TMI Blog1979 (6) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of interest with receipts, confirmation letters of creditors with respective income-tax file numbers, as asked for, also balance-sheets, profit and loss accounts and necessary documents. The ITO completed the assessment on his satisfaction with the said materials. On March 27, 1967, the appellant received a notice purported to be under s. 148 of the I.T. Act, 1961, whereby the appellant was asked to submit a return of income for the said year. A copy of the notice is set out below : " NOTICE UNDER SECTION 148 OF THE INCOME-TAX ACT, 1961. V(2)/305-H/A Income-tax Officer V(2),'A' Ward. Dated 27-3-67. To M/s. H. A. Nanji Co., 46, Ezra Street, Calcutta. Whereas I have reason to believe that your income chargeable to tax for the assessment year 1958-59, has escaped assessment within the meaning of section 147 of the Income-tax Act, 1961. I, therefore, propose to reassess the income for the said assessment year and I hereby require you to deliver to me within 30 days from the date of service of this notice a return in the prescribed form of your income assessable for the said assessment year. 2. This notice is being issued after obtaining the necessa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ords and proceedings relating thereto for ascertaining the terms, scope and effect thereof and deny all allegations contrary thereto and/ or inconsistent therewith. I say that the said assessment was completed on the basis of materials disclosed by the petitioner at that time. I further say that it appears from the records available that the petitioner had filed statement showing purported loans from various parties under the heading 'Hundi accounts' during the year 1957, and interest paid during the said year under the head ' Interest accounts 1957 (paid to Sundry Parties)'. It does not, however, appear from the records that the petitioner had produced the discharged hundis, receipts for payment, alleged interest, bills of brokers for procuring the purported loans, purported confirmation letters from the parties quoting their income-tax file No. as alleged. It also appears from the records that the said hundi loan account had been accepted by the assessing Income-tax Officer as such without verification. I say that on subsequent investigation it was found that the alleged loans purported to have been obtained on purported hundis were not genuine and most of the purported hundiw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... various hundi brokers and/or bankers and their alleged debtors before the Income-tax Officer the bogus nature of the said hundi trade and falsity of the said loans were proved in most of the said Purported creditors of the petitioner. Some of the said alleged creditors, inter alia, Dondaram Vasudev, Mohansing Kanhaiyalal, specifically admitted and made confession that they had been mere name-lenders for the said purported loans, which were entered in the books of accounts of various assessees including the petitioner for the said year on commission. It, therefore, prima facie, appeared to me that the petitioner introduced those hundi loans brokers and/or bankers and other parties regarding the said purported hundi loans to suppress its real income. The said purported hundi loans in fact represented the concealed income of the petitioner. In the premises on the aforesaid materials I had prima facie reasons to believe and I bona fide believe that due to the omission and/or failure on the part of the petitioner to disclose fully or truly all material facts necessary for his assessment for the said assessment year, income chargeable to tax had escaped assessment, and/or had been un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10535-934A dt. 7-3-67. Reference also to be made in IAC/R-IX's D.O. No. 40-C/R-IX/M-IV(Con)/62-63 dt. 21.7.66. I have reason to believe that hundi loans shown by the assessee are fictitious and hence that has escaped assessment for the year. (Sd.) (H.S. Serna) Income-tax Officer, A-Ward, Dist. V(2)/Cal. The recorded reasons refer to two circulars which are as follows :-- (1) Office of the Commissioner of Income-tax, West Bengal, P-7, Chowringhee Square, Calcutta. Dated the 7th March, 1967. No. Dis, 29/64-65/WB-III/SIB/10535-935A. All IACs and ITO.3 (by name) Sub : Normal voluntary disclosure u/s.271(4A) of I.T. Act, 1961-petition involving 1962-63 asstt. year-instructions regarding. A large number of disclosure petitions u/s. 271(4A) have been received in which assessment for the year 1962-63 is involved. Such petitions are being filed even now.It may not be possible to dispose of all such petitions before the end of the current financial year. In the meantime, assessment for 1962-63 has to be completed in all these cases to prevent it from becoming time-barred. The ITOs are, therefore, directed to complete the assessment for the year 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were not verified and they were accepted on mere confirmation letters. The present ITO should examine these hundi loans in the light of instructions and circulars issued by the Commissioner and take action u/s. 147 quickly. Yours faithfully, (Sd.) (Kewal Ram) " To Sri H.S. Serna, Income-tax Officer, 'A' Ward., Dist. V(2)/Calcutta. The learned judge in the