Gauhati H.C : The petitioner has prayed for a writ of certiorari for quashing the notice, dt. 30th Oct., 1998/2nd Nov., 1998, under s. 148 of the IT Act, 1961

High Court Of Gauhati

Eveready Industries India Ltd. vs. JCIT & Ors.

Sections 147, 148

Asst. Year 1991-92

A.K. Patnaik, J.

Civil Rule No. 6491 of 1998

16th March, 2000

Counsel Appeared

Dr. Debi Pal & Dr. A.K. Saraf with K.K. Gupta & S.K. Agarwal, for the Petitioner : K.P. Sarma & D. Sur, for the Respondent

JUDGMENT

A.K. PATNAIK, J. :

In this application under Art. 226 of the Constitution, the petitioner has prayed for a writ of certiorari for quashing the notice, dt. 30th Oct., 1998/2nd Nov., 1998, under s. 148 of the IT Act, 1961 (for short ‘the Act’), and the notice dt. 3rd/4th Dec., 1998, under s. 142 of the Act for the asst. yr. 1991-92 issued by the Joint CIT(Asst.), Special Range II, Guwahati (for short “the AO”). 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) Ltd. (for short “the company”), owned two tea estates, namely, Namdang Tea Estate and Bogapani 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) Ltd., which now stands merged with Eveready Industries (India) Ltd., the writ petition w.e.f. 1st April, 1996.

For the asst. yr. 1991-92, Namdang Tea Company (India) Ltd., filed its return on 30th Dec., 1991, showing an income of Rs. 41,82,030 and along with 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 s. 80HHC of the Act and other relevant documents and papers. The company then received notices dt. 24th Jan., 1992, under ss. 142(1) and 143(2) of the Act. The company also received a letter, dt. 28th Jan., 1993, requiring the company to furnish details/documents/informations covering a list of 30 requisitions. The company furnished the information/details/documents in the course of hearing before the AO by letters, dt. 13th Aug., 1993, 16th Aug., 1993 and 22nd Sept., 1993. The company filed information/details/documents as required by the AO by letter dt. 5th Nov., 1993. By letter dt. 22nd Dec., 1993, the AO 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 dt. 28th Jan., 1994 and 2nd March, 1994. Again by a letter dt. 12th March,1994, the company filed further information/details/documents in the course of hearing. By another notice dt. 22nd March ,1994, the AO required the company to furnish further information and documents which the company filed on 28th March, 1994 in the course of hearing. The AO then made the assessment under s. 143(3) of the Act on 30th March, 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 CIT(A), Guwahati, and by order dt. 27th Nov.,1995, the said appellate authority partially allowed the said appeal. Aggrieved by the said appellate order of the CIT(A), the Department filed an appeal before the Tribunal, Guwahati Bench, and the company also filed a cross-objection before the said Tribunal.

On 2nd Nov., 1998, however, the petitioner received the impugned notice, dt. 30th Oct., 1998/2nd Nov., 1998, from the AO under s. 148 of the Act alleging that income of the company for the asst. yr. 1991-92 had escaped assessment within the meaning of s. 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, dt. 26th Nov., 1998, to the AO contended, inter alia, that no income of the company for the asst. yr.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 s. 147 r/w s. 148 of the Act was not fulfilled and the AO had no jurisdiction to issue the impugned notice. Without prejudice to the said contention, however, the petitioner filed a return under protest. Thereafter on 8th Dec., 1998, the petitioner received the impugned notice dt. 3rd Dec., 1998/4th Dec., 1998, from the AO under s. 142 of the Act required the petitioner to furnish a return under s. 142(1) of the Act by 21st Dec.,1998, and also to produce or cause to be produced before him on 21st Dec., 1998, the books of account, etc. relevant to the asst. yr. 1991-92.

The petitioner then moved the present application under Art. 226 of the Constitution for appropriate relief and on 18th Dec., 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 8th Oct., 1999. The said affidavit-in-opposition has been sworn by Shri J.C. Pegu, Joint CIT, Special Range-II, Guwahati, who is the AO. In para. 2 of the said affidavit-in-opposition, the AO 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 s. 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 para. 2 of the affidavit-in-opposition that the AO has not made any 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 para. 3 of the said affidavit-in-opposition, the AO 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 s. 147 of the Act during the asst. yr. 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 s. 143(3) of the Act. An additional affidavit- in-opposition has been filed on 29th Nov., 1999, by Shri J.C. Pegu, the AO, and in paras. 4 and 5 of the said additional affidavit-in-opposition, he has disclosed his reasons for initiating action under s. 147 r/w s. 148 of the Act and for issuing the impugned notices. The said paras. 4 and 5 of the said additional affidavit-in-opposition are extracted hereinbelow : “4. That your deponent most respectfully begs to state that the enquiry officer on perusal of the D.O. letter, dt. 11th June, 1998, of the Commissioner of Income-tax (CIT), West Bengal-II, Calcutta, communicated to the CIT, Guwahati, vide his letter F. No. Con/CIT-97-98/134, dt. 30th June, 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 cowdung supply, labour quarters repairing, fencing, etc. It was also found that these four above stated companies did not render the kind of service 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 service on behalf of the above- mentioned 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 above-mentioned 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 cowdung, repairing of labour quarters, fencing, etc., as claiming 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 undermentioned parties during the financial year 1990-91 relevant to the asst. yr. 1991-92. Rs.

