑year or, as the case might be, four‑year limitation specified in subsection (1), serve on the assessee – or, if the assessee was a company, on its principal officer – a notice containing any of the requirements that might be included in a notice under sub‑section (2) of section 22, and could proceed to assess or reassess the income, profits, or gains for all or any of the years referred to in clause (i).

The provision allowed the Income‑tax Officer, after the period specified in subsection (1) had expired, to serve a notice on the assessee, or if the assessee was a company, on its principal officer. The notice could contain any of the requirements that might be included in a notice issued under sub‑section (2) of section 22. Upon serving such notice, the Officer could assess or reassess the income, profits or gains of the assessee for any of the years mentioned in clause (i). The Act, except for the provisions set out in clauses (i) and (iii) of the proviso to subsection (1) and in sub‑sections (2) and (3) of the same section, would then apply as far as possible. A further condition required that the Officer could not issue a notice under this sub‑section unless he recorded his reasons for doing so, and the Central Board of Revenue was satisfied, based on those recorded reasons, that the case warranted the issuance of the notice. An additional limitation stipulated that no such notice could be issued after 31 March 1956.

It was argued that, unlike cases falling under section 34(1) where the Officer had to treat the notice as if it were a notice under section 22(2), the same obligation did not arise for notices issued under section 34(1A) because the phrase “as if the notice were a notice issued under that sub‑section” was omitted in section 34(1A). The argument further contended that if a notice issued under section 34(1A) was not deemed to be a notice under section 22(2), the assessee would be deprived of the appeal and revision remedies provided in sections 30, 31, 32, 33, 33A and 33B of the Act. Consequently, the principal basis for challenging the validity of section 34(1A) rested on the proposition that the omission of the relevant words effectively denied the assessee the remedies prescribed by those sections. If that assumption proved correct, section 34(1A) could be said to violate Article 14. Although a rational classification existed between assessees covered by section 34(1) and those covered by section 34(1A), such classification would not justify denying the right of appeal to persons falling within section 34(1A). Thus, the matter presented was essentially one of statutory construction. Before addressing that construction, a brief reference to the legislative background of the section was deemed necessary. Section 34(1A) had been introduced by an amendment on 17 July 1954 because section 5(4) of the Taxation on Income (Investigation Commission) Act, 1947, had been declared unconstitutional by the Court on 28 May 1954 in the case of Suraj Mall Mohta and Another v. A. V. Viswanatha Sastri and Another. In that decision, the Court observed that the persons targeted by section 5(4) belonged to the same class as those covered by section 34 of the Act and dealt with under section 34(1). The Court noted that the procedure prescribed by section 5(4) was considerably less favorable to the assessees than the procedure available under section 34(1), leading to the conclusion that section 5(4) was unconstitutional. Following that judgment, the legislature enacted section 34(1A), but the issue remained unresolved.

In the earlier decision of 28 May 1954, the Supreme Court examined the constitutionality of section 5(4) of the Investigation Commission Act in the case of Suraj Mall Mohta and Another v. A. V. Viswanatha Sastri and Another. While reviewing that provision, the Court observed that the persons targeted by section 5(4) fell within the same class of taxpayers that were covered by section 34 of the Income‑Tax Act and therefore were already dealt with under subsection 34(1). The Court noted, with reference to the report at page 448 of the 1955 volume of the Supreme Court Reports, that the procedural regime created by section 5(4) was considerably less favourable to the assessee than the procedure available when action was taken under section 34(1). Because of this disparity, the Court concluded that section 5(4) was unconstitutional. The judgment did not repeat the multiple reasons set out by Chief Justice Mahajan, who spoke for the Court in striking down the impugned provision.

Following the declaration of unconstitutionality, the legislature responded by inserting subsection 34(1A) into the Income‑Tax Act. However, the legislative amendment did not resolve all difficulties. When subsection 34(1) had already been incorporated, two other statutory provisions continued to address essentially the same subject‑matter: section 5(1) of the Investigation Commission Act and subsection 34(1) of the Income‑Tax Act. In the case of Shree Meenakshi Mills Ltd., Madurai v. Sri A. V. Viswanatha Sastri and Another, the Court was asked to consider whether the Income‑Tax Department could rely on section 5(1) of the Investigation Commission Act after the enactment of subsection 34(1A). After comparing the two provisions, the Court held that section 5(1) violated Article 14 of the Constitution and therefore could not be invoked. Consequently, section 5(1) became ineffective, the Investigation Commission ceased to operate, and all pending matters before that Commission had to be transferred to proceedings under subsection 34(1A) of the Act.

