Civil Rule No.6491 of 1998, decided on 16th March, 2000. VS Civil Rule No.6491 of 1998, decided on 16th March, 2000., 2002 PTD-GAUHATI-HIGH-COURT-INDIA 2040 (2000)

Income‑tax‑‑

‑‑‑‑Reassessment‑‑‑Law 9 applicable‑‑‑Effect of amendment w.e.f. 1‑4‑1989‑‑‑‑Condition precedent for reassessment‑‑‑Reason to believe that income had escaped assessment‑‑‑Prima facie conclusion based on specific information or material‑‑‑Notice under S.148 issued on basis of subsequent information that payments of Rs.27,25,000 made by assessee company to R and G may not be genuine‑‑‑No definite or specific material or information to show that payments made to R and G were fictitious and not genuine‑‑‑Initiation of reassessment proceedings without jurisdiction‑‑‑Indian Income Tax Act, 1961, Ss. 147 & 148.

Sections 147 and 148 of the Income Tax Act, 1961, have undergone substantial amendments by the Direct Tax Laws (Amendment) Act, 1987, and the Direct Tax Laws (Amendment) Act, 1989, with effect from April 1, 1989. A bare reading of section 147 as it now stands, shows that in all cases where the Assessing Officer intends to take action under section 147 of the Act, he must have reason to believe that any income chargeable to tax has escaped assessment for any assessment year. From the language of section 147, it is clear that the power of the Assessing Officer' under section 147 is to be exercised subject to the provisions of section 148 of the Act. Under subsection (1) of section 148, the Assessing Officer is required to serve on the assessee a notice before making assessment, reassessment or recomputation under section 147 of the Act, Subsection (2) of section 148, however, provides that before issuing any notice under subsection (1) of section 148, the Assessing Officer has to record his reasons for doing so. The reasons to be recorded by the Assessing Officer under subsection (2) of section 148 must relate to his belief under section 147 that any income chargeable to tax has escaped assessment for any assessment year. Thus the reasons for the belief of the Assessing Officer that any income chargeable to tax has escaped assessment for any assessment year must exist and must be recorded before any notice under section 148(1) is issued to the assessee and before making any assessment, reassessment or computation under section 147. It is clear from the two decisions of the Supreme Court in Chhugamal Rajpal v. S.P. Chaliha (1971) 79 ITR 603 and ITO v. Lakhmani Mewal Das (1976) 103 ITR 437 that for initiating action under section 147 and for issuing notice to the assessee under section 148(1) of the Act, the Assessing Officer must have in his possession specific information or material to show that the particular transactions of "the assessee were not genuine or were fictitious and the Assessing Officer must have arrived at a prima facie conclusion on the basis of such specific information or material that the particular transactions were not genuine or were fictitious.

A company, N, the assessee, owned two tea estates and carried oil business of growing green tea leaves in the two estates and of manufacturing black tea out of the green tea leaves grown by it. Under a scheme of arrangement, the aforesaid tea business of the company was transferred to another company which then stood merged with the petitioner with effect from April 1, 1996. For the assessment year 1991‑92, N, filed its return alongwith its profit and loss account, audit balance‑sheet and audit report. The assessment was completed under section 143(3) of the Act. On November 2, 1988, the petitioner received notice under section 148 of the Act on the ground that income had escaped assessment and the income had to be reassessed. The reason for the notice as disclosed in the additional affidavit‑in‑opposition was that the company, N, had made payments amounting to Rs.27,25,600 during the financial year 1990‑91 relevant to the assessment year 1991‑92 to two companies, R and G for rendering some services, but in a survey conducted by the Investigations Wing, it was revealed that another company had also made huge payments to R and G for rendering services like‑cow‑dung supply, labour quarters repairing, fencing, etc., and the said two companies claimed that they were getting services rendered through other parties. But a common director of three of these other parties had admitted on oath that no services were rendered from supply of cow dung, labour quarters repairing, fencing, etc., as claimed by G and R and that payments made to G and R were mere accommodation entries and the amounts paid through cheques were ultimately returned in cash after routing them through four or five bank accounts. On a writ petition filed to quash the impugned notices under section 148:

Held, that in the additional affidavit‑in‑opposition filed by the Assessing Officer there was no specific information indicated in the reasons disclosed that the particular‑transactions of Rs.13,96,000 between N and R and the particular transaction between N and G were fictitious and not genuine. The Assessing Officer, therefore, could not possibly entertain a belief that the income of the said company had escaped assessment warranting initiation of action under section 147 of the Act. Accordingly, the impugned notices under section 148 and .section 142 for the assessment year 1991‑92 were liable to be quashed.

