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TMI Blog1988 (11) TMI 77X X X X Extracts X X X X X X X X Extracts X X X X ..... in relation to the claim for exemption, ultimately, the Incometax Officer upheld the appellant's claim for exemption for the assessment years 1955-56 to 1961-62. After the coming into force of the Income-tax Act, 1961, exemption was again claimed by the appellant under section 11 of this Act on the basis of the original trust deed. The claim for exemption was upheld by the concerned Income-tax Officer for the years 1962-63 to 1967-68. For the assessment year 1968-69, the Income-tax Officer issued notice under section 143(2) of the Act calling upon the appellant to produce its books of account relevant to the assessment year and also for the earlier years. This necessitated the appellant to file Writ Petition No. 611 of 1969 contending that the said notice was without jurisdiction. During the pendency of this writ petition, the Income-tax Officer issued notices dated May 23, 1969, to the petitioner under section 148 of the Income-tax Act, 1961 (for short "the Act"). It was proposed to reopen the assessment for the earlier assessment years 1965-66 to 1967-68. It was stated that the officer has reason to believe that there had been escapement of income chargeable to tax for the relev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this view, the notice issued for the assessment year 1969-70, which was impugned in Writ Petition No. 10840 of 1981, could not be challenged. The pendency of the appeal would not be a bar to the reopening of the assessment. In this view, the learned single judge dismissed both the writ petitions (Writ Petitions Nos. 10840 and 10841 of 1981). Writ Appeal No. 539 of 1981 is directed against Writ Petition No. 10840 of 1981, while Writ Appeal No. 540 of 1981 is directed against Writ Petition No. 10841 of 1981. To continue the narration of facts, it has already been noticed that the deed of declaration of trust was made on March 1, 1954. A supplementary deed was executed by the donor on June 28, 1961, directing that the surplus income of the trust should be utilised only for educational purposes. The appellant filed C. S. No. 90 of 1961 by way of originating summons in the High Court. The High Court held that the trustees were bound by the supplementary deed and, therefore, the entire income had to be spent for the purposes mentioned in the supplementary deed. On March 17, 1969, after the transfer of file from the Third Income-tax Officer, City Circle-II, to the Income-tax Officer, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77 (Cal). We will now set out the tabular statement as to the subject-matter of the writ petitions --------------------------------------------------------------------------------------------------------------------------------------------------- Assessment Completion of Reopening Proceedings year original notice No. assessment --------------------------------------------------------------------------------------------------------------------------------------------------- 1969-70 19-4-1972 4-3-1978 W. A. 539 of 1981 against W. P. 10840 of 1981 1970-71 28-3-1973 5-3-1979 W. P. 1222 of 1979 1971-72 26-2-1975 13-3-1980 W. P. 1742 of 1980 1972-73 27-3-1975 24-3-1981 W. A. 1828 of 1987 against W. P. 2297 of 1981 1973-74 31-12-1975 4-3-1978 W. A. 540 of 1981 against W. P. 10841 of 1981 --------------------------------------------------------------------------------------------------------------------------------------------------- It is under these circumstances that the writ petitions have been filed. The prayers in Writ Petitions Nos. 1222 of 1979, 1742 of 1980 and 2297 of 1981 are identical, viz., for the issue of a writ of prohibit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the stock register, this reason cannot be held to be valid. It is clear in this case, the reconciliation statement was filed. In fact, ABC newsprint stock register was in the full knowledge of the assessing authority. The assessing authority did not require the appellant to produce the register. If, subsequently, the Department by reason of the alleged information gathered during the search, formed any belief that any income is stated to have escaped, such escapement of the income, even if there be any such escapement, is in consequence of the information which information was acquired subsequent to the completion of the assessment. Therefore, section 147(a) cannot be invoked. In support of this submission, he cites the decision in ITO v. Madnani Engineering Works Ltd. [1979] 118 ITR 1 (SC). That was case where the loans were held to be fictitious and not genuine. It was held that the assessee had produced all the relevant accounts and documents. Therefore, the escapement is not due to the omission on the part of the assessee to file a return truly and fully. The ratio of that judgment will squarely apply to this case. To similar effect is the decision in CIT v. Burlop Dealers Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Madhya Pradesh High Court also as seen from Smt. Kanchanbai v. CIT [1979] 117 ITR 367. Therefore, the submission is that there was no obligation on the part of the appellant to produce the stock register as the figures of the Audit Bureau of Circulation were known to the assessing authority at the time of the original assessment. The decision in Thanthi Trust v. ITO [1973] 91 ITR 261 (Mad) makes it