JUDGMENT Mulye, J.
1. The petitioner, who is an income-tax assessee, has filed this petition under Articles 226 and 227 of the Constitution of India to quash the notice dated March 18, 1981 (annexure-O), issued to him under Section 148 of the I.T. Act, 1961, for reopening his assessment for the assessment year 1972-73 under Section 147(a) by respondent No. 1, the ITO, E-Ward, Indore.
2. The petitioner's case, as stated in the petition, may be stated, in brief, thus: The petitioner is a partner of the firm, M/s Yonus & Iqbal Co. The only source of income of the petitioner is the share income from the said partnership concern and he has no other source of income nor any immovable property. The petitioner is being regularly assessed to income-tax from the assessment year 1951-52 on the share income from the firm, M/s Yonus & Iqbal Co. The petitioner filed his return for the assessment year 1972-73 before the ITO, M-Ward, Indore, who, at the relevant time had the jurisdiction in respect of the petitioner, by his order dated December 23, 1972, completed the assessment of the petitioner against which no appeal was filed. Accordingly, the petitioner continued to file his return for the assessment year 1973-74, which was also completed on March 2, 1974.
3. The petitioner similarly filed his return for the assessment year 1974-75 in which also he showed his share income from the said partnership firm. The ITO in the course of these assessment proceedings added an amount of Rs. 10,000 as income from alleged smuggling business of the petitioner which was challenged before the AAC of Income-tax who deleted that addition and the same was also upheld by the Tribunal on appeal by the Department on October 22, 1977 (annexure D).
4. Mst. Hajjani Zulekhabai, who was the mother of the petitioner, died on February 1, 1979. During her lifetime, she was the owner of the house No. 2/2, Daulat Ganj, Indore, arid also owned another house in the small town Amreli in the State of Gujarat. The rental income from these houses was the only source of income of the said Hajjani Zulekhabai. In pursuance of the voluntary disclosure scheme, she filed her returns for the assessment years 1964-65 to 1971-72 showing the rental income from these two houses and her assessments were completed in respect of the said income by an order dated October 16, 1973, for the assessment years 1964-65 to 1966-67, and by an order dated January 9, 1973, for the assessment years 1968-69 to 1971-72. In the previous year relevant to the assessment year 1972-73, the said Hajjani Zulekhabai had invested a sum of Rs.90,583 in the renovation of the house No. 2/2 Daulat Ganj, Indore. In the course of her assessment for the assessment year 1972-73, the ITO, M-Ward, Indore, examined her and also held an enquiry into the investments made by her in the construction and renovation of the house and the investment of Rs. 90,583 as disclosed by her was accepted by the ITO, M-Ward, Indore, by his order passed on January 9, 1973 (annex.-E). Similarly her assessments for the subsequent years 1973-74 and 1974-75 were completed on March 1, 1976, and March 28, 1977.
5. Further, according to the petitioner, the assessing authority in his case as also that of his mother was the same, namely, the ITO, M-Ward, Indore. Thus, even though the petitioner was being assessed up to the assessment year 1974-75 only in respect of his share income and the petitioner's mother up to the assessment year 1974-75 was also assessed only in respect of the rental income from the said two houses, the ITO in the course of the assessment of the petitioner for the years 1975-76 and 1976-77, for the first time sought to assess the rental income from the two houses in the hands of the petitioner on the ground that the ownership of the said two houses was that of the petitioner and not of his mother. Accordingly, the ITO included the rental income from the two houses in the assessment of the petitioner for the assessment years 1975-76 and 1976-77, by his orders dated March 30, 1978, and March 6, 1979. The assessments of Hajjani Zulekhabai for the assessment years 1975-76 and 1976-77 were also going on simultaneously before the same ITO who assessed her on the rental income of the two houses in respect of these two assessment years by his order passed on March 27, 1978.
6. The petitioner as also, his mother filed separate appeals before the AAC in respect of these two assessments for the years 1975-76 and 1976-77 which were allowed on January 20, 1979, holding that the ownership of the houses was not that of the petitioner and deleted the rental income from the assessments of the petitioner in respect of the said assessment years (annexure-L) and (annexure-M), whereby he also held that the petitioner's mother, Hajjani Zulekhabai, was the owner of the two houses and that the rental income thereof should be assessed only in her hands as her income on substantive and productive basis. The Department did not file any appeal against these orders of the AAC.