Bhadarmal Hazarimal v. ITO (1975) 100 ITR 159 (Gauhati); Calcutta Discount Co. Ltd. v. ITO (1961) 41 ITR 191 (SC); Chhugamal Rajpal v. Chaliha (S.P.) (1971) 79 ITR 603 (SC); Coca‑Cola Export Corporation v. ITO (1998) 231 ITR 200 (SC); CIT v. Bihar Cotton Mills Ltd. (1986) 160 ITR 275 (Patna); Ganga Saran & Sons (P.) Ltd. v. ITO (1981) 130 ITR 1 (SC); ITO v. Lakhmani Mewal Das (1976) 103 ITR 437 (SC), ITO v. Madnani Engineering Works Ltd. (1979) 118 ITR 1 (SC); Kalyani Mavji & Co. v. CIT (1976) 102 ITR 287 (SC) and Narayanappa (S.) v. CIT (1967) 63 ITR 219 (SC) ref.

Dr. Debi Pal and Dr. A.K. Saraf, K.K. Gupta and S.K. Agarwal for Petitioner.

K.P. Sarma and D. Sur for Respondent

JUDGMENT

In this application under Article 226 of the Constitution, the petitioner has prayed for a writ of certiorari for quashing the notice, dated October 30, 1998/November 2, 1998, under section 148 of the Income Tax Act, 1961 (for short `the Act'), and the notice, dated December 4, 1998, under section 142 of the Act for the assessment year 1991‑92 issued by the Joint Commissioner of Income‑tax (Assessment), Special Range II, Guwahati (for short "the Assessing Officer"). The petitioner has also prayed for a writ of mandamus commanding the respondents to act according to law and/or to cancel and/or rescind and/or withdraw the impugned notices and for a writ of prohibition prohibiting the respondents from giving any effect to the impugned notices.

The relevant facts as stated in the writ petition are that Namdang Tea Company (India) Limited (for short "the company"), owned two tea estates, namely, Namdang Tea Estate and Bogapam Tea Estate, in the State of Assam. The company carried on the business of growing green tea leaves in the said two tea estates and of manufacturing black tea out of the said green tea leaves grown by it as well as purchased from others and selling the same in India and abroad. Under a scheme of arrangement, the aforesaid tea business of the company was transferred to McLeod Russel (India) Limited, which now stands merged with Eveready Industries (India) Limited, the writ petitioner with effect from April 1, 1996.

For the assessment year 1991‑92, Namdang Tea Company (India) Limited, filed its return on December 30, 1991, showing an income of Rs.41,62,030 and alongwith the said return filed profit and loss account and balance‑sheet audited as per the provisions of the Companies Act, 1956, and audit report under section 80HHC of the Act and other relevant documents and papers. The company then received notices, dated January 24, 1992, under sections 1420) and 143(2) of the Act. The company also received a letter, dated July 28, 1993, requiring the company to furnish details/documents/ information s covering a list of 30 requisitions. The company furnished the information/details/ documents in the course of hearing before the Assessing Officer by letters, dated August 13, 1992, August 16, 1993 and September 22, 1993. The company filed information/details/documents as required by the Assessing Officer by letter, dated November 5, 1993. By letter, dated December 22, 1995, the Assessing Officer required the company to furnish certain further information and documents and in the course of hearing the company furnished information/details/documents by two letters, dated January 28, 1994 and March 2, 1994. Again by a letter, dated March 12, 1984, the company filed further information/details/documents in the course of hearing. By another notice, dated March 22, 1994, the Assessing Officer required the company to furnish further information and documents which the company filed on March 28, 1994 in the course of hearing. The Assessing Officer then made the assessment under section 143(3) of the Act on March 30, 1994, and computed the total income of the company at Rs.1,16,55,470 as against the returned income of Rs.41,82,030. Aggrieved by the said assessment order the company preferred an appeal before the Commissioner of Income‑tax (Appeals), Guwahati, and by order, dated November 27, 1995, the said appellate authority partially allowed the said appeal. Aggrieved by the said appellate order of the Commissioner of Income tax (Appeals), the Department filed an appeal before the Income‑tax Appellate Tribunal, Gawahati Bench, and the company also filed a cross- objection before the said Tribunal.

On November, 2, 1998, however, the petitioner received the impugned notice, dated October, 30, 1998/November 2, 1998 from the Assessing Officer under section 148 of the Act alleging that income of the company for the assessment year 1991‑92 had escaped assessment within the meaning of 'section 147 of the Act and that he proposed to assess/reassess income of the said company and required the company to file a return within 30 days of the date of service of the said notice. The petitioner in his letter, dated November 26, 1998, to the Assessing Officer contended, inter alia, that no income of the company for the assessment year 1991‑92 had escaped assessment and such escapement, if any, was not by reason of any omission and/or failure on the part of the company either to file any return or disclose fully and/or truly all primary and material facts necessary for assessment of the said company and, therefore, the conditions precedent for invoking the power under section 147 read with section 148 of the Act was not fulfilled and the Assessing Officer had no jurisdiction to issue the impugned notice. Without prejudice to the said contention, however, the petitioner filed a return under protest. Thereafter on December 8, 1998, the petitioner received the impugned notice, dated December 3, 1998/December 4, 1998, from the Assessing Officer under section 142 of the Act requiring the petitioner to furnish a return under section 142(1) of the Act by December 21,1998, and also to produce or cause to be produced before him on December 21, 1998, the books of account, etc., relevant to the assessment year 1991‑92.

