TMI Blog1975 (5) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... al Board of Direct taxes. According to the assessee, its application was examined at great length with reference to the books of account with particular emphasis on the contract business, as a flat rate on percentage basis of the gross receipts was sought to be adopted for determining the assessable income and ultimately on 28th of August, 1970, the terms of settlement were communicated to the petitioner. In regard to the contract business, it was stipulated that ten per cent. of the gross receipts would represent the assessable income. On the basis of the terms of settlement, assessments for the five years in question were completed as per the particulars provided below: _________________________________________________________________________ Assessment year Date of return Date of completion of assessment _________________________________________________________________________ 1965-66 6- 9-1965 24-3-1970 1966-67 2-12-1966 19-3-1971 1967-68 31-10-1967 29-2-1972 1968-69 20-11-1968 29-2-1972 1969-70 31-10-1969 29-2-1972 _________________________________________________________________________ The Income-tax Officer (opposite party No. 1) took up the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r has contended: (i) The assessee had disclosed all primary facts to the Income-tax Officer when assessments were completed for these years. Therefore, action under section 147(a) of the Act was not open to be taken. As far as the notices are concerned, they are claimed to be barred by limitation as per the provisions of section 149(1)(b) of the Act. (ii) The Income-tax Officer has no reason to believe that on account of omission or failure on the part of the petitioner to disclose fully and truly all material facts necessary for the assessment, income chargeable to tax had escaped assessments for the years in question. Accordingly, the notices are without jurisdiction and liable to be quashed. (iii) The report of the Income-tax Officer to the Commissioner of Income-tax was upon untenable grounds and the true picture of the matter had not been disclosed to the Commissioner of Income-tax when proposal was sent up for reopening the assessments and Commissioner's consent was asked for. Thus, the entire proceeding is vitiated by mala fides of the Income-tax Officer. Again, the Commissioner of Income-tax having acted mechanically in according sanction by putting of a rubber-stamp, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Income-tax Officer [1965] 57 ITR 637, 642 (SC), observed: "Jurisdiction of the Income-tax Officer obviously arises when he has reason to believe that by reason of omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment, income of the assessee has escaped assessment, or has been under-assessed, and when the party claiming relief challenges on oath the existence of the conditions, which confer jurisdiction, and sets out facts which may, unless disproved, support his case, an order dismissing his petition in limine may not properly be made." Several instances where the court has entertained applications under article 226 of the Constitution have been indicated to us. For instance, Chhugamal Rajpal v. S. P. Chaliha [1971] 79 ITR 603 (SC) and Union of India v. Rai Singh Deb Singh Bist [1973] 88 ITR 200 (SC) are cases where notwithstanding alternative relief available under the statute, the application was entertained and relief was even granted. The preliminary objection must, therefore, stand overruled. We shall now deal with the several contentions of the assessee. Contention No. 1 Section 147 of the Act pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further facts, which on due diligence, the Income-tax Officer might have discovered, the legislature has put in the Explanation, which has been set out above. In view of the Explanation, it will not be open to the assessee to say, for example--'I have produced the account books and the documents: You, the assessing officer, examine them, and find out the facts necessary for your purpose: My duty is done with disclosing these account books and the documents.' His omission to bring to the assessing authority's attention those particular items in the account books, or the particular portions of the documents, which are relevant, will amount to 'omission to disclose fully and truly all material facts necessary for his assessment'. Nor will he be able to contend successfully that by disclosing certain evidence, he should be deemed to have disclosed other evidence, which might have been discovered by the assessing authority if he had pursued investigation on the basis of what has been disclosed. The Explanation to the section gives a quietus to all such contentions; and the position remains that, so far as primary facts are concerned, it is the assessee's duty to disclose all of them--i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he time of the original assessment all that he was bound to disclose, i.e., all the primary facts relevant to and having a bearing on his assessment, there would be no ground for the Income-tax Officer to have reason to believe that there was any omission or failure on the assessee's part to disclose. Similarly, if an assessee can show that, though there was omission or failure to disclose on his part, such failure or omission had not resulted in any non-assessment or under-assessment, etc., surely there would be no ground for the Income-tax Officer to have reason to believe that there was any non-assessment or under-assessment, etc., consequent upon such omission or failure. It would, therefore, follow that primary facts necessary for a proper assessment are objective facts, the existence or non-existence of which is not a matter of reasonable belief on the part of an Income-tax Officer. An Income-tax Officer cannot say that he had reason to believe that a certain fact which was relevant for assessment, and, therefore, a primary fact, existed and that it was not disclosed by an assessee if such a fact did not factually exist." What the primary facts in a given case would be, mus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at Rs. 10,45,934. For convenience of this hon'ble court, a summary of the position is indicated in annexure 7. 