trial court in disposing of the rule, in disagreement with the decision in Jamna Lal Kabra v. ITO [1968] 69 ITR 461 (All), held that provisions of sub-s. (2) of s. 148 does not require that the ITO should record all reasons which lead to the formation of the requisite belief relying on the decision in the Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191, 203 (SC). It was further held that the ITO is entitled to refer to additional reasons in his affidavit not inconsistent with reasons recorded which operated in his mind not recorded before the notice was issued. It was further held that during March, 1965, to March, 1967, list of bogus hundi brokers and bankers were received by the ITO from the Special Investigation Branch of the CIT, West Bengal. Of the hundi loans for the relevant year claimed to have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recorded reasons had vitiated the notice and the proceedings based thereon, as the fact of investigation alleged to have been made and its result were not obviously before the Commissioner. While it was incumbent on the ITO to record all material facts, by way of affidavit he is not entitled to introduce a fact which had no place in the recorded reasons. The learned judge, it was submitted, committed an error in misapplying the observations of the Calcutta Discount Co.'s case [1961] 41 ITR 191 (SC), made in a different context and in thinking it was not necessary even to mention all relevant facts including the most material fact in the recorded reasons which could be supplemented by a subsequent affidavit. We shall now consider some decisions cited at the bar on this point apart from the decision in Calcutta Discount Co.'s case. In S. Narayanappa v. CIT [1967] 63 ITR 219, the Supreme Court observed (pp. 221, 222) : " ........ 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 non-disclosure as regards any fact, which could have a material bearing on the question of under-assessment, that woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stances to find out whether the Income-tax Officer had jurisdiction to proceed under section 34(1)(a). " The court in this case drew an adverse inference as the revenue failed to produce the relevant records to enable the court to come to the conclusion that the facts necessary to confer jurisdiction under section 34(1)(a) had been established. The same proposition was laid down in Johri Lal (HUF) v. CIT [ 1973] 88 ITR 439, 441 (SC), in the following terms : " The formation of the required opinion by the Income-tax Officer is a condition precedent. Without formation of such an opinion he will not have jurisdiction to initiate proceedings under section 34(1)(a). The fulfilment of this condition is not a mere formality but it is mandatory. The failure to fulfil that condition would vitiate the entire proceedings. As held by this court in Sheo Nath Singh v. Appellate Assistant Commissioner of Income-tax [1971] 82 ITR 147 (SC), the Income-tax 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 this section. It is true that the courts will not go into the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by him pursuant to sub-section (2) of section 148. If those reasons are such that on their basis it can possibly be said that income chargeable to tax has escaped assessment for a certain assessment year because of the omission or failure on the part of the assessee to make a return for that year or to disclose fully and truly all material facts necessary for such assessment, there is a valid case for invoking the jurisdiction conferred by clause (a) of section 147. If, on the contrary, the reasons recorded by the Income-tax Officer cannot possibly lead to such conclusion, the proceedings initiated by the Income-tax Officer by reference to that clause must be struck down as invalid. " Sabyasachi Mukharji J , on the decision in Kraba's case [1968] 69 ITR 461 (All), is of the view that it is not necessary to record all the reasons, as the section does not say so and the Calcutta Discount Co.'s case [1961] 41 ITR 191 (SC), a case not cited before the court, expressly laid down that the report may not contain a reference to all the non-disclosures the ITO had in mind and in the affidavit the ITO has the opportunity to state clearly the material facts he had in mind. All the same such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve a rational connection or live link or relevant bearing on the formation of the belief. Mr. Bajoria's contention is that the ITO according to the relevant circular was to conduct an investigation before forming his belief that the loans are fictitious. There is no mention in the recorded reasons or any investigation carried on by the ITO before formation of the belief and on the terms of the recorded reasons there is no indication or whisper of any investigation which was a vital, essential and unavoidable step for formation of belief. The ITO cannot now be heard to say that he conducted the requisite investigation before his formation of belief a case made in the affidavit only. Accordingly, there were no materials before the ITO for the formation of the belief, a condition precedent for issue of notice. The circular dated July 21, 1966, clearly indicated that a list of bogus hundi financiers had been in possession of the ITO