' AJMAL MIAN, J.-The petitioner is a private limited company with 51% local equity and 49% of foreign participation. Their main business comprises of acting as an indenting house, but income is also earned from erection and service charges, consultancy fee and dealing in chemicals. The petitioner's income-tax assessm ent upto the assessment year 1975-76 (Accounting year ending on 31st December, 1974) were completed and everything was found in order by the Income-tax Officer and the same is reflected in the assessment orders for the years 1971-72 to 1975-76 (enclosures A-1 to A-5 to the petition). Mr. Iqbal Naeem Pasha Advocate has placed on record photostat copies of the assessm ent orders for the years 1976-77 to 1980-81 to indicate that the assessment for the above years have also been completed. It seems that on 12th November, 1976 respondents (i. e.
Income-tax Officer, Company Circle II, Karachi, and the Income-tax Officer, Investigating Circle I, Karachi) took possession of the books of account belonging to the petitioner. After that the petitioner was served with the notices under section 34 of the Income-tax Act, 1922 (hereinafter referred to as the Act) dated 24th November, 1976 requiring the petitioner to resubmit the returns relating to the aforesaid assessm ent years 1971-72, 1972-73, 1973-74, 1974-75 and 1975-76 which was complied with by the petitioner under protest. It has been averred that in spite of the request made by the petitioner's legal adviser on 18th December 1976 and 31st January, 1977 to intimate the reason for issuing notices under section 34 of the Act for the five years, the respondents have not furnished the above information and they have been eversince 21st December, 1976 conducting hearings pursuant to the aforesaid notices. The petitioner therefore had filed the above petition on 9th June, 1977 arraigning the Income-tax Officer Company Circle II, Karachi as the only respondent but it seems that respondent No, 2 was impleaded on or about 22nd November, 1978. The petitioner has prayed for the following reliefs : "It is, therefore respectfully prayed that the Honourable Court be pleased :
(a) to declare that the notices issued against the petitioner under section 34 of the Income-tax Act for the assessm ent years 1971-72 to 1975-76 was unjustified, illegal and without jurisdiction.
(b) to order that the said notices issued under section 34 of the Income-tax Act be quashed."
2. Upon the filing of the above petition a Division Bench of this Court by its order dated 12th September, 1977 sent for parawise comments which were submitted on or about 21st September, 1977 in which inter alia it has been averred that the Income-tax Officer is not required to assign the reason in advance for re-opening of assessment. It has been further averred that at present the position of the case is that the Respondent has asked for various statements and information to be submitted in regard to commission earned by the petitioner and other items of income and when information in response to the queries is received, the same will be compared with the information in hand. It has been further averred that in case any concealment is thereby discovered, only then it will be aecessary to confront the assessee with the information otherwise it may be unnecessary and the proceedings under section 34 will be dropped. The petition was admitted to regular hearing by an order dated 27th October, 1977.
3. (a) In support of the above petition, Mr. Lqbal Naeem Pasha, learned counsel for the petitioner has urged as follows : "That from the averments contained inter alia in paras. 5 and 9 (iv) of the comments, it is evident that the Respondents had no material on the basis of which they could have reason to believe that the petitioner had for any year concealed the particulars of his income or deliberately furnished inaccurate particulars thereof or omitted or failed to disclose all material facts necessary for the assessm ent for such year and therefore the impugned notices under section 34 of the Act and the proceedings commenced in pursuance thereof are Without jurisdiction.
(b) Otis the other hand Mr. Shaikh Haider learned counsel for the Respondents has contended as under :
(i) That by virtue of section 125 of the Evidence Act the respondents are not obliged to convey the information to the petitioner as to the material on the basis of which the above notices under section 34 of the Act have been issued at the stage of issuance of notices.
(ii) That there was sufficient material before the respondents to justify to have reason to believe that certain income has escaped assessment.
4. It may be pertinent to take up the first contention of Mr. Shaikh Haider, which is based on section 125 of the Evidence Act. It may be advantageous to reproduce hereinbelow above section, which reads as follows : "Section 125.-No Magistrate or police officer shall be compelled to say whence he got any information as to the commission of any offence, and no Revenue Officer shall be compelled to say whence he got any information as to the commission of any offence against the public revenue.
' Explanation.- "Revenue Officer" in this section means any officer employed in or about the business of any branch of the public revenue."
It may be noticed that in the above-quoted section, it has been provided that no Magistrate or police officer shall be compelled to say whence he got an information as to the commission of any offence and that no Revenue Officer, that is officer employed in or about the business of any branch of the public revenue, shall be compelled to say whence he got any information of any offence against the public revenue. In our view, the above section does not provide a general privilege to withhold the material on the basis of which an accused is to be charged for the commission of an offence or a person is to be charged with the commission of an offence against the public revenue but the above section provides a limited privilege to the extent of refusal to disclose from what place or source the information as to the commission of the offence referred to in the section has been received.
' Mr. Shaikh Haider has referred to the case of Government of West Pakistan and another v. Begum Agha Abdul Karim Shorish Kashmiri (1), in which case the erstwhile Government of West Pakistan filed an appeal against the judgment and order of the erstwhile High Court of West Pakistan, whereby the Government's objection to the jurisdiction of the Court either to examine the sufficiency or reasonableness of the grounds of detention was overruled. The Supreme Court dismissed the appeal and Hamoodur Rahman, S (as he then was) observed as follows inter alia on the question of privilege under section 123 of the Evidence Act :- "The contention that the detaining authority may avoid doing so by claiming privilege under section 123 of the Evidence Act omits to take into account that even where such a claim is preferred section 162 of the Evidence Act gives to the Court abundant power to inspect the document in order to determine the validity of the claim of privilege. The privilege is indeed a narrow one, as pointed out by Lord Blanesburgh in the case of Henry Greer Robinson v. State of South Australia AIR 1931 P C 254 and it is lawful for the Court to inspect the document for the purpose of deciding that the privilege is not being claimed inadvisedly or lightly or as a matter of routine."