The petitioner then moved the present application under Article 226 of the Constitution for appropriate relief and on December 18, 1998, this Court while issuing notice of motion to the respondents passed an interim order staying further proceedings pursuant to the impugned notices.

In response to the notice of motion, respondents Nos. 1, 2 and 3 have filed affidavit‑in‑opposition on October 8, 1999. The said affidavit -in‑opposition has been sworn by Shri J. C. Pegu, Joint Commissioner of Income‑tax, Special Range‑II, Guwahati, who is the Assessing Officer. In paragraph 2 of the said affidavit‑in‑opposition, the Assessing Officer has stated that it is a fact that detailed inquiries were made into the entire matter including the present issues involved at the time of assessment and after being satisfied the assessment was made and that the material on the basis of which the impugned notices under section 148 were also examined at the time of assessment. The present reassessment proceedings however have been initiated on the basis of an enquiry conducted by an outside authority and on the basis of that enquiry only the present notices have been issued. It is further stated in the said paragraph 2 of the affidavit in‑opposition that the Assessing Officer' has not made independent enquiry and on the basis of subsequent information received he has reason to believe that income has escaped assessment due to failure and/or omission on the part of the assessee to disclose material facts necessary for the purpose of assessment, In paragraph 3 of the said affidavit‑in‑opposition, the Assessing Officer has further stated that in his order‑sheet he has duly and clearly recorded the reasons which led to his belief that income returnable to tax to the tune of Rs.27,25,606 had escaped assessment within the meaning of section 147 of the Act during the assessment year 1991‑92 for the failure on the part of the assessee to disclose fully or truly all material facts necessary for assessment at the time of assessment proceeding under section 143(3) of the Act.

An additional affidavit‑in‑opposition has be filed on November 29, 1999, by Shri J.C. Pegu, the Assessing Officer, and in paragraphs 4 and 5 of the said additional Affidavit‑in‑opposition, he has disclosed his reasons for initiating action under section 147 read with section 148 of the Act and for issuing the impugned notices. The said paragraphs 4 and 5 of the said additional affidavit‑in‑opposition are extracted herein below:

"4. That your deponent most respectfully begs to state that the Enquiry Officer on perusal of the D.O. letter, dated June 11, 1998, of the Commissioner of Income‑tax (CIT). West Bengal‑II, Calcutta, communicated to the Commissioner of Income‑tax, Guwahati, vide his Letter F. No. Con/CIT‑97 98/ 134, dated June 30, 1998, found that a survey was conducted by the Investigation Wing, Calcutta, at the instance of D.C. Range 7 towards the end of March, 1997, at the business premises of following companies.

(i) Gladiolai Estate (P.) Ltd.

(ii) Rohini Estate (P.) Ltd.

(iii) Gagan Properties (P.) Ltd.

(iv) Smriti Properties (P.) Ltd.

It was found that huge payments were made to above parties by Williamson Magor Group of Companies for rendering services like cow‑dung supply, labour quarters repairing, fencing, etc. It was also found that these four above stated companies did not render the kind of services for which it was receiving payment. They claimed that they were getting the services rendered through other parties. A simultaneous survey was also carried out at the premises of the following three parties who were supposed to have rendered services on behalf of the abovementioned four parties.

(i) B.S. Consultants (P.) Ltd.

(ii) Manoj Commercial Services (P.) Ltd.

(iii) Ajanta Commercial & Mercantiles (P.) Ltd.

During the survey a common Director of the abovementioned three companies, namely, Shri B.S. Kathria admitted on oath that no service was rendered by the aforesaid three companies in the nature of supply of cow‑dung, repairing of labour quarters, fencing, etc., as claimed by the companies, namely, (i) Gladiolai Estate (P.) Ltd., (ii) Rohini Estate (P.) Ltd., (iii) Gagan Properties (P.) Ltd. (iv) Smriti Properties (P.) Ltd. Actually these transactions were merely accommodation entries and the amount paid through cheques were ultimately returned in cash after routing it through four or five bank accounts.

Out of the above transactions the assessee. Namdung Tea Company (India) Ltd. made the following payments to the under-mentioned parties during the financial year 1990‑91 relevant to the assessment year 1991‑92.

