High Court Of Sikkim
Alankar Commercial (P) Ltd. vs. Assistant Commissioner Of Income Tax & Ors.
Sections 147, 148 ART. 226, ART. 371-F
Asst. Year 1987-88, 1988-89, 1989-90
R. Dayal, C.J. & Anup Deb, J.
Civil Writ Petn. No. 18 of 1995
21st July, 1999
O.S. Bajpai, Talwer & T.B. Thapa, for the Petitioner : A. Moulik & S.P. Wangdi, for the Respondents
R. DAYAL, C.J. :
The petitioner is a company registered under the Registration of Companies Act, Sikkim, 1961, on 23rd June, 1986. It was served with three notices dt. 16th March, 1995, by the Asstt. CIT, Central Circle-4, New Delhi under s. 148 of the IT Act, 1961, for the asst. yrs. 1987-88, 1988-89 and 1989-90, each stating that the AO had reason to believe that the income of rupees forty lakhs had escaped assessment within the meaning of s. 147 of that Act and requiring the petitioner company to deliver to him within thirty days from the date of the service of the notice an Income-tax return. By this petition filed under Art. 226 of the Constitution, the petitioner challenged these notices and claimed a writ of certiorari for quashing and setting aside and same and also a mandamus directing respondent Nos. 1 to 3 to withdraw the same. During the pendency of the petition, the petitioner company was also served with three notices dt. 5th Feb., 1997, for the aforesaid years under s. 142(1) of the IT Act, 1961. On an application made by the petitioner company for staying the proceedings, pursuant to these notices, a learned single Judge of this Court passed an order on 29th March, 1997, “that the respondents may continue with the assessment proceedings but even after making the final assessment no demand should be raised or no further action for realisation of the assessed amount be made till the disposal of the writ petition.” This order was passed with respect to the notices relating to the asst. yr. 1988-89. Subsequently, on an application seeking the modification of this order, the learned single Judge passed an order on 19th June, 1997, specifying that the order dt. 29th March, 1997, would cover the asst. yrs. 1987-88, 1988-89 and 1989-90.
2. The petitioner has challenged the validity of the notices under s. 148 of the IT Act, 1961, on the ground that they have been issued without jurisdiction for the following reasons : (i) The IT Act came into force in the State of Sikkim with effect from the previous year relevant to the assessment year commencing on the 1st day of April, 1990, and prior thereto the Sikkim State Income-tax Manual, 1998, was the law applicable in the State of Sikkim and as such whatever liability arose for payment of income-tax in respect of the company, arose under the Sikkim State Income-tax Manual and the company filed income-tax return under the said Manual for the asst. yr. 1989-90, being the first year of its activities. In view of the special provisions of cls. (k) and (n) of Art. 371-F of the Constitution. Central law could not be operative, since two laws, that is, the State law and the law in force outside the State of Sikkim could not operate on the same subject and at the same time and if the matter was covered by the State law it was that law which would govern the issue till the law in force outside the State of Sikkim was extended to Sikkim. Respondent No. 1 could have no reason to believe that income chargeable to tax under the IT Act, 1961, had escaped assessment as the petitionerâs company was registered under the Registration of Companies Act, Sikkim, 1961, and was carrying on business in the State of Sikkim and was not carrying on business within the territorial jurisdiction of respondent No. 1. Although the petitioner company was incorporated in 1986, it did not carry out any activities till 1989. As such, respondent No. 1 did not have jurisdiction over the petitioner. (ii) The AO must have reason to believe that income chargeable to tax had escaped assessment and that belief must be founded on relevant material and the material which is relied upon must have some live-link or rational nexus with the formation of the belief, but there are no such materials or objective facts which would enable a person properly instructed to come to a belief that the petitioner had any income chargeable to tax under the Indian IT Act, 1961, and the same escaped assessment. (iii) The impugned notices under s. 148 record that the petitionerâs income amounting to rupees forty lakhs had escaped assessment for each of the years. The first accounts of the petitioner were drawn up only for the year ending 31st March, 1989, and these accounts also disclose that the petitioner did not earn any income in that year. So the impugned notices are patently illegal. The sanction of respondent No. 2 to the impugned notices had been given in a mechanical manner.
