9911796707
TMI Blog1978 (5) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... petitioner, it is a partnership firm carrying on business of commission agents in dry fruits, katha and kirana goods at Delhi. The firm and its partners are regularly assessed to income-tax since 1962-63. The last completed assessment is for the assessment year 1972-73. The financial year of the firm for the relevant period is from October 24, 1960, to November 6, 1961. For the said year, the firm filed its return of income on July 9, 1962, before the ITO, District B-IX, declaring an income of Rs. 81,646. The income returned is said to have been duly supported by the balance-sheet and the trading and profit and loss account. During the assessment proceedings, the petitioner claims, it filed before the ITO details of all the expenditure debited to the profit and loss account, including the details of interest paid to creditors from whom loans had been taken by the firm. The loans taken by the firm were also disclosed along with the names of parties from whom the said loans were taken. Letters issued by creditors of the firm were also produced along with other relevant records. Repayment of loans, to the extent paid, was also disclosed. It is claimed that after thorough scrutiny of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the ITO alleging that he had reason to believe that by reason of omission or failure on the part of the firm to disclose truly and fully all material facts necessary for its assessment for the year 1962-63, the income chargeable to tax had escaped assessment for that year. The petitioner-firm was once again called upon to file return of income in the prescribed form within 30 days of the receipt of the notice. This notice also stated that it had been issued after obtaining the necessary permission of the CIT-II, respondent No. 2 herein. This is the impugned notice and a true copy of it filed on the record bears no date (annex. " G " to the petition). The petitioner once again submitted its return declaring its total income to be Rs. 81,646 under protest. A notice under s. 142(1) of the Act dated April 12, 1973 (annex. " G-I " to the petition) was served on the petitioner. As the petitioner was of the view and contended that the ITO had no jurisdiction to issue the said notice under s. 142 or s. 143 of the Act it submitted a letter of protest dated May 30, 1973, and also called upon the ITO (respondent No. 1) to indicate the reasons inducing him to take action under s. 147(a) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of s. 147 of the Act operate in separate fields and are given distinct jurisdiction. Respondent No. 1 could not proceed under s. 147(a) of the Act merely if the material information came into his possession subsequent to the making of the original assessment creating doubts about the escapement of some income or on the genuineness of the loans. Distinction is made between an inferential fact that is a fact which will be now determined after weighing the pros and cons of the evidence on record and primary fact which it is contended was necessary to exist before s. 147(a) of the Act could be invoked. (d) That the impugned notice issued under s. 148 of the Act, if it has been issued at the instance of and under instructions from higher or other authorities, then the same would be vitiated in law. The petitioner contends that it has no adequate alternative remedy available against the type of harassment to which it is being subjected and, therefore, prays for the issue of writs as noticed earlier. In reply the respondents have filed an affidavit of Shri Hari Shankar who at the relevant time was the ITO, Special Circle-VII, New Delhi. An affidavit of Shri Harihar Lal, then CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f credits in the books of the petitioner without having actually advanced loans this would have considerably affected the incidence of tax. Therefore, the action taken under s. 147(a) of the Act was competent and s. 147(b) of the Act was not attracted. The ITO disputes that the CIT had not applied his mind in giving the requisite sanction. It is further pleaded that it was not necessary for the ITO to indicate in the notice the material in his possession which was relevant to formulate the reason for the belief or to state what income had escaped assessment. The CIT has stated in his affidavit that he duly considered the report of the ITO in an objective manner and then accorded approval for commencing proceedings against the petitioner. The contentions of the ITO and the Commissioner have been traversed by the petitioner in two separate affidavits filed by way of rejoinder. The earlier pleas taken by it have been reiterated. The relevant parts of s. 147 read as under : " 147. If-- (a) the Income-tax Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under section 139 for any assessment year to the Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notice." It is not in dispute that the impugned action attracts s. 151 of the Act. The proposal that was submitted by the ITO to the Commissioner on March 7, 1970, inter alia, reads : " I am herewith enclosing a proposal for the assessment year 1962-63 for reopening the assessment already completed on the basis of the audit objection received from the CIT Office, vide their letter No. IA/Spl. Cir. VII/69-70/416 dated 6th March, 1970. The above loans were originally accepted by the Income-tax Officer as genuine, in the original assessment, as the assessee filed the details at the time of the original assessment." The Commissioner on this proposal recorded " Yes " against the column reading " whether the Commissioner is satisfied that it is a fit case for the issue of notice under section 148 ". Along with this report is attached a document which reads as under : " Due to the failure on the part of the assessee to disclose fully and truly all the materials relevant for the assessment year 1962-63, income to the extent of Rs. 58,000 has escaped assessment. Permission may be accorded to reopen the assessment for including the income escaped." From the report submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment. Acting on the basis of that report the ITO may have formed an opinion that some income of the petitioner has escaped assessment but that would be a case which may fall under s. 147(b) of the Act but not under s. 147(a) of the Act. There are two parts of s. 147(a). One is that the ITO must bona fide have reason to believe. The other is that the reason to believe must be by reason of the omission or failure on the