Income-tax---

----Reassessment---Notice---Conditions precedent---Reasons for belief-- Necessity of live fink between material coming to the notice of ITO and formation of belief---Failure to disclose fully and truly all material facts-- Copies of loan accounts and confirmation letters filed---Genuineness of loans accepted in original assessment---Search of premises of one S and seizure of books and documents---Names of assessees found in one of the books seized-- Statement of S before raiding party that transactions noted by him in his books were bogus---S not saying anything about creditors in books of assessee---Statement of S has no direct nexus or live link for formation of belief that income had escaped assessment---Reassessment not valid.

During the course of the assessment, proceedings for the assessment years 1978-79, 1979-80 and 1981-82, the assessee had filed copies of the loan accounts with confirmation letters. The Income-tax Officer accepted the genuineness of the loans without making any further enquiry and the assessments were completed under section 143(3) of the Indian Income-tax Act, 1961. In the year 1984, the premises of one S were searched by the Department and certain books and documents were seized. One of the books was an exercise book/diary which contained the names of the petitioners. S stated before the officers of the raiding party that the transactions noted by him in his books/dairy were bogus and that he was arranging Havalas only for his clients. On the basis of the aforesaid information, the Income-tax Officer formed the reason to believe that certain loans taken by the petitioners during the relevant previous years were not genuine and that the petitioners income for those years had escaped assessment. The Income-tax Officer also held that the escapement of income resulted as a result of the petitioners not disclosing fully and truly all material facts necessary for the assessments. The Income-tax Officer, therefore, issued notices under section 148 read with section l47(A) of the Income-tax Act, 1961, to the petitioners for assessing the escaped income. On a writ petition filed by the. petitioners challenging the jurisdiction of the Income-tax Officer to issue the notices:

Held. that the copies of the loan accounts and confirmation letters were filed by the petitioners during the course of the original assessment proceedings and the petitioners had no further obligation. It was for the Income-tax Officer to investigate and determine whether such loans were genuine. It was not done during the original assessment proceedings. It could not be held that the petitioners had failed to disclose fully and truly all material facts necessary .for assessment. On the basis of the information, i.e., the statement of S before the raiding party, the Income-tax Officer formed the belief that the income of tile petitioners had escaped assessment. S had not said-a word about the creditors in the books of the petitioners. In the exercise book/diary the names of the petitioners had been merely noted. No details of loans or Havala transactions were noted therein. The statement of S had no connection, far less a live link or a direct nexus, with the loans taken by the -petitioners. Therefore, the formation of the belief by the Income-tax Officer that income might have escaped assessment was unwarranted. Therefore, the Income-tax Officer had no jurisdiction to reopen the assessments under section 148 of the Act.

C.I.T. v. Burlop Dealers Ltd. (1971) 79 ITR 609 (SC); ITO v. Madnani Engineering Works Ltd. (1979) 118 ITR 1 (SC) and ITO v. Lakhmani Mewal Das (1976) 103 ITR 437 (SC) fol.

Pradeep Jetley and Kambli for Petitioners.

Dr. V. Balasubramanian and Mrs. Manjula Singh for Respondents.

JUDGMENT

By these petitions under Article 226 of the Constitution of India, the petitioners have challenged the jurisdiction of the Income-tax Officer to issue notices under section 148 read with section 147(A) of the Income-tax Act, 1961, dated March 26, 1987, March 22, 1988, and September 1, 1987, for the assessment years 1978-79, 1979-80 and 1981-82, respectively.

During the course of assessment proceedings, the asessee had, inter alia, filed copies of loan accounts with confirmation letters. On that basis, the genuineness of the loans was accepted without making any further enquiry and the assessments were completed under section 143(3).

Some time in the year 1984; the premises of one Shri Satyanarayan Kedia were searched by the Department. Certain books and documents were seized. One such book was a red copy/diary in which the names of the petitioners were noted at pages 53 and 261. Shri Kedia stated before the Officers of the Department who had come to search his premises that transactions noted by him in that red copy/diary were bogus and that he was arranging Havalas only for his clients. The said information eventually came to the notice of the Income-tax Officer who assessed the petitioners. On the basis of -the aforesaid information, he formed a reason to believe that certain loans taken by the petitioners during the relevant previous years were not genuine and that the petitioners' income for those years had, thus, escaped assessment. He also held that that happened as a result of the petitioners' not disclosing fully and truly all material facts necessary for the assessments.

The first question is whether the statement of Shri Satyanarayan Kedia constitutes any material, and, if so, whether that material has a direct nexus or live link with the formation, of the belief that the petitioners income had or could have escaped assessment. The Supreme Court held in the case of ITO v. Lakhmani Mewal Das (1976) 103 ITR 437, that the reasons for the formation of the belief contemplated by section 147(a) of the Income Tax Act, 1961, for the reopening of an assessment must have a rational connection or relevant bearing on the formation of the belief, rational connection postulating 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 the belief that there has been escapement of income. Observing that the Court cannot go into the sufficiency or adequacy of the material and substitute its own opinion for that of the Income-tax Officer on the point, it was held that it is not any and every material, howsoever vague and indefinite or distant, remote and farfetched, which would warrant the formation of the belief relating to the escapement of income. In the case of I T O v. Madnani Engineering Works Ltd. (1979) 118 ITR 1, the Supreme Court further held, following its earlier decision in the case of CIT v. Burlop Dealers Ltd. (1971) 79 ITR 609, that the assessee having produced in the original assessment proceedings all the Hundis on the strength of which it had obtained loans from the creditors as also entries in the books of account showing payment of interest, the assessee could not be said to have failed to make a true and full disclosure of the material facts by not confessing that the Hundis and the entries in the books of account produced were bogus. It was for the Income-tax Officer to investigate and determine whether these documents were genuine or pot.

In the present case, as stated above, the copy of the loan accounts and the confirmation letters were filed during the course of the original assessment proceedings. The petitioners had no further obligation. It was for the Income- tax Officer to investigate and determine whether such loans were genuine. It was admittedly not done during the original assessment proceedings. It cannot be held that the petitioners had failed to disclose fully and truly all material facts necessary for assessment. On the basis of the information indicated by me above, viz. the statement of Shri Kedia in the year 1984 before the raiding party, the Income-tax Officer formed the belief that the income of the petitioners had escaped assessment. Shri Kedia has not said a word about the creditors in the books of the petitioners. In that red exercise book/diary at pages 53 and 261, the names of the petitioners were merely noted. No details of loans or Havala transactions were noted therein. Assuming that the said information constituted material, the material will be, to say the least, very vague and general. It can have no connection, far less a live link or a direct nexus, with the loans taken by the petitioners. In the circumstances, the formation of the belief that income had or might have escaped assessment is unwarranted in this case. Accordingly, it has to be held that the Income-tax Officer had not acquired valid jurisdiction to reopen the assessments under section 148 of the Income Tax Act, 1961, for the three years involved herein. The notices are, accordingly, quashed. Rule is made absolute in terms of prayer clause (a) in each of the three petitions with no order as to costs.

M.BA./1559/T. Rule made absolute.