1976 (1) TMI 9 - HC - Income Tax

Issues Involved:
1. Validity of the notice under section 148 of the Income-tax Act, 1961.
2. Whether the notice under section 148 was barred by time.
3. Whether there was sufficient material for the Income-tax Officer to believe that income had escaped assessment due to the assessee's omission or failure to disclose fully and truly all material facts.

Detailed Analysis:

1. Validity of the Notice under Section 148 of the Income-tax Act, 1961
The petitioner-firm challenged the notice issued under section 148 of the Income-tax Act, 1961, on the grounds that it was illegal and that no income had escaped assessment. The respondents, represented by the Income-tax Officer, argued that the notice was validly issued based on information indicating that income over one lakh rupees had escaped assessment due to the assessee's failure to disclose all material facts.

The court noted that for the Income-tax Officer to exercise jurisdiction under section 148, two conditions must be satisfied: (i) the Income-tax Officer must have reason to believe that income chargeable to tax had been under-assessed, and (ii) such under-assessment must have occurred due to the assessee's omission or failure to disclose fully and truly all material facts necessary for the assessment.

The court found that the affidavit filed by the Income-tax Officer did not indicate the material on which he formed the belief that there had been an omission or failure on the part of the assessee to disclose all material facts. As such, the court concluded that the belief was not held in good faith and was merely a pretence, as the reasons for such a belief were not presented before the court.

2. Whether the Notice under Section 148 was Barred by Time
The petitioner argued that the notice under section 148 was barred by time, citing that the period for issuing such a notice for the assessment year 1949-50 had expired on March 31, 1958, under the old Act of 1922. The petitioner referenced the Supreme Court case of J. P. Jain v. Induprasad Devshanker Bhatt [1969] 72 ITR 595 (SC), which held that the Income-tax Officer could not issue a notice under section 148 if the right to reopen the assessment was barred under the old Act when the new Act came into force.

The court, however, noted that the escaped income in the petitioner's case was more than one lakh rupees, for which the Act of 1922 prescribed no period of limitation. Therefore, the Income-tax Officer was not trying to reopen an assessment where the right to reopen had become barred under the old Act. The court concluded that the limitation period prescribed by section 149 of the Act of 1961 was applicable, and the notice was not barred by time.

3. Whether There Was Sufficient Material for the Income-tax Officer's Belief
The court examined whether there was cogent material for the Income-tax Officer to believe that income had escaped assessment due to the assessee's omission or failure to disclose all material facts. The court emphasized that the Income-tax Officer must have reasonable grounds for such a belief, and it must be held in good faith.

The court found that the affidavit filed by the Income-tax Officer did not provide any material basis for his belief. The notices issued under section 143(3) of the Act of 1961, which were referred to by the respondents, did not indicate that income had escaped assessment due to the assessee's omission or failure to disclose all material facts. The court concluded that the respondents failed to show any material on which the Income-tax Officer could have reasonably formed the belief required under section 147(a) of the Act of 1961.

Conclusion:
The court accepted the petition and quashed the notice dated March 21, 1966, under section 148 of the Income-tax Act, 1961, issued by the respondent Income-tax Officer. The petitioner was entitled to recover costs from respondents Nos. 1 to 3. The department's appeal was dismissed, and the judgment of the learned single judge was upheld, confirming that the notice under section 148 was not validly issued due to the lack of material evidence supporting the Income-tax Officer's belief.

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