7. That during each of these years the assessee had disclosed all primary facts relating to the accounts to the Income-tax Officer. The balance-sheets had been scrutinised with great care in view of the fact that the income to be assessed in the hands of the assessee was substantial and it constitutes one of the important assessees of the Income-tax Officer's circle." In paragraph 2 of the counter-affidavit, the deponent, Income-tax Officer, who made the assessment for the assessment year 1970-71, mainly dealt with the factual position in relation to that year. The counter-affidavit dealt with paragraphs 5, 6 and 7 of the writ petition in the following way: "7. That the allegations made in para. 5 of the writ petition are not disputed. But the accounts of all the branches were not produced before opposite party No. 1. The Income-tax Officer (opposite party No. 1) was not furnished with any list of creditors in relation to the work-site account. Thus, on the facts and in the circumstances of the case, proceedings under section 147 of the Act are maintainable. 8. Tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partment that the assessing officers of the respective five years are not available. Even if their affidavits were not produced to support the stand of the revenue, public records to support the plea raised in the counter-affidavit were expected to be produced for effectively opposing the stand of the petitioner. Though some of the records were before the court having been called for at the instance of the petitioner, learned standing counsel did not indicate to us any material at the time of hearing to support the stand of the revenue that there had been concealment of primary facts. Petitioner's assertion in paragraph 5 of the writ application that all the accounts were produced and were duly checked up has been accepted in paragraph 7 of the counter-affidavit. Whether the accounts of the branches were produced or not, was not within the knowledge of the deponent of the counter-affidavit. Even if a list of creditors in relation to the work-site account may not have been produced, if all other details as claimed had been placed before the Income-tax Officer, non-production of a list of creditors cannot amount to non-disclosure or concealment of primary facts. Before us, the ledg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the materials indicated above, we have no hesitation in our minds to conclude as a fact that the primary facts relating to the work-site account had been disclosed to the Income-tax Officer in each of the five years at the time assessment was done and for the reasons best known to the assessing officers, the amounts appearing in the work-site account were considered not to be taxable. There was thus no failure on the part of the assessee to discharge his duties as required under the law. Learned standing counsel for the revenue has conceded before us that if the finding be that the accounts had been produced and primary facts had been disclosed, subsequently the Income-tax Officer was not entitled to initiate a proceeding under section 147 of the Act merely upon a change of his opinion. The concession is based upon the settled position in law and it is not necessary to refer at length to precedents. See Income-tax Officer v. Barkat Ali Khan [1974] 97 ITR 239 (SC). Obviously, therefore, steps for reassessment under section 147(a) of the Act are not tenable. On behalf of the assessee, reliance has been placed on section 149(1)(b) of the Act in support of the contention that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er [1970] 76 ITR 151 (Orissa), while indicating the law on the point observed that before issue of notice under section 148, two conditions precedent are to be fulfilled, namely: "(a) The Income-tax Officer must have reason to believe that the income, profits or gains chargeable to income-tax have been under-assessed; (b) He must also have reason to believe that such under-assessment occurred by reason of omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment for that year." Sub-section (2) of section 148 of the Act requires that-- "the Income-tax Officer shall, before issuing any notice under this section, record his reasons for doing so." Whether the Income-tax Officer had sufficient grounds for entertaining a reason to believe is not justiciable, but where the assessee contends that the Income-tax Officer did not hold the belief at all, the court is entitled to look into the matter. The belief of the Income-tax Officer must be held in good faith and it cannot be a mere pretence. In other words, it is open to the court to examine the question whether the reasons for the belief have a rational nexus to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there was no scope for the Income-tax Officer to come to the view he has expressed in his order dated August 21, 1973. If the basis of his knowledge or information was otherwise than the records of the assessment year 1970-71, the position would have been certainly different and on the reasoning that the sufficiency is not justiciable, we would have declined to interfere in the matter. The position, however, is very different. The Income-tax Officer took into account the views expressed by him in the order of assessment for a subsequent year as upheld in appeal by the Appellate Assistant Commissioner to be the basis for initiation of a proceeding under section 147 though by the time he came to record his reasons, the position had been substantially varied by the ultimate decision of the Tribunal in regard to that assessment year. In the case of Sheo Nath Singh v. Appellate Assistant Commissioner [1971] 82 ITR 147 (SC), the court indicated that the belief of the Income-tax Officer must be that of an honest and reasonable person, based upon reasonable grounds and that the Income-tax Officer may act on direct or circumstantial evidence, but not on mere gossip or rumour. He will be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ention No. 3: As already noticed, the Income-tax Officer sent up proposals to the Commissioner of Income-tax for obtaining sanction to initiate proceedings under section 147(a) of the Act against the assessee for the five years in question by his letter dated August 21, 1973. For each of the years in question in the prescribed form, the Income-tax Officer sent up the proposal. For convenience, we extract below the entire proposal in relation to the assessment year 1965-66. " FORM FOR RECORDING THE REASONS FOR INITIATING PROCEEDINGS UNDER SECTION 148 AND FOR OBTAINING THE APPROVAL OF THE COMMISSIONER OF INCOME-TAX/CENTRAL BOARD OF DIRECT TAXES. _________________________________________________________________________ 1. Name and address of the assessee. M/s Govinda Choudhury Sons, Gosaninuagaon,Berhampur. 