5. That the deponent most respectfully begs to state that in view of the above transactions and on scrutiny of the reasons the Assessing Officer had reason to believe that income chargeable to tax to the tune of Rs.27,25,600 has escaped assessment within the meaning of section 147 of the Income Tax Act, 1961, during the assessment year 1991‑92 for the failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment at the time of assessment proceedings under section 143(3)."

Dr. Pal, learned counsel for the petitioner, submitted that the Assessing Officer has jurisdiction to initiate proceeding under section 147 of the Act and issue notice under section 148 of the, Act after expiry of four years from the relevant assessment year for which the assessment has been made under subsection (3) of section 143, only if two conditions are satisfied: (1) he has reason to believe that any income chargeable to tax has escaped assessment for the assessment year in question; (2) such escapement of income chargeable to tax from assessment is by reason of failure on the part of the assessee to make a return or to disclose fully and truly all material facts necessary for the assessment in the year in question. This position of law would be clear from a bare reading of section 147 and the proviso thereto. He explained that similar provisions existed in section 34 of the Indian Income‑tax Act, 1922, and in Calcutta Discount Co. Ltd. v. ITO (1961) 41 ITR 191, the Supreme Court held that to confer jurisdiction under section 34 of the Indian Income‑tax Act, 1922, to issue notice in respect of the assessment beyond the period of four years, but within a period of eight years, from the end of the 'relevant assessment year, two conditions had to be satisfied; the first was that the Income‑tax Officer must have reason to believe that income, profits or gains chargeable to income‑tax had been under-assessed; the second was that he must have reason to believe that such underassessment had occurred by reasons of either omission or failure on the part of the assessee to make a return of his income or omission or failure on the part of an assessee to disclose fully or truly all material facts necessary for his assessment. for that year. Dr. Pal submitted that in a recent decision of the Supreme Court in the case of Coca‑Cola Export Corporation v. ITO (1998) 231 ITR 200, the Supreme Court, while interpreting, section 147 of the Act, has held that the law with regard to the jurisdiction of the Assessing Officer under section 147 of the Act was well‑settled on the subject starting from Calcutta Discount Co. Ltd. v. ITO (1961) 41 ITR 191 (SC) and, therefore, the law laid down in Calcutta Discount Co. Ltd. (1961) 41 ITR 191 (SC) still holds good.

Dr. Pal submitted that the facts stated in the present writ petition show that the company had filed the return for the assessment year 1991‑92 and had from time to time disclosed fully and truly all material facts as required by the Assessing Officer at the time of assessment and that these facts had not been disputed by the Assessing Officer in paragraphs 2 and 2A ‑‑of the affidavit‑in‑opposition .filed on behalf of respondents Nos. 1, 2 and 3. Hence, the second condition for assumption of jurisdiction by the Assessing Officer under section 147 of the Act that escapement of income chargeable to tax was due to failure on the part of the assessee to disclose fully and truly all material facts did not exist in the present case.

Dr. Pal submitted that the first condition required that the Assessing Officer must have reason to believe that any income chargeable to tax had escaped assessment for the relevant assessment year. In ITO v. Lakhmani Amewal Das (1976) 103 ITR 437, the Supreme Court explained that the ground or reasons which led to the formation of such belief of the Assessing Officer must have a material bearing on the question of escapement of income of the assessee from assessment. He submitted that in the aforesaid decision, the Supreme Court further held that 'reason to believe' does not mean a purely subjective satisfaction on the part of the Income‑tax Officer and the reason must be held in good faith and it cannot be merely a pretence and it is open to the Court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the formation of his belief. He submitted that it has been held by the Supreme Court in ITO v. Madnani Engineering Works Ltd. (1979) 118 ITR 1, that the existence of reason for the belief of the Income‑tax Officer was a justifiable issue and it was for the Court to be satisfied whether in fact the Income‑tax Officer had reason to believe that income had escaped assessment. He pointed out that in Ganga Saran & Sons (P.) Ltd. v. ITO (1981) 139 ITR 1 the Supreme Court further held that the belief entertained by the Income‑tax Officer must not be arbitrary or irrational and it must be reasonable or, in other words, it must be based on reasons which are relevant and material. He submitted that in the aforesaid decision in Ganga Saran & Sons (P.) Ltd. v. ITO (1981) 130 ITR 1, the Supreme Court further held that if there was no rational and intelligible nexus between the reasons and the belief, so that, on such reasons, no one properly instructed on facts and law could reasonably entertain the belief, the conclusion would be inescapable that the Income tax Officer could not have reason to believe that any part of the income of the assessee had escaped assessment.

