TMI Blog1988 (2) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... f this notice, a return in the prescribed form of your income for the said assessment year. 2. This notice is being issued after obtaining the necessary satisfaction of the Commissioner of Income-tax, West Bengal-III, Calcutta. Sd/-Illegible, Income-tax Officer, "G" Ward, Companies Dt.IV, Calcutta" One of the contentions raised on behalf of the writ petitioner was that the condition precedent to the exercise of power under section 148 of the Act is non-existent and there was no material on the basis of which such "reason to believe" could be formed. We set out hereinbelow the relevant portions of sections 147 and 148 of the Act. "Section 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 make 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 (b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Income-tax Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,10,000. (b) Sri Mulchand Roars, proprietor of Amarlal Mulchand, made confessional statement before the Income-tax Officer, "E" Ward, N.C.E.P.T.I., on February 4, 1966, that from 1952 till 1965 he was doing name-lending for bogus hundi loan transactions and no genuine hundi loans were advanced to any party in the name of Amarlal Mulchand during the said period. (c) Sri Raghumal Makhia, partner of Giridharilal Raghumal, also made a confessional statement before the said Income-tax Officer on December 18, 1965, that since the starting of the partnership firm under the style of Giridharilal Raghumal on January 1, 1956, till the date of its closure of the business, the firm was completely involved in name-lending for bogus hundi transactions and that they never advanced any genuine hundi loans to any party. (d) The aforesaid confessional statements to which reference would be made at the time of the hearing of this case for terms, scope, effect and import thereof and which the answering respondents would also like to treat as a part of this affidavit were received from the Inspecting Assistant Commissioner of Income-tax, Survey Range, Calcutta. (e) Messrs. Jethanand Madhabdas c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns alleged to have been taken from bankers and that the alleged hundi loans amounting in all to Rs. 3,10,000 has escaped assessment. I say that on such opinion being formed on the basis of the statements as aforesaid, the Commissioner of Income-tax, West Bengal-III, was also duly satisfied and on receipt of his satisfaction steps were taken." From the records produced, it appears that the reasons which were recorded by the Income-tax Officer concerned in the report submitted for the sanction of the Commissioner of Income-tax were as follows: "Item No. 7, that is, reasons for reopening the assessment, I have reason to believe that the assessee, at the time of the original assessment, did not disclose fully and truly all material facts necessary for the assessment in respect of the sources of loans alleged to have been taken from hundi bankers, who are well known name bankers (sic). The alleged Hundi loans amounting in all to Rs.3,10,000 has escaped assessment." We have also looked into the records and this is the only reason recorded. The learned judge relied on the affidavit-in-opposition filed on behalf of the Department. We have ascertained from the records that the facts w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not contain all the reasons for the reopening and further reasons could, therefore, be disclosed in the affidavit and the court could rely thereon to judge whether the reopening of the assessment was proper or not. Strenuous and elaborate arguments were, therefore, made before us on the question as to how far and to what extent the court could rely and act on the affidavit of the Income-tax Officer filed before the court which might not strictly conform to the reasons recorded by the Income-tax Officer under section 148(2) of the new Act corresponding to the first portion of clause (iii) of the first proviso to section 34 of the old Act. On behalf of the appellant, it was contended that under section 151 of the new Act corresponding to the second portion of clause (iii) of the first proviso to section 34 of the old Act, the satisfaction of the Central Board of Direct Taxes (under the old Act the CBR) or of the Commissioner had to be based only on the said recorded reasons and on no other material. The affidavit that may be filed by the Income-tax Officer before the court is not a document which had been or could be considered by the Board or by the Commissioner in according th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment or for formation of his belief that income of the assessee had escaped assessment or has been underassessed on account of the assessee not having made full and true disclosure of his income but the section does not also say that the Income-tax Officer would record only some of the reasons and keep the others up his sleeve to be disclosed before the court if his action is ever challenged in court of law. The recording of reasons, in our opinion, is not an idle formality but is a mandatory requirement of the statute casting a duty and obligation on the Income-tax Officer to record his reasons for issuing a notice for reopening an assessment and the Central Board of