TMI Blog1979 (6) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... me-tax Officer was not justified in withdrawing development rebate of Rs. 38,918 for the assessment year 1957-58 and Rs. 17,730 for the assessment year 1958-59 in the respective assessments made under the provisions of section 147(a) ? " We shall deal with the question referred at the instance of the assessee before going into the question referred at the instance of the Commissioner. The assessee, who was alive till the stage of the disposal of the appeal by the Appellate Tribunal, was N. Sathianathan. He was running a business of bus transport in Salem under the name and style of " N. S. Motor Service ". He was assessed to income-tax originally for all these years. The following table gives the dates of the original assessment as against the respective years: Assessment year Data of completion of original assessment 1957-58 28-3-1959 1958-59 31-3-1959 1959-60 31-3-1960 1960-61 23-3-1961 1961-62 25-10-1962 1962-63 20-3-1963 1963-64 5-3-1964 Apart from producing the books of account for the relevant previous years, the assessee had also given a list of various creditors from whom borrowings had been effected on the security of hundis. The interest p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s-annex. " X " in which the money- lenders themselves had not given any statement, but some other borrowers from them had done so. The Inspector of Income-tax made a report on January 28, 1966, to the ITO for the assessment years 1957-58 and 1961-62 after receipt of the circular. In the report for these years he gave a list of four persons in respect of whom monies were said to be outstanding in the accounts of the assessee and to whom interest was said to have been paid. These creditors had been " blacklisted". The term " blacklisted " apparently means that they were not genuine money-lenders and that, therefore, the transactions with them deserved to be scrutinised. Similarly, for the assessment years 1962-63 to 1964-65 also, he gave report on January 28, 1966, in which there were similar credits. With reference to those years, after referring to the outstandings, the Inspector stated as follows: " A number of these bankers have admitted in writing that they have only given accommodation loans as per the CIT's circular C. No. 122(58)65 dated 18-9-1965. Some of the remaining bankers' names figure in annex.'X' of the same circular." He gave a list of the total amounts c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... multani bankers. After setting off of the loss originally determined in the assessment order, the total income which will be liable for taxation would come to Rs. 1,45,985 and tax effect will roughly come to Rs. 31,210. Sanction of the Commissioner to reopen the assessment under section 147(a) is, therefore, requested." (underlined by us). For 1959-60, the report of the ITO to the Commissioner dated February 28, 1969, was as under: "During the year of account, the assessee had borrowed Rs. 3,50,000 on hundis from multani bankers whose dealings are suspected to be ' havala' in nature. The assessee is not able to prove these loans. I have reason to believe that due to failure on the part of the assessee to disclose fully and truly the nature of the transactions, income to the tune of Rs. 4,04,620 (Rs. 3,50,000 plus interest of Rs. 54,620) has escaped assessment. The Board's sanction is requested to reopen the assessment under section 147(a) for 1959-60." (emphasis supplied) For 1960-61, the report to the Commissioner dated February 28, 1969, was as follows: " During the year of account, the assessee had borrowed Rs. 6,25,000 on hundis from multani bankers whose dealings a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to comply with any notice and for the inference drawn by the ITO as if he had any accounts which he had not produced was not correct. The ITO cancelled the assessment and made a fresh assessment as contemplated by s. 146. But in the reassessment he added in the place of the original sum of Rs. 1,50,000 a sum of Rs. 4,50,000. The assessments for all these years made under s. 147 were contested on appeal before the AAC on two main grounds, viz., (i) that s. 147(a) could not have been applied, and (ii) that, in any event, the additions as made were arbitrary and excessive. The AAC, after rejecting the contentions of the assessee regarding the applicability of s. 147(a) accepted the second contention and gave certain reductions. The assessee thereafter appealed to the Tribunal and before the Tribunal also the same two main contentions were advanced. The Tribunal did not accept the assessee's submission that s. 147(a) was wrongly applied. The Tribunal discussed in its order the statements that had been given by some of the money-lenders which had been circulated to the ITO along with another circular dated August 11, 1960. In the words of the Tribunal : "The material is certainly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstituted the assessee's income. One aspect is clear from the above, viz., that even those who have been alleged to have given statements to the taxing authorities to the effect that the transactions were bogus, were not available for examination at the material time. The contention of the learned counsel for the assessee before us was that he had done all in his power to disclose fully and truly all material facts relating to the assessment by producing his books, and the hundis themselves, and had also furnished the addresses of all the bankers who had advanced loans to them. According to him, only after a scrutiny of all the transactions, the ITO was satisfied at the initial stage about the genuineness of these credits. The assessment could not, therefore, be reopened on the ground that the assessee had not fully and truly disclosed all material facts. The only fact that is now sought to be relied on in support of the assessment, it was contended, was the circular issued by the Commissioners and according to the learned counsel, the circular did, not have anything to do with any transaction of the assessee. He pointed out that at the stage when the reassessment proceedings we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iz., (1) the ITO must have reason to believe that the income chargeable to tax had escaped assessment, and (2) he must have reasons to believe that the income had escaped assessment by