7. In the meanwhile, the ITO, E-Ward, Indore, who had acquired jurisdiction in respect of the petitioner as also his mother, on July 7, 1976, issued a notice to Hajjani Zulekhabai under Section 148 of the I.T. Act, 1961, claiming to reassess her in respect of the assessment year 1972-73 on the ground that income chargeable to tax had escaped assessment. She, therefore, in compliance with the said notice filed her return and had earlier already filed the report of her valuer. But, it appears, the ITO being not satisfied, after a lapse of 3 1/2 years, on June 29, 1976, referred the matter to the valuation cell of the Department who reported that the investment in the construction of the house was to the tune of Rs. 1,64,000. Consequently, the said ITO, E-Ward, Indore, by his order dated March 19, 1981, reassessed Hajjani Zulekhabai for the assessment year 1972-73 and made an addition of Rs. 70,000 as income from undisclosed sources being the difference in the cost of construction of Rs. 90,583 accepted by the Department at the time of the original assessment (annexure-N). As Hajjani Zulekhabai died on February 1, 1979, her legal representative, namely, the petitioner, had filed an appeal before the AAC who allowed the same. Against the order of the AAC, the Department went up in appeal before the Income-tax Appellate Tribunal which by its order dated May 26, 1984, dismissed the same. As this order of the Tribunal was passed during the pendency of this petition, the petitioner has filed a copy of the said order of the Tribunal. The learned counsel for the Revenue did not dispute this fact.
8. Further, according to the petitioner, despite the fact that the AAC having already held that the two houses were not the houses of the petitioner and the rental income therefrom was also not the income of the petitioner, respondent No. 1 on March 18, 1981, after the death of Hajjani Zulekhabai on February 1, 1979, sent the notice, annexure-O, under Section 148 of the said Act stating therein that he has reason to believe that income chargeable to tax for the assessment year 1972-73 had escaped assessment within the meaning of Section 147 of the I.T. Act and called upon the petitioner to file a return in the prescribed form for the said assessment year, though no reasons were stated therein. On receipt of the said notice, the petitioner filed a reply dated April 16, 1981, pointing out that no income chargeable to tax had escaped assessment and had also asked for the reasons. But the ITO did not supply the reasons for reopening the assessment, but directed the petitioner to file his return as per his letter dated April 20, 1981, whereupon the petitioner again repeated his request by his letter dated April 27, 1981, but as he did not receive any reply, the petitioner has filed this petition to quash the said notice, it being illegal and without jurisdiction.
9. The respondents in their returns contended that the assessment order for the year 1972-73 (annexure E) does not disclose any discussion about an enquiry into the investment made by the petitioner's mother in the house No. 2/2, Daulat Ganj, Indore, that the order of the AAC does not come in the way of the respondent who had every right to make the assessment in respect of the mother ; that as the Department's valuer had as per his report estimated the investment to the tune of Rs. 1,60,000, the difference of Rs. 70,000 thus remained unexplained which amounted to escaped assessment as the petitioner was liable to account for the same being the owner of the said house. The respondents have not disputed that the assessment of the petitioner for the accounting year 1972-73 has been reopened under Section 147(a) and not under Section 147(b) of the I.T. Act, 1961. It is, therefore, not necessary to consider the authorities cited on behalf of the respondent on this point, namely, Lalji Haridas v. ITO [1961] 43 ITR 387 (SC) and Lalji Haridas v. Bhatt [1965] 55 ITR 415 (SC).
10. However, we may point out that the real distinction between the provisions of Section 147 (a) and (b) is that where the assessee is found to be lacking in disclosing fully and truly all material facts necessary for the assessment in question, the provisions of Section 147(a) of the Act will be attracted, so as to give eight years' limitation to the Revenue to initiate reassessment proceedings. But in case where the assessee is not guilty of suppression of material facts, and has given the said facts fully and truly, but the income of the assessee has escaped assessment, then in consequence of information received by the ITO, if he has reason to believe that income chargeable to tax has escaped assessment, the provisions of Section 147(b) of the Act will be applicable and in such a case, the limitation will be only four years.
11. We have set out the facts in somewhat detail in order to appreciate the submission of the learned counsel for the petitioner as to whether apparently or otherwise, in these facts and circumstances of the case, there was legal justification for the ITO to issue the notice of reassessment under Section 148 of the Act for reopening the assessment for the year 1972-73, which was already completed and accepted as also for the subsequent years. Therefore, before dealing with the points of controversy, it will be useful to reproduce the relevant provision of Section 147(a) of the said Act which deals with income escaping assessment :
"147. Income escaping assessment. 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 malce a return under Section 139 for any assessment year to the Income-tax Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, or
he may, subject to the provisions of Sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereafter in Sections 148 to 153 referred to as the relevant assessment year)."
12. It would appear from a perusal of the said provision reproduced above that two conditions have to be satisfied before an ITO acquires jurisdiction to issue notice under Section 148 in respect of an assessment beyond the period of four years but within a period of eight years from the end of the relevant year, i.e., (1) the ITO must have reason to believe that income chargeable to tax has escaped assessment, and (2) he must have reason to believe that such income has escaped assessment by reason of the omission or failure on the part of the assessee (a) to make a return under Section 139 for the assessment year to the ITO, or (b) to disclose fully and truly material facts necessary for his assessment for that year. Both these conditions must co-exist in order to confer jurisdiction on the ITO. It is also imperative for the ITO to record his reasons before initiating proceedings as required by Section 148(2). Another requirement is that before a notice is issued after the expiry of four years from the end of the relevant assessment year, the Commissioner should be satisfied on the reasons recorded by the ITO that it is a fit case for the issue of such notice.