Dr. Pal submitted that paragraphs 4 and 5 of the additional affidavit‑in‑opposition show that the Assessing Officer has initiated action under section 147 read with section 148 of the Act because it appeared that payment of Rs.27,25,600 made by the company for services rendered by Rohini Properties (P.) Ltd. and Gladiolai Estate (P.) Ltd. were not genuine. This was done on the basis of survey in connection with some other cases in West Bengal during which a common Director of three parties through whom the aforesaid two parties rendered service to the company had admitted on oath that no services were rendered by the said two parties and that the transactions were merely accommodation entries and the amounts paid through cheques were ultimately returned in cash after routing it through four or five bank accounts. Dr. Pal submitted that the survey at best may indicate some bogus transactions by Rohini Properties (P.) Ltd, and Gladiolai Estate (P.) Ltd. but until and unless there was definite material to indicate that no services were actually rendered by Rohini Properties (P.) Ltd. and Gladiolai Estate (P.) Ltd, to the company in the present case during the financial year 1990‑91 and that the payments were ultimately returned, no belief could be reasonably entertained that the income to the tune of Rs.27,25,600 of the company had escaped assessment. Dr. Pal submitted that in Chhugamal Rajpal v. S.P. Chaliha (1971) 79 ITR 603 (SC), the Income‑tax Officer issued a notice under section 148 of the Act to the assessee on receiving information that the alleged creditors of the assessee were name‑lenders and the transactions were bogus, but the Supreme Court found that the Income‑tax Officer had not even come to a prima facie conclusion that the transactions between the assessee and the alleged creditors were not genuine and held that the Income‑tax Officer did not have reason to believe that due to omission or commission on the part of the assessee to make a return under section 139 or to disclose fully or truly all material facts income of the assessee had escaped assessment for the assessment year in question. He vehemently argued that in the present case also no prima facie conclusion has been arrived at by the Income‑tax Officer that the transactions between the company and Rohini Properties (P.) Ltd. and Gladiolai Estate (P.) Ltd. were (not ?) genuine.

Dr. Pal finally submitted that it would appear from paragraphs 4 and 5 of the additional affidavit‑in‑opposition filed on behalf of respondents Nos. 1, 2 and 3 that the impugned notices have been issued to the petitioner pursuant to a communication of the Commissioner of Income‑tax without any application of mind by the Assessing Officer. He vehemently argued that under sections 147 and 148 of the Act, the Assessing Officer has to apply his own independent mind and record reasons before issuing notice to the assessee and the Commissioner of Income‑tax was required to accord sanction under the proviso to section 151 of the Act on the reasons recorded by the Assessing Officer that it is a fit case for issue of such notices. But the Assessing Officer cannot at the instance of the Commissioner issue notices under section 148 of the Act mechanically and without application of his own. independent mind to the question as to whether there was reason to believe that any income chargeable to income‑tax has escaped assessment for the assessment year 1991‑92 due to failure on the part of the assessee to make a return or to disclose fully and truly all material facts, necessary for his assessment for that assessment year. According to Dr. Pal, therefore, the impugned notices issued by the Assessing Officer in the present case were without jurisdiction and were liable to be quashed.

Mr. K. P. Samia, learned counsel appearing for the Department, on the other hand, submitted that the impugned notices have been issued to the petitioner on the basis of information sent with the letter, dated June 30, 1998, of the Commissioner of Income‑tax, Guwahati, referred to in paragraph 4 of the additional affidavit‑in‑opposition. He submitted that alongwith the said letter, dated June 30, 1998, of the Commissioner of Income‑tax, Guwahati, a D.O. letter, dated June 11, 1998, of the Commissioner of Income‑tax, West Bengal‑II, Calcutta, was enclosed in which the results of a, survey conducted by the Investigation Wing, Calcutta, have been communicated. He explained that this information was not available with the Assessing Officer when he made the original assessment in the year 1994 on the basis of the materials disclosed by the assessee. He cited the decision of the. Supreme Court in Kalyanji Mavji & Co. v. CIT (1976) 102 ITR 287, in which the Supreme Court while interpreting section 34 of the Indian Income‑tax Act, 1922, held that the Income‑tax Officer would have jurisdiction to reopen the original assessment even on the basis of information derived from an external source of any kind including discovery of new and important matters or on knowledge of fresh facts which were not present at the time of original assessment. Mr. Samia further submitted that although the information was received from the D.O. letter, dated June 11, 1998, of the Commissioner of Income‑tax, West Bengal‑II, Calcutta, the Assessing Officer after applying his own mind to the said information entertained the belief that income of the company chargeable to tax had escaped assessment for the assessment year 1991‑92 and issued the impugned notices to the petitioner under section 148 of the Act. Mr. Samia argued that it will be clear from the averments made in the affidavit‑in‑opposition and the additional affidavit‑in‑opposition that all the conditions for assuming jurisdiction under section 147 of the Act and for issuing the impugned notice under section 148 of the Act were satisfied in the present case. He contended that it is only in the course of such reassessment proceedings that the Assessing Officer would record a clear finding as to whether or not the income of the company chargeable to tax has escaped assessment and the purport of the impugned notices to the petitioner is to give an opportunity to show that there is no such escapement of income chargeable to tax from assessment.