' It may be noticed that even in a case of detention under the Defence of Pakistan Rules the honourable Supreme Court has held that the privilege is very narrow one and the Court is entitled to examine the material on the basis of which the detention order was passed. It may further be observed that the instant case cannot be equated with a detention order under the Defence of Pakistan Rules as the detention orders are passed under the Defence of Pakistan Rules to prevent the detenu from indulging in anti-State activities. We intend to dilate on the question, whether the respondent can withhold the material on the basis of which the impugned notices have been issued, from the petitioner, while {{FOOT NOTE}}
(1) PLD 1969 SC 14
(2) {{FOOT NOTE}} dealing with the remaining contentions of the learned counsel for the parties.
5. Mr. Lqbal Naeem Pasha in furtherance of his above submission has invited our attention to the above paras. 5 and 9 (Iv) of the comments, which read as follows : "5. That with regard to the contents of para. 5 it is submitted that the Income-tax Officer is not required to assign the reason in advance for re-opening of assessment. The present position of the case is that the Respondent has asked for various statement and information to be submitted in regard to commission earned by the petitioner and other items of income. When information in response to the queries is received, the same will be compared with the information in hand. In case any concealment is thereby discovered, only then will it be necessary to confront the assessee with the information otherwise it may be unnecessary and the proceedings under section 34 will be dropped. At the present stage the investigations are proceeding and the respondent is proceeding according to law. Section 34 does not provide that the Income-tax Officer must furnish the information in his hand to the assessee in advance. It is, however, submitted that there is a vast volume of information before the respondent against which the new returns of the petitioner will be checked. It is submitted that at the appropriate time when any difference is discovered between the information in the Respondent's hand and that submitted by the petitioners now, the relevant information will be confronted to the petitioners. Such is the ordinary course and the intent and procedure in this behalf. Advance information will lead to malpractices, approaching the informant, in advance and causing dislocation, separation and distortion of the same.
9, (iv) the constitutional jurisdiction of this Hon'ble Court cannot be invoked for obtaining something which according to law will be available to the petitioners as and when necessary otherwise the proceedings under section 34 shall be dropped."
' It may be noticed that from the contents of the above-quoted paras, it is evident that the respondents have not disclosed the material on the basis of which they have reason to believe that the assessee has for any year in question concealed the particulars of his income or deliberately furnished inaccurate particulars thereof or omitted or failed to disclose all material facts necessary for the assessm ent for the years in question. It is also apparent that the respondents are not sure whether the materials with them are sufficient to justify the re-assessment as they have stated that in case of any concealment is discovered after comparing the information in hand with the further information sought from the petitioner, the same will be confronted to the petitioner otherwise it may be unnecessary and the proceedings under section 34 will be dropped.
6. Before taking up the case-law cited by the learned counsel for the parties, it may be pertinent to quote hereinbelow section 34 (I) (1-A) of the Act which reads as follows :- "34. Income escaping assessment :- (1) If for any reason income, profits or gains chargeable to income-tax have escaped assessme nt in any year, or have been under-assessed, or have been assessed at too low a rate, or have been the subject of excessive relief or refund under this Act, "or the total income and the total world income and the tax payable has been determined under subsection (1) of section 23" the Income-tax Officer may, serve on the person liable to pay tax on such income, profits or gains, or in the case of a company on the principal officer thereof, a notice containing all or any of the requirements which may be included in a notice under subsection (2) of section 22, and may proceed to assess or re-assess such income, profits or gains, and the provisions of this Act, shall, so far as may be, apply accordingly as if the notice were a notice issued under that subsection.
' Provided that the tax shall be charged at the rate at which it would have been charged had the income, profits or gains not escaped assessment or full assessment, as the case may be.
' Provided further that except in case in which an order has been made under subsection (1) of section 23 unless definite information has come into his possession the Income-tax Officer shall not initiate proceeding under this subsection without obtaining the previous approval of the Inspecting Assistant Commissioner of Income-tax in writing.
(1-A) Notice under subsection (1) may be served by the Income-tax Officer.
(a) in any case in which he has reason to believe that assessee or any other person on his behalf has not filed any return under subsection (1) or subsection (2) of section 22, at any time ;
(b) in any case in which he has reason to believe that the assessee has for any year concealed the particulars of his income or deliberately furnished inaccurate particulars thereof or omitted or failed to disclose all material facts necessary for the assessment for such year, within six years from the end of the year in which the assessment for such year was first made and where no assessm ent has been made, within six years from the end of the last year in which assessment for such year could be made, had clause (c) been applicable to such case : ' Provided that in a case where a fresh assessment is made for any year in pursuance of an order under section 31, section 33, section 33-A or section 34-A the period of six years referred to in this clause shall commence from the end of the year in which the fresh assessment is made ;
(c) in any other case, within four years from the end of the year for which assessment is to be made."