Direct Taxes or the Commissioner, as the case may be, being satisfied that it is a fit case for issue of such notice solely on the basis of the said reasons recorded, accords its sanction to the issue of such notice. The observations made by the Supreme Court in the case of Calcutta Discount Co. [1961] 41 ITR 191, were made with regard to the report of the Income-tax Officer to the Commissioner and not with regard to the recorded reasons. In H. A. Nanji and Co. [1979] 120 ITR 593 (Cal), the Division Bench has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avit before the court in support of his action in reopening the assessment on which the court might be satisfied as to the validity of the proceedings, that would not, in our opinion, validate the proceedings, if the reasons recorded under clause (iii) of the first proviso to section 34(1) of the old Act or section 148(2) of the new Act were not sufficient for the initiation of the proceedings or for the grant of sanction by the Board or the Commissioner, as the case might be. The Income-tax Officer, however, in his affidavit filed in court could explain or elaborate or clarify the reasons recorded by him but could not thereby introduce new grounds or new reasons or new materials which were not to be found in the recorded reasons either expressly or by necessary implication." We need not refer to the decision in Jamna Lal Kabra v. ITO [1968] 69 ITR 461 (All), separately inasmuch as that was one of the decisions considered by the learned judges of the Division Bench. In that case, the Allahabad High Court held that to justify action by reference to clause (a) of section 147, it is not open to the Income-tax Officer to refer to reasons that are given pursuant to sub-section (2) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied before an Income-tax Officer acquired 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, viz., (1) the Income-tax Officer 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 Income-tax Officer, or (b) to disclose fully and truly material facts necessary for his assessment for that year. Both these conditions must coexist in order to confer jurisdiction on the Income-tax, Officer. It is also imperative for the Income-tax Officer to record his reasons before initiating proceedings as required by section 148(2). Another requirement is that before 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 Income-tax Officer that it is a fit case for the issue of such notice. We may add that the duty which is cast upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come escaping assessment is open to challenge in a court of law (See the observations of this court in the cases of Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC) and S. Narayanappa v. CIT [1967] 63 ITR 219 (SC), while dealing with the corresponding provisions of the Indian Income-tax Act. 1922)." So far as the ground mentioned in the report of the Income-tax Officer to the Commissioner of Income-tax which ground related to Mohansingh Kanyalal, the Supreme Court observed as follows (at p. 447): "We may now deal with the first ground mentioned in the report of the Income-tax Officer to the Commissioner of Income-tax. This ground relates to Mohansingh Kanyalal, against whose name there was an entry about the payment of Rs. 74, annas 3 as interest in the books of the assessee, having made a confession that he was doing only name-lending. There is nothing to show that the above confession related to a loan to the assessee and not to someone else, much less to the loan of Rs. 2,500 which was shown to have been advanced by that person to the assessee-respondent. There is also no indication as to when that confession was made and whether it relates to the period from April 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lying 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 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 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 asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the Supreme Court was not sufficient for the purpose of reopening of the case, then in the present case, a fortiori the reopening is bad. This report is worse than the report before the Supreme Court. If, in that case, the report was improper and vague, then, in the present case also, it is much more vague and improper. For similar reasons given by the Supreme Court in the similar case, we uphold this contention. We hold that the reasons as recorded were not sufficient to enable the Income-tax Officer concerned to proceed to reopen the assessment as he has purported to do. It is not necessary to go into the merits of the other contentions raised in support of the appeal. The admitted position is that even if such reopening could be made not on the basis of section 147 (a) but on the basis of section 147(b) of the Act, in view of the period of limitation, it was time-barred. Accordingly, the appeal is allowed. The writ petition is allowed. The rule is made absolute. There will be an order of mandamus restraining the respondents in the writ petition from giving any effect or further effect to the impugned notice under section 148 of the Act being annexure-D to the petition. There ..... X X X X Extracts X X X X X X X X Extracts X X X X
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