Mr. Samia relied on the observations of the Supreme Court in ITO v. Lakhmani Mewal Das (1976) 103 ITR 437 to the effect that the production of the books of account and other documents before the Income‑tax Officer will not necessarily amount to disclosure of material facts as contemplated by law and that it was the duty of the assessee to make a full ‑and true disclosure of primary facts at the time of assessment.. He further submitted that in the said case, the Supreme Court further clarified that once there existed reasonable grounds for the Income‑tax Officer to form the belief that income of the assessee had escaped assessment, that would be sufficient to clothe him with jurisdiction to issue notice and whether 'the grounds for issue of such notices are adequate or not is not .a matter for the Court to investigate. He also relied on the decision of the Supreme Court in S. Narayanappa v. CIT (1967) 63 ITR 219, wherein the Supreme Court held that the legal position is that if there are in fact some reasonable ground for the Income‑tax Officer to believe that there had been any non‑disclosure as regards any fact which could have a material bearing on the question of underassessment, that would be sufficient to give jurisdiction to the Income‑tax Officer to issue notice under section 34 of the Indian Income ‑tax Act, 1922, and whether the grounds are adequate or not, is not a matter for the Court to investigate. He also cited the decision of this Court in Bhadarmal Hazarimal v. ITO (1975) 100 ITR 159, wherein a Division Bench of this Court held that if material facts or primary facts necessary for assessment as disclosed by the assessee at the time of assessment are subsequently on investigation found to be false or non existent, it cannot be said that the assessee disclosed fully and truly all material facts necessary for the assessment. Mr. Samia submitted that it will be clear from the information revealed in the D.O. letter, dated June 11, 1998, of the Commissioner of Income‑tax, West Bengal‑II, Calcutta, and which has been stated in paragraph 4 of the additional affidavit‑in‑opposition that Rohini Properties (P.) Ltd. and Gladiolai Estate (P.) Ltd. were actually not rendering any service like cow‑dung supply, labour quarters repairing, fencing, etc., and that payments made to the said two companies were actually accommodative entries and the amount paid through cheques were ultimately returned in cash after routing it through four or five bank accounts. Thus the transactions with the said two parties by the company in the present case needed fresh examination by the Assessing Officer in the reassessment proceedings under section 147 of the Act. In a similar kind of racket of fictitious loans, Mr. Samia submitted that the Patna High Court in CIT v. Bihar Cotton Mills Ltd. (1986) 160 ITR 275, has held that the initiation of proceedings under section 147 of the Act by the Income Tax Officer was justified.

Sections 147 and 148 of the Act have undergone substantial amendments by the Direct Tax Laws (Amendments) Act, 1987, and the Direct Tax Laws (Amendments) Act, 1989, with effect from April 1, 1989. After the said amendments sections 147 and 148 read as follows:

"147. Income escaping assessment.‑‑‑If the Assessing Officer, has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recomputed the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year):

Provided that where an assessment under subsection (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has f escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under subsection (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for this assessment for that assessment year.

Explanation 1.‑‑Production before the Assessing Officer of account books or other evidence from which material evidence could, with due diligence, have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso.

Explanation 2.‑‑‑For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely:‑‑‑

(a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income tax;

(b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return;

(c) where an assessment has been made, but‑‑‑

(i) income chargeable to tax has been under assessed; or ‑

(ii) such income has been assessed at too low a rate; or

(iii) such income has been made the subject of excessive relief under this Act; or

(iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed.

148. Issue of notice where income has escape assessment.‑‑‑(1) Before snaking the assessment, reassessment or recomputation under section 147, the Assessing Officer shall serve on the assessee a notice requiring him to furnish within such period not being less than thirty days, as may be specified in the notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed; and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139.