Thus, the present dispute has a complex history. The first challenge concerned section 5(4) of the Investigation Commission Act, which was struck down in Suraj Mall Mohta (citation [1955] 1 S.C.R. 448). The legislature then introduced subsection 34(1A). Subsequently, pending cases before the Investigation Commission were attempted to be continued under section 5(1), but that provision was invalidated in Shree Meenakshi Mills Ltd. (citation [1955] 1 S.C.R. 787). Now, the present proceedings seek to continue actions against the same class of assessees under subsection 34(1A), and the contention advanced is that subsection 34(1A) itself is invalid. In view of this background, the Court indicated that the controversy between the parties must be evaluated by first addressing the precise question of construction of subsection 34(1A).

The issue that required examination was the legal consequence of the failure to incorporate in section 34(1A) the expression “as if the notice were a notice issued under that sub‑section,” a phrase that does appear in section 34(1). In addressing this question, it was considered appropriate to remember that when the legislature enacted section 34(1A) its purpose was to eliminate the defects that had caused section 5(4) of the Investigation Commission Act to be declared invalid. In other words, the legislature presumably intended to give the assessees against whom section 34(1A) was to be applied the same remedies that were available to an assessee falling within the scope of section 34(1). Although this purpose cannot be given excessive weight, it cannot be said to be irrelevant either. The Court had already examined the wording of section 34(1A) and observed that the provision obliges the issuance of a notice that contains all or any of the requirements that may be included in a notice issued under section 22(2). Thus, the notice required by section 34(1A) is, in effect, referable to section 22(2) because the legislature expressly stipulated that it must embody any of the requirements that would be found in such a notice. Section 34(1A) further provides that once the notice has been served on the assessee in the manner prescribed, the Income‑Tax Officer may proceed to assess or reassess the income, profit or gain of the assessee for the relevant assessment years. In this context, the Court considered it reasonable to hold that the assessment or reassessment that follows the issuance of the notice must be carried out in accordance with the applicable provisions of the Income‑Tax Act. This understanding is reinforced by the clause that follows, which begins with the word “thereupon.” The use of “thereupon” indicates that when the assessment or reassessment process commences, the succeeding clause becomes operative, and that clause states that the provisions of the Act, as far as they may be, shall apply accordingly. The term “accordingly,” like “thereupon,” emphasizes that the relevant provisions of the Act are to govern the proceedings under section 34(1A); otherwise there would be no justification for the additional provision that excludes certain sections of the Act from applying to proceedings under section 34(1A). It is true that section 34(1) contains the phrase “as if the notice were a notice issued under that sub‑section,” whereas section 34(1A) omits this phrase. However, the two provisions were not enacted simultaneously: section 34(1) in its present form was enacted in 1948, while section 34(1A) was introduced in 1954. Consequently, it is quite possible that the drafter of section 34(1A) regarded the final clause in section 34(1) as superfluous, which may explain its omission in the later provision.

The Court observed that the drafting history of section 34(1A) suggested that the final clause present in section 34(1) was considered unnecessary and therefore omitted. Consequently, the Court found it difficult to accept the contention that the omission was a deliberate and significant legislative choice. If the omission were given effect, the result would be that the provisions of section 22 and all provisions that depend on the application of section 22 would become irrelevant in proceedings under section 34(1A). Declaring section 22 inapplicable to section 34(1A) would produce an irrational and fantastical consequence. Under such a view, the powers granted to the Income‑tax Officer by section 23(2) to take evidence would no longer be available. Moreover, every power and procedure prescribed in section 23 would lose its force in the context of section 34(1A). In the same manner, the appeal and revision mechanisms contained in sections 30, 31, 33, 33A and 33B would also be excluded from application. The Court noted that this alleged inapplicability formed the chief basis of the challenge to the validity of section 34(1A).

