1978 (5) TMI 18 - HC - Income Tax

Issues Involved:
1. Jurisdiction of the ITO under Section 147(a) of the I.T. Act, 1961.
2. Validity of the notice under Section 148 read with Section 147(a) of the I.T. Act.
3. Distinction between Sections 147(a) and 147(b) of the I.T. Act.
4. Requirement of the ITO to disclose reasons for the belief that income has escaped assessment.
5. Impact of higher authority's instructions on the validity of the notice.

Detailed Analysis:

1. Jurisdiction of the ITO under Section 147(a) of the I.T. Act, 1961
The petitioner contended that the ITO had no jurisdiction to initiate reassessment proceedings under Section 147(a) because all primary facts necessary for making the assessment were fully and truly disclosed during the original assessment proceedings. The court held that for the ITO to invoke Section 147(a), there must be positive grounds for belief that the assessee did not fully and truly disclose all material facts necessary for assessment. The belief must be based on primary facts and not on inferences. The court found that the ITO's belief was based on an audit report and a list of bogus hundi brokers circulated by the department, which would fall under Section 147(b) and not Section 147(a).

2. Validity of the notice under Section 148 read with Section 147(a) of the I.T. Act
The court scrutinized the notice issued under Section 148 read with Section 147(a) and found it invalid. The ITO's belief that income had escaped assessment was based on vague and indefinite information, which did not constitute primary facts. The court referred to the Supreme Court's decisions in Chhugamal Rajpal v. S. P. Chaliha and ITO v. Lakhmani Mewal Das, emphasizing that the reasons for belief must have a rational connection with the formation of the belief and not be based on mere suspicion.

3. Distinction between Sections 147(a) and 147(b) of the I.T. Act
The petitioner argued that if the ITO had received information casting doubt on the genuineness of the loans, the appropriate provision would be Section 147(b) and not Section 147(a). The court agreed, stating that Sections 147(a) and 147(b) operate in separate fields. Section 147(a) requires a failure to disclose material facts, whereas Section 147(b) pertains to the ITO receiving information after the original assessment. The court found that the ITO's action was more aligned with Section 147(b).

4. Requirement of the ITO to disclose reasons for the belief that income has escaped assessment
The petitioner contended that the ITO did not indicate the reasons for the belief that income had escaped assessment. The court held that it was necessary for the ITO to record his reasons before issuing a notice under Section 148, as mandated by Section 148(2). The court found that the ITO had acted on an audit report and a departmental list without forming a prima facie belief based on primary facts, rendering the notice invalid.

5. Impact of higher authority's instructions on the validity of the notice
The petitioner argued that the notice issued under Section 148 was vitiated if it was issued at the instance of higher authorities. The court examined the proposal submitted by the ITO to the Commissioner and found that the Commissioner had mechanically accorded approval without applying his mind. The court reiterated that the Commissioner's satisfaction must be based on the ITO's reasons, which must show a direct nexus between the material and the belief that income had escaped assessment.

Conclusion:
The court quashed the impugned notice under Section 148 read with Section 147(a) and the subsequent notice under Section 142(1), restraining the respondents from taking any further proceedings in consequence thereof. The petitioner was awarded costs, and the rule was made absolute.

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