# SHEO NATH SINGH v. APPELLATE ASSISTANT COMMISSIONER OF INCOME TAX, CALCUTTA

- **Citation:** [1972] 1 S.C.R. 175
- **Court:** Supreme Court of India
- **Decided:** 1971-08-12
- **Bench:** K. S. Hegde, A. N. Grover
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/sheo-nath-singh-v-appellate-assistant-commissioner-of-income-tax-calcutta-5341
- **Pages:** 9

## Headnote

Income-tax Act, 1922. s. 34(1-A)-Preconditions for issue
of notice-'Reason to believe'-Belief must be of honest and
reasonable person and must not be based on mere suspicionCourt can examine this aspect in writ petition.
Supreme Court Appeal-Practice-High
Court sustaining
preliminary objection to petition under Art. 226 but nevertheless
proceeding to decide on merits question of validit.l' of notice under
s. 34 (1-A)-This Court in appeal is not barred from considering
High Court's decision on validity ~l section.
The assessee appellant was at all material times a shareholder of a
number of companies engaged in the business of managing hotels. Gradually he came to own a large block of shares of Spence's Hotel Ltd.
and also became its managing director. He was in
charge of the
management thereof at the material time.
He further purchased interest in Associated Hotels of India Ltd. and Hotels (1938) in association
with M. S. Oberoi. In 1944 Oberoi purchased from the assessee his
share holding in the Associated Hotels of India Limited for an amount
of Rs. 20,657,05/13/0. The assessee maintained that he had filed returns of income in respect of the relevant assessment years and that
during the assessment for the year 1944-45 he had disclosed to the Tncome.
tax Officer 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.
Subsequently the
Income-tax Officer issued seven notices dated 5th November 1954 to
the assessee under s. 34 (I-A) of the Income-tax Act. 1922 in respect of
assessment years 1940-41 to 1946-47 alleging therein that the income of
the appellant had partly escaped assessment. In spite of the assessee's
objections relating tojurisdiction the Income Tax Officer made asseessments in respect of the years 1942-43 to 1945-46. ln appeal the Appellate
Assistant Commissioner ·remanded the case to the Income-tax Officer
to submit a report on various matters. Thereafter the appellant submitted a petition under Art. 226 in the High Court challenging inter alia
the validity of the notice under s. 34 (I-A). The High Court accepted
the preliminary objection of the Revenue that since the appellant
had invoked the remedy under the Act a petition under Art. 2~6 did
not lie.
Neverthele5' it proceeded to hold that the notice under s. 34
( 1-A) was valid and the required preconditions were satisfied.
Appeal
was filed by the assessee in this Court by special leave.
HELD : (i) The correct course for the High Court to follow after
sustaining the preliminary objection was to have dismissed the
writ
petition. Since the High Court gave a decision in the matter which
176
SUPREME COURT REPORTS
( 1972) I S.C.R.
would be binding on the Appellate Assistant Commissioner, the contention of the Revenue that this Court should decline to go into the
question arising out of the provisions of s. 34 (I-A) could not be accepted.
[179 D-E]
(ii) 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 and circumstantial evidence but not on mere suspicion gossip or rumour. The Income-tax Officer would be acting without iurisdiction if the reason for this 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. [182 F-H]
Chhugamal Rajpal v. S. P. Chaliha & Ors., 1971 (79) l.T.R. 603.
referred to.
There was no material or fact which had been stated in the reasons
for starting proceedings in the present case on which any belief could be
founded of the nature contemplated by s. 34 (I-A)
The so called
reasons were stated to be beliefs, thus leading to an ohvious self contrad

## Text

A
B
c
D
E
F
G
H
SHEO NATH SINGH
v.
APPELLATE ASSISTANT
COMMISSIONER OF
INCOME TAX, CALCUTTA
August 12, 1971
(K. S. HEGDE AND A. N. GROVER, JJ.]
