1979 (1) TMI 2 - SC - Income Tax

Interest paid by the respondent to creditors from whom it claimed to have borrowed monies on hundis - ITO merely stated his belief but did not set out any material on the basis of which he had arrived at such belief so that the court could decide for itself whether there was any material on the basis of which the ITO could reasonably entertain such belief - notice under s. 147(a) of the I.T. Act for reopening the assessment must in the circumstances be held to be void.

Summary

Issues:
1. Validity of notice issued by the Income Tax Officer under section 148 of the Income Tax Act, 1961 to reopen the assessment for the assessment year 1959-60.
2. Failure of the respondent to disclose fully and truly all material facts necessary for assessment.
3. Interpretation of section 147(a) of the Income Tax Act in relation to the obligation to disclose material facts.

Analysis:
1. The case involves an appeal against a Division Bench of the High Court of Calcutta's order allowing an appeal against a single judge's decision to dismiss the writ petition of the respondent challenging the validity of a notice issued by the Income Tax Officer (ITO) under section 148 of the Income Tax Act, 1961, to reopen the assessment for the assessment year 1959-60. The ITO claimed that certain loan transactions represented by hundis were bogus and resulted in the respondent's income escaping assessment. The respondent contended that there was no failure on its part to disclose all material facts necessary for assessment. The single judge initially dismissed the writ petition, but the Division Bench disagreed, leading to the appeal to the Supreme Court.

2. The respondent argued that it had fully disclosed all relevant documents, including hundis and interest payment entries, and it was for the ITO to determine their authenticity. The Supreme Court referred to a previous judgment to establish that the respondent had met its obligation by providing all relevant documents, and there was no requirement to confess the possible falsity of the documents. The Court held that the respondent did not fail to make a true and full disclosure of material facts, as required by law. The ITO's failure to provide specific material supporting his belief that income had escaped assessment due to the respondent's non-disclosure rendered the notice under section 147(a) void.

3. The Court emphasized that the ITO's belief must be based on tangible material, not mere assertions. The ITO's affidavit lacked specific material supporting his belief, making it insufficient for the court to determine the validity of the notice. The Court found that the ITO's belief was not adequately substantiated, leading to the dismissal of the appeal. The judgment highlighted the importance of tangible material supporting the ITO's belief for the validity of a notice issued under section 147(a) of the Income Tax Act.

In conclusion, the Supreme Court dismissed the appeal, emphasizing the necessity for the ITO to have a valid reason to believe that income had escaped assessment due to the respondent's failure to disclose material facts. The judgment reaffirmed the obligation of the taxpayer to provide relevant documents for assessment and the requirement for the ITO to substantiate their belief with tangible material for the validity of a notice under section 147(a) of the Income Tax Act.