1981 (4) TMI 5 - SC - Income Tax

Reassessment - validity of notice issued under s. 148 - hold that neither of the two conditions necessary for attracting the applicability of S. 147(a) was satisfied in the present case and the notice issued by the ITO must be held to be without jurisdiction.

Summary

Issues Involved:
1. Validity of the notice issued under Section 148 of the Income-tax Act, 1961.
2. Whether there was omission or failure on the part of the assessee to disclose material facts.
3. Whether the Income-tax Officer (ITO) had reason to believe that income had escaped assessment.

Issue-wise Detailed Analysis:

1. Validity of the Notice Issued Under Section 148 of the Income-tax Act, 1961:

The primary issue in this case was the validity of a notice issued under Section 148 of the Income-tax Act, 1961. The respondent, a private company, had obtained reductions in taxable income due to salary and perquisites paid to Deo Dutt Sharma, the brother-in-law of its managing director. The ITO concluded that the respondent's income had escaped assessment because the salary and emoluments paid to Deo Dutt were considered excessive and not genuine. The ITO issued a notice under Section 148, which the respondent challenged. The High Court initially quashed the notice, but the Supreme Court had to determine whether the notice was justified.

2. Omission or Failure on the Part of the Assessee to Disclose Material Facts:

The ITO argued that the respondent failed to disclose the relationship between its managing director and Deo Dutt Sharma, and the manner in which Deo Dutt disposed of his income, including loans and gifts to relatives. The ITO believed these facts were material and their non-disclosure led to excessive deductions being allowed. The respondent contended that all primary facts were disclosed, and the ITO's belief was based on mere inference. The Supreme Court emphasized that the assessee's obligation was to disclose primary facts, not to inform the ITO of possible inferences.

3. Reason to Believe that Income Had Escaped Assessment:

The Supreme Court analyzed whether the ITO had a valid reason to believe that income had escaped assessment. The Court noted that the belief must be reasonable and based on relevant and material reasons. The Court found that the ITO's belief that the remuneration paid to Deo Dutt was bogus was not reasonable. Deo Dutt was managing the Delhi branch and was paid for his services, which was found genuine by appellate authorities in previous assessments. The Court held that the manner in which Deo Dutt used his income (loans and gifts to relatives) did not justify the belief that the remuneration was sham and bogus.

Conclusion:

The Supreme Court concluded that neither of the two conditions necessary for attracting the applicability of Section 147(a) was satisfied. The ITO did not have a reasonable basis to believe that income had escaped assessment due to the assessee's omission or failure to disclose material facts. Consequently, the notice issued under Section 148 was held to be without jurisdiction. The appeal was allowed, the judgment of the Division Bench was set aside, and the notice dated 28th March 1968, issued by the ITO was quashed. The revenue was ordered to pay the costs of the assessee throughout.