Case: Income Tax Officer, I Ward, Dist, Vi, Calcutta &amp; Ors Vs. Lakhmani Mewal Das

This appeal on certificate is against the Full Bench judgment of the Calcutta High Court whereby on petition under article 226 of the Constitution of India filed by the respondent that court by majority quashed notice under section 148 ofthe Income-tax Act, 1961 (hereinafter referred to as the Act) issued by appeallant No. 2 (Income-tax Officer E Ward, Hundi Circle, Calcutta) (hereinafter referred to as the appellant) for the purpose of reopening assessment of the income of the respondent for the assessment yearrespondent was assessed for the assessment year 1958-59 under section 23(3) of the Indian Income-tax Act, 1922 on June 14, 1960. His total income was assessed to be Rs. 37, 872. While making the assessment the Income-tax Officer allowed deduction of a sum of Rs. 15, 991 by way of expenses claimed by the respondent. The expenses included Rs. 10, 494/4 As/3 Pies by way of interest. According to the respondent, he produced through his authorised representative all books of accounts, bank statements and other necessary documents in connection with the return. On March 14, 1967 the respondent received notice dated March 8, 1967 issued by the appellant under section 148 of the Act stating that the appellant had reason to believe that the respondents income which was chargeable to tax for the assessment year 1958-59 had escaped assessment within the meaning of section 147 of the Act and that the notice was being issued after obtaining the necessary satisfaction of the Commissioner of Income-tax. The respondent was called upon to submit within 30 days from the date of the service of the notice a return in the prescribed form of his income for the assessment year 1958-59. On May 2, 1967 the respondent through his lawyer stated that there was no material on which the appellant had reason to believe that the respondents income had escaped assessment and, therefore, the condition precedent for the assumption of jurisdiction by the appellant had not been satisfied. The appellant was said to have no competence or jurisdiction to re-open the assessment under section 147 of the Act on a mere change of opinion. The appellant was also called upon to furnish all the materials on which he had reason to believe that income had escaped assessment. As, according to the respondent, there was no satisfactory response from the appellant, he filed petition under article 226 of the Constitution for quashing the impugned notice.It was denied in the affidavit on behalf of the appellant that all materials relevant and necessary for the assessment of the respondents income for the assessment year 1958-59 had been produced before the Income-tax Officer at the time of the original assessment. It w as furtherto the assessment for the assessment year 1958-59, it was discovered, inter alia, that some of the loans shown to have been taken and interests alleged to have been paid thereon by the petitioner during the relevant assessment year were not genuine. The Income-tax Officer had reason to believe and bona fide believed that the said alleged loans and the interest alleged to have been paid thereon are not genuine. If necessary, I crave leave to produce before the honble Judge hearing the application, the relevant records on the basis of which the said Income-tax Officer had reason to believe that the income of the petitioner escaped assessment as aforesaid at the hearing of thethe pendency of the proceedings the High Court directed that a copy of the report made by the appellant to the Commissioner of Income-tax for obtaining latter s sanction under section 147 be produced. The report was accordingly produced, and the same reads asare hundi loan credits in the name of Narayan singh Nandalal, D. K. Naraindas, Bhagwandas Srichand, etc., who are known name-lenders, and also hundi loan credit in the name, Mohansingh Kanayalal, who has since confessed he was doing only name-lending. In the original assessment these credits were not investigated in detail. As the information regarding the bogus nature of these credits is since known, action under section 147 (a) is called for to reopen the assessment and assess these credits as the undisclosed income of the assessee. The assessee is still claiming that the credits are genuine in the assessment proceedings for 1962-63. Commissioners sanction is solicited to reopen the assessment for 1958-59, under section 147(a)."All the three Judges who constituted the Full Bench found that the assessee was not being charged with omission to disclose all facts: he was 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 these persons. It was also stated by the assessee at the time of the original assessment that he had paid interest to certain persons when, in fact, he had not, if t he information received later was true. The duty of the assessee, it was held, was not only to make a full disclosure of all material facts, his duty was also to make a true disclosure of facts and not to mislead the assessing officer by disclosing certain things which did not represent facts. The High Court accordingly held that once an assessee infringes this rule, any subsequent discovery of fact by the assessing officer which would raise a resonable belief in his mind that the assessee had not made a true and correct disclosure of the facts and had thereby been responsible for escapement of his income from assessment would attract section 147 of the Act. Two of the learned Judges, A. K. Mukherjea and S. K. Mukherjea JJ., however, took the view that the conditions precedent for the exercise of jurisdiction by the Income-tax Officer under section 147 of the Income-tax Act were not fulfilled in the case as the report submitted by the Income- tax Officer to the Commissione r for sanction under section 147(a) was defective. The defects in the report, in the opinion of the High Court, were the same as had been pointed out by this Court in the case of Chhugamal Rajpal v. S. P. Chaliha.(1) The Commissioner, while according permission for taking action under section 147, it was observed, acted mechanically because the Commissioner had not expressly stated that he was satisfied that this was a fit case for the issue of notice under section 148. As against the majority, Sabyasachi Mukherji J. held that notice under section 148 of the Act was valid and did not suffer from any infirmity. It was also observed that the Commissioner of Income-tax had not acted improperly in giving sanction.In t he result, by majority the High Court quashed the notice issued by the appellant to theappeal before us

Reasoning: As stated earlier, the reasons for the formation of the belief must have a rational connection with or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Income-tax Officer and the formation of his belief that there has been escapement of the income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts. It is no doubt true that the court cannot go into the sufficiency or adequacy of the material and substitute its own opinion for that of the Income-tax Officer on the point as to whether action should be initiate d for reopening assessment. At the same time we have to bear in mind that it is not any and every material, howsoever vague and indefinite or distant, remote and far-fetched, which would warrant the formation 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 le ad to the conclusion that action cannot be taken for reopening 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 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 this respect depart from the normal rule that there 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 latters failure or o mission 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. The majority of the learned Judges in the High Court, in our opinion, were not in error in holding that the said material could not have led to the formation of the belief that the income of the assessee respondent had escaped assessment because of his failure or omission to disclose fully and truly all material facts.