' It may be noticed that subsection (1) of section 34 of the Act deals with the different situation than subsection (1-A) thereof. In order to invoke subsection (1) except in the case in which an order has been made under subsection (1) of section 23, the Income-tax Officer is not entitled to initiate proceedings unless definite information has come into his possession without obtaining the previous approval of the Inspecting Assistant Commissioner of Income-tax in writing. It may further be noticed that subsection (1-A) deals with two categories of the cases namely, the first category covered by clause (a) which can be pressed into service at any time in any case in which the Income-tax Officer has reason to believe that the assessee or any other person on his behalf has not filed any return under subsection (1) or subsection (2) of section 22, whereas clause (b) can be invoked in any case within a period of six years from the end of the year in which the assessment for such year was first made and where no assessment has been made within six years from the end of the last year in which assessment for such year should be made had clause (c) of above subsection (1-A) been applicable to such case or within six years of the making of fresh assessm ent order under section 31, section 33, section 33-A, and section 34-A, if the Income-tax Officer has reason to believe that the assessee has for any year falling within the above period concealed the particulars of his income or deliberately furnished inaccurate particulars thereof or omitted or failed to disclose all material facts necessary for the assessment of such year.
' It is a common ground that the respondents have invoked clause (b) of above subsection (1-A).
7. (a) Mr. Lqbal Naeem Pasha learned counsel for the petitioner has referred to the following cases in support of his contention :-
(i) Sheo Nath Singh v. Appellate Assistant Commissioner of Income-tax (Central) Calcutta and others (1971) 821 T R 147, in which the facts were that the appellant was at all material times a shareholder of a number of companies doing hotel business. He had also been a Director and the Managing Director of various companies. In 1944 M. S. Oberoi purchased from the appellant his shareholding in the Associated Hotels of India Limited for an amount of Rs, 20.65,705-13-0, whereas in or about 1949 the appellant's holding in a Company known as Hotels (1938) Limited was purchased by said M. S. Oberoi. During the relevant assessment year and during the assessment for the year 1945-46 the appellant had disclosed to the Income-tax Officer, District II (2), Calcutta that he had received the aforesaid amount for the sale of the shares of the Associated Hotels, that amount was held to be a capital receipt on which no income-tax was payable. During the subsequent years the appellant assessee continued to show in his returns the interest received on the above amount of Rs, 20,65,705-13-0. It seems that the case of M. S. Oberoi was referred to the Investigation Commission set up under the Taxation on Income (Investigation Commission) Act, 1947. The appellant assessee was also served with a notice by the Commission under section 5 (4) of the aforesaid Act which was challenged by the appellant through a writ petition. The above notice was dropped on the basis of the undertaking given by the Solicitor-General before the High Court. After that the Income-tax Officer had issued seven notices dated 5th November 1954 to the appellant assessee under section 34 (1A) of the Income-tax Act in respect of assessment years 1940-41 to 1946-47. In spite of the objection of the appellant assessee that the Income-tax Officer had no jurisdiction, he proceeded with the assessment. Eventually the appellant assessee filed a writ petition in the Calcutta High Court which was dismissed. Upon an appeal, the Supreme Court of India allowed the same and while allowing the appeal observed as follows :- "In our judgment, the law laid down by this Court in the above case is fully applicable to the facts of the present case. There can be no manner of doubt that the words "reason to believe" suggest that the belief must be that of an honest and reasonable person based upon reasonable grounds and that the Income-tax Officer may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour. The Income-tax Officer would be acting without jurisdiction if the reason for his belief that the conditions are satisfied does not exist or is not material or relevant to the belief required by the section. The Court can always examine this aspect though the declaration or sufficiency of the reasons for the belief cannot be investigated by the Court.
' There is no material or fact which has been stated in the reasons for starting proceedings in the present case on which any belief could be founded of the nature contemplated by section 34 (I-A) were not satisfied and, therefore, the notices which had been issued were wholly illegal and invalid."
(ii) Income-tax Officer, I Ward, District VI, Calcutta, and others v. Lakhmani Mewal Das (1976) 103 IT R
437. In the above case the assessee was allowed deduction of a sum of Rs, 10,494 towards the interest paid by him to certain creditors during the assessment year 1958-59. Thereafter by a notice under section 148 of the Income-tax Act, 1961, dated 8th March, 1967 served on the respondent the Income-tax Officer sought to re-open the assessment after 4 years under section 147 (a) of the above Income-tax Act, 1961, on the two grounds namely, (i) that M. K. Who was shown to be one of the creditors has since confessed that he was doing only name lending and (ii) N. M., D. K. N., B. S. And others whose names were also mentioned in the names of the creditors of the respondent were known name-lenders. The respondent challenged the above notice through a Writ Petition in the Calcutta High Court which was heard by a Full Bench and the majority view held that the notices were without jurisdiction as there was no sufficient material to justify to have reason to believe. The Income-tax Department went in appeal before the Supreme Court in India which was dismissed. While dismissing the above appeal it was observed by the Supreme Court that the grounds or reasons which led to the formation of believe contemplated by section 147 (a) of the Act must have a material bearing on the question of escapement of income of the assessee from assessm ent because of his failure or omission to disclose fully and truly all material facts. It was further observed that once there exists reasonable grounds for the Income-tax Officer to form the above belief, that would be sufficient to clothe him with jurisdiction to issue notice and that whether the grounds are adequate or not is not a matter for the court to investigate nor the grounds which induce the Income-tax Officer is a justiciable It was also held that the existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. It was further held that the expression "reason to believe" does not mean a purely subjective satisfaction on the part of the Income-tax Officer but the reason must be held in good faith. It cannot be merely a presence and that it is open to the Court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose. It may be pointed out that the above ruling is on sections 147 and 148 of the Indian Income-tax Act, 1961 but since expression "reason to believe" has been used in subsection (1-A) (b) of section 34 of the Act as well as in section 147 (a) of the Indian Income-tax Act. 1961, the above ruling has direct bearing on the question of construction of the above expression.