concerned. For the relevant year, the circular mentioned some hundi loans with names of the respective creditors which were not investigated by the ITO concerned during the assessment. The circular directed the ITO to examine the records and to complete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose fully and truly all material facts necessary for his assessment. What facts are material and necessary for assessment will differ from case to case. In every assessment proceeding, the assessing authority will, for the purpose of computing or determining the proper tax due from an assessee, require to know all the facts which help him in coming to the correct conclusion. From the primary facts in his possession, whether on disclosure by the assessee, or discovered by him on the basis of the facts disclosed, or otherwise the assessing authority has to draw inferences as regards certain other facts ; and, ultimately, from the primary facts and the further facts inferred from them, the authority has to draw the proper legal inferences, and ascertain, on a correct interpretation of the taxing enactment, the proper tax leviable ...... Does the duty, however, extend beyond the full and truthful disclosure of all primary facts? In our opinion, the answer to this question must be in the negative. Once all the primary facts are before the assessing authority, he requires no further assistance by way of disclosure. It is for him to decide what inferences of facts can be reasonably drawn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceeding under section 34(1)(a) will not lie merely on the ground that the Income-tax Officer has raised an inference which he may later regard as erroneous. The assessee had disclosed his books of account and evidence from which material facts could be discovered: it was under no obligation to inform the Income-tax Officer about the possible inferences which may be raised against him. It was for the Income-tax Officer to raise such an inference and if he did not do so the income which has escaped assessment cannot be brought to tax under section 34(1)(a). " The Supreme Court affirmed the order of the Tribunal directing that the amount of 50% profit be excluded from the total income of the assessee for 1949-50. The Calcutta Discount Co.'s case [1961] 41 ITR 191 (SC) thus lays down as provided in the statutory provisions that the assessee has no further duty beyond a full and truthful disclosure of all primary facts. In this case, the assessee disclosed all transactions of sale in shares and securities which fetched a profit of Rs. 5.48 lakhs. The ITO at the time of assessment accepted the assessee's version that the transactions were casual and in the nature of change in i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment and the assessee had no obligation to point out to the ITO that such conclusion to the effect that loans were bogus and no interest was paid thereon was also possible on the same primary facts. In the circumstances, the court confirmed the order of our High Court on appeal which quashed the notice under s. 147(a). It may also be noted that the Supreme Court, in agreement with the High Court, held further, that on the grounds recorded and affidavit in support by the ITO, there was no material for any belief on the part of the ITO to initiate proceedings under s. 147(a). The cases are distinguishable on facts from the case before us. Here the ITO was proceeding not merely on the basis of the primary facts which he had at the time of original assessment. The assessee claimed deductions from income for the relevant year on account of interest paid on a number of hundi loans which were accepted as genuine in the original assessment. Subsequently, the ITO received a list of bogus hundi creditors from the Governmental authorities which included the alleged creditors of the assessee. The ground for the belief for initiation of proceedings under s. 147, cl. (a), was thus not the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such creditors for loans by them, accepted as genuine daring the assessment. There is thus a rational nexus or live link between the facts discovered and the reasonable belief arrived at by the ITO regarding the escapement of income chargeable to tax due to the failure or omission of the assessee to disclose fully and truly all material particulars relating to the assessment though such belief being tentative was yet to be established in reassessment proceedings. It has been repeatedly contended on the authority of the observations of the Supreme Court that the assessee is under no obligation to confess contrary to his return that the hundi creditors and their loans to him as disclosed in the original assessment were bogus and fictitious. Such contention is wholly erroneous and no such proposition was ever laid down by the Supreme Court to the effect that the assessee is entitled to make an untrue return of income with bogus creditors and loans and escape with impunity once he has been able to cross the barrier in the shape of the ITO. Observations of the Supreme Court as of judicial pronouncements are to be considered with reference to the context and the circumstances in the p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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