SHEO NATH SINGH versus APPELLATE ASSISTANT COMMISSIONER OF INCOME TAX, CALCUTTA

Citation: [1972] 1 S.C.R. 175 · Decided: 12-08-1971 · Supreme Court of India · Bench: K.S. HEGDE · Disposal: Appeal(s) allowed

Judgment (excerpt)

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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 suspicion-
Court 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. Gradu-
ally 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 in-
terest 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 re-
turns 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 asseess-
ments 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 sub-
mitted 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 con-
tention 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 sus-
picion gossip or rumour. The Income-tax Officer would be acting with-
out iurisdiction if the reason for this belief that the conditions are satis-
fied ·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 investiga-
ted 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 con-
tradiction. 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 JURISDICT

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