Case: Sheo Nath Singh Vs. Appellate Assistant Commissioner Ofincome Tax, Calcutta

there was an initial lack of jurisdiction.7. Section 34 (1-A) to the extent it is necessary, may be reproduced."34 (1-A). If, in the case of any assessee, the Income-tax Officer has reason to believe-(i) that income, profits or gains chargeable to income-tax have escaped assessment for any year in respect of which the relevant previous year falls. . .. .; and(ii) that the income, profits or gains which have so escaped assessment for any such year or years amount or are likely to amount to one lakh of rupees or more; he may. . .. serve on the assessee. . . .a notice containing. . . ,and may proceed to assess or reassess the income, profits or gains of the assessee . . . :Provided that the Income-tax Officer shall not issue a notice under this sub-section unless he has recorded his reasons for doing so and the Central Board of Revenue is satisfied on such reasons recorded that it is a fit case for the issue of such notice".8. Since nothing had been disclosed which was relevant for the purpose of finding out whether the Income Tax Officer had any reason to believe that the income, profits or gains of the assessee chargeable to income-tax had escaped assessment, we gave an opportunity to the Revenue to produce the records containing those reasons. All that have been found in the records are reports in Form B made in connection with starting of proceedings under S. 34 (1-A), each report relating to a different assessment year. Items (7) and (8) of this Form relate to brief reasons for starting proceedings and whether the Central Board of Revenue was satisfied that it was a fit case for issue of notice. Against item (7) it is stated "reasons as per separate sheet attached". Against item (8), the Secretary of the Central Board of Revenue signed after writing "Yes. satisfied". The reasons for starting the proceedings given in the separate sheet may be fully reproduced:"For the reasons hereinafter recorded I believe that income, profits and gains earned by the assessee in his personal capacity and in conjunction with others and chargeable to income-tax have escaped assessment and that the amount of such concealed income relating to the Accounting years covering the period beginning on the lst day of September, 1939 and ending on the 31st day of March, 1949, amount to or is likely to amount to Rupees 1,00,000/-. The reason for such belief, inter alia, is as follows:(1) The assessee who is or was at the relevant time a Managing Director in about a dozen limited companies, along with "Oberois" is believed to have made some secret profits which were not offered for assessment.(2) The assessee is believed to have received a sum of Rs. 22 lakhs from "Oberois" and this sum or at least part of which represents income has escaped assessment.Sd./ (A. K. Bhowmik)Income-tax Officer,Dist. II (2), Calcutta".9. It is abundantly clear that the two reasons which have been given for the belief which was formed by the Income-tax Officer hopelessly fail to satisfy the requirements of the statute. In a recent case Chhugamal Rajpal v. S. P. Chaliha 79 ITR 603 = (AIR 1971 SC 730 ) which came up before this Court, a similar situation had arisen and under the directions of the Court the Department produced the records to show that the Income-tax Officer had complied with the conditions laid down in the statute for issuing a notice relating to escapement of Income. There also, the report submitted by the Officer to the Commissioner and the latters orders thereon were produced. In his report, the Income-tax Officer referred to some communications received by him from the Commissioner of Income-tax Bihar and Orissa from which it appeared that certain creditors of the assessee were mere name-lenders and the loan transactions were bogus and, therefore, proper investigation regarding the loans was necessary. It was observed that the Income-tax Officer had not set out any reason for coming to the conclusion that it was a fit case for issuing a notice under Section 148 of the Income Tax Act, 1961. The material that he had before him for issuing notice had not been mentioned. The facts contained in the communications which had been received were only referred to vaguely and all that had been said was that from those communications, it appeared that the alleged creditors were namelenders and the transactions were bogus. It was held that from the report submitted by the Income-tax Officer to the Commissioner it was clear that he could not have had reasons to believe that on account of assessees omission to disclose fully and truly all material facts, income chargeable to tax had escaped assessment.10. 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-lax 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 examine this aspect though the declaration or sufficiency of the reasons for the belief cannot be investigated by the Court.11. There is no material or fact which has been stated in the reasons for starting proceedings in the present case on which any belief could be founded of the nature contemplated by Section 34 (1-A). The so-called reasons are stated to be beliefs thus leading to an obvious self contradiction. We are satisfied that the requirements of Section 34 (1-A) were not satisfied and, therefore, the notices which had been, issued were wholly illegal and invalid.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]9. It is abundantly clear that the two reasons which have been given for the belief which was formed by the Income-tax Officer hopelessly fail to satisfy the requirements of the statute. In a recent case Chhugamal Rajpal v. S. P. Chaliha 79 ITR 603  = (AIR 1971 SC 730 ) which came up before this Court, a similar situation had arisen and under the directions of the Court the Department produced the records to show that the Income-tax Officer had complied with the conditions laid down in the statute for issuing a notice relating to escapement of Income. There also, the report submitted by the Officer to the Commissioner and the latters orders thereon were produced. In his report, the Income-tax Officer referred to some communications received by him from the Commissioner of Income-tax Bihar and Orissa from which it appeared that certain creditors of the assessee were mere name-lenders and the loan transactions were bogus and, therefore, proper investigation regarding the loans was necessary. It was observed that the Income-tax Officer had not set out any reason for coming to the conclusion that it was a fit case for issuing a notice under Section 148 ofthe Income Tax Act, 1961. The material that he had before him for issuing notice had not been mentioned. The facts contained in the communications which had been received were only referred to vaguely and all that had been said was that from those communications, it appeared that the alleged creditors were namelenders and the transactions were bogus. It was held that from the report submitted by the Income-tax Officer to the Commissioner it was clear that he could not have had reasons to believe that on account of assessees omission to disclose fully and truly all material facts, income chargeable to tax had escaped assessment.10. 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-lax 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 examine this aspect though the declaration or sufficiency of the reasons for the belief cannot be investigated by the Court.11. There is no material or fact which has been stated in the reasons for starting proceedings in the present case on which any belief could be founded of the nature contemplated by Section 34 (1-A). The so-called reasons are stated to be beliefs thus leading to an obvious self contradiction. We are satisfied that the requirements of Section 34 (1-A) were not satisfied and, therefore, the notices which had been, issued were wholly illegal and invalid.