Y. Moideen Kunhi and Co. and Others Vs. Income-tax Officer and Others - Court Judgment

R.V. Raveendran, J.

1. The twenty petitioners are all income-tax assessee. The petitioners are either individuals or proprietary concerns or partnership firms or private trusts or private limited companies incorporated under the Companies Act. They all belong to a group known as Yenepoya Group. They have their place of residence/ place of business/office at Mangalore. Their assessment files are with several different assessing authorities at Mangalore.

2. The Chief Commissioner of Income-tax, Bangalore (third respondent) initiated proceedings under section 127 of the Income-tax Act, 1961 ('the Act', for short), for transfer of the Income-tax cases of all the petitioners from their respective jurisdictional assessing authorities to the Assistant Commissioner of Income-tax, Central Circle-III, Bangalore (second respondent). The respective earlier assessing authorities are impleaded as respondents (first respondent in the respective cases). The third respondent caused show-cause notices dated August 20, 1992, to be issued to all the petitioners proposing to transfer their cases from their respective existing assessing authorities at Mangalore to the file of the second respondent under section 127 of the Act to facilitate proper investigation. By the said notices, the petitioners were also required to appear before the Chief Commissioner of Income-tax, Bangalore, on September 7, 1992, at 11.15 a.m. and in case any of the petitioners did not wish to appear personally or through their authorised representative, they were required to file their objections in writing by September 7, 1992.

3. The petitioners did not choose to appear before the third respondent either in person or through their authorised representatives on September 7, 1992, but filed their objections on August 18, 1992, wherein wherein they objected to the proposed transfer on the following ground :

'We hereby register our objections to the proposal, since we fall in the jurisdiction of Mangalore and all the business firms in which we are partners are situated in Mangalore. We have no office in Bangalore whatsoever. The Income-tax consultant is also stationed in Mangalore and if the file is transferred to Bangalore we shall find it difficult to appear before you with the books, in view of the long distance and also in view of the number of days that may be lost in appearing and producing the books and documents before you for hearing.

There is, therefore, no jurisdiction to transfer our files to Bangalore, which have been all along handled by the Mangalore Income-tax office. We, therefore, request you not to transfer our files which will cause tremendous strain and inconvenience to us and also delay in appearing before you. We hope you will appreciate our objection and retain our files in Mangalore itself. An opportunity of being personally heard may kindly be given before disposal of our objections.'

4. Thereafter, the third respondent passed an order dated October 7, 1992 (annexure 'C' to the petition), transferring the cases of all the twenty petitioners from the respective jurisdiction assessing authorities at Mangalore to the second respondent (Assistant Commissioner of Income-tax, Central Circle-III, Bangalore). The order dated October 7, 1992, communicated to the petitioner reads as follows :

'In exercise of the powers conferred under section 127(2) of the Income-tax Act, 1961, the Chief Commissioner of Income-tax, Bangalore, hereby transfers the cases, the particulars of which are mentioned in columns 2 and 3 of the schedule below, from the Assessing Officer in column 4 to the Assessing Officer in column 5 below, in order to facilitate proper coordinated investigation and after giving them proper opportunity of being heard in terms of section 127 of the Income-tax Act, 1961.

SCHEDULE

This order shall take from October 15, 1992.

(Sd.)

for Chief Commissioner of Income-tax, Bangalore.'

5. The petitioners have challenged the transfer of their ceases to Bangalore in this batch of petitioners on the following grounds :

(a) The petitioners were not given an opportunity of being personally heard before the disposal of their objections;

(b) Reasons for the proposed transfer were not given in the show-cause notice proposing the transfers;

(c) The order of transfer passed by the third respondent does not give any reason for transfer.