Income-tax Act, 1922. s. 34(1-A)-Preconditions for issue
of notice-'Reason to believe'-Belief must be of honest and
reasonable person and must not be based on mere suspicionCourt can examine this aspect in writ petition.
Supreme Court Appeal-Practice-High
Court sustaining
preliminary objection to petition under Art. 226 but nevertheless
proceeding to decide on merits question of validit.l' of notice under
s. 34 (1-A)-This Court in appeal is not barred from considering
High Court's decision on validity ~l section.
The assessee appellant was at all material times a shareholder of a
number of companies engaged in the business of managing hotels. Gradually he came to own a large block of shares of Spence's Hotel Ltd.
and also became its managing director. He was in
charge of the
management thereof at the material time.
He further purchased interest in Associated Hotels of India Ltd. and Hotels (1938) in association
with M. S. Oberoi. In 1944 Oberoi purchased from the assessee his
share holding in the Associated Hotels of India Limited for an amount
of Rs. 20,657,05/13/0. The assessee maintained that he had filed returns of income in respect of the relevant assessment years and that
during the assessment for the year 1944-45 he had disclosed to the Tncome.
tax Officer 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.
Subsequently the
Income-tax Officer issued seven notices dated 5th November 1954 to
the assessee under s. 34 (I-A) of the Income-tax Act. 1922 in respect of
assessment years 1940-41 to 1946-47 alleging therein that the income of
the appellant had partly escaped assessment. In spite of the assessee's
objections relating tojurisdiction the Income Tax Officer made asseessments in respect of the years 1942-43 to 1945-46. ln appeal the Appellate
Assistant Commissioner ·remanded the case to the Income-tax Officer
to submit a report on various matters. Thereafter the appellant submitted a petition under Art. 226 in the High Court challenging inter alia
the validity of the notice under s. 34 (I-A). The High Court accepted
the preliminary objection of the Revenue that since the appellant
had invoked the remedy under the Act a petition under Art. 2~6 did
not lie.
Neverthele5' it proceeded to hold that the notice under s. 34
( 1-A) was valid and the required preconditions were satisfied.
Appeal
was filed by the assessee in this Court by special leave.
HELD : (i) The correct course for the High Court to follow after
sustaining the preliminary objection was to have dismissed the
writ
petition. Since the High Court gave a decision in the matter which
176
SUPREME COURT REPORTS
( 1972) I S.C.R.
would be binding on the Appellate Assistant Commissioner, the contention of the Revenue that this Court should decline to go into the
question arising out of the provisions of s. 34 (I-A) could not be accepted.
[179 D-E]
(ii) 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 and circumstantial evidence but not on mere suspicion gossip or rumour. The Income-tax Officer would be acting without iurisdiction if the reason for this 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. [182 F-H]
Chhugamal Rajpal v. S. P. Chaliha & Ors., 1971 (79) l.T.R. 603.
referred to.
There was no material or fact which had been stated in the reasons
for starting proceedings in the present case on which any belief could be
founded of the nature contemplated by s. 34 (I-A)
The so called
reasons were stated to be beliefs, thus leading to an ohvious self contradiction. Therefore the requirements of s. 34(1-A) were not satisfied
and, the notices which had been issued were whollv illegal and invalid.
[183 B]
ln the result the appeal must be allowed and the impugned notices
were quashed.
C!v1L APPELLATE JURISDICTION : Civil Appeal No.
1477 of 1967.
Appeal_ from the judgment and order dated October 6,
1966 of the Calcutta High Court in Matter No. 236of1961.
A
B
c
D
E
M. C.
Chagla, M. L. Aggarwal, N. K. Aggarwal
and M. N. Pombara, for the appellant.
F
S. D. Desai, A. N. Kirpa/, R. N. Sachthey and
B. D. Sharma, for the respondents.
The Judgment of the Court was delivered by.
Grover, J.-This is an appeal by certificate from the
judgment of the Calcutta High Court.
G
The assessee who is the appellant was at all material
times a share-holder of a number of companies engaged
in the business of managing Hotels.
He had also been a
Director and Managing Director of various companies.