(iii) Income-tax Officer, I-Ward, Hundi Circle Calcutta and others v. Madnani Engineering Works Ltd.
(1979) 118 I T R 1, in which the facts were that the respondent's assessment for the year 1959-60 was completed on 23rd August, 1960. The assessee had claimed certain interests paid by him to the creditors on Hundis as a revenue expenditure which was allowed. However, subsequently on 25th January, 1968 after a lapse of four years of the assessment order a notice was issued by the I.-T.
0. To re-open the assessm ent of the respondent on the ground that the transaction of loan represented by the Hundis was bogus and no interest was paid by the respondent to any of the creditor, thereupon the respondent challenged the validity of the notice by filing a writ petition in the Calcutta High Court. The Income-tax Officer in his first counter-affidavit declined to disclose the facts on the ground that if such facts were disclosed it would cause great prejudice to the interests of the revenue and would frustrate the object of reopening the assessment but in his further affidavit it was stated that in the course of assessment of the respondent for the assessm ent year 1963-64 it was discovered that various items shown as loans against the security of Hundis in the respondent's books of account for the year 1959-60 were in fact fictitious and credits against the names of certain persons namely Amarlal Moolchand, Girdharidas, Raghoomal, Murlidhar, Kanhaiyalal and Deudaram Basdeo were found not to be genuine. The writ petition was dismissed by a learned Single Judge but upon an appeal a Division Bench of the High Court allowed the petition and quashed the notices. The department went in appeal before the Supreme Court of India which dismissed the appeal. It was held by the Supreme Court that the respondent had produced all the Hundis on the strength of which it had obtained loans from creditors and also entries in the books of account showing payment of interest and it was for the I.-T.
0. To investigate and determine whether these documents were genuine or not. It was further held that the respondent could not be said to have failed to make a true and full disclosure of the material facts by not confessing before the I.-T.
0. That the Hundis and the entries in the books of account produced by it were bogus. It was held that the Court do not see any distinction at all between Burlop Dealear's case (1971) 79 I T R 609 (SC) and the present one and the language of section 147 (a) being identical with that of section 34
(1) (a) and the ratio of the decision in Burlop Dealer's case must govern the decision of the present case.
(iv) Union of India and others v. Rai Singh Deb Singh Bist and another (1973) 88 I T R 200. In above case the facts were that the assessee was the Hindu undivided family. During the assessment years 1942-43 to 1953-54 certain cash credit was shown in the account books inter alia in the name of brother-in-law of the second respondent the karta The assessee was the forest contractor. After the completion of the assessm ent and after the expiry of sometime notices under section 34 (1)(a) were issued which were impugned in a writ petition filed in the High Court of Delhi which were allowed and the notices were quashed. The department filed appeals before the Supreme Court of India which were dismissed. While dismissing the appeal the Indian Supreme Court observed as follows : ' Before an Income-tax Officer can issue a statutory notice under section 34 (1) (a), he must have reason to believe that by reason of omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment for the years in question, income, profits or gains chargeable to income-tax have escaped assessment during those years. Further, before doing so, he must have recorded his reasons for acting under section 34 (1) (a) and the Central Board of Revenue must have been satisfied on those reasons that it is a fit case for the issue of the notice. The recording of the reasons in support of the belief formed by the Income-tax Officer and the satisfaction of the Central Board of Revenue on the basis of the reasons recorded by the Income-tax Officer that it is a fit case for issue of notice under section 34 (1) (a) are extremely important circumstances to find out whether the Income-tax Officer had jurisdiction to proceed under section 44 (1) (a)."
' It may be pointed out that in the above case the department had failed to show the material on the basis of which the impugned notices were issued to the Court. It was held by the Supreme Court that it was not necessary to go into the question mere deeply in view of the fact that there is nothing to show that there was any relevant material before the Income-tax Officer before he issued the notices under section 34 (1) (a).
(v) Asoke Kumar Sen v. Income-tax Officer Circle V, New Delhi and another 1982 PTD 225. In the above case the facts were that the petitioner was a practising Senior Advocate. He remained as the Minister of Law in the Central Government of India for about a decade terminating in January, 1966. He was served with a notice dated 7th August, 1974 under section 147/148 for the assessment year 1966-67 of the Indian Income-tax Act, 1961 for reopening of the assessment on the ground that the domestic expenses were not correctly disclosed. The above petition was allowed by a Division Bench of the Delhi High Court. In the judgment the words "reason to believe" were construed with reference to Indian Supreme Court case reported in (1979) 118 I T R 1 referred to hereinabove and also with reference to an English House of Lords case namely I. R C. v. Ross-minster Ltd. (1980) 2 W L R 1, 49 (H L) in which the dissenting view of Lord Atkin in the case of Liversidge v. Anderson (1942) A C 206 (H L) was held to be correct. It may be pointed out that in the above Supreme Court case namely Government of West Pakistan and another v. Begum Agha Abdul Karim Shorish Kasmiri P L D 1969 SC 14 referred to hereinabove in para. 4, Hamoodur Rahman, J (as he then was) has approved Lord Atkin's minority judgment given in the above well-known case of Liversidge v.