6. The respondents contended that the files/cases of the petitioners' group are with five Assessing Officers at Mangalore, that the group death mainly in timber, plywood, granite, hospitals, hotels, construction of commercial complexes and residential flats; that the Commissioner, after going through the files of the group, found that there was substantial tax evasion and in order to have through investigation into the affairs of the petitioners, proposed that the entire group of cases should be centralised in order to conduct a coordinated investigation to probe into the matter under the supervision of senior officers of the Central Circle at Bangalore. The abovesaid three objections of the petitioners were countered by the respondents in the following manner :

(a) that the proposed notice itself gave an opportunity to the assessees to appear before the Chief Commissioner on September 7, 1992, either in person or through authorised representative and, therefore, no further opportunity was required;

(b) that the proposed notices contained the reason for the proposed transfer, namely, to facilitate proper investigation; and

(c) that the order of the Commissioner also contains the reason for transfer, namely, 'in order to facilitate proper coordinated investigation'.

7. The respondents further contended that the Commissioner had passed a detailed order as per official memorandum dated September 13, 1992, directing the second respondent to whom the cases were transferred, to hear the cases at Mangalore, by holding camps from time to time and as and when its felt necessary and is found to be feasible; and in view of such an arrangement, the petitioners will not be put to the hardship of having to travel to Bangalore with files/documents.

8. Sub-sections (1) and (3) of section 127 of the Act may conveniently be extracted at this stage :

'127. Power to transfer cases. - (1) The Directors-General or Chief Commissioner or Commissioner may, after giving, the assessee a reasonable opportunity of being heard in the matter, wherein it is possible to do so, and after recording his reasons for doing so, transfer any case from one or more Assessing Officers subordinate to him (whether with or without concurrent jurisdiction) to any other Assessing Officer or Assessing Officers (whether with or without concurrent jurisdiction) also subordinate to him......

(3) Nothing in sub-section (1) or sub-section (2) shall be deemed to require any such opportunity to be given where the transfer is from any Assessing Officer or Assessing Officers (whether with or without concurrent jurisdiction) to any other Assessing Officer or Assessing Officers (whether with or without concurrent jurisdiction) and the offices of all such officers are situated in the same city, locality or place.'

9. The first objection does not have any merit. The notices under section 127(1) issued on August 20, 1992, called upon the assessees to appear before the Chief Commissioner either in person or through an authorised representative on September 7, 1992, at 11.15 a.m. The said notices have been served on the petitioners at Mangalore on August 27, 1992. The petitioners submitted their objections in writing by letters dated August 28, 1992. They did not choose to appear before the Chief Commissioner on September 7, 1992, either in person or through any authorised representative. Nor did the petitioners give any reason for not appearing on September 7, 1992, for personal hearing. In these circumstances, it cannot be said that the petitioners were not give adequate or reasonable opportunity of being heard. Hence the first objection relating to want of a hearing has no basis. The question that remains for consideration is whether the show-cause notice and the order of transfer can be said to contain the reasons for transfer and, therefore, valid.

10. Sri Ramabhadran, learned counsel for petitioners, contended that merely stating in the notice that the 'transfer is proposed to facilitate proper investigation', cannot be construed as setting out the reasons for the proposed transfer; similarly, merely stating in the order of transfer that the transfer is 'in order to facilitate proper coordinated investigation', cannot be construed as communicating the reasons for transfer; that it was not sufficient to record the reasons for the transfer in a separate office note or official memorandum; and that the order suffers from a patent illegality, if the reasons are not communicated to the party.

11. On the other hand, Mr. Dattu, learned Standing counsel for the Department, contended that the reason for the transfer was to facilitate proper and coordinated investigation and this reason was communicated both in the show-cause notice and the order of transfer and it was not necessary to state anything more in the show-cause notice and the order. He further contended that the official memorandum of the Chief Commissioner contained a preamble portion and an operative portion and the essence of the order was communicated in the order dated October 7, 1992; and that it was not necessary to communicate the preamble portion in the order of transfer. In other words, he contended that mention of the words 'in order to facilitate coordinated investigation' is sufficient compliance with the requirement that reasons should be communicated.

