Income-tax

----Reassessment---Scope of powers of I.T.O.---Condition precedent---Failure to disclose material facts necessary for assessment ---Assessee disclosing loans and furnishing confirmation letters from creditor---Loan accepted as genuine in original assessment---Subsequent confession by creditor that some loans including the ones made to the assessee were bogus---No evidence that loans in the relevant year were not genuine---Reassessment proceedings on the basis of the creditor's confession---Not valid---Indian Income Tax Act, 1961, S. 147(a).

The powers of the Income-tax Officer to reopen an assessment, though wide, are not plenary. The words of the statute are "reason to believe" and not "reason to suspect". The reopening of the assessment after a lapse of many years is a serious matter. The Act, no doubt, contemplates the reopening of the assessment, if grounds exist for believing that income of the assessee has escaped assessment. The underlying reason for that is that instance of concealed income or other income escaping assessment in a large number of cases come to the notice of the income-tax authorities after the assessment has been completed. The provisions of the Act in this respect depart from the normal rule that there should be, subject to right of appeal and revision, finality about orders made in judicial and quasi-judicial proceedings. It is, therefore, essential that, before such action is taken, the requirement of the law should be satisfied. The Revenue cannot, in reopening the assessment, look into any materials which were not placed before the Income-tax Officer while he initiated the proceedings or the materials which were not before the Commissioner of Income-tax while he accorded his sanction for reopening the assessment under section 147(a) of the Income Tax Act, 1961.

The Income-tax Officer who made the assessment for the assessment year 1965-66 perused the primary facts disclosed by the assessee in respect of loans from N. The said Income-tax Officer issued summons under section 131 of the Income Tax Act, 1961, to N, for verification of the loans. At the original assessment stage, the assessee filed a confirmed copy of accounts from N. The Income-tax Officer accepted the loans as genuine after making necessary enquiries. Subsequently, the proprietor of N, made a confessional statement before the Revenue authorities to the effect that bogus Jama-kharch entries were made in his books of account in respect of various loan transactions including the loan given to the assessee. Reassessment proceedings were initiated but the Tribunal held that the Income-tax Officer had no jurisdiction to initiate the proceedings in this case. On a reference:

Held, that the finding of the Tribunal that there was no omission or failure on the part ofthe assessee to disclose fully and truly all the material facts had not been challenged by any appropriate action. Even assuming that the creditor made a confessional statement that he made the bogus entries to accommodate others, it had to be established that the confessional statement made by the creditor related to the transaction in question. There was no live link or close nexus between the materials before the Income-tax Officer and the belief which he formed in initiating the proceedings under section 147(a). The reassessment proceedings were not valid.

I.T.O. v. Lakhmani Mewal Das (1976) 103 ITR 437 (SC) applied.

Sunil Mukherjee led by A.C. Moitra for the Commissioner.

JUDGMENT

AJIT K. SENGUPTA, J: --In this reference under section 256(1) of the Income Tax Act, 1961, for the assessment year 1965-66, the following questions of law have been referred to this Court:

"(1) Whether, on the facts and in the circumstances of the case and having regard to the fact that, after completion of the original assessment, the Income Tax Officer noticed the confessional statement of the loan creditor regarding the bogus Jama-kharch entry made in his books of account in respect of various loan transactions including the loans alleged to have been given to the assessee, the finding of the Tribunal that there was no live nexus leading to the formation of the belief that the income of the assessee escaped assessment because of the assessee's failure to disclose fully and truly all material facts is unreasonable and/or perverse?

(2) Whether, on the facts and in the circumstances of the case and having regard to the fact of receipt of information in the form of the confessional statement of the loan creditor by the Income-tax Officer after the completion of the original assessment, the Tribunal was justified in holding that the provisions of section 147(b) have also no application to the facts of the case as it was only a change of opinion and, in that view, in upholding the orders of the Commissioner of Income-tax (Appeals)?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the orders of the Commissioner of Income-tax (Appeals) that the assumption of jurisdiction by the Income-tax Officer to reopen the proceeding for the assessment year 1965-66 was not maintainable in law?"

Shortly stated, the facts are that .the original assessment on the assessee for the assessment year 1965-66 was completed on April 18, 1966. On May 6, 1977, the Income-tax Officer reopened the assessment with the following observations:

"Information has been received to the effect that the assessee has introduced its concealed income in the form of loan from Nandkishore Lachminarain during the relevant accounting year. The assessee has failed to disclose his income fully and truly. This amounts to deliberate concealment on the part of the assessee. Issue notice under section 148."

During the course of the reassessment proceedings, the Income-tax Officer found other bogus cash credits and he made a total addition of Rs.70,000 under the head "Other sources".

Being aggrieved, the assessee preferred an appeal to the Commissioner of Income-tax (Appeals) and challenged the jurisdiction of the Income-tax Officer to issue notice under section 148. It was urged that, during the original assessment proceedings, the Income-tax Officer who made the assessment perused the primary facts disclosed by the assessee in terms of loans from Nandkishore Lachminarain of No. 25, Burtola Street, Calcutta. The said Income-tax Officer also issued summons under section 131 of the Act to Messrs Nandkishore Lachminarain for verification of the loans. At the original assessment stage, the assessee also filed a confirmed copy of accounts from Messrs Nandkishore Lachminarain. The assessee submitted that the Income tax Officer making the original assessment accepted the loans as genuine after making necessary enquiries. The assessee contended that the assessment proceeding was reopened on a mere change of opinion. The Commissioner of Income-tax (Appeals) accepted the contention of the assessee and observed that there was no live nexus leading to the formation of the belief that the income had escaped assessment for the assessment year 1965-66 because of the assessee's failure to disclose fully all material facts. The Commissioner of Income-tax (Appeals), therefore, held that the assumption of jurisdiction by the Income-tax Officer to reopen the proceedings for the assessment year 1965-66 was not maintainable in law. The Commissioner of Income-tax (Appeals), therefore, cancelled the reassessment.