Anderson and particularly the portion in which it was held that every imprisonment without trial and conviction is prima facie unlawful and it is for the detaining authority to justify the detention by establishing the legality of his action, and then the onus shifts on the detenu to show mala fide.
Hamoodur Rahman, J. Also quoted the well-known observation of Lord Atkin namely, "amidst the clash of arms the laws are not silent. They may be changed but they speak the same language in war and peace."
(vi) Paramount Electric Company, Lahore v. Commissioner of Income-tax, Lahore Zone, Lahore 1976 PTD 218. In the above case the facts were that the assessee was a dealer in electric equipments and was running business under the name and style of Paramount Electric Company. He was assessed to tax in his status as an individual. His assessment for the assessment sear 1967-68 was completed on 28th February, 1967 under the self-assessment scheme on the basis of disclosed income of Rs, 8,000. Afterwards the Income-tax Officer issued notice under section 34 in Form I.-T.
90. Eventually the matter went in reference before the Lahore High Court under section 66(1) of the Income-tax Act filed by the assessee in which five questions referred to in para. 5 of the judgment were raised. It may be pertinent to quote question No, 3 which reads as follows :- "Whether on the facts and in the circumstance of the case, the omission to state in the notice under section 34 that it was issued on the basis of definite information and/or that prior approval of the Inspecting Assistant Commissioner had been obtained and the reasons which led to its issuance, could validly be treated as defects curable under section 66-B of the Act ?
It was contended by the learned counsel for the assessee that in the notice no where it was mentioned that the Income-tax Officer was proceeding against the assessee on the basis of definite information in his possession or after having obtained previous approval of the Inspecting Assistant Commissioner in writing and therefore the notice was bad. The Division Bench of the Lahore High Court while repelling the above contention and while relying upon the Privy Council case, namely, Commissioner of Income-tax, Bengal v. Mahaliram Ramjidas AIR 1940 P C 124 and on a number of other cases of Indian jurisdiction including that of Radhakant Jagannath Prasad v.
V. K. John I and another (1960) 39 I T R 182 held that it was not necessary to disclose that information in the notice and it is sufficient if the notice addressed to the assessee merely indicates that the Income-tax Officer has "reason to believe" that his assessable income (a) has escaped assessm ent, (b) been under assessed, (c) been assessed at too low a rate, (d) been subject to excessive relief and this belief may be due to reason that the Income-tax Officer has definite information to that effect. It was further held that in case this belief is not based on an information which is not definite then he cannot initiate proceedings under section 34(1) of the Act.
Mr. Iqbal Naeem Pasha has particularly relied upon the observation of Muhammad Akram, J, who had delivered the judgment that "Even in a case covered by the second part of this proviso the Income-tax Officer is not entitled to initiate the proceeding under subsection (1) of this section capriciously and without any reason. In this respect the proviso is itself subordinate to the main subsection and the Income-tax.Officer is entitled to initiate these proceedings only if for any reason income, profits or gains chargeable to tax have escaped assessment etc. It is only in this bona fide believe that he may decide to proceed under this subsection."
' It may be pertinent to point out that Mr. Shaikh Haider has also relied upon this case and has cited 1976 PTD 218 which is equivalent to 1976 PTD 218 relied upon by Mr. Iqbal Naeem Pasha.
(vii) Begum Nusrat Bhutto v. Income.Tax Officer, Circle V, Rawalpindi PLD 1980 Lah.
449. In the above case a notice under section 34 (1-A) was issued for the assessthent years 1972-73 to 1976-77 on the basis of the news item in the daily Nawa-i-Waqt dated 13th September, 1977 furnishing particulars of declaration filed by the assessee under M. L. R.
21. The above notices were impugned in a writ petition. It was contended by the respondent department that a writ was not competent and inter alia it was urged by the learned counsel for the petitioner that the information received from a news item is not such a information as is envisaged in section 34, which was not accepted and the petition was dismissed. The above case seems to be pending before the honourable Supreme Court. It may also be stated that Mr. Shaikh Haider has also relied upon the above case.
(viii) Muhammad Hanif Monnoo v. Income-tax Officer, Central Circle I Lahore 1984 P ID 171. In the above case a learned single Judge of the Lahore High Court while construing section 65 of the Income-tax Ordinance, 1979, held that in order to invoke the above section the Income-tax Officer either should have definite information in his possession as to the escapement of the income or he should obtain previous apprbval of the Inspecting Assistant Commissioner in writing. It was further held that requirements of the above section are fully met if the notice indicates that the I.-T.
0. Has reason to believe that the assessable income is hit by any of the conditions laid down in clauses (a), (b) and (c) or subsection (1) of section 65.
' It may be observed that Mr. Shaikh Haider has also quoted the above judgment by citing 1984 PTD 171 which is equivalent to the above citation namely (1984) 50 Tax 87.
