INDIA FINANCE AND CONSTRUCTION CO. (PVT.) LTD. VS B.N. PANDA, DEPUTY COMMISSIONER OF INCOME-TAX AND ANOTHER, 1993 PTD-BOMBAY-HIGH-COURT-INDIA 1495 (1992)

(a) Income-tax---

----Reassessment---General principles---Information that income had escaped assessment---Transaction relating to property entered into in 1967 and 1982-- Suspicion that capital gain arising as a result of the transactions may have escaped---Reassessment proceedings in respect of assessment year 1988-89-- Not valid---Indian Income Tax Act, 1961, Ss.147(b) & 148---Constitution of India, Art.226.

The assessee-company which owned a plot of land with structures thereon, entered into an agreement of lease in 1967. There was a further agreement in 1982 under which the assessee agreed to sell its reversionary rights in the property. Notice was issued in respect of the assessment year 1988-89 in 1990, on the ground that capital gains arose to the assessee as a result of the transaction. The second transaction on the basis of which the notice, was issued was one of a loan on which no interest had been charged. The Income-tax. Officer contended that the assessee should have received approximately Rs.3 lakhs if interest had been charged and hence this sum of Rs3 lakhs had escaped assessment. On a writ petition to quash the notice:

Held, that, in the present cage, looking to the dates when the above transactions, namely, agreements, dated April 3, 1967, and April 1, 1982, took place, apart from mere suspicion, there was no material at all before the Assessing Officer which would give him reason to believe that any capital gains arose in the assessment year 1988-89 which escaped assessment. It was an accepted position that the assessee had in fact not received any interest on the loan. Hence, the notice issued under section 148 was without jurisdiction and was liable to be quashed.

(b) Income-tax--

----Reassessment---Writ---Writ can issue to quash reassessment proceedings initiated without jurisdiction---Indian Income Tax Act, 1961, Ss.147 & 148----- Constitution of India, Art.226.

The High Court exercising jurisdiction under Article 226 of the Constitution of India has power to set aside a notice under section 147(b) of the Income Tax Act, 1961, if the condition precedent for the exercise of jurisdiction under that section does not exist.

(c) Income-tax---

----Income---Assessment---Condition precedent---Income must have arisen-- Income which could have been earned cannot be assessed.

The law does not oblige a trader to make the maximum profit that he can, out of this trading transaction. Income which accrues to a trader is taxable in his hands. Income which he could have but has not earned is not made taxable as income accrued to him.

The words "reason to believe" in section 147 of the Income Tax Act, 1961, suggest that the belief 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 suspicion, gossip or rumour. The Income-tax Officer will be acting without jurisdiction if the reason for his belief does not exist or is not material or relevant to the belief required by the section. 'The Court can always examine this aspect though the declaration or sufficiency of the reasons for the belief cannot be investigated by the Court.

Sheo Nath Singh v. AAC of I.T. (1971) 82 ITR 147 (SC) and CIT v. A. Raman & Co. (1968) 67 ITR 11(SC) ref.

Dilip Dwarkadas with P.J. Pardiwala instructed by M/s. Haridas & Co. for Petitioner.

Dr. V. Balasubramanian with Mrs. Manjula Singh and P.S. Jetley for Respondents.

JUDGMENT

MRS. SUJATA MANOHAR, J: --The petitioners are a company registered under the Companies Act, 1956, and carry on, inter alia, business as property owners, financiers and hoteliers. The petitioners have challenged a notice, dated December 17, 1990, under section 148 of the Income Tax Act, 1961, issued by the respondents under which the respondents propose to reassess the petitioners' income for the assessment year 1988-89.