Gradually he came to own a large block of shares
of H
Spence's Hotel Limited and also bacame its Managing
Director. He was incharge of the Management thereof at
s. N. SINGH v. C.I.T. (Grover, J.)
177
A the· material time.
He further purchased interest
m
Associated Hotels of India Limited & Hotels (1938) in
association with M. S. Oberoi. In 1944, M. S. Oberoi
purchased from the assessee his share )lolding in
the
Associated Hotels of India Limited for an amount of
8
Rs.20,657,05/13/0. Similarly in or about 1949, the holding
in Hotels (1938) Limited was purchased by the said M. S.
Oberoi. It was maintained by the assessee. that he has
filed returns of his income in respect of the relevant assessment years and that during the assessment for the year
1945-46, the assessee had disclosed to the
Income-tax
c Officer, District II (2) Calcututa that he had received the
aforesaid amount for the sale of the shares of the Associated Hotels. The amount
was held to be a capital
receipt on which no income tax was payable. During the
subsequent years, the assessee continued to show in his
returns the interest
received
on the
amount
of
D
Rs. 20,657,05/13/0.
It appears 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
assessee was also served a notice by the Commission on ?r
E
about 18th August, 1951 under section 5(4) of the aforesaid
Act, in respect of the assessment year 1940-41. The assessee filed a Writ Petition in March, 1953 in the Punjab
High Court (Circuit Bench) Delhi to quash the proceedings
before the said Commission. According to the assessee,
the Solicitor General, who appeared in the High Court
F
after a rule had been issued, gave an undertaking that all
proceedmgs against the assessee would be dropped.
Upon
such undertaking being given, the rule was discharged.
The Income-tax Officer, District II (2) Calcutta issued
seven notices dated 5th November, 1954 to the assessee
under s. 34(1-A) of the Income Tax Act, 1922 in respect of
G assessment years 1940'41 to 1946-47 alleging therein that
the appell~nt had partly escaped assessment. In spite of
the ObJect10n of the assessee that in the absence of any
~at7rial oi:i record, the Income Tax Officer had no jurisd1ct10n to issue any notice under 34( I-A), the said Officer
H proceeded to
make assessment in
respect
of the
assessment
years
1942-43,
1943-44,
1944-45 and
1945-46. The assessee filed an appeal to the Appellate Assistant Commissioner of Income Tax who remanded
178
SUPREME COURT REPORTS
[1972] l S.C.R.
the case to the Income Tax Officer to submit a report on
various matters. One of such matters was that the Income
Tax Officer should state as to what fresh material was
before him to satisfy him that the sum of Rs. 20,00,000/-
which was previously treated as capital should be treated
A
as income. In 1961, the assessee filed a petition under
8
Art. 226 of the Constitution in the Calcutta High Court
challenging the order of the Appellate Assistant Commissioner. This Writ Petition was dismissed on 6th October,
1966.
In clause (v) of Para (22) of the Writ Petition, the c
assessee had stated that at the time when the notice had
been issued under s. 34( I-A) of the Act, the Income Tax
Officers concerned did not hav~ any material before them
constituting reason to believe that any income, profits or
gains of the assessee had escaped assessment for any year.
It was asserted that the only material before the Income o
Tax Officers concerned on which they had purported to
issue the notices consisted of the fact of the receipt of about
Rs. 22,00,000/- which the assessee had received for the sale
of his shares in the Associated Hotels of India Limited in
the
year 1944 that receipt had already been disclosed
to the Income Tax Officer who had made the original
E
assessment relating to the year 1945-46 and he had held that
the said amount was a capital receipt. There was merely
a denial in the affidavit in reply with reference to paragraph
22(v), that the conditions precedent to the exercise of
power under s. 34(1-A) had not been fulfilled.
An objection was also taken that it was not open to the assessee
F
to urge the said ground in a petition under Art. 226 when he
had already invoked the remedy available under the Act
against the assessment order pursuant to the notice under
s. 34 ( 1-A) of the Act.