(2) The Assessing Officer shall, before issuing any notice under this section, record his reasons for doing se." (emphasis supplied)

A bare reading of section 147 would show that in all cases where the Assessing Officer intends to take action under section 147 of the Act, he must have reason to believe that any income chargeable to tax has escaped assessment for any assessment year. From the language of section 147, it is clear that the power of the Assessing Officer under section 147 is to be exercised subject to the provisions of section 148 of the Act. Under subsection (1) of section 148, the Assessing Officer is required to serve on the assessee a notice before making assessment, reassessment or recomputation under section 147 of the Act. Subsec tion (2) of section 148, however, provides that before issuing any notice under subsection (1) of section 148, the Assessing Officer has to record his reasons for doing so. The reasons to be recorded by the Assessing Officer under subsection (2) of section 148 must relate to his belief under section 147 that any income chargeable to tax has escaped assessment for any assessment year. Thus the reasons for the belief of the Assessing Officer that any income chargeable to tax has escaped assessment for any assessment year must exist and must be recorded before any notice under section 148(1) is issued to the assessee and before making any assessment, reassessment or recomputation under section 147. The first question for decision in this writ petition, therefore, is whether before issuing the impugned notice, dated October 30, 1998/November 2, 1998, under section 148, the Assessing Officer has reason to believe that any income of the company chargeable to tax has escaped assessment for the assessment year 1991‑92.

The reasons which have been recorded under section 148(2) by the Assessing Officer before issuing the impugned notice under section 148(1) have been disclosed in paragraphs 4 and 5 of the additional affidavit‑in‑opposition filed on behalf of respondents Nos. 1.2 and 3 quoted above. From the said reasons in paragraphs 4 and 5 of the additional affidavit‑in‑opposition quoted above, it appears that the company had made payments amounting to Rs.27,25,600 during the financial year 1990‑91 relevant to the assessment year 1991‑92 to Rohini Properties (P.) Ltd. and Gladiolai Estate (P.) Ltd. for rendering some services, but in a survey conducted by the Investigation Wing, Calcutta, it was revealed that Williamson Magor Group of Companies had made huge payments to Rohini Properties (P.) Ltd. and Gladiolai Estate (P.) Limited for rendering services like cow‑dung supply, labour quarters repairing, fencing, etc., and the said two companies claimed that they were getting services rendered through other parties. But a common Director of three of these other parties had admitted on oath that no services were rendered for supply of cow‑dung, labour quarters repairing, fencing, etc., as claimed by Gladiolai Estate (P.) Ltd., and Rohini Properties (P.) Ltd. and that payments made to Gladiolai Estate (P.) Ltd. and Rohini Properties (P.) Ltd. were mere accommodative entries and the amounts paid through, cheques were ultimately returned in cash after routing it through 4 or 5 bank accounts. From the reasons disclosed by the Assessing Officer in the additional affidavit‑in- opposition in paragraphs 4 and 5 for issuing the impugned notices, it appears that there is no definite or specific material or information whatsoever to show that no services were actually rendered by the aforesaid two parties to Numdang Tea Company (I) Limited and that the payments of Rs.27,25,600 were merely accommodation entries and that the said payments were ultimately returned in cash to Numdang Tea Company (I) Limited after ruling them through several bank accounts. Moreover, in the reasons disclosed in the said paragraphs 4 and 5 of the additional affidavit‑in‑opposition, the Assessing Officer has not come to a prima facie conclusion that the said payments totalling Rs.27,25,600 to Rohini Properties (P.) Limited and Gladiolai Estate (P.) Limited were fictitious and not genuine and were not made towards the business expenses of the assessee‑company. In the absence of such prima facie conclusion by the Assessing Officer, the Court cannot hold that he had the reason to believe that income of the company to the tune of Rs.27,25,600 had escaped assessment for the assessment year 1991‑92.

In Chhugamal Rajpal v. S.P. Chaliha (1971) 79 ITR 603 (SC), the assessee had produced before Income‑tai: Officer at the time of assessment for the assessment year 1960‑61, a statement showing various creditors from whom the assessee had borrowed hundis during the accounting year in question and after enquiry the assessee's total income was assessed at Rs.69,886. Subsequently, on the basis of information received from the Commissioner of Income‑tax, Bihar and Orissa, the Income‑tax Officer issued a notice under section 148 of the Act to the assessee and the assessee challenged the validity of the said notice on various grounds and the Supreme Court held (page 607):

"In his report the Income‑tax Officer does no set out any reason for coming to the conclusion that this is a fit case to issue notice under .section 148. The material that he had before him for issuing notice under section 148 is not mentioned in the report. In his report he vaguely refers to certain communications received by him from the Commissioner of Income‑tax, Bihar and Orissa. He does not mention the facts contained in those communications. All that he says is that from those communications it appears that these persons (alleged creditors) are name‑lenders and the transactions are bogus. He has not even come to a prima facie conclusion that the transactions to which he referred are not genuine transactions. He appears to have had only a vague feeling that they may be bogus transactions. Such a conclusion does not fulfil the requirements of section 151(2). What that provision requires is that he must give reasons for issuing a notice under section 148. In other words he must have some prima facie grounds before him for taking action under section 148. Further his report mentions . Hence proper investigation regarding these loans is necessary.' In other words his conclusion is that there is a case for investigating as to the truth of the alleged transactions. That is not the same thing as saying that there are reasons to issue notice under section 148. Before issuing a notice under section 148, the Income‑tax Officer must have either reasons to believe that by reason of the omission or failure on the part of the assessee to make a return under section 139 for any assessment year to the Income‑tax Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year... "(emphasis supplied)

The Income‑tax Officer in the aforesaid report under section 147 of the Act had stated that it appeared from the communications received that persons from whom the assessee had taken loans are name‑lenders and the transactions were bogus, but the Supreme Court held that as he has not even come to the prima facie conclusion that the transactions to which he referred were not genuine transactions there were no reasons or prima facie grounds before him to issue the notice under section 148 of the Act.