Dr. Balasubramanian, learned Advocate for the respondents, has produced before us the reasons recorded by the Assessing Officer for issuing the notice of December 17, 1990. As per the reasons so recorded, it seems that the assessee-company was the owner of a plot of land together with structures thereon known as "Mor Bunglow" situated at Tejpal Road, Vile Parle (East), Bombay 400 057. The assessee-company entered into an agreement with its parent company, M/s. C.R. Developers (Private) Limited in respect of this property. The lease agreement is dated April 3, 1967. The lease which the assessee-company has granted is, for a period of 98 years with an option of renewal. Pursuant to this agreement, possession of the property has been handed over to M/s. C.R. Developers (Pvt.) Limited. There is also a further agreement, dated April 1, 1982, entered into between the assessee-company and M/s. C.R. Developers (Pvt.) Limited under which the assessee-company has agreed to sell its reversionary rights in the said property and/or release its reversionary rights in the said property for. a sum of Rs.50 lakhs with a stipulation for subsequent revision, if any additional F.S.I. is received. Subsequently, the assessee-company received additional F.S.I. of 16,000 sq. ft. which has been sold to M/s. C.R. Developers (Pvt.) Limited. at the rate of Rs.200 per sq. ft.

None of these transactions took place in the relevant year relating to the assessment year 1988-89. Under section 147 of the Income Tax Act, if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may proceed to assess or reassess such income. In the present case, the transactions relating to this property took place much prior to the period covered by the assessment year in question. On the face of it, there is no material on the basis of which the Assessing Officer can have reason to believe that in the assessment year 1988 89, any income has escaped assessment.

In the case of Sheo Nath Singh v. AAC reported in (1971) 82 ITR 147), the Supreme Court has said that the words "reason to believe" suggest that the belief 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 suspicion, gossip or rumour. The Income-tax Officer will be acting without jurisdiction if the reason for his belief does not exist or is not material or relevant to the belief required by the', section. The Court can always examine this aspect though the declaration or', sufficiency of the reasons for the belief cannot be investigated by the Court.

In the present case, looking to the dates when the above transactions took place, apart from mere suspicion, there is no material at all before the Assessing Officer which would give him reason to believe that for the assessment year 1988-89, any income has escaped assessment.

The only reason why the notice under section 148 has been issued in respect of this transaction is that with effect from April 1,1988, section 2(47) of the Income Tax Act, 1961, has been amended by adding clause (v) to section 2(47). Section 2(47) defines "transfer" in relation to a capital asset as from. April 1, 1988. It now includes, "any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of the contract of the nature referred to in section 53-A of the Transfer of Property Act, 1882". There is no material at all to show that any such transaction took place or gave rise to any capital gains during the assessment year 1988-89, which can be brought to tax in the assessment year in question.

The second transaction on the basis of which notice under section 148 is issued relates to a transaction entered into in May, 1982, under which the assessee-company advanced to M/s. C.R. Developers (Pvt.) Limited a sum of Rs.15 lakhs purporting to be an advance for the purpose of construction of a hotel. The advance is in the nature of a loan and no interest is being charged on this account. The respondents contend that the assessee-company should have received an interest income worth approximately Rs3 lakhs if interest had been charged on this advance. Hence, this interest income of approximately Rs.3 lakhs has escaped assessment. Once again the reason which is recorded is' beyond the scope of section 147. It is an accepted position that the assessee-company has in fact not received any interest in respect of this advance from M/s. C.R. Developers (Pvt.) Limited in the assessment year 1988-89. When no income is received there is no question of paying any tax on income which the respondents think should have been received but was in fact not received. In the case of CIT v. A: Raman & Co. reported in (1968) 76 ITR 11), the Supreme Court said that the law does not oblige a trader to make the maximum profit that he can out of his trading transaction. Income which accrues to a trader is taxable in his hands. Income which he could have but has not earned, is not made taxable as income accrued to him. The Court also said that the High Court exercising jurisdiction under Article 226 has power to set aside a notice issued under section 147(b) of the Income Tax Act, 1961, if the condition precedent for the exercise of jurisdiction does not exist. It is open to the Court to ascertain where the Income Tax Officer had in his possession any information and whether, from the information, the Income-tax Officer may have reason to believe that the income chargeable to tax has escaped assessment. In the present case, the reasons which are recorded clearly show that there is no material at all on the basis of which the Assessing Officer could have reason to believe that any interest income had escaped assessment. No such income had accrued during the assessment year in question.

In the premises, in our view, the notice issued under section 148 of the Income Tax Act is without jurisdiction and hence the same is set aside.

Rule is made absolute accordingly, with no order as to costs.

M.BA./2403/TRule made absolute.