(b) On the other hand Mr. Shaikh Haider apart from relying upon the three judgments referred to hereinabove has relied upon the following judgments :
(i) Daulatram Rawatmal v. Income-tax Officer Central Circle VI, Calcutta and another (1960) 38 I T R
301. In the above case the facts were that the petitioner assessee was carrying on business in Calcutta under the name and style of Daulatram Rawatmal. For the assessment year 1940-41 to 1945-46 the firm was assessed in the normal course but on or about 30th November, 1954 the case of the petitioner was transferred under section 5(7-A) of the Indian Income-tax Act, 1922, to the Income-tax Officer Central Circle VI, Calcutta. On or about 21st March, 1956 respondent No, 1 i,e, Income-tax Officer Central Circle VI, Calcutta issued natice under section 34(1-A) of the Indian Income-tax Act for the above assessment years, on the ground that the Income-tax Officer has reason to believe that the income, profits or gains assessable to income-tax, likely to the amount of Rs, 1,00,000 or more partly or wholly escaped assessment during the above period. The above notice was challenged in a writ petition filed in the Calcutta High Court which was dismissed. The Division Bench of the Calcutta High Court after reviewing the case-law held that the expression "reason to believe" makes the matter justiciable and it is not wholly dependent on the subjective satisfaction of the Income-tax Officer and that he must satisfy the Court that his belief is based upon facts which would induce a reasonable person to arrive at the conclusion which had been arrived by the Income-tax Officer.
The question whether an assessee is entitled to look into the material on the basis of which a notice under section 34(1-A) is issued, the Court observed as follows :-- "It has been constantly held that at this stage the assessee is not entitled to look at the reasons recorded by the Income-tax Officer or compel the Income-tax Officer to disclose to him the reasons. Re-opening of an assessm ent under section 34 is always a very serious affair. Therefore, the Income-tax Act has not left the matter entirely to the discretion of the Income-tax Officer but has provided for certain safeguards. It has laid down that the Income-tax Officer must record his reasons in writing and get the sanction of the Commissioner or the Board of Revenue as the case may be. But if at this stage of the proceedings, these reasons have to be disclosed to the assessee, then he will be put on his guard and in most cases the very object of re-assessment will be frustrated. The books will be removed and/or destroyed, and evidence generally which would enable the Income-tax Officer to establish that the original assessment was not complete, would disappear. If the law is that at this stage the assessee is not entitled to such information or disclosure, then it is obvious that in this application the assessee wishes to achieve the same end by an indirect process."
(ii) Commissioner of Income-tax, Bengal v. Messrs Mahaliram Ramjidas (1940) 6 I T R 442. In the above case the question before the Privy Council was, whether the Income-tax Officer before issuing a notice under subsection (I) of section 34 should hold quasi-judicial enquiry or that he could act on the information. It was held that it is enough that the Income-tax Officer on the information which he has before him in good faith considers that he has good ground for believing that the assessee's profits have for some reason escaped assessnient or have been assessed at too low a rate. It was also held that the above section although is part of a taxing Act, imposes no charge on the subject, and deals merely with the machinery of assessment, and interpreting provisions of this kind the rule is that the construction should be preferred which makes the machinery workable, ut res valeat potius quam pereat.
' It may be pointed out that the above judgment was delivered in 1948. After the above judgment a number of amendments were made in the above section.
(iii) U. C. Rekhi v. Income-tax Officer 1st "F" Ward, New Delhi (1950) 18 I T R 618. In the above case the facts were that the petitioner was issued notices under section 34 of the Income-tax Act, 1922 calling upon him to make returns of the assessment year ending on 31st March, 1945 and 31st March, 1946. The above notices were impugned in a writ petition in the East Punjab High Court which was dismissed. It has been held that the jurisdiction to proceed under section 34 is by law vested in the Income-tax Officer who has a statutory duty imposed upon him to proceed when he makes a discovery within the meaning of section 34 of the Act and that he has to determine the facts and the law in order to give him the jurisdiction to proceed and if in the determination of this he goes wrong, the proper remedy for an assessee is to go up in appeal and to have a case stated to the High Court under the provisions of the Indian Income-tax Act.
' It will suffice to observe that in the above-cited Supreme Court cases-relied upon by Mr. Iqbal Naeem Pasha learned counsel for the petitioner contrary view has been taken and it has been held that a writ petition will be competent if a notice under sections 34(1) or 34(1-a) is issued without having material to justify the formation reason to believe.
(iv) Lala Lachmandas Nayar and others, In re (1952) 22 1 T R 418, in which the notices issued under section 34(1) of the Income-tax Act and 34(1-A) of the Income-tax Act were impugned through a writ petition filed in the High Court of East Punjab. The same was dismissed on the ground that the proper remedy provided for is in form of an appeal etc. Under the Income-tax Act. The above case is also contrary to the subsequent view of the Indian Supreme Court referred to hereinabove.
(v) Commissioner of Income-tax, East Pakistan, Dacca, v. Wahiduzzaman 1965 PTD 283 in which the honourable Supreme Court of Pakistan held that the principle of res judicata provided for under section 11, C. P. C. Is not applicable in income-tax cases. It may be observed that the above ruling has no relevancy as it was not urged by the learned counsel for the petitioner that the principle of res judicata was applicable to the instant case.
(vi) Messrs Escorts Ltd. v. Income-tax Officer, Lahore 1975 PTD 50 (Lah.). In the above case the assessee filed a writ petition challenging the notices under section 34 of the Act and it was contended that the notices did not contain any information as to the nature of the alleged escapement or the factum that the approval of the Assistant Inspecting Commissioner was obtained. It was held by a learned Single Judge of the Lahore High Court that under section 34, Income-tax Officer is not required to intimate the nature of the alleged escapement nor factum that he has obtained approval from his superiors for initiating proceedings.
(vii) Muhammad Husain Munir and others v. Sikandar and others PLD 1974 SC 139. In the above case the honourable Supreme Court while construing the expression "without lawful authority and of no legal effect" used in Article 98(1) (a) (ii) of the Constitution of Pakistan, 1962 and Article 199(1)
(a)(ii) of the Constitution of Pakistan, 1973 held that when there is a jurisdiction to decide a particular matter then there is jurisdiction to decide it rightly or wrongly and the fact that decision is incorrect does not render the decision without jurisdiction.