reason of omission or failure on the part of the assessee, to disclose fully and truly all material facts necessary for his assessment for that year. These conditions, which are conditions precedent, are to be satisfied before the ITO, who acquires jurisdiction to issue a notice under this section. In dealing with s. 34(1)(a) of the Indian I.T. Act, 1922, corresponding to s. 147(a) of the Act of 1961, the Supreme Court in S. Narayanappa v. CIT [1967] 63 ITR 219 pointed out the scope of the jurisdiction of the appellate or other authorities at page 221 as follows : " But the legal position is that if there are in fact some reasonable grounds for the Income-tax Officer to believe that there had been any nondisclosure as regards any fact, which could have a material bearing on the question of underassessment, that would be sufficient to give jurisdiction to the Income-tax Officer to issue the notice under section 34. Whether these grounds are adequate or not is not a matter for the court to investigat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 Income-tax Officer in starting proceedings in respect of income escaping assessment is open to challenge in a court of law (See observations of this court in the cases of Calcutta Discount Co. Ltd. v. Income-tax Officer [1961] 41 ITR 191 (SC) and S. Narayanappa v. Commissioner of Income-tax [1967] 63 ITR 219 (SC) while dealing with the corresponding provisions of the Indian Income-tax Act, 1922). At page 448, it was further pointed out as follows: "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 y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disclosed fully and truly all material facts and that the ITO did not think it necessary to make any further enquiry at the original stage and that if he had accepted the assessee's case on the basis of such scrutiny as he made of the materials placed before him, then it would not be open to the succeeding ITO to reopen the assessments merely because he takes a different view on the same facts. It is with reference to this aspect that the Tribunal pointed out in its order after examining the materials available to the ITO that the jurisdiction under s. 147(a) was properly invoked in the present case. In effect the Tribunal's conclusion is that there were relevant materials which showed that what the assessee disclosed was neither full nor true. We shall discuss this aspect a little later. But the nature of the controversy that was before the Tribunal clearly shows that the assesses challenged the existence of relevant materials in support of the assumption of the jurisdiction by the ITO. In para. 19 of its order the Tribunal refers to the contentions urged on behalf of the assessee as follows: " The argument of Mr. Srinivasan was that while the sufficiency of the reasons which we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, there were some materials to show that the assessee had received not only the said sum of Rs. 60,000, but in addition a sum of Rs. 1,75,000. The ITO, however, did not consider the assessability of the sum of Rs. 1,75,000. The assessment was reopened under s. 147(a) on the ground that the assessee had not disclosed fully and truly all material facts relating to the assessment in respect of Rs. 1,75,000. The assessee failed before the Tribunal. In the reference at the instance of the assessee, the assessee wanted to challenge in this court the validity of the assessment, by contending that he had disclosed fully and truly all material facts and that if any income had escaped assessment it was only because of the failure of the ITO to investigate the facts and come to his own conclusions thereon. The assessee was not permitted to urge this part of the contention, as the question had not raised this part of the controversy. In that case, there was a clear finding that as regards the sum of Rs. 1,75,000 the assessee had not disclosed fully and truly all material facts. It is this fact which was examined by this court and the Tribunal's view that the assessee had not disclosed fully a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proposal under section 147 maybe dictated. " On this the ITO has noted " proposal dictated ". Thus, we have to consider only the circular that was issued by the Commissioners dated September 18, 1965, for these years. That circular contained only two lists, annex. " A " and annex. " X ", annex. " A " representing a list of those who had made " confessions " regarding the transaction being in the nature of havala and annex. " X " being a list of creditors in respect of whom there were other statements available to show that they (creditors) were bogus in nature. The question to be examined is whether the lists themselves constituted relevant materials for coming to the conclusion that the income had escaped assessment by reason of the failure on the part of the assessee to disclose fully and truly all material facts relating to the assessment. The matter appears to be concluded by two decisions of the Supreme Court. The first of the two cases is reported as ITO v. Lakhmani Mewal Das [1976] 103 ITR 437. The original assessment for the assessment year 1958-59 was made in that case after allowing deduction of a sum of Rs. 10,494 as interest paid to certain creditors. Thereafter, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered necessary by him to make a proper investigation regarding those loans. In dealing with this report of the ITO, the Supreme Court held as follows (p. 608) : " From the report submitted by the Income-tax Officer to the Commissioner, it is clear that he could not have had reasons to believe that by reason of the assessee's omission to disclose fully and truly all material facts necessary for his assessment for the accounting year in question, income chargeable to tax has escaped assessment for that year ; nor could it be said that he, as a consequence of information in his possession, had reasons to believe that the income chargeable to tax has escaped assessment for that year. We are not satisfied that the Income-tax Officer had any material before him which could satisfy the requirements of either clause (a) or clause (b) of section 147. Therefore, he could not have issued a notice under section 148. " It may be seen that such general statements were not taken to constitute even information so as to enable the ITO to reopen the assessment under s. 147(b). In