13. We may further add that the duty which is cast upon the assessee is to make a true and full disclosure of the primary facts at the time of the original assessment. Production before the ITO of the account books or other evidence from which material evidence could with due diligence have been discovered by the ITO will not necessarily amount to disclosure contemplated by law. The duty of the assessee in any case does, not extend beyond making a true and full disclosure of primary facts. Once he has done that, his duty ends. It is for the ITO to draw the correct inference from the primary facts. It is not the responsibility of the assessee to advise the ITO with regard to the inference which he should draw from the primary facts. If an ITO draws an inference which appears subsequently to be erroneous, mere change of opinion with regard to that inference would not justify initiation of action for reopening the assessment.
14. The grounds or reasons which lead to the formation of the belief 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 to disclose fully and truly all material facts. Once there exists reasonable grounds for the ITO 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 induce the ITO to act, is, therefore, not a justiciable issue. It is of course open to the assessee to contend that the ITO 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 reasons for the belief. The expression "reason to believe "does not mean a purely subjective satisfaction on the part of the ITO. 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 ITO in starting proceedings in respect of income escaping assessment is open to challenge in a court of law as has been held by the Supreme Court in the decision in ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 (SC). In this decision, it has further been held that 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, farfetched and remote. The reason for the formation of the belief must be held in good faith and should not be a mere pretence.
15. The above view has further been reiterated by the Supreme Court in its decision reported in Ganga Saran & Sons Pvt. Ltd. v. ITO [1981] 130 ITR 1 (SC), though the learned counsel for the petitioner also placed reliance on the decisions in Jawaharlal Daryavbuxmal v. CIT [1982] 137 ITR 54 (MP), Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC), Modi Spinning and Weaving Mills Co. Ltd. v. ITO [1970] 75 ITR 367 (SC), Amala Das v. CIT[1984] 146 ITR 216 (P&H), ITO v. Lakhmani Mewal Das [l976] 103 ITR 437 (SC) and Chunnilal Onkarmal (Pvt.) Ltd. v. ITO [1983] 139 ITR 380 (MP), which have all taken a similar view.
16. In the light of these decisions, the decisions cited on behalf of the Revenue, CIT v. Chidambaram Chetiar [1971] 80 ITR 467 (SC), CWT v. Chhatrshal Sinhji D. Zala [1982] 135 ITR 826 (Guj) and Nanji & Co. v. ITO [1979] 120 ITR 593 (Cal), are distinguishable and to some extent they also support the proposition laid dnwn in the decisions referred to above, cited on behalf of the petitioner.
17. Keeping the above principles in view, we may now turn our attention to the facts of the present case. It is not disputed that no grounds have been mentioned by the ITO for reopening the assessment of the petitioner-assessee with a view to show that his income had been underassessed because of his failure to disclose fully and truly material facts necessary for the assessment. From the returns submitted by the respondents, it would appear that though the petitioner as also his mother were assessed by the same ITO simultaneously on the separate incomes which they independently derived from different sources and which assessment was accepted also, the sole basis for the ITO for issuance of the notice under Section 148 of the Act seems to be the report of the Departmental valuer who had assessed the estimated cost of renovation or reconstruction of the Daulatganj house to be Rs. 1,60,000 and it is on that basis only he assumed that the income of the assessee had escaped to the tune of about Rs. 70,000. It also appears that the ITO was obsessed by the fact that the petitioner was a suspected smuggler and was also detained under the MISA with the result that he must have been the real owner of the Daulatganj house and had deliberately concealed the true facts and that he must have spent the amount to the tune of Rs. 1,60,000 on the renovation of the said house. But, it is clear that apart from the report of the Department's valuer, which is just an estimate and that too obtained after a period of almost 3 1/2 years after the completion of the renovation work, the same can be said to be only the opinion of the valuer and on that basis, the ITO cannot be said to have the jurisdiction to issue the notice under Section 148 of the I.T. Act, 1961, in the absence of any evidence to show that there had been a failure to disclose material facts necessary for the assessment.
18. Thus, it would appear that in proceedings for reassessment under Section 147 of the Act, reasonable belief is the sine qua non for initiation of such proceedings and, therefore, in such a situation, jurisdiction of the ITO can be challenged on the grounds of absence of such belief, the same being a question of law. Such a belief must be that of an honest and reasonable person based upon reasonable grounds and the ITO may act under this section on direct or circumstantial evidence, but not on mere suspicion, gossip or rumour. Therefore, in the present case, we are of the opinion that the notice issued by the ITO under Section 148 of the I.T. Act, 1961 (annexure 0), is illegal and without jurisdiction as the necessary preconditions to confer jurisdiction under Section 148 of the Act are totally absent.
20. In the result, this petition succeeds and is allowed. The impugned notice (annexure O) dated March 18, 1981, issued by the ITO, E-Ward, Indore, under Section 148 of the said Act is quashed and the respondents are restrained from taking any proceedings under the said notice dated March 18, 1981, regarding reassessment. A writ is issued accordingly. However, in the facts and circumstances of the case, the parties are directed to bear their respective costs. The amount of security deposit, if any, be returned to the petitioner on verification.