TMI Blog2000 (4) TMI 145X X X X Extracts X X X X X X X X Extracts X X X X ..... except nature and quantum of various additions, numbered as ground Nos. 2 to 12 are also common, Ground No. 13 is of general nature, which requires no separate adjudication. 3.1. These appeals were heard for the first time on 1st Feb., 2001, when the assessee challenging the validity of initiation of proceedings under s. 147 of the Act and the consequential actions including the assessment dt. 31st March, 1998, for all the four years by submitting that: (i) The mandatory requirement of recording of the reasons as envisaged by the provisions of s. 148(2) of the Act has not been met with because, no reason had been recorded before issuing notice under s. 148 of the Act. (ii) Notices under s. 148 had not been served on the assessee. 3.2. The assessee's counsel reserving his right to make submissions against the validity of the reasons, if recorded (because the copy of the same had not been furnished to the assessee), further submitted that there was no material or information with the ITO which could led him to form his belief or on the basis of which he could have reasons to believe that assessee's any income chargeable to tax for or any of these assessment years had esc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it does not refer to any definite material for arriving at the belief or to have reasons to believe that income chargeable to tax had escaped assessment. 7.1. On this, the learned senior Departmental Representative was directed to provide copies of relevant letters (referred in the order-sheets entry dt. 16th Jan., 1997) to the Bench as well as to the counsel for the assessee before the next date of hearing and the parties were left free to make further arguments on the validity of initiation of the proceedings under s. 147 of the Act. 7.2. The learned Senior Departmental Representative furnished the certified photocopies of letter F. No. Addl. DIT(Inv.)/Alld/1995-96.1131 issued by Addl. DIT(Inv.), Allahabad on 20th Dec., 1995, and letter F.No. Asstt. DIT(Inv.)/Alld/1133, dt. 14th Dec., 1995 issued by Asstt. DIT(Inv.) Allahabad. 8. The parties were finally heard on 15th March, 2001. 9.1. Assessee's counsel Sh. S.K. Garg, advocate, after referring to order-sheets entry dt. 16th Jan., 1997 (common for all the four assessment years) and letter of Asstt. DIT(Inv.), Allahabad, and Asstt. DIT(Inv.), Allahabad dt. 20th Dec., 1995, and 14th Dec., 1995, respectively, submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roving enquiries, and on the basis of mere suspicion, which is not permitted in law. 9.4. The counsel further submitted that it is also settled law that there must be live link between the reasons/material/formation of belief, but the same is lacking in the present case. It is not any and every material however vague and indefinite or distant, remote and far-fetched, which would warrant the formation of belief relating to the escapement of income of the assessee from assessment and if there is no rational and intelligible nexus between the reasons and the belief, the inescapable conclusion would be that the ITO could not have reasons to believe and in such a case the notice issued under s. 148 would be liable to be struck down as invalid. 9.5. The counsel, after applying the above legal proposition to the order-sheet entry dt. 16th Jan., 1997, submitted that there is no nexus between the reasons and the belief, because the reasons only refers to the letters of the Addl. CIT (Inv.) and Addl. DIT(Inv.) none of which refer to any income having escaped assessment. Mere direction for making roving enquiries on certain points or investments or business activities cannot be equated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u Nanak Service Station, M/s R.K. Traders and M/s Dihal Sons, with respect to the sources of various investment and their nexus with the appellant. The Addl. DIT, Investigation, Allahabad, letters dt. 14th Dec., 1995, is reproduced as under: "F. No. Addl. DIT(Inv.)/Alld/1133 Office of the Asstt. DIT(Inv.), Allahabad. dt.: 14th Dec., 1995 To, The Asstt. Commr. of Income-tax, (Circle),/ITO-W-1,/Mirzapur/ITO, Jaunpur. Through: Addl. DIT(Inv.), Allahabad Sir, Sub: Sri Chandra Dhari Singh, r/o 28-C/8A, Sarvodya Nagar, Allahpur, Allahabad—T.E.P. report—regarding. A tax evasion petition was received in this office against Sri Chandra Dhari Singh, Junior Engineer, r/o 28C/8A, Sarvodya Nagar, Allahpur, Allahabad. The complainant had alleged that Sri Chandra Dhari Singh was running several bank accounts in various names in a large number of banks for example Bank of Baroda, Allahpur, Allahabad, Allahabad Bank, Allenganj, Allahabad, Allahabad Bank, Alopibagh, Allahabad, Allahabad Bank, Lodikalan Mirzapur, New Bank of India, Bajirao Katra, Mirzapur etc. He has constructed a house at 28-C/8A, Sarvodya Nagar, Allahpur, Allahabad in the name of his wife Smt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the name of Sri Shree Prakash Singh and his address was recorded as Patrahia Colony, Mirzapur. For the opening of this account, the above person was introduced by Sri Chandra Dhari Singh, S/o Sri Ram Dihal Singh. After some time the old Patrahia Colony address was changed and a new address namely 28-C/8A, Sarvodya Nagar, Allahpur, Allahabad