TMI Blog1976 (11) TMI 51X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia) (Private) Ltd., having its registered office at Calcutta (hereinafter referred to as the "Calcutta company"). This alleged borrowing was shown in the entry dated May 25, 1962, in its (the petitioner's) books of account and in the balance-sheet as liability. In the interest account produced before the ITO interest on this amount of Rs. 50,000 was shown for each of the relevant previous years. At the instance of the ITO, it (the petitioner) filed a copy of the account of the Calcutta company with it. It also produced before the ITO a letter dated November 15, 1963, written by the Calcutta company confirming this alleged loan of Rs. 50,000 to the petitioner on May 19, 1962. In the assessment of the petitioner for each of the years 1963-64 to 1968-69 the ITO allowed deduction of interest claimed to have been paid by the petitioner to the Calcutta company on this sum. On August 26, 1971, the ITO issued a notice to the petitioner in which it was stated, inter alia, that the deposit of Rs. 50,000 appearing in the name of the Calcutta company was not genuine, that it (the petitioner) failed to disclose fully and truly all the material facts necessary for its assessment for the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent, 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 co-exist 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 years, 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...the duty which is cast upon the assessee is to make a true and full disclosure of the primary facts at the time of the original assessment. Production before the Income-tax Officer of the account books or other evidence from which material evidence could with due diligence have been discovered by the Income-tax Officer will not necessarily amount to disclosure contemp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould form the basis for the Income-tax Officer having reason to believe that the income of the petitioner had escaped assessment. It was also contended by Sri Gulati that the material on which the Income-tax Officer purported to act, did not have any rational connection with, or relevant bearing to, the formation of the belief that the income of the petitioner had escaped assessment. In support of his contention Sri Gulati relied on the decision of the Supreme Court in Chhugamal Rajpal v. S. P. Chaliha [1971] 79 ITR 603 (SC). There, the ITO had initiated reassessment proceedings on the basis of a circular issued from the office of the Commissioner of Income-tax, Bihar and Orissa, merely stating that the three persons named in that circular were merely name-lenders, that their transactions were bogus and that proper investigation regarding those loans were necessary. The Supreme Court held that the aforesaid circular, by itself, could not form a basis for the ITO forming a reasonable belief that the income of the assessee had escaped assessment. The Supreme Court observed thus at page 607 of the report: "All that he (the ITO) says is that from those communications 'it appears th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s genuine. I can furnish further information to you if you send me full particulars of transactions which you may be enquiring about. Sd. A. R. Das Gupta Income Tax Officer, K Ward, Companies District-III, Calcutta." The learned standing counsel drew our attention to mention in the letter of the ITO, Calcutta, of the reference number of the letter dated May 19, 1970, of the ITO, Azamgarh, namely, P-306/A. The learned standing counsel has explained that the letter "P" was the first letter in the name of the assessee, i.e., Phoolchand, that the letter "A" after the number 306, indicated the ward of the Income-tax Officer, Azamgarh, and that the number 306 was the general index number of the petitioner in the assessment records. The learned standing counsel produced the assessment records of the petitioner for the years 1965-66, 1966-67 and 1969-70 which bear the number P. 306. The learned standing counsel is right in his submission that the letter of the ITO, Calcutta, dated July 7, 1970, was not in the nature of a general circular by the ITO, Calcutta, giving information to all ITOs, about the affairs of the Calcutta company, but that the letter was in reply to a specifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oan 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, 1957, to March 31, 1958, which is the subject-matter of the assessment sought to be reopened. The report was made on February 13, 1967. In the absence of the date of the alleged confession, it would not be unreasonable to assume that the confession was made a few weeks or months before the report. To infer from that confession that it relates to the period from April 1, 1957, to March 31, 1958, and that it pertains to the loan shown to have been advanced to the assessee, in our opinion, would be rather farfetched. 