In para (29) it was stated that
''all necessary information regarding the reasons for which
the proceedings· were started under s. 34 was available
G
from the records of the Income Tax Department ralating
to the assessment of the assessee.
The High Court dealt with several points which were
raised on behalf of the assessee which included the question whether the Income Tax Officer had the jurisdiction
H
to make an assessment under the provisions of s. 34 unless
the conditions contained in s. 34 (l-A) were satisfied.
In
s. N. SINGH v. C.I.T. (Grover, J.)
179
A other words, unless he had "reason to believe" that income
profits or gains chargeable to income had escaped assessment, he could not have proceeded under the aforesaid
provision. The High Court in the first place sustained a
preliminery objection which had been raised on behalf of
B the revenue that because the assessee had filed appeals to
the Appellate Assistant Commissioner, he could not pursue
his petition under Art. 226 of the Constitution before the
High Court. The other points which had been com,i.,sed
related to the validity and constitutionality of s. 34( !-A).
The High Court held that it had been settled by a series of
c
decisions of this Court that it was not unconstitutional.
Indeed that point was subsequently abandoned by the
learned counsel for the assessee. But after holding that
preliminary objection
had substance, the High Court
proceeded to decide the question relating to the satisfaction
of the pre-conditions under s. 34 (I-A),
although
the
D correct course for it to follow after sustaining the preliminary objection was to have dismissed the Writ Petition.
Since the High Court gave a decision on that matter, which
would be binding on the Appellate Assistant Commissioner,
we are unable to accede to the submission made by the
learned counsel for the revenue that we should decline to
E go into' the question arising out of the provisions of s. 34
(1-A),
The impugned notices which were issued under s. 34
(1-A) stated that the Income Tax Officer had "reason to
believe" that income, profits and gains assessable to income
F tax had escaped assessment. There was also a note at the
foot of the notices that they had been issued after necessary sa•isfaction of •he Central Board of Revenue. The
High Court observed tlfat the Income Tax Officer had obtained the sanction of the Board upon reasons recorded
in writing, and although the record containing those reasons
G was sought to be produced before the Court, an objection
was raised on behalf of the assessee, that the recorded
reasons should not be looked into. The High Court felt
that there was no necessity to travel beyond the order of
the Appellate Assistant
Commissioner read with the
assessment orders which were
under
challenge. The
H Appellate Assistant Commissioner, it was felt, had looked
into the records which included the statements and other
materials filed with the Income Tax Investigation Commis_
180
SUPREME COURT REPORTS
[1972] 1 S.C.R.
sion by the petitioner. The High Court proceeded to say
A
that although the Appellate Assistant Commissioner had
looked at all the material, he had expressed some difficulty
in coming to a conclusion without further material on the
question as to what fresh evidence was available before the
Income Tax Officer to convince him that the sum of B
Rs. 20,00,000/-which was previously treated as capital should
be treated as income. It was finally held that the assessee
had failed to establish that the pre-conditions contained
in s. 34 (I-A) had not been fulfilled and consequently
there was an initial lack of jurisdiction.
Section 34 (I-A) to the extent it is necessary, may be c
reproduced.
"34 (I-A). If, in the case of any assessee, the
income-tax officer has reason to believe-
(i) that income, profits or gains chargeable
to income-tax have escaped assessment
for any year in respect of which the
relevant previous year falls ...... ,
and
(ii) that the
income, profits
or gains
which have so escaped assessment for
any such year or years amount or are
likely to amount to one lakh of rupees
or
more~
he
may ............. .
serve on the assessee ........ a notice
containing ...... and may proceed to
assess or reassess the income, profits
or gains of the assessee ............ ;
D
E
F
Provided that the Income-tax Officer shall not issue
a notice under this sub-section unless he has recorded
his reasons for doing so and the Central Board of Revenue
is satisfied on such reasons recorded that it is a fit case for
G
the issue of such notice".