12. Learned Counsel for the petitioner referred to the decision of the Supreme Court in Pannalal Binjraj v. Union of India : [1957]31ITR565(SC) , wherein the Supreme Court examined the corresponding provision, viz., section 5 (7A) of the Indian Income-tax Act, 1922, and held that it would be prudent to follow the principles of natural justice before the order of transfer is made and the assessee should be given notice and afforded a reasonable opportunity of representing his views on the question, and briefly, to writing. Most of these requirements are not incorporated in section 127(1) of the 1961 Act. He net relied on the decision of the Supreme Court in Ajantha Industries v. CBDT : [1976]102ITR281(SC) , wherein it was held as follows (at page 285) :

'Communication of the order is an absolutely essential requirement since the assessee is then immediately made aware of the reasons which impelled the authorities to pass the order of transfer. It is apparent that if a case file is transferred from the usual place of residence or office where ordinarily assessments are made to a distant area, a great deal of inconvenience and even monetary loss is involved. That is the reason why before making an order of transfer the Legislature had ordinarily imposed the requirement of a show-cause notice and also recording of reasons......

The reason for recording of reasons in the order and making these reasons known to the assessee is to enable an opportunity to the assessee to approach the High Court under its writ jurisdiction under Article 226 of the Constitution or even this Court under article 136 of the Constitution in an appropriate case for challenging the order, inter alia, either on the ground that it is mala fide or arbitrary or that it is based on irrelevant and extraneous considerations. Whether such a writ or special leave application ultimately fails is not relevant for a decision of the question.'

'........... the requirement of recording reasons under Section 127(1) is a mandatory direction under the law and non-communication thereof is not saved by showing that the reasons exist in the file although not communicated to the assessee.......

Recording of reasons and disclosure thereof are not a mere formality..... When law requires reasons to be recorded in a particular order affecting prejudicially the interest of any person who can challenge the order in court, it ceases to be a mere administrative order and the vice of violation of the principles of natural justice on account of omission to communicate the reasons is not expiated.'

13. He next relied on the judgment of a Division Bench of the Madhya Pradesh High Court in Sagarmal Spinning and Weaving Mills Ltd. v. CBDT : [1972]83ITR130(MP) , wherein it was held as follows (at page 133) :

'The question whether the opportunity given is reasonable or not will be a matter for interpretation by the Court and not by the authority itself. Similarly, the other aspect relating to the recording of reasons would clearly indicate that it has to be an order in the sense of a quasi-judicial nature and it cannot be an arbitrary order where no reasons need be disclosed. From this point of view, we have no doubt that an order of transfer to be passed under section 127 of the Act can certainly be said to be an order of a quasi-judicial nature, if not wholly of a judicial nature and it is incumbent on the authority passing the order of transfer to strictly comply with the two requirements mentioned by the said section. If there be not compliance, the matter will be justiciable and a Court of law would be able to interfere with an order which does not comply with the requirements of the section.'

14. It was also Held that facility of investigation would not be a sufficient reason for transfer of a case; and the mentioned of that reason in the show-cause notice proposing a transfer of a case would not be in compliance with the requirements of section 127. Nor would the giving of some reasons, in a return filed before the High Court in writ proceedings, be in compliance with the section. The impugned order of transfer which did not give to reason for the transfer of the case in the order was held to be in contravention of the mandatory provision of section 127(1) of the Act and was quashed. This was followed by the same Court in the case of Shivajirao Angre v. CIT [1986] 158 ITR 1962 (MP).

15. The Andhra Pradesh High Court in V. K. Steel Industries Pvt. Ltd. v. Asst. CIT : [1991]187ITR403(AP) , considered a case where a show-cause notice was issued which proposed transfer with a view to 'facilitate detailed and coordinated investigation' followed by an order on the ground that the transfer is 'to facilitate detailed and co-ordinate investigation.' No other reasons was mentioned either in the show-cause notice or the order communicated to the assessee. Subsequently, at the stage or writ proceedings, the reasons were submitted. The Court held (at page 404) :

'It is evident that these reasons were not communicated to the petitioner. We do not see any justification for withholding the reasons and communicating only the conclusion. Indeed, the reasons for transfer must have also been stated in the show-cause notice so as to enable the person concerned to make an effective representation. Since that has not been done, the order of transfer is liable to be quashed and it is accordingly quashed.'