The aforesaid decision in the case of Chhugamal Rajpal v. S.P. Chaliha (1971) 79 ITR 603 (SC), was followed the Supreme Court in the case of ITO v. Lakhmani Mewal Das (1976) 103 ITR 437. In the said case of Lakhmani Mewal Das (1976) 103 ITR 437 (SC), the first ground mentioned in the report of the Income‑tax Officer to the Commissioner of Income‑tax for initiating action under section 147 related to Mohansingh Kanayalal against whom there was an entry about payment of Rs.74 and 3 annas as interest in the books of the assessee and the said Mohansingh Kanayalal made a confession that he was doing only name- lending. The Supreme Court, however, held that there was nothing to show that the confession of Mohansingh Kanayalal 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. The relevant portion of the said judgment of the Supreme Court is quoted herein below (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, m our opinion, would be rather far‑fetched.

As stated earlier, the reasons for the formation 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 belief that there has been 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 assessment. At the same time we have to bear in mind 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 escapement of the income of the assessee from assessment. The fact that the words `definite information' which were there m 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 information 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." (emphasis supplied)

It is thus clear from the aforesaid two decisions of the Supreme Court in Chhugamal Rajpal v. S.P, Chalika (1971) 79 ITR 603 and ITO v. Lakhmani Mewal Das (1976) 103 ITR 437, that for initiating action under section 147 and for issuing notice to the assessee under section 148(1) of the Act. the Assessing Officer must have in his possession specific information or material to show that the particular transactions of the assessee were not genuine or were fictitious and the Assessing Officer must have arrived at a prima facie conclusion on the basis of such specific information or material that the particular transactions were not genuine or were fictitious because in the absence of such specific information anti a prima facie conclusion, the Assessing Officer could not possibly have a reason to believe that income of the assessee has escaped assessment. But in the instant case, paragraphs 4 and 5 of the additional affidavit‑in‑opposition do not show such specific information or material and a prima facie conclusion by the Assessing Officer that the payments of Rs.27,25,600 made by Nundang Tea Company (1) Limited to Rohini Properties (P.) Limited and Gladiolai Estate (P.) Limited were not for services rendered by the said two companies and were not genuine and were fictitious. The Assessing Officer, therefore, in fact had no reason to believe that income of the said company had escaped assessment for the assessment year 1991‑92.

In CIT v. Bihar Cotton Mills Ltd. (1986) 160 ITR 275 (Patna), cited by Mr. Sarma, the Patna High Court had found that the Income‑tax Officer came to know on the basis of statement of Gulabchand Jain, Advocate, that he had resorted to a device for helping the assessee by accommodating concealed profits in his books of account in the name of fictitious parties and for these parties certain books of account were got prepared and some assessments were also got framed by filing fictitious returns and the Patna. High Court held that the Tribunal rightly came to the finding that the proceedings under section 147 of the Act had not been initiated for making a fishing enquiry and the reason to believe that the income had escaped assessment was based on specific information received by the Income‑tax Officer regarding the two parties. In the present case, on the other hand, there is no specific information indicated in the reasons disclosed in paragraphs 4 and 5 of the additional affidavit-in‑opposition by the Assessing Officer that the particular transaction of Rs.13,96,000 between Numdang Tea Company (1) Limited and Rohini Properties (P.) Limited and the particular transaction of Rs.13,36,600 between Numdang Tea Company (P.) Limited and Gladiolai Estate (P.) Limited were fictitious and were not genuine. The Assessing Officer, therefore, could not possibly entertain a belief that the income of the said company had escaped assessment warranting initiation of action under section 147 of the Act.

I am, therefore, of the considered opinion that the Assessing Officer in fact has no reason to believe that any income of the assessee chargeable to tax has escaped assessment: for the assessment year 1991‑92 and that the initiation of the proceedings under section 147 read with section 148 of the Act was without Jurisdiction. In view of this conclusion, it is not necessary to deal with the other contentions raised by Dr. Pal learned counsel for the petitioner.

The impugned notices under sections 148 and 147 for the assessment year 1991‑92 are accordingly quashed. Considering, however, facts and circumstances of the case, the parties shall bear their own costs.

M.B.A./800/FCNotices quashed.