Since nothing had been disclosed which was relevant
for the purpose of finding out whether the Income Tax
Officer had any reason to believe that the income, profits or
gains of the assessee chargeable to income-tax had escaped
H
assessment, we gave an opportunity to the Revenue to
produce the records containing those reasons. All that
-
A
s. N. SINGH v. C.l.T. (Grover, J.)
181
have been found in the records are reports in Form 'B'
made in connection with starting of proceedings under
s. 34(1-A), each report relating to a different assessment
year. Items (7) and (8) of this form relate to brief reasons
for starting proceedings and whether the Central Board
B of Revenue was satisfied that it was a fit case for issue of
notice. Against item (7) it is stated "reasons as per separate
sheet attached". Against item (8), the Secretary of the
Central Board of Revenue signed after writing "Yes,
satisfied". The reasons for starting the proceedings given in
the separate sheet may be fully reproduced.
c
D
E
F
G
"For the reasons hereinafter recorded
I
believe that income, profits and gains earned by the
assessee in his personal capacity and in conjunction
with others and chargeable to income-tax have
escaped assessment and that the amount of such
concealed income relating to the Accounting years
covering the period beginning on the 1st day of
September, 1939 and ending on the 31st day of
March, 1949, amount to or is likely to amount to
Rs. 1,00,000/-. The reason for such belief, inter
alia, is as follows :-
(1) The assessee who is or was at the relevant
time a Managing Director in about a dozen
limited companies, along with "Oberois" is
believed to have made some secret profits
which were not offered for assessment.
(2) The assessee is believed to have received a
sum of Rs. 22 lakhs from "Oberois" and this
sum or at least part of which represents
income has escaped assessment.
Sd/- (A. K. BHOWMIK)
Income-tax Officer
Distt. II (2), Calcutta"
It is abundantly clear that the two reasons which
H have been given . for the belief which was formed by the
Income Tax Officer hopelessly fail to satisfy the requirements of the statute. In a recent case-Chhugamal Rajpal
182
SUPREME COURT REPORTS
(1972] l S.C.R.
A
v. S. P. Chaliha and Others (1) which came up before this
Court, a similar situation had arisen and under the directions of the Court, the Department produced the records
to show that the Income Tax Officer had complied with the
conditions laid down in the statute for issuing a notice
relating to escapement of income. There also, the report subB
mitted by the Officer to the Commissioner and the latter's
orders thereon were produced. In his report, the Income
Tax Officer referred to some communications received
by him from the Commissioner of Income-tax , Bihar and
Orissa from which it appeared that certain creditors of the
assessee were mere name-lenders and the loan transactions c
were bogus and, therefore, proper investigation regarding
the loans was necessary. It was observed that the Income
Tax Officer had not set out any reason for coming to the
conclusion that it was a fit case for issuing a notice under
s. 148 of the Income Tax Act, 1961. The material that
he had before him for issuing notice had not been mentioned.
D
The facts contained in the communications which had
been received were only referred to vaguely and all that
had been said was that from those communications it
appeared that the alleged creditors were name-lenders
and the transactions were bogus. It was held that from
the report submitted by the Income Tax Officer to the
E
Commissioner it was clear that he could not have had
reasons to believe that on account of assessee's omission
to disclose fully and truly all material facts, income chargeable to tax had escaped assessment.
In our judgment, the law laid down by this Court
F
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
dire~t or circumstantial evidence but no.! on mere suspicion,
G
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
H
investigated by the court.
(I) 1971 (79) l.T.R. 603.
-
c
A
s. N. SINGH v. C.I.T. (Grover, J.)
183
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
s. 34 (1-A). The so-called reasons are stated to be beliefs
B thus leading to an obvious self-contradiction. We are
satisfied that the requirements of s. 34 (1-A) were not
satisfied and, therefore, the notices which had been issued
were wholly illegal and invalid.
In the result, the appeal is allowed and the judgment of
the High Court is set aside. The writ petition succeeds to
C the extent that the impugned notices shall stand quashed.
The assessee shall be entitled to his costs.
G. C.
Appeal allowed.
1J.-MI245SupCl/71