was inserted. It appears that this account was opened by Sri Chandra Dhari Singh himself and he was using this account for his own purposes and deposited in this account sourced from his unaccounted income. This account was actually operated till 29th Jan., 1992 when Sri Shree Prakash was under the influence and control of Shri Chandra Dhari Singh. After the dispute in 1992 Shri Chandra Dhari Singh stopped using this account. The AO is, therefore, requested to seek explanation of Sri Chandra Dhari Singh with respect to the sources of all the deposits in this account while scrutinizing the case. Sri Chandra Dhari Singh also operated an account in his own name in new Bank of India, Bajirao Katra, Mirzapur, a copy of the bank statement is enclosed. Following is a summary of the account. The account opened on 13th June, 1991, with cash de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e withdrawal are for the purpose of drafts in favour of IOC. The AO is advised to closely scrutinise the big cash deposits since its source remains to be verified. The AO is requested to specially seek explanation for the cash deposit in this account for the period between March, 1992 and April, 1994. (This is the period when Sri Sanjai Singh was not a partner in M/s Guru Nanak Service Station). II. Vehicles (i) Maruti Car No. U.P. 63-6999. The AO may scrutinise the books of M/s R.K. Traders to verify the claims of Sri Sanjai Singh while scrutinizing the case. (ii) Ambassador Car UTE-6464 The AO may scrutinize the investment. III. House property Therefore, it appears that the house was constructed by Shri Chandra Dhari Singh from his unaccounted income in the name of his wife. Sri Chandra Dhari Singh has also got a double storyed house at V.P.O. Birampur, P.S. Karkat, Jaunpur. IV. Weapons It appears that the money from undisclosed sources has been utilised to purchase the revolver and cost has been suppressed to the convenience of both the parties. Copies of both the bills filed with Addl. DIT(Inv.), Allahabad are enclosed herewith. V. Petrol Pum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Circle), ITO, W-1, Mirzapur. 2. The detailed investigations have been carried out by the Addl. DIT(Inv.), Allahabad in the above-mentioned case. Sri Chandra Dhari Singh is a Junior Engineer, presently working in the office of the Executive Engineer, Laghudal Nahar Khand, Mirzapur, since 9th Sept.,1995. He is also interested in M/s Guru Nanak Service Station, Bhujwa Chowk, Mirzapur, and M/s R.K. Traders, Mirzapur. 3. You are requested to kindly direct the concerned AO's to take up this case for detailed scrutiny as suggested in the report of the Addl. DIT(Inv.,) Allahabad The case may be monitored at your level and progress of the investigation may be discussed in our coordination meeting. Yours faithfully, Encl: As above (two sets) (Prakash Chandra) Addl. DIT(Inv.), Allahabad." 12.3. The ITO, Mirzapur, who happened to have jurisdiction over the appellants case, issued notice under s. 148 of the Act for the asst. yrs. 1992-93, 1995-96 on 16th Jan., 1997 after making the following entry on the order-sheet. "Sri Chandra Dhari Singh, Junior Engineer 16th Jan., 1997 On receipt of information in the case of Sri Chandra Dhari Singh, Junior Engineer for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, we proceed to analyse the fact and legal proposition laid down in various decisions so that the decision in assessee's case can be arrived at after applying the legal proposition laid down in these decisions. 14.2. Decisions relied upon by the appellant: (i) Sheonath Singh vs. AAC The facts in this case were that in 1944, the assessee, who was a shareholder as well as director and managing director of various companies, sold his shares of Associated Hotels for Rs. 20,65,705 and in 1949 sold his shares of another hotel. In asst. yr. 1945-46 the assessee disclosed the sale of shares of Associated Hotel. Subsequently, the ITO issued notices under s. 34(1A) of the Act—corresponding to the notice under s. 148, and made assessments for asst. yrs. 1942-43, 1943-44, 1944-45 and 1945-46. On a writ petition before the Calcutta High Court, the assessee's objection that the officer had no jurisdiction to issue the notices, was rejected by accepting the Revenue's preliminary objection that the assessee having filed appeals before the AAC could not pursue the writ petition. On further appeal before the Supreme Court by the assessee the Department produced the report of the ITO sen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the High Court, on the facts, (i) that the second ground could not have led to the formation of the belief that the income of the respondent chargeable to tax had escaped assessment for the asst. yr. 1958-59 because of failure of the assessee to disclose fully and truly all material facts; (ii) that since there was nothing to show that the confession of M.K. related to a loan to the assessee, much less to the loan shown to have been advanced by that person to the respondent, in the first ground the live link or close nexus which should be there between the material before the ITO and the belief which he was to form was missing or in any event too tenuous to provide legally sound basis for the reopening the assessment. Before holding as above, the Hon'ble Court discussed the