MADHYA PRADESH INDUSTRIES LTD. versus THE INCOME-TAX OFFICER, NAGPUR

Citation: [1971] 1 S.C.R. 266 · Decided: 16-04-1970 · Supreme Court of India · Bench: J.C. SHAH · Disposal: Appeal(s) allowed

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Judgment (excerpt)

266 
MADHYA PRADESH INDUSTRIES LTD. 
v. 
THE INCOME-TAX OFFICER, NAGPUR 
April 16, 1970 
[J. C. SHAH, K. S. HEGDE AND A. N. GROVER, JJ.] 
Indian Income-tax Act (11 of !922) s. 34(1) (a)--Circumstances for 
initiating proceedings under s. 341 !) (a)-lf open to challenge in a Court 
of/aw. 
A 
B 
· The assessee paid commission to A, one of its selling agents, 
and 
claimed that amount as a revenue outgoing in the computation of 
it& 
C 
profits for that year. 
The Income-tax Officer made the order of assess-
ment 
without expressly 
referring to 
the 
said 
deduction but 
proceeding on the basis that it was a permissible deducti.on. 
Later, the 
Income-tax Officer issued' notices 
under s. 34(1) (a) of the Income-ta)' 
Act, 1922 stating that he had "reason to. believe that" the .. income of the 
assessee had escaped assessment 
and 
was 
under-assessed. 
He sent a 
questionnaire to the assessee. Since 'the assessee, did not reply to the 
questionnaire, the income-tax officer informed the assessee, that he presum-
D 
ed that no correspondence with A existed that no ser1 ice was 
rendered 
by A and the payments made were without justification. The assessee filed 
petitions under Arts. 226 and 227 of the Constitution for restraining the 
Jl'ICome-tax Officer from taking any action on the notices. The assessee's 
case was that it had placed all the material facts before the Income-tax 
officer that the Income-tax Officer had examined those facts before making 
the assessments, and that the Income-tax officer had added back the com-
E 
mission paid to another selling agent to the profits of the assessee. but 
took no objction to the commission paid to A. 
The High Court dismissed 
the petition. A!lowing the assessee's appeal, this Court : 
HELD: Th~ proceedings taken under s. 34(1) (a) must be quashed. 
Two conditions must be •atisfied in order to confer iurisdiction on 
the 
Income-tax Officer to issue the notice unaer s. 34 of the Act in respect 
of assessments beyond the period of four years, but within a period of 
F 
eight years, from the end of the relevant year, viz. (i) the Income-tax 
Officer must have reason to believe that income, profits or gains charge-
able to income-tax had. been under-assessed, and (ii) he mu§t have reason 
to believe that such "under-assessment" had occurred by reason of either 
(a) omission or failure on the part of the assessee to make a return of 
his income under s. 22 or (b) omission or failure on the part of the 
as~essee to disclose fully and truly all the material facts necessary for hi• 
assessment for that year. 
Both these conditions ate conditions precedent 
G 
to be satisfied before the Income-tax Officer acquires jurisdiction to issue 
:a notice under the section. 
If there are in fact some reasoiiable grounds 
for the Income-ta< Officer to believe 
that there had 
been any 
non-
disclosure as regards any fact, which could have a material bearing on the 
question of under-assessment, that. would be sufficient to give jurisd1c.tion 
to the Income-tax Officer to issue the notice under s. 34. Whether ti1ese 
grounds are adequate or not is not a r.natter for the Court to investigat~. 
fa other words, the sufficiency of the grounds which induced tlw Income-
ff 
tax Officer to act is not a justiciable issue. It is of course open for the 
assessee to contend that the Income-tax Officer did 
not hold the 
belief 
· that there had been such non-disclosure. In other words. th~ existence of 
A 
B 
c 
D 
E 
G 
H 
M.P. INDUSTRIES v. I.T.O., NAGP.UR (Hegde, J.) 
267 
the belief can be challenged by the assessee but not the sufficiency of the 
1e010ns for the belief. 
The 
expression., 
"reason to believe" in s. 
34 
do .. not mean purely subjective satisfaction on the part of the Jncomc-
tax Officer. The belief must be held in good faith; it cannot be me['Iy 
a pretence. 
lt is oPen to the court 10 ,examine whether the reasons tor 
~ belief have a. rational connect.ion or a relevant bearing to the for1na-
tion of the belief and are not extraneous or irrelevant to the purpose of 
I.be section. To this limited extent, the action of the Income-tax Officer 
in starting proceedings under s. 34 of the Act is open. to challenge in a 
court of Jaw. [273 E-H; 274 A-CJ 
Calcutta Discoune Company Ltd. Y. Jnco1netax Officer Co1np(l11ies Di;)'/, 
l and another; [1961] 2 S.C.R. 241; S. Narayant1ppa and Ors. v. 
Co111-
111isslo11er of Income-tax Bangalore, 63 I.T.R. 219; Kantamani 
Ve11kata 
Narayana and 

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