3. Respondent Nos. 1 to 3, in their counter-affidavit, have taken the preliminary objection as to the territorial jurisdiction of this Court to entertain the petition. It is not disputed that respondent Nos. 1 to 3 against whom reliefs are claimed have their offices at Delhi beyond the territorial jurisdiction of this Court. It is averred in the counter-affidavit that no part of the cause of action arose within the territorial jurisdiction of this Court inasmuch as the notices under s. 148 were sent to the petitionerâs authorised agent M/s. Rattan Gupta & Co. 4356/4, Ansari Road, Daryaganj, New Delhi, under registered cover but were refused, as the authorised agent stated that there was no company at the given address. Notices were sought to be served on M/s Rattan Gupta & Co. since respondent Nos. 1 to 3 had the information in their possession that there was no office running from the address given by the company in the Memorandum and Articles of Association and on enquiry it was found that merely a sign-board in the name of the company had been placed there and the letters addressed to the company were despatched by the person employed there to the Delhi address of M/s Rattan Gupta & Co., Daryaganj, New Delhi. It is further stated that the fact that M/s Gupta & Co. were authorised to receive such notices is evident from the letter dt. 7th April, 1994, though the notices were also sent to the Gangtok address and it is erroneous to say that the notices were only served at Gangtok. The petitioner company did not respond to the notices under ss. 148 and 142(1) of the Indian IT Act and did not also produce the account books pursuant to those notices and the copies of the accounts were also not attached with the writ petition which would otherwise have shown that the petitioner had made heavy investments aggregating approximately Rs. 1,28,00,000 up to 31st March, 1989, and it is within the jurisdiction of the IT authorities to examine the means of financing the investments and to ascertain whether the financing is from unproven sources. Further, it is pleaded that income which accrues or arises in India or income which is deemed to have accrued or arisen in India is liable to tax under the Indian IT Act, 1961, and respondent Nos. 1 to 3 have the jurisdiction to make inquiry and ascertain about escapement of income-tax, if any, and also that notices have been issued in respect of the income liable to tax in India. A plea is also taken to the effect that the Court is not concerned with the ascertainment of facts but only with the existence of rational nexus between the reasons and the belief that income liable to tax has escaped assessment. The sufficiency of the reasons cannot and need not be gone into. Following reasons to believe escapement of income have been recorded : “Kindly refer to the note of my predecessor and approval of CIT. A search and seizure operation was carried out on 15th March,1990 in cases belonging to âDalmia Groupâ and Shri Rattan Gupta, C.A. of M/s Rattan Gupta & Co. Darya Ganj, Delhi was one of the persons covered with this group. In the course of search operation certain documents were seized from the above persons. Page 22 of the bunch of loose papers marked as Annexure âA-45â reveals that M/s Alankar Commercial (P) Ltd. had made an investment of Rs. 1,22,22,500 till 31st March, 1989. Year-wise bifurcation is not available. The jurisdiction in this case was assigned to this circle vide order No. CIT.I/HQ/Centralisation/1993-94/522 dt. 8th July,1993.
The company was incorporated on 23rd June, 1986. Thus, the first assessment year would be 1987-88. No return of income was filed by the company. In absence of exact bifurcation, it is estimated that the company had invested a sum of Rs. 40 lacs each in asst. yrs. 1987-88, 198889, 1989-90. No return of income showing the income earned through above investment was filed by the assessee for subsequent years. I therefore, have reasons to believe that income of Rs. 40 lacs each chargeable to tax has escaped assessment for asst. yrs. 1987-88 to 1989-90. If approved notice under s. 148 may be issued.”
Further, it is alleged that the petitioner has accepted that it did not carry out any activity for generation of income in the years under consideration and the sole source of its finances is the issue of bearer share capital, the verification of which can only be done from the petitioner, the onus to show that the money has come from the bearer shares is squarely on the petitioner and this coupled with the non-functional office of the petitioner, doubtful incorporation and a back account indicating simultaneous deposits and withdrawals has given rise to a reasonable belief of escapement of income liable to tax. Thus, according to these respondents, there was sufficient material for the formation of reasons to believe.
4. Following points arise for decision : Whether this Court has the territorial jurisdiction to entertain this petition? Whether the Asstt. CIT of Delhi did not have the jurisdiction to issue a notice under s. 148 of the Act to the petitioner company simply because it is registered in Sikkim, in view of the provisions of Art. 371F of the Constitution ? Whether respondent No. 1 had the reason to believe that any income chargeable to tax had escaped assessment ?