16. In Vijayasanthi Investments Pvt. Ltd. v. Chief CIT : [1991]187ITR405(AP) , the show-cause notice and the order of transfer communicated to the assessee merely used the formula words 'to facilitate detailed and coordinated investigation'. The reasons behind the order were furnished in the writ proceedings. The Court followed the decisions referred to above and held as follows (at page 411) :

'From the aforesaid decisions, it is clear that, in the matter of the transfer of a case under section 127 of the Act, it is necessary that the authority which proposes to transfer the case must, wherever it is possible to do so, give the assessee a reasonable opportunity of being heard with a view to enable him to effective show-cause against the proposed transfer. The notice must also propose to give a personal hearing. It is also necessary to mention in the notice the reasons for the proposed transfer so that the assessee could make an effective representation with reference to the reasons set out. It is not sufficient merely to say in the notice that the transfer is proposed 'to facilitate detailed and coordinated investigation'. The reasons cannot be vague and too general in nature but must be specific and based on material facts. It is again not merely sufficient to record the reasons in the file but it is also necessary to communicate the same to the affected party.'

17. There can be no doubt that, if the above decisions are followed and the principle therein are applied, the only inference that can be drawn in this case is that the show-cause notice and the order of transfer are in violation of section 127(1) of the Act for want of reasons. But Mr. Dattu contended that the High Court of Rajasthan, Calcutta, Delhi Gauhati and Allahabad and a later decision of the Madhya Pradesh High Court have taken a contrary view.

18. The first case relied on by Mr. Dattu is Assam Surgical Co v. CBDT in which a Division Bench of the Gauhati High Court considered an order of transfer under section 127(1), wherein the reason given for transfer was that the search conducted in the group of assessees had revealed extensive business connection at Delhi and that the transfer was effected to facilitate coordinated investigation in all connected search cases by the one Income-tax Officer at Delhi. The Court distinguished the decision of the Madhya Pradesh High Court in Sagarmal's case : [1972]83ITR130(MP) , for the following reasons (at page 409) :

'Counsel for the petitioners had relied on Sagarmal Spinning and Weaving Mills Ltd. v. CBDT : [1972]83ITR130(MP) , where the Board issued show-cause notice under section 127 of the Act as to why cases pending at Indore should not be transferred to Bombay and the reason set forth read 'facility of investigation'. The order of transfer did not ascribe any reason at all. The Board also could not produce any record that there existed any reason for the transfer independently of the reason contained in the show-cause notice. The High Court held that 'facility of investigation' could not be 'a sufficient reason for transfer' of a case under section 127. However, in the instant case the order is not a bald one. The reasons for transfer are substantial, strong and potent - the Delhi connection of the petitioner - and in Delhi similar cases of the group were being investigated; so, coordinated investigation was necessary. In Sagarmal's case : [1972]83ITR130(MP) , the High Court held the ground to be vague; so the transfer was not in compliance with the requirements of section 127.'

19. Thus, instead of taking a contrary view, it is seen that the Gauhati High Court held that merely stating that the transfer was to 'facilitate investigation' cannot be treated as ascribing any reason at all for the transfer. In the case considered by the Gauhati High Court, the order did contain a reason, i.e., search conducted in the group has revealed extensive business connections at Delhi. The Court also pointed out that the petitioner in that case had admitted that the search had revealed undisclosed income of the petitioner. It is pointed out that the special leave petition filed against the decision of the Gauhati High Court was dismissed by the Supreme Court as is evident from : [1984]146ITR1(Mad) .