very clear. Yet another case that was cited in this behalf was Gemini Leather Stores v. ITO [1975] 100 ITR (SC), where the amounts received by drafts were not disclosed. From this, it will be clear that it is not in every case if there is an escapement, straightway section 147 could be invoked. What is important to be noted is, whether it is on account of the failure to disclose or on account of subsequent information. If it is the latter, certainly, it is not open to the authority to invoke section 147(a). If, in the light of the case law, the notices are analysed, they do not answer the test and the omission cannot, by any stretch of imagination, be held to be attributable to the appellant. For the assessment year 1970-71, the reasoning in relation to discovery of promissory note ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... find out the correctness of the reasoning. There are adequate remedies available. Hence, the remedy of the writ petitioner is misconceived. In support of this argument, learned counsel cites K. Mohammed Hussain v. CIT [1981] 132 ITR 866 (Mad), VXL India Ltd. v. ITO [1988] 173 ITR 124 (P H), CIT v. A. Raman and Co. [1968] 67 ITR 11 (SC), Kantamani Venkata Narayana and Sons v. First Addi. ITO [1967] 63 ITR 638 (SC) and CIT v. Mahalakshmi Textiles Mills Ltd. [1975] 100 ITR 360 (Mad). Merely because there was subsequent information, it does not mean that section 147(a) ceases to apply. It has been so held in CIT v. Mahalakshmi Textiles Mills Ltd. [1975] 100 ITR 360 (Mad). Again, in Jameson and Magrudar Co. Pvt. Ltd. v. ITO [1987] 167 ITR 77 (Cal), it has been ruled that if out of the several grounds seeking to reopen an assessment, one ground is good, the notice has to be upheld. In Kantamani Venkata Narayana and Sons v. First Addl. ITO [1967] 63 ITR 638 (SC), it has been held that in view of the subsequent disclosure when it came to light that large accretions had not been disclosed in the original return, that was enough to reopen the assessment. The decision in D. L. F. Housing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e not been challenged as wrong. The prayer itself is one for prohibition. Therefore, there cannot be any delay. Even if there were any delay, that cannot be against the appellant. The authorities in this regard are P. C. Doshi v. Seventh ITO [1967] 65 ITR 187 (Bom) and Smt. Suniti Devi Jaipuria v. ITO [1971] 79 ITR 391 (Cal). Further, if there is lack of jurisdiction, no question of delay would arise as laid down in Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 at p. 207 (SC). In P. C. Doshi v. Seventh ITO [1967] 65 ITR 187 (Bom), the delay of four years was held not to matter. Lastly, it is submitted that materials were available to the assessing authority at the time of assessment and hence section 147 (a) could not be invoked. Having regard to the above submissions, the following questions emerge for our consideration : (1) What is the law in relation to invocation of power under section 147(a) of the Act ? (2) Whether the reasons given in the notices could be held to be tenable ? (3) Whether the writ petitions are maintainable ? (4) Whether there is delay ? Section 147 of the Income-tax Act, 1961, confers jurisdiction to reopen the escaped assessment under two ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer in his counter-affidavit declined to disclose the facts on the ground that if such facts were disclosed, it would cause great prejudice to the interests of the Revenue and would frustrate the object of reopening the assessment. Thereafter, he filed further affidavit on January 27, 1970, stating that in the course of the assessment of the respondent for the assessment year 1963-64 it was discovered that various items shown as loans against the security of hundis in the respondent's books of account for the assessment year 1959-60 were in fact fictitious and credits against the names of certain persons, viz., A. G. R, M and D, were found not to be genuine, and that in that premise it appeared to the Income-tax Officer that the respondent had failed to disclose fully and truly all material facts necessary for its assessment and by reason of such failure a portion of its income had escaped assessment. single judge of the High Court dismissed the writ petition, but on appeal Division Bench of the High Court allowed the petition and quashed the notice. On appeal to the Supreme Court : Held, affirming the Division Bench of the High Court, (i) the stand taken by the Income-tax Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome-tax Officer to investigate and determine whether these documents were genuine or not. The respondent could not be said to have failed to make a true and full disclosure of the material facts by not confessing before the Income-tax Officer that the hundis and the entries in the books of account produced by it were bogus. We do not see any distinction at all between Burlop Dealers' case [1971] 79 ITR 609 (SC) and the present one and the language of section 147(a) being identical with that of section 34(1)(a), the ratio of the decision in Burlop Dealers' case must govern the decision of the present case. We must, therefore, hold that there was no failure on the part of the respondent to disclose fully and truly all material facts necessary for its assessment and the condition for the applicability of section 147(a) was not satisfied." CIT V. Burlop Dealers Ltd. [1971] 79 ITR 609 (SC), which