conditions to be satisfied before an ITO acquires jurisdiction to issue notice under s. 148 of the Act. (iii) Ganga Saran Sons (P) Ltd. The facts in this case were that prior to March, 1947, one D was carrying on prosperous business in Delhi making an average profit of Rs. 36,000 a year. In March, 1947, the appellant-company, which was incorporated with D's brother-in-law, G, as its managing director, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ative (i) ITO vs. Biju Patnaik Facts of this case were that original assessment was completed on the basis of the fact that transfer of the capital asset took place on a date when there existed no capital gain tax levy. The assessment was reopened on the information that the transfer took place on a date when such levy was in existence. Hon'ble Supreme Court upheld the validity of reopening proceedings after having found that there was failure on the part of the assessee to disclose the material fact fully and truly. The objection that notice under s. 148 did not disclose or establish the details of reasons recorded was also rejected. (ii) Midland Fruit Vegetable Products (India) (P) Ltd. vs. CIT The facts in this case were that during the original assessment proceedings for asst. yrs.1964-65 and 1965-66, a loan of Rs. 10,000 from M/s Topan Das Gopal Das and interest thereon (in asst. yr. 1964-65) and loans of Rs. 95,000 from Topan Das Gopal Das, loan of Rs. 90,000 from Faquir Chand Lakshman Das and loans of Rs. 2,10,000 from M/s Om Prakash Co. and interest thereon were accepted as genuine but later on assessment for both these assessment years, were reopened aft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in enquiries and found that payments for asst. yrs. 1980-81 and 1981-82 were made in violation of the provisions of s. 40A(3). With respect to second objection the Tribunal, after referring to various decisions rejected the assessee's objection that notice under s. 148 is invalidated merely because, facts or material which form the basis of ITO's belief that there is escapement of income chargeable to tax, were not recorded in the notice of reopening. 15.1. After having considered the rival submissions, facts and circumstances of the case, provisions of ss. 147 and 148 and the various decisions relied upon by the parties, we are of the opinion that for a reassessment or assessment under s. 147 to be valid the following mandatory prerequisite conditions must be satisfied: (I) In a case where assessment has been framed under s. 143(3), the AO must have reason to believe that the escapement of income from the assessment has been due to failure on the part of the assessee to disclose all material facts necessary for his assessment fully and truly and the proceedings under s. 147 can be initiated only within a period of four years. (II) In any other case, the AO must have re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g reason to believe, necessity of there being a direct nexus or live link between the material coming to the notice to the ITO and the formation of his belief and that there has been escapement of income of the assessee from the assessment either because of failure on the part of the assessee to disclose all material facts fully and truly or otherwise, the law relating to the unamended provisions i.e., provisions of s. 147(a) and 147(b), still hold good and consequently, to hold the initiation of proceedings under s. 147 of the Act to be valid the law laid down on that basis is fully applicable. 15.6(ii). Consequently, we are, therefore, of the opinion that the reasons for formation of belief contemplated by amended provisions of s. 147 of the Act, for initiation of proceedings under s. 147, must have a rational connection 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 AO and formation of his belief that there has been escapement of particular income from assessment in a particular year either because of failure of the assessee to disclose fully and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment. He simply expressed/indicated a doubt/suspicion gathered as a result of enquiries conducted by him on the basis of alleged tax evasion petition. (iii) The letter of Addl. DIT(Inv.), Allahabad, dt. 20th Dec., 1995, also does not specify as to what specific income and for which particular assessment year has escaped assessment. On the contrary this letter also simply conveys a request to the authorities to take up the case of the appellant and of the HUF for detailed scrutiny. 15.8. After having put the aforesaid information/material/facts, i.e., the order-sheet entry and letters of the authorities referred therein, which have been claimed by the Revenue to be the only basis for initiating proceedings under s. 147 of the Act on 16th Jan., 1997 (for all the four assessment years under appeal), to the tests partulated (sic-prescribed) by us in para Nos. 14.2, 15.1 and 15.2 above and in view of the admitted fact by the Revenue that the AO had not made any sort of enquiry after having received the report of the Addl. DIT(Inv.), Allahabad and before issuing notice under s. 148 on 16th Jan., 1997, only inescapable conclusion is that the proceedings under s. 147 of the Act, in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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