20. In Shri Rishikul Vidyapeeth v. Union of India , the Rajasthan High Court held that the statement in the order of transfer that the transfer was effected to facilitate coordinated investigation along with other connected cases was treated as sufficient disclosure of the reasons for transfer. In Maheshwari Lime Works v. CIT : [1984]147ITR804(MP) , the Madhya Pradesh High Court found that the reason given, namely, that centralization of the cases at Jabalpur was necessary to have a thorough scrutiny and detailed investigation before completion of the assessment, was insufficient to comply with section 127(1). In Peacock Chemicals (P.) Ltd. v. CIT : [1990]182ITR98(All) , the Allahabad High Court found that transfer of cases for 'coordinated investigation' was valid. In Sameer Leasing Co. Ltd. v. Chairman, CBDT : [1990]185ITR129(Delhi) , a Division Bench of Delhi High Court held that they were unable to hold that 'a property coordinated investigation' cannot be a ground for directing that all the cases belonging to a group should be decided by single assessing authority. In Dwarka Prosad Agarwalla v. Director of Inspection : [1982]137ITR456(Cal) , the Calcutta High Court held that, in appropriate cases, facility of investigation ground for transferring the case from one officer to another within the same city.

21. Whenever a group of files is transferred from the jurisdiction Assessing Officers at the place where the assessee are carrying on business or reside to a place outside the city, locality or place, the assessee will invariably be put to undue hardship and inconvenience. Therefore, there must be justifiable and valid reasons for such transfer. Whenever several files pending with various assessing authorities are transferred to a single authority, it is necessarily to facilitate coordinated investigation. Hence that cannot be the reason for the transfer. To say that the transfer of several files is being done to facilitate proper and coordinated investigation, does not amount to giving the reason for transfer, but stating the result sought to be achieved by the transfer. Take the example of a group of assessee each of whom is maintaining true and correct accounts, but assessed with different assessing authorities. It will certainly be convenient and time-saving to transfer all the files to a single officer, even though there is not tax evasion. But, on that ground, can the files be transferred to a far away place The answer will be 'NO'. The section itself makes a distinction between a transfer to another authority in the same city/locality and a transfer to an authority outside the city/locality. Sub-section (2) of section 127 provides that, if the transfer is to another assessing authority in the same city of locality, no opportunity to show caused need be given. That is because there is not stigma attached to such a transfer as the transfer is deemed to be merely a matter of convenience. But, if the transfer is outside the city, the transfer ceases to be one of convenience but becomes one with the purposes of countering evasion of tax or a similar reason which is sought to be prevented by the transfer. In such cases, merely stating that the transfer is to facilitate coordinated investigation will not be a sufficient reason for the transfer.

22. In this case, the reason alleged for the transfer of the files was stated for the first statement of objections filed in the writ proceedings. The reason given is that, on going through the files of this group, the Commissioner noticed substantial evasion of tax and to detect tax evasion, a thorough investigation has to be carried out and for the purpose, the cases are to be transferred from one place to another. Strangely, this reason is not recorded in the official memorandum, let alone in the order communicated to the petitioner. The reason given in the official memorandum reads as follows :

'However, in order to facilitate coordinated investigation and proper assessment of the income of the assessee mentioned, centralization of the case with a senior officer in the Central Circle at Bangalore is absolutely necessary.'

23. This cannot be considered as a reason sufficient to order transfer outside the city. A decision for transfer of the cases to another city can be taken only on the basis of reasons which are valid in law. Evasion of tax, non-disclosure of income, maintenance of improper books of account, search, inspection and/or seizure disclosing information of material necessitating coordinated investigation, filing of false/incorrect returns, are some of the reasons that can give rise to such a transfer.

24. Whenever the Commissioner orders transfer of the files of a group from one city to another, tax evasion or misdemeanour by all of several of the parties constituting the group is assumed. Before such a stigma is cast, it is necessary that the affected parties should be notified of the reason, for the proposed transfer in the show-cause notice so that they can effectively explain why such a course is not necessary. Similarly, it is necessary that the order communicated should also contain the reason for making the order of transfer. Thus, where the transfer is to another city, then mere mention of stock phrases like 'to facilitate con-ordinate investigation' or variations thereof will not be in compliance with the mandatory requirement of section 127(1) and contrary to the principle enunciated by the Supreme Court in Ajanta Industries' case : [1976]102ITR281(SC) . If the decisions of the High Courts of Rajasthan, Calcutta, Delhi Allahabad and Madhya Pradesh referred to in paragraph 16 (at page 38) above are to be taken as laying down a proposition that even in case of transfers to other cities, it is sufficient to state 'to facilitate co-ordinate investigation' or similar formal words as the reason for the transfer in compliance with the statutory requirement in section 127(1) relating to giving and communication reasons, then is respectfully dissent from such a view.