Point No. 1
5. To decide whether this Court has the territorial jurisdiction to entertain this petition, the only question that falls for consideration is whether any part of the cause of action arose within the territorial jurisdiction of this Court. “Cause of action” has not been defined in any enactment but the meaning of it has been judicially considered in various decisions. “Cause of action” means the whole bundle of material facts which are necessary for the petitioner to prove, if traversed, in order to support the right of the petitioner to the judgment of the Court. If a limb of that bundle of facts is available, seen or discernible in one particular place which is the seat of the High Court, then such High Court has the jurisdiction to exercise all the powers conferred on it under Art. 226(2), notwithstanding the fact that the authority against whom the ultimate rule has to be issued and whose act has created a cause of action as a whole or in part, is situated outside its territorial limits. An AO does not have the jurisdiction to make an assessment under s. 147 of the IT Act, unless notice under s. 148 has been validly issued to and served on the assessee. This leads to the question as to whether, in the instant case, notices under s. 148 were served within the territorial jurisdiction of this Court ? The petitioner has alleged in para 9 of the petition that the notices were received at Gangtok by registered post on 7th April, 1995. On the other hand, case of respondent Nos. 1 to 3 is that the notices were served on M/s Rattan Gupta & Co. Daryaganj, New Delhi who was allegedly the authorised agent of the petitioner but who refused to receive the notices. In support of this submission, learned counsel for the petitioner referred to a copy of the letter dt. 7th April, 1994, addressed by Shri T.B. Thapa, Advocate on behalf of the petitioner company to Shri Hemant Sarangi, Asstt. CIT, Central Circle-4, Mayur Bhawan, Connaught place, New Delhi, inter alia, stating that the notices under s. 142(1) had been received by the petitioner company from M/s Rattan Gupta & Co. on 4th March, 1994. Reference has been made to this letter to show that M/s Rattan Gupta & Co., was authorised to receive notices on behalf of the petitioner company. In order to show that such inference cannot be drawn from this letter, reference has been made by the learned counsel for the petitioner to letter dt. 25th Feb., 1994, sent earlier by M/s Rattan Gupta & Co. to Shri Hemant Sarangi, Asstt. CIT, New Delhi to the effect that M/s Rattan Gupta & Co. had received the notices under s. 142(1) of the IT Act, but M/s Rattan Gupta & Co. was neither the principal officer nor the authorised representative of the petitioner company nor was it in any other manner empowered to receive any notices on behalf of the petitioner company nor to file return of income nor to make any compliance nor to give any information on its behalf. In this letter, reference was also made to the earlier letter dt. 24th Feb., 1993, and 19th April, 1993, wherein the addressee had been informed that the aforesaid company had been registered in the State of Sikkim and the address of the registered office of the company had also been communicated vide letter 24th Feb., 1993. In view of this letter, it is not possible to draw an inference from the letter dt. 7th April, 1994, that M/s Rattan Gupta & Co. was the principal officer of the petitioner company or was its authorised agent competent to receive any notices on its behalf. There is no other document on record to prove that M/s Rattan Gupta & Co. was the principal officer or the authorised agent of the petitioner company. So, it has to be held that the notices under s. 148 of the IT Act were served at Gangtok and the service of the notices on Rattan Gupta & Co. by refusal of registered posts did not amount to service of notices on the company. Under s. 282(2)(b) of the IT Act, notice is required to be served in the case of a company on its principal officer. Since notices under s. 148 were served at Gangtok and since the AO does not have the jurisdiction to make assessment under s. 147 unless a notice under s. 148 has been validly issued to and served on the assessee, we hold that a part of the cause of action arose within the territorial jurisdiction of this Court and as such this Court has the territorial jurisdiction to entertain the petition.
Point No. 2
6. Sikkim was a feudal State governed by a monarch and became a part of the Indian Union by the 36th Amendment to the Constitution, whereby Art. 371-F was introduced making special provisions with respect to that State. The Sikkim State Income-tax Manual was the law in force prior to the date of the merger of Sikkim with the rest of India and it continued to be in force even after the merger until it was to be amended or repealed by a competent legislature by virtue of cl. (k) of Art. 371-F. Clause (n) of Art. 371-F provides that the President may, by public notification, extend with such restrictions or modifications as he thinks fit to the State of Sikkim any enactment which is in force in a State in India at the date of the notification. At the same time, any law which is in force in any other part of the country may be extended to Sikkim or may be enacted to be in force in Sikkim, as in any other part of the country, as per the general provisions of the Constitution which are applicable to the whole of India. The IT Act, though was initially purported to be extended to the State of Sikkim by a presidential notification issued under cl. (n), was subsequently extended to Sikkim by s. 26 of the Finance Act, 1989, with effect from the previous year relevant to the assessment year commencing from the 1st day of April, 1990. Since the present case concerns the assessment years up to 1989-90, the extention of the IT Act to Sikkim by virtue of s. 26 of the Finance Act, 1989, is of no consequence. Learned counsel for the petitioner has submitted that since special provision was made under cl. (k) of Art. 371-F providing that a State law would continue until it was repealed or modified by a competent legislature or other competent authority, that was the law applicable to the petitioner company which was registered in Sikkim, even for the income that accrued or arose outside the State of Sikkim. We see absolutely no merit in this submission. Clause (K) of Art. 371-F does not have any relevance to the interpretation of the IT Act, 1961. If income which accrued or was received outside Sikkim was liable to tax under the Indian IT Act, it cannot be said that the same would not be liable to tax under that Act merely because of the provisions of cl. (k) of Art. 371-F. There can be no doubt that Sikkim State Income-tax Manual, being a State law cannot have its operation beyond the limits of Sikkim. Therefore, that law cannot stultify the operation of the central law of income-tax with respect to a company registered in Sikkim concerning its income which accrued or was received outside Sikkim. Furthermore, law of income-tax is not a personal law which a person may carry with him wherever he goes or functions. Therefore, if the petitioner company has carried on its business activities or has otherwise earned or received income outside the State of Sikkim but within India, the same would be liable to tax under the Indian IT Act, 1961. We, therefore, hold that the jurisdiction of the Asstt. CIT, Delhi to issue notices under s. 148 of the IT Act, 1961, is not ousted by Art. 371-F of the Constitution.
