NARANG BROTHERS Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE petitioner-firm has prayed for the issuance of a writ in the nature of certiorari or mandamus or any other appropriate writ for quashing the notice issued by respondent No. 2 under Section 148 of the Income-tax Act and Subsequent action taken in pursuance of the aforesaid notice. THE relevant assessment year is 1973-74. It is the case of the petitioner that the notice has been issued under Section 148 without any justification and is without jurisdiction.

(2.) THE case of the petitioner is that it is an assessee under the Income-tax Act and is regularly assessed by the Income-tax Officer concerned under Section 143(3) read with Section 182(1) of the Income-tax Act (hereinafter to be referred to as "the Act"). Its case is that in the course of the assessment proceedings, the petitioner-firm had filed its profit and loss account before the Income-tax Officer which disclosed payment of commission to persons who had transacted business on behalf of the petitioner amounting to Rs. 81,000 odd. This amount was shown in the purchase account. Moreover, the income-tax authorities made queries about the names and details of the persons to whom the commission had been allowed and in response thereto, the petitioner had filed a detailed reply giving particulars of the persons to whom commission was paid and the rate at which such commission was paid. THEir case is that the Income-tax Officer, after being satisfied that such commission had been paid, allowed the same in accordance with law and completed the assessment. However, the petitioner was surprised to receive a notice dated January 22, 1980, issued by the Income-tax Officer stating that during the course of the assessment year 1974-75, books of account of the earlier years, namely, assessment years 1972-73 and 1973-74, were called for under Section 142(1) of the Act and upon examination, it was found that sums of Rs. 1,13,699 and Rs. 81,145, respectively, which were debited to the sales account were fictitious amounts representing payment of commission. It was, therefore, stated in the notice that the Income-tax Officer had reason to believe that on account of omission or failure on the part of the assessee to disclose fully and truly all facts necessary for the assessment years 1972-73 and 1973-74, income chargeable to tax amounting to Rs. 1,13,699 and Rs. 81,145, respectively, had escaped assessment in the relevant years. THE petitioner was asked to show cause why proceedings should not be initiated under Section 147(a) of the Act. THE petitioner showed cause and stated that the books of account for the two assessment years referred to in the notice had never been called for under Section 142(1) of the Act and, therefore, it was wrong to state in the notice that such books of account had been called for and they reveal that any income had escaped assessment. It was reiterated that the Income-tax Officer concerned had seen the statements filed by the petitioner during the course of the assessment proceedings for those years. THE petitioner further stated in its objection that for the assessment years 1974-75 and 1975-76, the Income-tax Officer had disallowed the payment of commission and the matter went up to the Income-tax Appellate Tribunal, Patna Bench, Patna. By order dated October 22, 1980, the Tribunal deleted the addition and held that the commission paid to the persons concerned were genuine. It was stated that Kiran Kumar Arya and Vijay Kumar Chang were genuine persons to whom commission was paid in the earlier years, that is, assessment years 1972-73 and 1973-74. In respect of the assessment year 1975-76 as well, the Appellate Assistant Commissioner, Dhanbad, in appeal preferred by the petitioner-firm set aside the addition of an amount of Rs. 40,264 which was the amount representing payment of commission disallowed by the Income-tax Officer. THE case of the petitioner was that merely because a different Income-tax Officer took a different view of the materials on record, there was no justification for issuance of a notice under Section 148 of the Act for initiation of proceedings under Section 147(a) of the Act. Various authorities of the Supreme Court and the High Courts were cited in support of the plea of the petitioner-firm.

