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TMI Blog1988 (4) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... ho had transacted business on behalf of the petitioner amounting to Rs. 81,000 odd. This amount was shown in the purchase account. Moreover, the income-tax, authorities made queries about the names and details of the persons to whom the commission had been allowed and in response thereto, the petitioner had filed detailed reply giving particulars of the persons to whom commission was paid and the rate at which such commission was paid. Their case is that the Income-tax Officer, after being satisfied that such commission had been paid, allowed the same in accordance with law and completed the assessment. However, the petitioner was surprised to receive notice dated January 22, 1980, issued by the Income-tax Officer stating that during the course of the assessment year 1974-75, books of account of the earlier years, namely, assessment years 1972-73 and 1973-74, were called for under section 142(1) of the Act and upon examination, it was found that sums of Rs. 1,13,699 and Rs. 81,145, respectively, which were debited to the sales account were fictitious amounts representing payment of commission. It was, therefore, stated in the notice that the Income-tax Officer had reason to believe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on that it again filed objections on April 2, 1981, contending that there had been no escapement of income for the assessment year 1973-74. It was contended that no reason had been recorded for initiation of proceedings under section 147(a) of the Act. However, since the notice issued against the petitioner was not withdrawn, the petitioner has approached this court for the quashing of the notice and the initiation of proceedings under section 147(a) of the Act. A counter-affidavit has been filed on behalf of the respondents which is affirmed by the Income-tax Officer, Ward-D, Dhanbad. It is stated on behalf of the respondents that in the profit and loss account submitted by the petitioner, the purchase account disclosed a sum of Rs. 23,98,538 as inclusive of the rebate and commission, but without furnishing such details separately. The Income-tax Officer concerned had not made any query about the names and details of the persons to whom commission had been paid by the assessee, nor was any such list as alleged in the writ petition filed before the Income-tax Officer. It is then stated that a notice under section 142(1) of the Act was issued in the course of the assessment procee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion were called for by the income-tax authorities and the impugned notice was issued after the books of account were received and examined by the Income-tax Officer. Before dealing with the merits of the rival submissions, I consider it necessary to reproduce in extenso the notice issued to the petitioner-firm dated January 22, 1981, which has been annexed as annexure 3 to the writ application. The notice reads as follows: " During the course of hearing for the assessment year 1974-75, books of account for the earlier two years, i.e., for the assessment years 1972-73 and 1973-74, were called for under section 142(1) of the Incometax Act, 1961, and the same were examined. It was found that sums of Rs. 1,13,699 and Rs. 81,145 were debited to the sales account as fictitious commission during the years 1972-73 and 1973-74, respectively. I have reason to believe that by reason of omission or failure on your part to disclose fully and truly all material facts necessary for your assessment for the Assessment years 1972-73 and 1973-74, income chargeable to tax amounting to Rs. 1,13,699 and Rs. 81,145 for the assessment years 1972-73 and 1973-74, respectively, have escaped assessment for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made on the respondent after allowing deduction of a certain sum towards interest to certain creditors. Later, by a notice dated March 8, 1967, issued under section 148 of the Act, the Income-tax Officer sought to reopen the assessment and in his report made to the Commissioner, it was disclosed that there were two grounds for reopening the assessment, namely, that one of the creditors to whom interest is said to have been paid had since confessed that he was doing only name-lending; the second reason being that, other persons, whose names were mentioned in the list of the creditors of the assessee, were known name-lenders. The assessee filed a writ petition claiming that there was no material before the Income-tax Officer on which he could have reason to believe that income chargeable to tax for the year had escaped assessment by reason of the respondent's failure to disclose material facts. He stated that he had produced all books of account, bank statements and other necessary documents in connection with his return. The High Court, by a majority judgment [1975] 99 ITR 296 (Cal) [FB], held that the pre-conditions for the exercise of jurisdiction under section 147 were not fulf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng assessment. So far as grounds or reasons are concerned, it was held that the grounds or reasons contemplated by section 147(a) of the Act must have a material bearing on the question of escapement of income of the assessee from assessment because of his failure or omission to disclose fully and truly all material facts. Once there existed reasonable grounds for the Income-tax Officer to form the above belief, that would be sufficient to clothe him with jurisdiction to issue notice. Whether the grounds are adequate or not is not a matter for the court to investigate. The sufficiency of grounds which induced the Income-tax Officer is not a justiciable issue. The existence of the belief can be challenged by the assessee but not the sufficiency of reasons for the belief. The expression " reason to believe " does not mean a purely subjective satisfaction on the part of the Income-tax Officer. It