2. G.I.R. No. 302-G 3. Status Registered firm 4. District/Circle Berhampur, Ganjam 5. Assessment year in respect of which it is 1965-66 proposed to issue notice under section 148 6. The quantum of income which has escaped As per separate sheet attached. assessment 7. Whether the provisions of section 147(a) 147(a) or 147(b) are applicable or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by accretions from year to year and hence the entire amount was not to be assessed as income for the year. While no attempt was made either to produce the accounts of the branch or to establish the genuineness of the liability, the assessee offered the following explanation in the written grounds of appeal filed before the Appellate Assistant Commissioner. '8. For that the learned Income-tax Officer has omitted to consider the fact that the income available in the hands of the partners during the several years of assessment to which the said amount relates was much in excess of the amount shown under the head of work-site and merely because a separate head was maintained in the accounts, the addition in the manner made by the learned Income-tax Officer cannot be sustained.' The Appellate Assistant Commissioner on the ground that the liability was a fictitious one, restricted the addition to the amount of accretion during the accounting year relevant to the assessment year 1970-71 only and excluded the sum which had accrued in earlier years. 3. The assessee went before the Tribunal but there also no explanation was offered relating to the genuineness of the liability. All ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1973, is not disputed. The Income-tax Officer made no reference to the disposal of the appeal by the Tribunal or the findings of the Tribunal reversing the Income-tax Officer's conclusions as also those of the Appellate Assistant Commissioner. Reference in the ultimate paragraph of the proposal to the fact that the Appellate Assistant Commissioner had excluded the amount in respect of which escapement was indicated was wholly unjustified, because, as a fact, by then the position was that the entire addition in relation to the work-site account stood deleted. Similarly, reference to Explanation 2 of section 153(3) of the Act was totally unjustified. Explanation 2 is to the following effect: "Where, by an order referred to in clause (ii) of sub-section (3), any income is excluded from the total income of the assessee for an assessment year, then, an assessment of such income for another assessment year shall, for the purposes of section 150 and this section, be deemed to be one made in consequence of or to give effect to any finding or direction contained in the said order." The Income-tax Officer had incorporated reference to Explanation 2 obviously with reference to the obs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year, unless the Commissioner is satisfied on the reasons recorded by the Income-tax Officer that it is a fit case for the issue of such notice." Admittedly, to the facts of this case, sub-section (2) has application. Sanction of the prescribed authority is a condition precedent to issue of notice and if there be no sanction, the proceedings are invalid. See Commissioner of Income-tax v. Maharaja Pratapsingh Bahadur [1961] 41 ITR 421 (SC). The statute requires the Commissioner to take into account the reasons recorded by the Income-tax Officer. The Income-tax Officer, therefore, is obliged under the law to make a full report of the correct state of affairs and furnish the Commissioner adequate material to enable him either to accord or withhold sanction. In the case of Chhugamal Rajpal v. S.P. Chaliha [1971] 79 ITR 603 (SC) the court examined the provisions of sections 148 and 151(2) of the Act. Dealing with this question at page 608 of the report, the court observed: "Further, the report submitted by him under section 151(2) does not mention any reason for coming to the conclusion that it is a fit case for the issue of a notice under section 148. We are also of the opinion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mp above the signature of the Commissioner." These observations were used against the revenue. In the facts of the case in hand, we must, therefore, hold that there has been no valid sanction as required under section 151(2) of the Act and, therefore, the initiation of the proceedings is without jurisdiction. Before we leave this aspect of the matter, we think it pertinent to notice the pleadings. In paragraph 16 of the writ application, the petitioner pleaded: "........... In the face of such a finding the present proceeding is not only without jurisdiction but smacks of the mala fides of the Income-tax Officer. There is thus no basis for initiation of the proceedings. Your petitioner reasonably believes it to be true and humbly submits that there has been no failure on its part to disclose the necessary primary facts as already indicated and the Income-tax Officer has no scope to be satisfied that there has been any escapement at all. The assessee has gathered, which he reasonably believes to be true, that the Income-tax Officer did not make a complete report to the Commissioner of Income-tax in the matter for obtaining the requisite sanction as required under section 151 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Income-tax Officer is bound to interfere with such settlement and disturb the matter. It is not open to him to exercise such jurisdiction without the necessary clearance from the board." In paragraph 17 of the counter-affidavit, the Income-tax Officer averred: "That the facts stated in para. 17 of the writ petition are not admitted as correct and true. The settlement proceeding before the opposite party No. 4 was limited to two points as stated above and the work-site account was not a subject-matter of settlement. It is not correct for the petitioner to say that the said account was examined by opposite party No. 4. The question of examination of work-site account did not arise at all before the opposite party No. 4 while arriving at the settlement." In paragraph 15 of the rejoinder filed on behalf of the petitioner, it has been asserted thus: "That there is no dispute that the 'work-site account' pertained to the contract works of the assessee as asserted already. The question of fixation of a rate for computation of profits from contract business was directly under consideration in the settlement proceeding. Therefore in the long-drawn consideration of the matter ..... X X X X Extracts X X X X X X X X Extracts X X X X
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