(3.) IT was Submitted on behalf of the petitioner that on the basis of the admitted fact, it is apparent that the Income-tax Officer had no reason to believe that by reason of the omission or failure on the part of the petitioner to disclose fully and truly all material facts necessary for the assessment, income chargeable to tax had escaped assessment. The Submission was that the notice issued does not disclose any material or ground to show that there had been any omission or failure on the part of the assessee as contemplated by Section 347(a) of the Act. All that the notice states is that upon examination of the books of account for the assessment year in question, the Income-tax Officer had reason to believe that by reason of omission or failure on the part of the petitioner to disclose fully and truly all material facts, income chargeable to tax had escaped assessment. According to the petitioner, the notice discloses no ground whatsoever for issuance of the notice and might have been issued only on the basis of a different view of the matter though on the basis of the same material which was available to the Income-tax Officer who completed the assessment for the assessment year in question. In support of its case, various authorities have been relied upon. Learned counsel for the petitioner relied upon a decision of the Supreme Court in CIT v. Dinesh Chandra H. Shah [1971] 82 ITR 367, wherein it was held that the mere fact that the successor of the Income-tax Officer who had made the original assessment had changed his opinion did not furnish a justifiable reason for taking action under Section 34(1)(b) of the Indian Income-tax Act, 1922, which was similar to Section 148, of the Income-tax Act, 1961. Learned counsel appearing on behalf of the respondent did not dispute this proposition of law which is well-settled, but contended that this was not a case of a mere change of opinion. The next case relied upon by the petitioner is ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 (SC). There, the Supreme Court was dealing with a case in which the original assessment for the assessment year 1958-59 was made on the respondent after allowing deduction of a certain sum towards interest to certain creditors. Later, by a notice dated March 8, 1967, issued under Section 148 of the Act, the Income-tax Officer sought to reopen the assessment and in his report made to the Commissioner, it was disclosed that there were two grounds for reopening the assessment, namely, that one of the creditors to whom interest is said to have been paid had since confessed that he was doing only name-lending ; the second reason being that other persons, whose names were mentioned in the list of the creditors of the assessee, were known name-lenders. The assessee filed a writ petition claiming that there was no material before the Income-tax Officer on which he could have reason to believe that income chargeable to tax for the year had escaped assessment by reason of the respondent's failure to disclose material facts. He stated that he had produced all books of account, bank statements and other necessary documents in connection with his return-The High Court, by a majority judgment [1975] 99 ITR 296 (Cal) [FB], held that the pre-conditions for the exercise of jurisdiction under Section 147 were not fulfilled. The majority judgment of the High Court was upheld by the Supreme Court. IT found that the ground that some of the creditors were known name-lenders could not have led to the formation of the belief that the income of the respondent chargeable to tax had escaped assessment because of the failure of the assessee to disclose fully and truly all material facts. The other ground relating to the confession of one of the creditors that he was doing only name-lending did not show that it was related to a loan to the assessee, much less the loan which was shown to have been advanced by that person to the respondent. The Supreme Court, in so far as it is relevant for the instant writ petition, held that before an Income-tax Officer can acquire jurisdiction to issue notice under Section 148 of the Act, two conditions have to be satisfied : firstly, the Income-tax Officer must have reason to believe that income chargeable to tax had escaped assessment and, secondly, he must have reason to believe that such income had escaped assessment by reason of the omission or failure on the part of the assessee to disclose fully and truly material facts necessary for his assessment for that year. Both these conditions must co-exist to confer jurisdiction on the Income-tax Officer. IT is also imperative for the Income-tax Officer to record his reasons before initiating proceedings as required by Section 148(2) of the Act. The law casts a duty upon the assessee to make a true and full disclosure of the primary facts at the time of the original assessment. Production before the Income-tax Officer of the account books or other evidence from which material evidence could, with due diligence, have been discovered by the Income-tax Officer, does not necessarily amount to disclosure as contemplated by law. The duty of the assessee in any case does not extend beyond making a true and full disclosure of primary facts. Once he has done that, he is duty bound and it is for the Income-tax Officer to draw the correct inference from the primary facts. IT is not the responsibility of the assessee to advise the Income-tax Officer with regard to the inference which he should draw from the primary facts. If an Income-tax Officer draws an inference which appears Subsequently to be erroneous, mere change of opinion with regard to that inference would not justify initiation of action for reopening assessment. So far as grounds or reasons are concerned, it was held that the grounds or reasons contemplated by Section 147(a) of the Act must have a material bearing on the question of escapement of income of the assessee from assessment because of his failure or omission to disclose fully and truly all material facts. Once there existed reasonable grounds for the Income-tax Officer to form the above belief, that would be sufficient to clothe him with jurisdiction to issue notice. Whether the grounds are adequate or not is not a matter for the court to investigate. The sufficiency of grounds which induced the Income-tax Officer is not a justiciable issue. The existence of the belief can be challenged by the assessee but not the sufficiency of reasons for the belief. The expression "reason to believe" does not mean a purely Subjective satisfaction on the part of the Income-tax Officer. IT must be held in good faith and should not merely be a pretence. 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 the belief and are not extraneous or irrelevant for the purpose of the section. Rational connection postulates that there must be a direct nexus or a live link between the material coming to the notice of the Income-tax Officer and the formation of his belief that there has been escapement of income of the assessee because of his failure to disclose fully and truly all material facts.