must be held in good faith and should not merely be a pretence. It is open to the court to examine whether the reasons for the formation of the belief have rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 for its assessment, and by reason of such failure, a portion of its income had escaped assessment. The Supreme Court held that the existence of reason to believe on the part of the Income-tax Officer was a justiciable issue as it was for the court to be satisfied whether in fact he had reason to believe that income had escaped assessment by reason of failure of the respondent to make a full and true disclosure. The stand of the Income-tax Officer in not disclosing the facts was, therefore, untenable. It was further held that the respondent having produced in the original assessment proceedings all the hundis on the strength of which it claimed to have obtained loans from his creditors as also entries in the books of account showing payment of interest, it wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... coming to the belief, but the court can certainly examine whether the reasons are relevant and have a bearing on the matters in regard to which he is required to entertain the belief before he can issue notice under section 147(a). If there is no rational and intelligible nexus between the reasons and the belief, so that, on such reasons, no one properly instructed on facts and law could reasonably entertain the belief, the conclusion would be inescapable that the Income-tax Officer could not have reason to believe that any part of the income of the assessee had escaped assessment and such escapement was by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts and the notice issued by him would be liable to be struck down as invalid." In view of the settled position in law, I will now proceed to examine the facts of the instant case. It is not in dispute that the petitioner-firm was assessed to income-tax for the assessment year 1973-74, vide assessment order, annexure-2. The assessment order shows that the books of account and relevant records and documents were produced and examined by the Income-tax Officer before making t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Income-tax Officer which led him to form the necessary belief. The position that emerges is that in the books of account for the assessment year in question, an amount was shown in the sales account which included payment of commission. On the basis of those books of account, the predecessor Income-tax Officer allowed the deduction. On the basis of the same books of account, without any other material whatsoever, the Income-tax Officer issued the notice under section 148 of the Act. In my view since the impugned notice does not disclose any other material which had come to the knowledge of the Income-tax Officer issuing the notice under section 148 of the Act, apart from the materials which were earlier produced before the Income-tax Officer who completed the assessment, the only reason for the issuance of the notice under section 148 of the Act was that the Income-tax Officer issuing the notice differed from the opinion of his predecessor. This apart, the notice does not disclose why the Incometax Officer changed his opinion. Even the counter-affidavit is silent on this aspect of the matter. Thus, apart from the fact that no further material had come to the notice of the Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formation of his belief. In the instant case, the notice, apart from stating the belief, does not disclose reasons or grounds on the basis of which the Income-tax Officer entertained such belief. From the notice, it can only be gathered that on the basis of the same materials, the Income-tax Officer issuing the notice under section 148 of the Act formed an opinion different from the one formed by the Income-tax Officer completing the assessment. It is, therefore, quite clear that neither of the two conditions mentioned in the case of Lakhmani Mewal Das [1976] 103 ITR 437 (SC) that conferred jurisdiction on the Incometax Officer under section 148 of the Act has been satisfied in the instant case. It must, therefore, be held that the Income-tax Officer acquired no jurisdiction to issue the impugned notice under section 148 of the Act. Learned counsel appearing on behalf of the respondents has relied upon several judgments of various High Courts in support of the impugned notice issued under section 148 of the Act. In my view, those judgments do not help the respondents at all and must be understood in the facts and circumstances of those cases. In A. Shanmugham Chetty v. CIT [1985 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich gave him reason to believe that the sole selling agent was nothing but a dummy created by the petitioner as a device, and that the so-called sole selling agent had not rendered any service to the petitioner. These facts were revealed during survey and investigation conducted by the Department. This case is also distinguishable on the facts since the High Court was satisfied that there were reasons justifying the issuance of the notice under section 148 of the Act, in view of the materials which came to the notice of the Income-tax Officer in the course of survey and investigation conducted by the Department. In the instant case, no such material had come to his notice to justify the issuance of the impugned notice. Lastly, it was urged on behalf of the respondents that instead of quashing the notice, the Income-tax Officer should be directed to consider the objections and to decide the objections as regards jurisdiction as preliminary issue, before making an order of reassessment. In support of this submission, reliance was placed upon a judgment of the Delhi High Court, R. L. Traders v. Union of India [1986] 158 ITR 824. In that case, there were disputed facts and the court ..... X X X X Extracts X X X X X X X X Extracts X X X X
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