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 assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered the following three circumstances: (i) The confession of Mohansingh Kanayalal did not specify the name of the assessee (Lakhmani Mewal Das), the alleged borrower; (ii) The confession did not specify the loan of Rs. 2,500 which the assessee claimed to have borrowed from Mohansingh Kanayalal; and (iii) The confession did not specify the period during which Mohansingh Kanayalal was doing only name-lending. In the present case also the information furnished by the ITO, Calcutta, in his letter dated July 7, 1970, did not state that the confession of the managing director of the Calcutta company related to the alleged borrowing by the petitioner and much less to the alleged borrowing of Rs. 50,000 by him. As rightly pointed out by the learned standing counsel, the ITO, Calcutta, has stated that the confession of the managing director of the Calcutta company had been accepted in the assessment of the company for the years 1962-63 to 1964-65. In other words, the alleged confession of the managing director of the Calcutta company had been particularised with reference to time, but not with reference to the petitioner or the loan of Rs. 50,000. Thus, the confession in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the petitioner to advise or assist the ITO in drawing the appropriate inference from those primary facts. Sri Gulati maintained that if the ITO had drawn from those primary facts an inference which subsequently appeared to him to be erroneous, such mere change of opinion would not justify his reopening the assessment. On the other hand, the learned standing counsel contended that the petitioner could not be said to have disclosed to the ITO fully and truly all the material facts about the alleged borrowing of Rs. 50,000 if the same was false and not true and that if the ITO subsequently came to know that there was, in fact, no such borrowing, it could not be said that there was mere change of opinion on the part of the I.T.O. which led to initiation of the reassessment proceedings. In support of their respective contentions Sri Gulati and the learned standing counsel relied on several decisions of the Supreme Court and of the High Courts. Sri Gulati strongly relied on the decision of the Supreme Court in Commissioner of Income-tax v. Burlop Dealers Ltd. [1971] 79 ITR 609 (SC). There, the facts were these: In the assessment for the year 1949-50 the assessee had submitted a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he had disclosed details thereof to the ITO at the time of original assessment, he (the assessee) is under no obligation to inform the ITO further that such loan was a bogus one, that whether such loan is genuine or bogus, is a matter of inference which the ITO has to draw on the facts so disclosed after proper verification and that if the ITO had treated such loan as genuine, he cannot reopen the assessment merely because he has subsequently reason to believe that such loan was not genuine. On the other hand, certain other High Courts have taken the view that if on the basis of the representation made by an assessee, the ITO had treated certain loans as genuine and subsequently came to know that such representation was either false or incorrect, the ITO would have jurisdiction to initiate reassessment proceedings because the assessee cannot be said to have disclosed the material facts truly and fully. The latter view is put forcefully by Arun K. Mukherjea J., who delivered the majority opinion of the Full Bench in Lakhmani Mewal Das v. Income-tax Officer [1975] 99 ITR 296 (Cal) [FB]. After referring to the decision of the Supreme Court in Burlop Dealers Ltd.'s case [1971] 79 ITR 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd had not satisfied himself whether this was a fit case for according such permission. Sri Gulati drew our attention to the fact that the order made by the Commissioner on the report of the ITO merely contained the word "yes" below which he had put his signature. Sri Gulati referred to the decision of the Supreme Court in Chhugamal Rajpal's case [1971] 79 ITR 603 (SC). There also the Commissioner had just noted the word "yes" on the report of the ITO and had affixed his signature thereunder. The Supreme Court observed that the important safeguard provided by section 151 of the Act was treated lightly by the Commissioner. But this observation must be read in the context of the finding by the Supreme Court earlier in the judgment that the report of the ITO did not disclose that he had any relevant material before him which could satisfy the requirement of either clause (a) or clause (b) of sec tion 147. It was in those circumstances that the Supreme Court said: "We are of the opinion that if only he (the Commissioner) had read the report (of the ITO) carefully, he could never have come to the conclusion on the material before him that this is a fit case to issue notice under s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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