It was submitted that although the specific powers of section 23 might not be available, the Income‑tax Officer could still exercise comparable powers because the authority to assess inherently includes incidental powers. The argument further proposed that the best‑judgment assessment authorized by section 23(4) could be made in cases governed by section 34(1A) on the basis of the officer’s inherent authority. The Court rejected this line of reasoning as wholly misconceived and contrary to legislative intent. The Court was convinced that Parliament did not intend that the procedural scheme beginning with section 22 be omitted from proceedings under section 34(1A). Likewise, the Court held that the legislature did not intend that the officer’s powers be limited to vague “inherent or incidental” authority. Accordingly, the Court expressed no hesitation in holding that the challenge to the validity of section 34(1A) based on the alleged denial of appeal or revision remedies could not succeed. The Court also addressed a second contention that the absence of an eight‑year limitation period in section 34(1A), unlike the period prescribed in section 34(1)(a), amounted to unconstitutional discrimination. The Court stated that it was not persuaded by this argument and therefore dismissed it.

In this case, the Court observed that, in a broad sense, both section 34(1)(a) and section 34(1A) address situations where income has escaped assessment and therefore the assessees concerned can be regarded as belonging to a similar class. However, the Court noted that this similarity disappears when one recalls that section 34(1A) was specifically intended to deal with assessees whose unassessed income arose during the period from 1 September 1939 to 31 March 1946, a period widely recognized as one in which the war generated exceptionally large profits in business and industry. The Court further pointed out that, for cases falling within section 34(1A), action may be taken only when the escaped income is likely to be at least one lakh rupees, meaning that the limitation on the period of limitation was removed solely for cases involving a high magnitude of unassessed income. It was deemed difficult to accept the argument that the legislature was not justified in treating this smaller subset of assessees differently on the ground that the profits made by them were higher and the escaped income correspondingly larger. The Court explained that the legislative purpose was to capture income that had escaped assessment, and it is legitimate for the legislature to focus on the class of assessees whose escaped income is substantially larger, because such a classification has a rational basis and an intelligible connection with the statute’s objective. An additional submission suggested that the provisions of section 34(1)(a) and section 34(1A) might overlap for one year, and while the Court acknowledged that factual overlap could occur, it held that the argument was irrelevant because it makes no practical difference whether action is taken under section 34(1) or section 34(1A) for that year. Once a notice is served under either provision, the subsequent procedural steps and the remedies available to the assessees are identical. Consequently, the Court found no substance in the contention that the absence of a limitation period restriction in section 34(1A) creates any infirmity in that provision. In the result, the Court held that section 34(1A) is constitutionally valid and does not violate article 14 of the Constitution, following the majority view expressed by the Allahabad High Court in Jai Kishan Srivastava v. Income‑tax Officer, Kanpur and Another. The Court also mentioned a minor additional point raised in civil appeal No. 589 of 1963, concerning the proviso to section 34(1A) which requires the Income‑tax Officer to record his reasons before issuing a notice.

The Court observed that the proviso to section 34(1A) required the Income‑tax Officer to record his reasons before issuing a notice and also required the Central Board of Revenue to be satisfied that, on the basis of those recorded reasons, the case justified the issuance of the notice. An argument was advanced that this requirement created a condition precedent to the authority conferred on the Income‑tax Officer by section 34(1A). The argument further contended that because the recorded reasons were not shown to have been satisfied in the present case, the appellant in Civil Appeal No. 589 of 1963 should prevail even if section 34(1A) were held to be constitutionally valid. The Court was not persuaded by this line of reasoning. The submission that had been placed before the High Court by the appellant did not allege that the Income‑tax Officer had failed to record any reasons as mandated by the proviso. Rather, the contention was that the appellant had not been provided with a copy of the reasons that had been recorded and that the appellant was entitled to receive such a copy. This aspect of the case had not been raised before the Court by the counsel, and the Court considered that omission appropriate. In reviewing the pleadings of the parties, the Court found that the appellant proceeded on the assumption that reasons had indeed been recorded, and the respondent expressly affirmed that the reasons had been recorded. Consequently, the real dispute centred on whether, once the reasons were recorded, the assessee had a right to obtain a copy of those reasons. Accordingly, the Court concluded that the counsel could not contend that no reasons had in fact been recorded and therefore that the condition precedent under the proviso had been breached. As a result, the Court dismissed all the civil appeals and writ petitions that were grouped together in this matter. No order as to costs was made, and the appeals and writ petitions were dismissed.