was relied on, is a case wherein it was held that where a wrong inference was made at the original assessment, the assessee was not obliged to inform the officer of probable inference that may be raised on facts disclosed. It was further held (headnote): "The respondent had disclosed its bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the belief relating to escapement of the income of the assessee from assessment. The fact that the words 'definite information' which were there in section 34 of the Act of 1922, at one time before its amendment in 1948, are not there in section 147 of the Act of 1961, would not lead to the conclusion that action can now be taken for reopening an assessment even if the information is wholly vague, indefinite, far-fetched and remote. The reason for the formation of the belief must be held in good faith and should not be a mere pretence. The powers of the Income-tax Officer to reopen an assessment, though wide, are not plenary. The words of the statute are 'reason to believe' and not 'reason to suspect'. The reopening of the assessment after the lapse of many years is, a serious matter. The Act, no doubt, contemplates the reopening of the assessment if grounds exist for believing that income of the assessee has escaped assessment. The underlying reason for that is that instances of concealed income or other income escaping assessment in a large number of cases come to the notice of the income-tax authorities after the assessment has been completed. The provisions of the Act in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tial amounts as loans to the managing director and gifts to his near relatives and drew only smaller amounts to himself, it was held at page 11 as follows : "It is well-settled as a result of several decisions of this court that two distinct conditions must be satisfied before the Income-tax Officer can assume jurisdiction to issue notice under section 147 (a). First, he must have reason to believe that the income of the assessee has escaped assessment and, secondly, he must have reason to believe that such escapement is by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. If either of these conditions is not fulfilled, the notice issued by the Incometax Officer would be without jurisdiction. The important words under section 147(a) are 'has reason to believe' and these words are stronger than the words 'is satisfied'. The belief entertained by the Income-tax Officer must not be arbitrary or irrational. It must be reasonable or in other words it must be based on reasons which are relevant and material. The court, of course, cannot investigate into the adequacy or sufficiency of the reasons wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee omitted or failed to disclose fully and truly any material facts relating to its assessment." In the decision in Gemini' Leather Stores v. ITO [1975] 100 ITR 1 (SC), it is held (headnote) : "In proceedings for the original assessment of the appellant firm though the appellant did not disclose certain transactions evidenced by certain drafts, the officer himself discovered the facts relating thereto but by oversight did not bring the amounts represented by the drafts to tax as the income of the appellant. Subsequently, the Income-tax Officer issued notice under section 147(a) of the Income-tax Act, 1961, with a view to assess the amounts as the appellant's income from undisclosed sources. On a writ petition filed by the appellant, the High Court held that the Income-tax Officer did not apply his mind to the question whether the amounts could be treated as part of the total income of the appellant and as the appellant did not disclose the source of those amounts which were not recorded in the account books, all the conditions for invoking the jurisdiction under section 147(a) were present. On appeal to the Supreme Court : Held, reversing the decision of the High Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ily. We have to, therefore, hold that this writ petition is premature. Further, the matter involves investigation of facts. The proper thing for the petitioner is to go before the second respondent and put forward his objections and if ultimately any adverse orders are passed against him by the second respondent, he can challenge that order in appropriate proceedings." In the decision in VXL India Ltd. v. ITO [1988] 173 ITR 124 (P H) it is held (headnote) : "Whether there is any material or information in the possession of the Income-tax Officer which is sufficient to invoke the provisions of section 147 of the Income-tax Act, 1961, viz., whether income chargeable to tax has escaped assessment, has to be decided under the provisions of the Act itself and not by way of a writ petition under article 226 of the Constitution. It has to be decided in the assessment proceedings after considering the objections raised by the assessee before the Income-tax Officer, the appellate or other authorities. In the instant case, the writ petition was dismissed with liberty to the appellant to raise all questions that were open to it under law before the assessing authorities, including the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... him subsequent to the original assessment showed that the statement made by the assessee at the stage of the original assessment proceedings cannot be true or full, then he is entitled to initiate proceedings under section 34(1)(a) notwithstanding