5. That the deponent most respectfully begs to state that in view of the above transactions and on scrutiny of the reasons the AO had reason to believe that income chargeable to tax to the tune of Rs. 27,25,600 has escaped assessment within the meaning of s. 147 of the IT Act, 1961, during the asst. yr.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 s. 143(3).”

4. Dr. Pal, learned counsel for the petitioner, submitted that the AO has jurisdiction to initiate proceeding under s. 147 of the Act and issue notice under s. 148 of the Act after expiry of four years from the relevant assessment year for which the assessment has been made under sub-s. (3) of s. 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 s. 147 and the proviso thereto. He explained that similar provisions existed in s. 34 of the Indian IT Act, 1922, and in Calcutta Discount Co. Ltd. vs. ITO (1961) 41 ITR 191 (SC) : TC 51R.779, the Supreme Court held that to confer jurisdiction under s. 34 of the Indian IT 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 ITO must have reason to believe that income, profits or gains chargeable to income-tax had been underassessed; the second was that he must have reason to believe that such underassessment had occurred by reason 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 vs. ITO (1998) 146 CTR (SC) 250 : (1998) 231 ITR 200 (SC) : TC S51.4058, the Supreme Court, while interpreting s. 147 of the Act, has held that the law with regard to the jurisdiction of the AO under s. 147 of the Act was well settled on the subject starting from Calcutta Discount Co. Ltd. vs. ITO (supra) and, therefore, the law laid down in Calcutta Discount Co. Ltd. (supra) 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 asst. yr. 1991-92 and had from time to time disclosed fully and truly all material facts as required by the AO at the time of assessment and that these facts had not been disputed by the AO in paras. 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 AO under s. 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 AO must have reason to believe that any income chargeable to tax had escaped assessment for the relevant assessment year. In ITO vs. Lakhmani Mewal Das 1976 CTR (SC) 220 : (1976) 103 ITR 437 (SC) : TC 51R.598, the Supreme Court explained that the ground or reason which led to the formation of such belief of the AO 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 ITO 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 vs. Madnani Engineering Works Ltd. (1979) 12 CTR (SC) 144 : (1979) 118 ITR 1 (SC) : TC 51R.725, that the existence of reason for the belief of the ITO was a justicable issue and it was for the Court to be satisfied whether in fact the ITO had reason to believe that income had escaped assessment. He pointed out that in Ganga Saran & Sons P. Ltd. vs. ITO (1981) 22 CTR (SC) 112 : (1981) 130 ITR 1 (SC) : TC 51R.639, the Supreme Court further held that the belief entertained by the ITO 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. vs. ITO (supra), 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 ITO could not have reason to believe that any part of the income of the assessee had escaped assessment.

Dr. Pal submitted that paras 4 and 5 of the additional affidavit-in-opposition show that the AO has initiated action under s. 147 r/w s. 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 vs. S.P. Chaliha (1971) 79 ITR 603 (SC) : TC 51R.611, the ITO issued a notice under s. 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 ITO had not even come to prima facie conclusion that the transactions between the assessee and the alleged creditors were not genuine and held that the ITO did not have reason to believe that due to omission or commission on the part of the assessee to make a return under s. 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 ITO 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 paras. 4 and 5 of the additional affidavit-inopposition 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 CIT without any application of mind by the AO. He vehemently argued that under ss. 147 and 148 of the Act, the AO has to apply his own independent mind and record reasons before issuing notice to the assessee and the CIT was required to accord sanction under the proviso to s. 151 of the Act on the reasons recorded by the AO that it is a fit case for issue of such notices. But the AO cannot at the instance of the CIT issue notices under s. 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 asst. yr. 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 AO in the present case were without jurisdiction and were liable to be quashed.

