1978 (4) TMI 33 - HC - Income Tax

Summary

Issues Involved:
1. Validity of the notice issued under Section 148 of the Income Tax Act, 1961.
2. Competence and application of mind by the Commissioner in granting sanction for reopening.
3. Sufficiency of materials to form the belief that income had escaped assessment due to failure or omission by the assessee.

Issue-wise Detailed Analysis:

1. Validity of the Notice Issued under Section 148 of the Income Tax Act, 1961:
The primary challenge was to the notice issued under Section 148 of the Income Tax Act, 1961, dated 23rd February 1972, for the assessment year 1963-64. The assessee contended that there were no materials for the Income Tax Officer (ITO) to form the belief that there was any failure or omission on the part of the assessee to disclose fully or truly any material or relevant fact, or that as a result of such failure, the income of the assessee had escaped assessment. The court examined whether the ITO had materials to form the requisite belief that the income of the assessee had escaped assessment due to the assessee's failure to disclose material facts. The court concluded that the ITO did not have sufficient materials to form such a belief, referencing the decision in Lakhmani Mewal Das v. ITO [1975] 99 ITR 296 (Cal), which was upheld by the Supreme Court [1976] 103 ITR 437. The court thus set aside the impugned notice and restrained the respondents from giving any effect to it.

2. Competence and Application of Mind by the Commissioner in Granting Sanction for Reopening:
The assessee also contended that the Commissioner was not competent to grant sanction for reopening the assessment and that there was no application of mind by the Commissioner. The court found that the Commissioner could not have been properly satisfied, as indicated by the letter to the Commissioner stating that the assessee had confessed, which was an incorrect statement. The court concluded that there was complete non-application of mind by both the ITO and the Commissioner in this matter.

3. Sufficiency of Materials to Form the Belief that Income had Escaped Assessment due to Failure or Omission by the Assessee:
The court examined the materials available to the ITO, including the confessions made by one Rangabeharilal Atmaram Goel, who confessed to carrying on bogus Hawala transactions in various names, including Lachmi Narayan Atmaram. However, Goel did not state that all transactions in the name of Lachminarayan Atmaram were fictitious. The court noted that the ITO's belief that the loan of Rs. 25,000 was bogus was based on the presumption that the transactions were not genuine, without direct evidence linking the specific loan to a fictitious transaction. The court emphasized that there must be a rational connection or live link between the material and the formation of the belief that income had escaped assessment due to the assessee's failure to disclose material facts. The court found that there was no direct nexus or live link between the materials and the formation of the belief by the ITO.

Judgment of the Division Bench:
The Division Bench upheld the judgment of the single judge, agreeing that the ITO did not have sufficient materials to form a reasonable belief that the income of the respondent had escaped assessment. The Bench also noted that the Commissioner had not applied his mind properly before granting sanction. The appeal was dismissed, and the operation of the judgment was stayed for six weeks as requested by the appellants.

Conclusion:
The court upheld the challenge to the notice issued under Section 148, set aside the impugned notice, and restrained the respondents from giving any effect to it. The court also quashed any assessment completed pursuant to the impugned notice and made the rule absolute without any order as to costs.