Point No. 3
7. The High Court in exercise of its supervisory jurisdiction under Art. 226 of the Constitution is not concerned with the question whether any income of the petitioner liable to tax under the Indian IT Act, 1961, had escaped tax but only with the question whether the AO had reason to believe that an income chargeable to tax under that Act had escaped assessment. The Supreme Court held in ITO & Ors. vs. Madnani Engg. Works Ltd. (1979) 12 CTR (SC) 144 : (1979) 118 ITR 1 (SC) : TC 51R.725 that the existence of reason to believe on the part of the ITO is a justiciable issue and it is for the Court to be satisfied whether in fact the ITO had reason to believe that income had escaped assessment. In Lalji Haridas vs. R.H. Bhatt & Anr. (1965) 55 ITR 415 (SC) : TC 56R.975, the Supreme Court said that the jurisdiction conferred on the High Court under Art. 226 of the Constitution is not intended to supersede the jurisdiction and authority of the ITOs to deal with the merits of all the contentions that the assessees may raise before them. Again, the Supreme Court held in S. Narayanappa & Ors. vs. CIT (1967) 63 ITR 219 (SC) : TC 51R.621 that it is open to the Court to examine whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section. To this limited extent, the action of the ITO in starting proceedings is open to challenge in a Court of law. Whether the grounds are adequate or not is not a matter for the Court to investigate. It was observed in State of U.P. vs. Dharmendar Prasad Singh AIR 1989 SC 997 that the judicial review under Art. 226 cannot be converted into an appeal. Judicial review is directed, not against the decision, but is confined to the examination of the decision-making process. CIT vs. Pr. Pl. Palaniappa Chettiar (1945) 13 ITR 269 (Mad), Chhugamal Rajpal vs. S.P. Chaliha & Ors. (1971) 79 ITR 603 (SC) : TC 51R.611, Raunaq & Co. (P) Ltd. vs. ITO & Anr. (1986) 56 CTR (Del) 127 : (1986) 158 ITR 30 (Del) : TC 51R.720 and Smt. Kantamani Venkata Satyavathi vs. ITO (1967) 64 ITR 516 (AP) : TC 51R.1047 referred on behalf of the petitioner do not lay down law any the different. We have already extracted the reasons to believe escapement of income to tax recorded by the AO which show that as a result of search and seizure operations that were carried out on 15th March, 1990, in the case of âDalmia Groupâ and Shri Rattan Gupta, C.A. of M/s Rattan Gupta & Co. Darya Ganj, Delhi certain documents were seized and one of those documents revealed that the petitioner company had made an investment of Rs. 1,22,22,500 till 31st March, 1989. From the documents seized at the time of the search, the AO had entertained the belief that though the company was registered in Sikkim, its activities of profits were carried out from Delhi and income accrued and arose in Delhi and that the head and brain of the company was situated at Delhi. It was also found that no office was running at the registered office of the company at Gangtok. There was only a signboard of the company at that address and the office remained mostly locked. In our view, from the documents seized as a result of the search and seizure operations carried out on 15th March, 1990, the AO had reason to believe that the income shown in the notices under s. 148 was chargeable to tax and had escaped assessment. Thus, the petition has no merit.
In the result, the petition is dismissed. The interim orders passed during the pendency of the petitioner stand vacated. In the circumstances, there shall be no order as to costs.
[Citation : 243 ITR 626]