25. In this context, it may be clinching to refer to the following observations made by the Supreme Court in the recent decision rendered in G. B. Gautam v. Union of India : [1993]199ITR530(SC) , while dealing with the words 'for reasons to be recorded in writing' occurring in section 269UD(1) and (2) of the Act (at page 555) :

'Section 269UD(1), in express terminology, provides that the appropriate authority may make an order for the purchase of the property 'for reasons to be recorded in the writing'. Section 269UD(2) casts and obligation on the authority that it 'shall cause a copy of its order under sub-section (1) in respect of any immovable property to be served on the transferor'. It is, therefore, inconceivable that the order which is required to be served by the appropriate authority under sub-section (2) would be one which does not contain the reasons for the passing of the order or is not accompanied by the reasons recorded in writing. It may be permissible to record the reasons separately but the order would be an incomplete order unless either the reasons are incorporated therein or are served separately along with the order of the affected party. We are of the view, that the reasons for the order must be communicated to the affected party.'

26. Dealing with the need to give reasons in the show-cause notice before effecting a purchase under section 269UD, the Supreme Court held (at page 533)

'We have further pointed out that, although a presumption of an attempt to evade tax may be raised by the appropriate authority concerned in case of the aforesaid circumstances being established, such a presumption is rebuttable and this would necessarily imply that the concerned parties must have an opportunity to show cause as to why such a presumption should not be drawn............. The very fact that an imputation of tax evasion arises where an order for compulsory purchase is made and such an imputation casts a slur on the parties to the agreement to sell leads to the conclusion that, before such an imputation can be made against the parties concerned, they must be given an opportunity to show-cause...........

The recording of reasons which led to the passing or the order is basically intended to serve a two-fold purpose :

(1) that the 'party aggrieved' in the proceedings before the authority (the appropriate authority) acquires knowledge of the reasons and, in a proceeding before the High Court or the Supreme Court (since there is no right of appeal of revision), it has an opportunity to demonstrate that the reason which persuaded the authority to pass an order adverse to his interest were erroneous, irrational or irrelevant, and

(2) that the obligation to record reasons and convey the same to the party concerned operates as a deterrent against possible arbitrary action by the quasi-judicial or the executive authority invested with judicial powers.'

27. In this case, the transfer is ordered from Mangalore to Bangalore Neither the show-cause notice nor the order of transfer disclosed any reason for transfer. The official memorandum which is stated to be the basis of the order of transfer also does not contain any valid reason. The transfer is not for convenience but is alleged to be for countering evasion of tax. This reason is disclosed for the first time in the statement of objections, filed in the writ proceedings. If true, the said reason will be a valid reason for transfer. But the petitioners were not given an opportunity to counter or explain the said reason. Hence the order is contrary to section 127(1).

28. I, therefore, hold that the order October 7, 1992, passed by the third respondent under section 127 of the Act transferring the case of the petitioners from Mangalore to the second respondent at Bangalore violates the mandatory provisions of section 127(1) and cannot stand. The said order (annexure C to the petitions) is hereby quashed. The petitioner are allowed and the rule issued is made absolute. The third respondent is at liberty to initiate fresh action for transfer in accordance with law. As a consequence of quashing of annexure C : (a) the concerned assessing authorities (first respondent in the respective petitions) shall also be entitled to issue fresh notices for completion of assessment proceedings for the relevant assessment years; (b) any order passed pursuant to the transfer will be void and will not affect or bind the petitioners.