the fact that he has accepted the statements of the assessee made at the stage of the original assessment without further scrutiny. We are not inclined to agree with the Tribunal that in this case the Income-tax Officer has tried to make good his deficiency in the original assessment. Admittedly, the materials gathered by the Income-tax Officer which formed the basis of the reassessment were not there at the stage of the original assessment. He had no opportunity to consider these materials at that stage. There is, therefore, no question of any deficiency in his original assessment. It is in view of the materials gathered subsequently after the original assessment, the reassessment had been initiated on the ground that from those materials it is reasonable to infer that the statement made by the assessee regarding the credits in the name of Thenappa Chettiar cannot be true. We are of the view that, on the materials, the initiation of proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... losed sources. On a writ petition filed by the assessee challenging the notice of reassessment issued by the Income-tax Officer, the assessee contended that at the time of the original assessment he had disclosed fully and truly all necessary facts and had produced all vouchers, receipts and payments, that the Income-tax Officer was fully aware that the vendor was also an assessee and could have verified the transaction by reference to the vendor's books, and that the mere fact that the vendor went back upon the transaction and alleged that he had received only a sum of Rs. 19,00,654 could not constitute material on the basis of which the assessment could be reopened : Held, that the Income-tax Officer had, at the time of the original assessment, no reason to doubt the purchase price as stated by the assessee, but when he came across the statements and accounts of the vendor, he had reason to believe that the assessee's income had escaped assessment by reason of his wrongly stating the material facts as to the purchase price. The only method by which the Income-tax Officer could satisfy himself, as to the correctness or otherwise of the statement of the vendor, was by initiating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de the question as preliminary issue during the proceedings for reopening the assessment and then the assessee could appeal if he was aggrieved." In this case, because there were disputed facts which were not easy to ascertain and what was the material and what was the nexus, it was directed to be decided as a preliminary issue. No doubt, in some of the cases cited by the Revenue, the matter was relegated to the Revenue. But we do not think that that could be the universal rule in all cases. As rightly urged by Dr. Debi Pal, the jurisdiction of this court is limited to find whether there is a live link or a reasonable nexus. For that limited finding at least, the reasons could be examined. No doubt, the income-tax authorities are not bound to furnish the assessee with the file containing the reasons. But in this case, the reasons have been furnished and a copy thereof has also been given to the appellant. All that he wanted at our hands is to examine whether the reasons contained in the notices, which are more or less identical in language, have a live link or a close nexus. According to him, as to what is the scheme of the Act with regard to the obligation on the part of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that point. It is at the stage when the assessee was required by the Income-tax Officer to elucidate some particular point that the assessee had again been obliged to disclose all primary facts truly and fully in respect of that point. Till this stage was reached, there was no obligation on the assessee to disclose or produce evidence in respect of the points other than those in respect of which the assessee was, as provided in the prescribed form of return, obliged to furnish full and true information. In our opinion, so long as in the assessment proceedings the third stage was not reached, the assessee could not be blamed or held liable for not disclosing some information which till then he was not required to furnish in the prescribed form but which ultimately was found to be relevant in connection with his assessment." From the above, it is clear that there are three stages : (1) To file the return as required under the Act and supply all the information sought for in the various columns in the prescribed form of return. (2) Should the income-tax authorities feel that the information was not sufficient, they could require the assessee to produce evidence in support of his r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity of the reassessment proceedings and contended that she had received ornaments from her father and father-in-law. The Income-tax Officer did not accept the version of the assessee and the amount obtained by the assessee by sale of ornaments was added to the assessee's income from undisclosed sources. On appeals, both the Appellate Assistant Commissioner and the Tribunal affirmed the order of the Income-tax Officer. On a reference : Held, that the assessee had produced before the Income-tax Officer at the time of original assessments a list of persons to whom moneys had been advanced by the assessee and the amounts of interest received from them. At the time of filing of her returns for the relevant assessment years, the