Being aggrieved, the Department preferred an appeal before the Tribunal. Although the details of the information leading to the reopening of the assessment were not recorded in the order-sheet, the Departmental Representative submitted that Shri Raghubir Saran Goel, Proprietor of Messrs Nandkishore Lachminarain, made a confessional statement before the Revenue authorities to the effect that bogus Jama-kharch entries were made in his books of account in respect of various loan transactions including the loan given to the assessee. The Department Representative submitted before the Tribunal that, in view of the receipt of the confessional statement made by the proprietor of Messrs Nandkishore Lachminarain to the effect that bogus loan was allegedly given to the assessee, the Income-tax Officer -had reason to believe that the income of the assessee had escaped assessment because of the assessee's failure to disclose fully and truly all material facts.

The Tribunal, after considering the facts and circumstances of the case and considering the principles laid down by the several decisions cited before the Tribunal, held that the Income Tax Officer had no jurisdiction to initiate proceedings in this case. The initiation was made on a mere change of opinion.

No one appeared before us for the assessee. The contention raised before the Tribunal had been reiterated. It may be mentioned it the very outset that the finding of the Tribunal that there was no omission or failure on the part of the assessee to disclose fully and truly all the material facts has not been challenged by any appropriate action. We have already set out the reasons which had been recorded by the Income-tax Officer for reopening the assessment under section 147(a) of the Act. The only reason is that the Income-tax Officer received information that the assessee-company had introduced its concealed income in the business in the form of loan from Nandkishore Lachminarain during the relevant accounting year. In the original assessment, the assessment filed a confirmatory copy of accounts from Messrs Nandkishore Lachminarain, the said loan creditor. The Income-tax Officer made the original assessment after accepting the letter of confirmation holding the loan to be genuine. He also made necessary enquiries. As indicated earlier, although there is nothing on record to show that Nandkishore Lachminarain made any confessional statement before the Revenue authorities, the Department relied on that statement before the Tribunal. It is now well-settled that the Revenue cannot, in reopening the assessment, look into any materials which were not placed before the Income Tax Officer while he initiated the proceedings or the materials which were not before the Commissioner of Income-tax while he accorded his sanction for reopening the assessment under section 147(a) of the Act. Even assuming that the loan creditor made a confessional statement that he made bogus enteries to accommodate others, it has to be established that the confessional statement by the loan creditor relates to the transaction in question as laid down by the Supreme Court in the case of ITO v. Lakhmani Mewal Das (1976) 103 ITR 437. In that case, the Supreme Court held as follows (at page 447):

"We may now deal with the first ground mentioned in the report of the Income Tax Officer to the Commissioner of Income-tax. This ground relates to Mohansingh Kanayalal, against whose name there was an entry about the payment of Rs. 74 Annas 3, as interest in the books of the assessee, having made a confession that he was doing only name- lending. There is nothing to show that the above confession related to a loan 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 far-fetched.

As stated earlier, the reasons for the information 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 behalf that there has been escapement of income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts. It is no doubt true 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 as to whether action should be initiated for reopening the assessment. At the same time we have to bear in mind that it is not any every material, howsoever vague and indefinite or distant, remote and far-fetched, which would warrant the formation of the belief relating to escapement of income for the assessee from assessment. The fact that the words `definite information which were there in section 34 of the Act of 1922, at one time before its amendment in 1948, are not there in section 147 of the Act of 1961, would not lead to the conclusion that action can now be taken for reopening assessment even if the formation is wholly vague, indefinite, far-fetched and remote. The reason for the formation of the belief must be held in good faith and should not be a mere pretence.

The powers of the Income Tax Officer to reopen an assessment, though wide, are not plenary. The words of the statute are `reason to believe' and not `reason to suspect'. The reopening of the assessment after the lapse of many years is a serious matter. The Act, no doubt, contemplates the reopening of the assessment if grounds exist for believing that the income of the assessee has escaped assessment. The underlying reason for that is that instances of concealed income or other income escaping assessment in a large number of cases come to the notice of the Income-tax Authorities after the assessment has been completed. The provisions of the Act in this respect depart from the normal rule that there should be, subject to right of appeal and revision, finality about orders made in judicial and quasi-judicial proceedings. It is, therefore, essential that before such action is taken the requirements of the law should be satisfied. The live fink or close nexus which should be there between the material before the Income Tax Officer in the present case and the belief which he was to form regarding the escapement of the income of the assessee from assessment because of the latter's failure or omission to disclose fully and truly all material facts was missing in the case. In any event, the link was too tenuous to provide a legally sound basis for reopening the assessment. The majority of the learned Judges in the High Court, in our opinion, were not in error in holding that the said material could not have led to the formation of the belief that the income of the assessee-respondent had escaped assessment because of his failure or omission to disclose fully and truly all material facts."

In our view, the Tribunal was justified on the facts and circumstances of the case to hold that there was no live link or close nexus between the materials before the Income Tax Officer and the belief which he formed in initiating the proceedings under section 147(a) of the Act.

For the reasons aforesaid, all the questions in this reference are answered in the affirmative in favour of the assessee and against the Revenue.

There will be no order as to costs.

BHAGABATI PRASAD BANERJEE, J; --I agree.

M.BA./165/T.F.

Reference answered.