Supreme Court Judgments — 1955

The Supreme Court, by a majority decision (Jagannadhadas J. dissenting), held that Section 5(1) of the Taxation on Income (Investigation Commission) Act, 1947, is ultra vires the Constitution as it violates Article 14. The majority reasoned that the amendments to Section 34 of the Indian Income-Tax Act, 1922, made in 1948 and 1954, fundamentally altered its scope. Previously, Section 34 required "definite information" discovered by the Income-Tax Officer. Post-amendment, it required only a "reason to believe" that income escaped assessment due to omission or failure by the assessee. This change meant that cases previously falling under the purview of the Investigation Commission could now also be dealt with under the amended Section 34. The crucial point of discrimination was that assessees subjected to the Investigation Commission were denied procedural safeguards like the right to inspect documents, appeal, and revision, which were available to those assessed under the amended Section 34. This created an unequal treatment for individuals in the same class of substantial tax evaders. Consequently, the Court ordered a writ of certiorari quashing the report of the Income-Tax Investigation Commission and certain assessment orders, and a writ of prohibition restraining the respondents from implementing findings regarding a specific year. Jagannadhadas J. dissented, finding the class of persons under Section 5(1) distinct from those under the amended Section 34, thus not violating Article 14.

The Supreme Court held that the notice issued on February 12, 1944, under Section 34 was validly issued. The Court reasoned that for the purposes of Section 34, income chargeable to tax that failed to result in a valid assessment due to a legal lacuna, not attributable to the assessing authorities, constitutes 'escaped assessment'. The initial assessment had failed due to the absence of the Indian Finance Act of 1939, and the subsequent retrospective legislation validated the re-initiation of assessment proceedings. The Court distinguished the case from Sir Rajendranath Mukherjee v. C.I.T., Bengal, where assessment proceedings were still pending. The Court found that the income of the assessee, chargeable to income tax, had escaped assessment in the relevant year 1939-40. The High Court's answer to the referred question was upheld. The Court did not decide the second issue regarding cash credits, as it was not referred.