' The above case is also not applicable to the controversy in issue.
8. From the above-cited cases the following principles of law are deducible :-
(i) That by the use of the words "reason to believe" in section 34(1-A) of the Act, the legislature intended that the belief must be based upon reasonable grounds and not on mere suspicion, gossip and rumour.
(ii) That the expression "reason to believe" does not mean a purely subjective satisfaction on the part of the Income-tax Officer but the reason must be held in good faith and cannot be a mere pretence.
(iii) That it is open to the Court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose.
(iv) That before an Income-tax Officer issues a statutory notice under section 34(1)(a), he must have reason to believe that by reason of omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment for the years in question, income, profits or gains chargeable to income-tax have escaped assessment during those years.
(v) That the notice of the Income-tax Officer under section 34(1-A) would be without jurisdiction if the reason for his belief that the conditions are satisfied, does not exist or is not material or relevant to the belief required by the section.
(vi) That before issuing a notice under section 34 it is not necessary to hold a quasi-judicial enquiry but there should be material before the Income-tax Officer on the basis of which an honest and reasonable officer can form the opinion that there has been escapement of assessment.
(vii) That once it is shown to the Court there exists reasonable grounds for the Income-tax Officer to form the belief that there has been escapement of the income from the levy of tax, that would be sufficient to clothe him with jurisdiction to issue notice and the Court would not go into the question whether the grounds are sufficient or not nor it would go into the question of sufficiency of the reasons for the belief.
(viii) That a notice under section 34 of the Act need not contain the reasons or the material on the basis of which the Income-tax Officer formed the opinion that there is a reason to believe that the income, profits or gains chargeable to income have escaped assessment during the relevant years.
(ix) That an assessee against whom a notice under section 34 of the Act is issued is not entitled in law at the stage of investigation to see the material on the basis of which the notice was issued or belief was formed but once the Income-tax Officer decides to act upon certain material for re- opening the assessm ent, the assessee is entitled to be confronted with the material to be used against him and is also entitled to an opportunity to explain and to place material in rebuttal to the above material to be used against him by the Income.Tax Officer.
(x) That in a case falling within the ambit of the second part of the proviso to subsection (1) of section 34 of the Act, the Income-tax Officer cannot initiate proceedings under the above subsection capriciously and without any reason as the proviso is itself subordinate to that above main subsection.
(xi) That since section 34 is not the charging section but deals merely with the machinery of assessm ent, that construction should be preferred which makes the machinery workable, (ut res valeat potius quam pereat).
9. (a) It was also contended by Mr. Shaikh Haider, learned counsel for the respondents that the judgments of the Indian Supreme Court pertaining to sections 147 and 148 of the Indian Income-tax Act, 1961 (hereinafter referred to as the New Act) are not applicable as the above sections have been differently worded from subsections (1) and (1-A) of section 34 of the Act. In this regard, it may be pertinent to quote hereinbelow above sections 147 and 148 of the new Act, which read as follows :- "Section 147. If :-
(a) the Income-tax Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under section 139 for any assessment year to the Income-tax Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, or
(b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year. He may subject to the provisions of sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereinafter in sections 148 to 153 referred to as the relevant assessment year).
' Explanation 1. For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely :-
(a) where income chargeable to tax has been under assessed ; or
(b) where such income has been assessed at too low a rate ; or
(c) where such income has been made the subject of excessive relief under this Act or under the Indian Income-tax Act, 1922 (XI of 1922); or
(d) where excessive loss or depreciation allowance has been computed.
' Explanation 2.-Production before the Income-tax Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Income-tax Officer will not necessarily amount to disclosure within the meaning of this section. Section 148.-(1) Before making the assessm ent, reassessm ent or recomputation under section 147, the Income-tax Officer shall serve on the assessee a notice containing all or any of the requirements which may be included in a notice under subsection (2) of section 139 ; and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that subsection.
(2) The Income-tax Officer shall, before issuing any notice under this section, record his reasons for doing so."
(b) It is true that section 147 has re-enacted section 34 of the Income-tax Act, 1922 with certain additions and modifications. However in clauses (a) and (b) of the above-quoted section 147 the same expression, namely "reason to believe" has been used which has been employed in section 34(1-A) and, therefore, it has been held by the Indian Supreme Court that the cases decided on the construction of section 34(1-A) shall be applicable to the cases involving interpretation of section 147 of the new Act. In this regard, reference may be made to the case of Income-tax Officer, I- Ward, Hundi Circle, Calcutta and others v. Madnani Engineering Works Ltd. (1) quoted hereinabove in para. 7(a)(iii). We are also inclined to hold that since the above expression is used in both the above sections (i,e, in 34(I-A) of the Act and section 147 of the new Act) the {{FOOT NOTE}}
(1) (1979) 118ITR 1 {{FOOT NOTE}} ratio of the judgments on section 34(1-A) shall be equally applicable to the cases involving interpretation of section 147 of the New Act and vice versa. However section 148 of the New Act has made mandatory provision that the Income-tax Officer shall before issuing any notice under the above section record his reasons for doing so. There is no parallel provision either in the Income- tax Act, 1922 or in the Income-tax Ordinance, 1979 (hereinafter referred to as the new Ordinance), which came into force in Pakistan on 1st July, 1979. It may be pertinent to refer to section 65 of the New Ordinance, which corresponds to section 34 which reads as follows :- "65. Additional assessment :-(1) If, in any year, for any reason, -
(a) any income chargeable to tax under this Ordinance has escaped assessment ; or
(b) the total income of an assessee has been under assessed, or assessed at too low a rate, or has been the subject of excessive relief or refund under this Ordinance ; or
(c) the total income of an assessee or the tax payable by him has been (assessed or) determined under subsection (1) of section 59 and no order of assessment has subsequently been made under this section or any other provision of this Ordinance the Income-tax Officer may, at any time, subject to the provisions of subsections (2), (3) and (4), issue a notice to the assessee containing all or any of the requirements of a notice under section 56 and may proceed to assess or determine, by an order in writing, the total income of the assessee or the tax payable by him, as the case may be, and all the provisions of this Ordinance shall, so far as may be apply accordingly: ' Provided that the tax shall be charged at the rate of rates applicable to the assessment year for which the assessm ent it made.