part of the assessee to make a return under s. 139 of the Act or to disclose fully and truly all material facts necessary for assessment. The reason to believe must have a rational connection or relevant bearing on the formation of the belief. There must be a direct nexus between the material coming to the notice of the ITO and the formation of this belief that specified income has escaped assessment in a particular year because of the failure of the assessee to disclose fully and truly all material facts. If the facts disclosed are earlier accepted as true but there is possibility of those facts being disbelieved later on it will not fall within the ambit of the assessee's default in fully and truly disclosing all material facts. Sections 147 and 148 of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anically accorded permission. Thus, the important safeguards provided in ss. 147 and 151 were lightly treated by the ITO and the Commissioner. The ITO could not have had reason to believe that income had escaped assessment by reason of the appellant-firm's failure to disclose material facts and if the, Commissioner had read the report carefully he could not have come to the conclusion that this was a fit case for issuing a notice under s. 148. The notice issued under s. 148 was, therefore, held to be invalid. In ITO v. Lakhmani Mewal Das [1976] 103 ITR 437, the Supreme Court upheld the judgment of the majority in a Full Bench decision of the Calcutta High Court ([1975] 99 ITR 296). In this case, the assessee was assessed on the basis of his return filed under s. 23(3) of the Indian I.T. Act, 1922, for the assessment year 1958-59 on June 14, 1960. While making the assessment, the ITO allowed deduction of a sum of Rs. 15,991 by way of expenses paid by the assessee. These expenses included a sum of Rs. 10,494-4-3 paid by the assessee by way of interest on loans. The assessments were finalised after enquiry and scrutiny of the books of accounts, bank statements and other necessary do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e undisclosed income of the assessee. The report clarified that the assessee was still claiming the credits as genuine in the assessment proceedings for a future year. The Commissioner's sanction was solicited to reopen the assessment for the year 1958-59. The High Court found that according to the report the assessee was not being charged with omission to disclose all facts. He was being charged for having made an untrue disclosure because the assessee had stated that he had received certain sums of money from certain persons as loans when, in fact, he had not received any sum at all from those persons. According to the later information of the revenue, the contention of the assessee regarding deposit of loan and payment of interest was not true. The majority followed the Supreme Court's decision in Chhugamal Rajpal's case [1971] 79 ITR 603 and quashed the notice. The ITO appealed to the Supreme Court. After noticing the various provisions of the Act, namely, ss. 147, 148 and 151 of the Act, the Supreme Court observed as under ([1976] 103 ITR 437, 445 (SC)) : " It would appear from the perusal of the provisions reproduced above that two conditions have to be satisfied before an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... truly 11 material facts. Once there exist 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 the grounds which induce the Income-tax Officer to act is, therefore, not a justiciable issue. It is, of course, open to the assessee to contend that the Income-tax Officer did not hold the belief that there had been such non-disclosure. The existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. The expression ' reason to believe ' does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The reason must be held in good faith. It cannot be merely a pretence. It is open to the court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose of the section. To this limited extent, the action of the Income-tax Officer in starting proceedings in respect of income escaping as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be, subject to right of appeal and revision, finality about orders made in judicial and quasi-judicial proceedings. It is, therefore, essential that before such action is taken the requirements of the law should be satisfied. The live link or close nexus which should be there between the material before the Income-tax Officer in the present case and the belief which he was to form regarding the escapement of the income of the assessee from assessment because of the latter's failure or omission to disclose fully and truly all material facts was missing in the case. In any event, the link was too tenuous to provide a legally sound basis for reopening the assessment. " Several other decisions were cited by learned counsel for the petitioner but I need not notice all of them. I may, however, notice Rai Singh Deb Singh Bist v. Union of India [1970] 77 ITR 802 (Delhi) decided by a Bench of this court. It was a case under the Indian I.T. Act, 1922, and though the similar provision in the Act of 1922, namely, s. 34, had the words " definite information " which are not to be found in s. 147 of the Act, the principle is still the same. In this case it was held that the assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... some of the material disclosed earlier was not truly disclosed a change in opinion of this type cannot be said to preclude action under s. 147(a) of the Act. The same view was expressed by the Madras High Court in the case of Varadarajulu Naidu v. CIT [1978] 111 ITR 301 and another Calcutta High Court decision in ITO v. Mahadeo Lal Tulsiyan [1978] 111 ITR 25. It is urged that the distinction is true disclosure as against untrue disclosure. In my view, such an interpretation is contrary to the principles enunciated by the Supreme Court. Mere change of opinion with regard to the same facts will not bring the case within the ambit of s. 147(a) of the Act. Indeed, the Calcutta and the Madras High Courts do not seem to notice the rule laid down in ITO v. Lakhmani Mewal Das [1976] 103 ITR 437, 442. The argument regarding true disclosure is fully discussed therein. The bogus nature of the transactions has to be found out during the first assessment and not in later assessments. If that was allowed, it would amount to change of opinion on the same facts. What is postulated is non disclosure of full facts and untrue disclosure of full facts on the earlier occasion. The present case is that ..... 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