assessee was not required to furnish information regarding the source of the capital invested in money-lending business and the Income-tax Officer had, at no stage, required the assessee to furnish the information. Therefore, there was no omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for her assessment for the relevant assessment years and the condition precedent for the exercise of powers under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udit, it was found that deductions under sections 80K, 80L and 80M had been wrongly allowed and no deductions could be allowed in view of the provisions of section 80A(2) since there was no gross total income within the meaning of section 80B(5), the net result being a minus figure and loss had been carried forward due to incorrect deductions ; (ii) that excess relief under section 80J had been allowed due to incorrect computation of capital employed ; (iii) that travelling allowance disallowable under section 37(3) read with rule 6D of the Income-tax Rules, 1962, had not been disclosed in the return ; (iv) that the assessee paid compensation on account of short production of controlled cloth which was in the nature of penalty and should have been disallowed ; and, hence, the Income-tax Officer had reasons to believe that on account of the failure of the assessee to disclose fully and truly all material facts necessary for its assessment and also in consequence of information in the possession of the Incometax Officer, the assessee's income had escaped assessment. The question arose whether the condition precedent for assumption of jurisdiction for initiation of proceedings in resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Circulation." Therefore, where the reconciliation statement relating to the sales which shows the total demand as per ABC reconciliation, the assessing authority could have called upon the appellant to furnish the particulars. We do not think this contention is well-founded. Therefore, applying the ruling of the Allahabad High Court in Modi Spg. and Wvg. Mills v. ITO [1975] 101 ITR 637 and Smt. Kanchanbai v. CIT [1979] 117 ITR 367 (MP), which succinctly set out the scheme of the Act, which extracts we have extracted above, this is not a case of an assessee failing to furnish true and full return. Unless the assessee was called upon, there was no obligation on the part of the assessee to produce any further material. Nor can the assessee delve into the mind of the authority to find out what inferences could be drawn either on facts or on law. As regards the advertisement charges, the finding of the appellate authority for the year 1970-71 may now be extracted : "As pointed out by the Commissioner of Income-tax (Appeals) in respect of the same addition, the additions rest on surmises and suspicions. The explanation which was originally given was subsequently changed but the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asoning is in relation to the two promissory notes, one dated April 21, 1969, for Rs. 1,30,000 executed by Pachaiyear Sugar Mills (P.) Ltd., and another dated January 1, 1970, executed by D. R. Adityan for sum of Rs. 69,200. According to Dr. Debi Pal, these promissory notes are beyond three years and, therefore, the recovery of these promissory note amounts is not possible. Hence, there is no rational nexus or a live link. He also relies in this regard on Sheo Nath Singh v. AAC [1971] 82 ITR 147 (SC), wherein it was held at page 153 as follows : "In our judgment, the law laid down by this court in the above case is fully applicable to the facts of the present case. There can be no manner of doubt that the words 'reason to believe' suggest that the belief must be that of an honest and reasonable person based upon reasonable grounds and that the Income-tax Officer may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour. The Income-tax Officer would be acting without jurisdiction if the reason for his belief that the conditions are satisfied does not exist or is not material or relevant to the belief required by the section. The court can always exam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r than the employees of the appellant and such excessive commission payments to these persons were not genuine. We find some difficulty in accepting this line of reasoning because unless it is clear that the payments to the employees of the appellant have been siphoned off to the trust, there is no question of failure to render a true and full account. We think the ruling in Ganga Saran and Sons (P.) Ltd. v. ITO [1981] 130 ITR 1 (SC) supports the appellant. For the assessment years 1972-73 and 1973-74, the same grounds have been urged. But as regards 1973-74, the notice issued is under section 147 of the Act which is well within four years. With regard to the other year, the law clearly lays down, that it must be within four years, if it is under section 147(a). In our view, on a very careful consideration, the notices for the assessment years 1969-70, 1971-72 and 1972-73 have to be held to be invalid because the reasons do not have a live-link or a close nexus. However, for 1970-71, we have to uphold the notice since in paragraph 3 of that notice reference is made to the two promissory notes which have not been brought into account. That will show that the appellant had not submit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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