2. No proceedings under subsection (1) shall be initiated unless definite information has come into the possession of the Income-tax Officer or he has obtained the previous approval of the Inspecting Assistant Commissioner of Income-tax in writing to do so.
3. Notice under subsection (1) in respect of any income year, may be issued within ten years from the end of the assessm ent year in which the total income of the said income year was first assessable, 3-A. Where a notice under subsection (1) has been issued, no order under the said subsection shall be made after the expiration of one year from the end of the financial year in which such notice was served.
4. Nothing contained in subsection (2) shall apply to any such case or class of cases to which clause (c) of subsection (1) applies as may be specified by the Central Board of Revenue.
(c) The above section has been framed on the pattern of section 147 of the New Act but does not employ the expression "reason to believe" but the requirement of having definite information or obtaining the previous approval of the Inspecting Assistant Commissioner of Income-tax in writing has been retained under subsection (2) in the same phraseology as in subsection (1) of section 34 of Income-tax Act, 1922. Furthermore, 10 years period has been substituted in place of 6 years period. Since the scope of above section 65 of the New Ordinance is not in issue before us, it is not necessary to dilate on the question of scope of the jurisdiction of this Court with reference to the above section nor it is necessary to highlight the effect of the omission of the expression "reason to believe" from above-quoted section 65. However, it will suffice to observe that it is a well-settled principle of law that constitutional corrective jurisdiction in the form of writs is pressed into service by the Superior Courts to nullify capricious/arbitrary/ma/a fide actions/orders of the Government functionaries.
10. From the ratio of the above-cited cases, it is evident that the Income-tax Officer cannot press into service section 34 (1-A) of the Act on the basis of mere pretence or suspicion, or gossip or rumour, without having material on the basis of which a reasonable and honest officer could have reason to believe that by reason of omission or failure on the part of an assessee to disclose fully and truly all material particulars for the F years in dispute, income, profit or gains chargcable to income-tax have escaped assessm ents during the said years, the. Reasons for the formation of the belief should have rational connections with or relevant bearing on the formation of belief and should not be extraneous or irrelevant for the purpose. It is also evident that the above question is justiciable and the Court is entitled to see the record on the basis of which a notice under subsection (1-A) of section 34 is issued. If upon perusal of the record the Court comes to the conclusion that a reasonable honest officer could G not have "reason to believe" that there has been escapement of assessm ent of income etc. From the levy of income-tax, the Court is entitled to quash the notice in exercise of constitutional jurisdiction. It is also apparent that once the Court forms the opinion that a reasonable honest officer on the basis of the material before him, could issue the notice under subsection (1-A) of section 34, the Court would not go into the question of sufficiency of the material at the stage. It may also be observed that the income-tax Officer is not required by law to disclose the material on the basis of which he has reason to believe that there has been escapement of the assessment of income etc. From the levy of income-tax in a notice under section 34 (1-A) though under section 148 of the New Act referred to hereinabove in para. 9
(a) a statutory obligation has been imposed upon the Income-tax Officer to record reasons before issuing a notice under section 147, nor he is obliged to confront the above material to an assessee at the stage of investigation. But once the Income-tax Officer makes up mind to re-open the assessm ent in pursuance of a notice under above section 34 (1-A), he is obliged to confront the material upon which he wishes to rely upon for the purpose of re-opening the assessment to the assessee concerned in order to enable him to explain and to place on record material contrary to what has been relied upon by the Income-tax Officer.
11. We had directed the respondent department to produce the material on the basis of which the impugned notices were issues. They have placed the relevant file before us. We would not like to dilate in detail on the material placed before us as the matter is still under investigation. However, it will suffice to observe that the respondents had received information that there has been escapement of assessm ent on account of non-disclosure on the part of the petitioner of certain incomes particularly in respect of the transactions referred to in the document containing the information. The above information is supported by some alleged documents. Its seems that the respondents have prepared notes on the basis of the above information after seizing the account books etc. Of the petitioner. It will suffice to observe that on the basis of the above material a reasonable honest officer could issue notice under section 34 (1-A) of the Act. Whether the above material is sufficient to re-open the assessment cannot be gone -into in these proceedings at this stage. It may be observed that the respondents themselves in above-quoted para. 9 (iv) of their comments have inter alia stated that after full investigation if they would decide to make re- assessm ent of the years in question, they would confront the petitioner with the materials on the basis of which they would make re-assessment, otherwise the notices would be dropped. We have no reason to believe that the respondents would not adhere to their above stand.
' We are, therefore, of the view that at present the petitioners have no cause of action for filing the above petition and, therefore, the petition does not merit and it is dismissed with no order as to costs.