Abdul Vahab P vs The Assistant Commissioner of Income Tax and Another

K. Vinod Chandran, J.—The petitioner in the above writ petition challenges the assessment order, Exhibit P1, purportedly passed u/s 175 read with Section 174(3) of the Income Tax Act (for short "the Act") as confirmed in revision by Exhibit P4 order. The facts of the case relevant for the consideration of the writ petition are that the petitioner was accosted by the Sub Inspector of Police, Koduvally while on night patrol duty and unaccounted cash amounting to Rs. 1,74,000/- was seized from him. The seized amount was deposited with the Judicial First Class Magistrate-I, Thamarasserry which, later, was released to the petitioner-assessee after setting apart 33% towards income tax dues. Thereafter notice u/s 142(1) was issued to the petitioner and since no return was filed, a letter was issued communicating the proposal to complete the assessment ex parte. In response to the said communication, the petitioner-assessee filed a reply, pursuant to which a statement was recorded from him, wherein the petitioner furnished some materials to explain the source, which was disbelieved by the income tax authorities. The return of income filed by the assessee declaring total income of Rs. 36,000/- was rejected and assessment was completed adding the unaccounted cash recovered from the petitioner by Exhibit P1 order. The subsequent revision filed by the petitioner was also dismissed by Exhibit P4 order.

The counsel for the petitioner would urge before me that Section 175 is only with respect to attachment and Section 175 postulates a prima facie satisfaction of the assessing officer that the individual against whom assessment is proposed may leave India during the assessment year or shortly after its expiry and it definitely postulates a notice u/s 174(4) before an assessment is completed. The counsel for the petitioner would contend that the notice issued u/s 142(1) cannot lead to an assessment u/s 174(4) and he is prejudiced in so far as the invocation of Section 174(4) disentitles the petitioner from pursuing the appellate remedies.

The counsel for the Revenue, per contra, would contend that it was after proper notice that assessment was completed by Exhibit P1 and the assessment is one completed u/s 175 and not u/s 174 and, hence, the non-obstante clause of Section 175 provides for an assessment to be completed in the event of any person appears to be likely to transfer a property to defeat the charge u/s 4 of the Act.

I have given anxious consideration to the contentions raised by both sides. Admittedly notice was issued u/s 142 (1) of the Act and the assessment has to be completed in such cases u/s 143 of the Act. Section 174, in my opinion, is a distinct assessment proceeding contemplated against persons leaving India to defeat the statutory charge of income tax created u/s 4 of the Act. The Section creates a charge of income tax on the income of the assessment year itself and postulates an assessment to be made during the current assessment year as distinguished from the charge of income tax created as per Section 4 "in respect of the total income of the previous year of every person". Any assessment u/s 174 necessarily requires a notice to be issued u/s 4 and such notice can be issued if it "appears to the assessing officer that such individual would leave India during the current assessment year or shortly after its expiry and has no intention to return to India". The Section has been enacted to charge, levy and recover income from a person who proposes to leave the country and not return inter alia with the object of evading payment of tax for the income derived during the current year. From the word "appears" it can be inferred that the assessing officer should be prima facie satisfied of the intention of an individual to leave the country and not to return, thus defeating the provisions of the Act. Such prima facie satisfaction has to be recorded and notice issued before any assessment is completed u/s 174. Section 175 similarly deals with transactions resulting in alienation of assets with the object of evading recovery of income tax and makes applicable sub-section (2), (3), (4), (5) and (6) of Section 174 to all proceedings under the said section. Section 175 again, has a non-obstante clause, providing for charge of tax on the income of the current assessment year to defeat evasion of tax and recovery, by sham transactions and specifically provides that sub-section (4) of Section 174 shall apply to any proceedings in the case of any such person as they apply to the case of persons leaving India. The assessment order issued u/s 175 read with Section 174(3) in the instant case is not preceded with a notice u/s 174(4) and even in the order Exhibit P1 there is no whisper about the assessee-petitioner''s likelihood of attempting to alienate his assets for the purpose of avoiding tax. Evidently by invoking powers u/s 175 read with Section 174(3) the assessing officer has invoked special provisions for assessment invoking the non-obstante clause to create charge of income tax on the income of the assessee not liable to charge u/s 4 of the Act There is no doubt that the assessing officer if having sufficient materials and on a prima facie consideration, can invoke such powers u/s 175 as the Section itself provides a charge of income tax on such income of the current assessment year. However, while invoking the same, necessarily it has to be on the prima facie satisfaction on a consideration of the facts and circumstances and under a specific notice issued u/s 174(4); which are both absent in the above proceedings. The notice, evidently, was issued u/s 142(1) invoking the charge of income tax provided u/s 4 on the income of the previous year and the same is contemplated only on the expiry of the previous year. The charge on such income materialises only after the close of the previous year and the beginning of the assessment year making the levy also possible only for the income of the previous year after the close of the said year.

In the circumstance of the law based on the provisions, as explained above, the assessment order passed u/s 175 read with Section 174(3) of the Act cannot be sustained on account of there being no prima facie consideration or satisfaction of the assessing officer that the assessee is likely to transfer property to avoid tax; which is a prerequisite to create the charge of income tax on the income of the current year as provided u/s 175 and also for the absence of any notice u/s 174(4); as again specifically provided u/s 175. In the circumstances, Exhibit P4 revisional order as well as Exhibit P1 assessment order are set aside. It is noticed that the assessing officer has issued notice u/s 142(1) in the current year in which the cash was seized from the assessee, which may not be permissible, since as noticed earlier there is no charge on the income of the current year. However, at this distance of time, I am of the opinion that no separate notice be issued and the said notice issued u/s 142(1) can be proceeded with as one issued in the assessment year 2004-05 for assessing the income of the previous year 2003-04 in which the seizure was made. The assessment shall be completed in accordance with law as expeditiously as possible, at any rate, within a period of three months from the date of receipt of a copy of this judgment. The petitioner shall co-operate with the assessment proceedings and shall produce a copy of this judgment before the assessing officer within two weeks from the date of receipt of a certified copy, on which date the assessing officer shall give the petitioner a date for hearing. In the event of the petitioner failing to produce the certified copy as directed above, Exhibit P1 shall stand revived and the demand shall stand confirmed.

The writ petition is allowed, however with no order as to costs.