a recent judgment in ITO v. Madnani Engineering Works Ltd. [1979] 118 ITR 1 (SC), the assessment for 1959-60, ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee was accepted by the Supreme Court. Thus, it is clear that it is necessary for the assessee to place before the ITO only the materials that were available with him. The assessee cannot be found fault with if he did not place before the ITO the statements recorded by the department from some of the multani bankers, as the assessee could not have and did not have those statements at any rate, at the time when the original assessments were completed. As far as the assessee was concerned he had placed all the materials in his possession, viz., account books, hundis and the addresses of the creditors. If the ITO was not satisfied with the correctness of the assessee's claim regarding these loans, he could have asked the assessee to substantiate the genuineness of these loans at the time of the original assessment. But the ITO did not do so. The assessee cannot be required to parade all his creditors before the ITO at the time when the original assessment was taken up even if the ITO raises no doubt about them. It is common knowledge that it is the ITO who requires the assessee to place before him any materials in support of any particular claim. It is open to the ITO to acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t material to demonstrate that the assessee had failed to disclose fully and truly all material facts. The learned standing counsel repeatedly contended that all these statements bore on the truth of the assessee's claim made originally in the assessments that he had borrowed monies from these creditors and that he had paid interests to them. His point was that the correctness of this claim stood discounted by reason of the confessions made by, these individuals. Unfortunately for him in the absence of any statement from them regarding any transaction with the assessee, the ITO could not have come to a reasonable belief that the assessee's earlier stand was wrong and that income had escaped assessment by reason of the assessee's failure to disclose fully and truly all material facts relating to his assessment. Our attention was drawn to the decision of a Bench of this court in M. Varadarajulu v. ITO [1974] 97 ITR 476. In that case, the assessee was assessed for the assessment years 1960-61 and 1961-62. Subsequently, these assessments were reopened on the ground that the borrowings made on hundis from multani bankers were not genuine. The notices issued for the reassessment were c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the original assessment. He, however, completed the assessment on the basis that the assessee had received only Rs. 3,50,500. Subsequently, some enquiry was made with the debtor and proceedings for reopening the assessment were commenced. The assessee took up objections as regards the validity of the reassessment proceedings. The Supreme Court held that the assessee had not disclosed any information regarding the sum of Rs. 1,50,000 and that, therefore, the provisions of s. 34(1)(a) of the Indian I.T. Act, 1922, corresponding to s. 147(a) of the Act of 1961, were attracted. It was pointed out by their Lordships that the fact that the officer could have made further enquiry into the matter but did not do so, did not take the case out of s. 34(1)(a) as the assessee had failed to place fully and truly all the material facts before him. The position is wholly different in the present case. As far as the assessee was concerned he had placed all the materials before the ITO. As pointed out by the Calcutta High Court in Panchanan Hati v. CIT [1978] 115 ITR 336, it was impossible for the assessee to have disclosed to the ITO the confession made by creditors, which was made subsequentl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat we have to take the finding of the ITO on jurisdictional facts as sacrosanct. The assumption of jurisdiction on the part of the ITO has to be established on the facts and if there are no relevant facts, the revenue cannot seek to get away with the plea that the matter of jurisdiction is dependent on the facts and the facts are beyond the jurisdiction of this court. The reappraisal of evidence is one thing and examination of the materials for the purpose of finding out the existence of jurisdiction is another. It is not proper to mix up the two. The objection of the learned standing counsel that in examining the evidence in this case for the purpose of finding out the existence of jurisdiction the evidence is reappraised, is not well founded. We have only examined the existence of materials and have not weighed or appreciated any evidence on our own. It is only facts that give rise to the jurisdiction, and in relation to those facts the enquiry as regards the existence of jurisdiction would be necessary and called for. After examining the existence of the relevant materials for coming to the conclusion whether the ITO could have entertained the reasonable belief regarding the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statutory period, would authorise proceedings under s. 147(b) and if the department had not taken action within the said period, it could not withdraw the development rebate in the proceedings under s. 147(a). In the decision in Veerappa Chettiar v. CIT [1973] 91 ITR 116 (Mad), it was pointed out that where the ITO validly initiated reassessment proceedings by issuing a notice under A. 34(1)(a) of the Indian I.T. Act, 1922, corresponding to s. 147(a) of the Act, 1961, in respect of a particular item, he could, during the reassessment proceedings, deal with all the items falling under cl. (a) though they might not have been dealt with specifically in the notice and his jurisdiction was not limited only to the item in respect of which a notice under s. 34(1)(a) was issued. However, the power to bring to charge income falling under s. 34(1)(b) in the reassessment proceedings validly initiated by the issuance of a notice under cl. (a) was, held to be subject to the limitation that the reassessment proceedings should be initiated within the period of four years as mentioned in cl. (b). In effect the conclusion was that if the reassessment in respect of that particular item was barred by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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