5. Mr. K.P. Sarma, 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 dt. 30th June, 1998, of the CIT, Guwahati, referred to in para 4 of the additional affidavit-in-opposition. He submitted that along with the said letter dt. 30th June, 1998, of the CIT, Guwahati, a D.O. letter dt. 11th June, 1998, of the CIT, 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 AO 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. vs. CIT 1976 CTR (SC) 85 : (1976) 102 ITR 287 (SC) : TC 51R.1379, in which the Supreme Court while interpreting s. 34 of the Indian IT Act, 1922, held that the ITO 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. Sarma further submitted that although the information was received from the D.O. letter dt. 11th June, 1998, of the CIT, West Bengal-II, Calcutta, the AO 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 asst. yr. 1991-92 and issued the impugned notices to the petitioner under s. 148 of the Act. Mr. Sarma 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 s. 147 of the Act and for issuing the impugned notice under s. 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 AO 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. Sarma relied on the observations of the Supreme Court in ITO vs. Lakhmani Mewal Das (supra) to the effect that the production of the books of account and other documents before the ITO 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 ITO 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 vs. CIT (1967) 63 ITR 219 (SC), wherein the Supreme Court held that the legal position is that if there are in fact some reasonable grounds for the ITO 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 ITO to issue notice under s. 34 of the Indian IT Act, 1922, and whether these 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 vs. ITO (1975) 100 ITR 159 (Gau) : TC 51R.1089, 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. Sarma submitted that it will be clear from the information revealed in the D.O. letter dt. 11th June, 1998, of the CIT, West Bengal-II, Calcutta, and which has been stated in para. 4 of the additional affidavit-in-opposition that Rohini Properties (P) Ltd. and Gladiolai Estate (P) Ltd. were actually not rendering any service like cowdung 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 though 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 AO in the reassessment proceedings under s. 147 of the Act. In a similar kind of racket of fictitious loans, Mr. Sarma submitted that the Patna High Court in CIT vs. Bihar Cotton Mills Ltd. (1986) 54 CTR (Pat) 53 : (1986) 160 ITR 275 (Pat) : 51R.343, has held that the initiation of proceedings under s. 147 of the act by the ITO was justified.

6. Secs. 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, w.e.f. 1st April, 1989. After the said amendments, ss. 147 and 148 read as follows : “147. Income escaping assessment.—If the AO, has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of ss. 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 recompute 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 ss. 148 and 153 referred to as the relevant assessment year) : Provided that where an assessment under sub-s. (3) of s. 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 escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under s. 139 or in response to a notice issued under sub-s. (1) of s. 142 or s. 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year. Explanation 1.—Production before the AO of account books or other evidence from which material evidence could, with due diligence, have been discovered by the AO 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 AO 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 underassessed; 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 escaped assessment.—(1) Before making the assessment, reassessment or recomputation under s. 147, the AO 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 s. 139. (2) The AO shall, before issuing any notice under this section, record his reasons for doing so.” [Emphasis, italicised in print, supplied] A bare reading of s. 147 would show that in all cases where the AO intends to take action under s. 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 s. 147, it is clear that the power of the AO under s. 147 is to be exercised subject to the provisions of s. 148 of the Act. Under sub-s. (1) of s. 148, the AO is required to serve on the assessee a notice before making assessment, reassessment or recomputation under s. 147 of the Act. Sub-s. (2) of s. 148, however, provides that before issuing any notice under sub-s. (1) of s. 148, the AO has to record his reasons for doing so. The reasons to be recorded by the AO under sub-s. (2) of s. 148 must relate to his belief under s. 147 that any income chargeable to tax has escaped assessment for any assessment year. Thus the reasons for the belief of the AO that any income chargeable to tax has escaped assessment for any assessment year must exist and must be recorded before any notice under s. 148(1) is issued to the assessee and before making any assessment, reassessment or recomputation under s. 147. The first question for decision in this writ petition, therefore, is whether before issuing the impugned notice, dt. 30th Oct., 1998/2nd Nov., 1998, under s. 148, the AO had reason to believe that any income of the company chargeable to tax has escaped assessment for the asst. yr. 1991-92.

7. The reasons which have been recorded under s. 148(2) by the AO before issuing the impugned notice under s. 148(1) have been disclosed in paras. 4 and 5 of the additional affidavit-inopposition filed on behalf of respondents Nos. 1, 2 and 3 quoted above. From the said reasons in paras. 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 asst. yr. 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 Magon Group of Companies had made huge payments to Rohini Properties (P) Ltd. and Gladiolai Estate (P) Ltd. for rendering services like cowdung 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 cowdung, 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 to 5 back accounts. From the reasons disclosed by the AO in the additional affidavit-in-opposition in paras. 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) Ltd. 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) Ltd. and routing them through several bank accounts. Moreover, in the reasons disclosed in the said paras. 4 and 5 of the additional affidavit-in-opposition, the AO has not come to a prima facie conclusion that the said payments totalling Rs. 27,25,600 to Rohini Properties (P) Ltd. and Gladiolai Estate (P) Ltd. 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 AO, 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 asst. yr. 1991-92.

8. In Chhugamal Rajpal vs. S.P. Chaliha (supra), the assessee had produced before the ITO at the time of assessment for the asst. yr. 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 CIT, Bihar and Orissa, the ITO issued a notice under s. 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 : “In his report the ITO does not set out any reason for coming to the conclusion that this is a fit case to issue notice under s. 148. The material that he had before him for issuing notice under s. 148 is not mentioned in the report. In his report he vaguely refers to certain communications received by him from the CIT, 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 s. 151(2). What that provision requires is that he must give reasons for issuing a notice under s. 148. In other words he must have some prima facie grounds before him for taking action under s. 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 s. 148. Before issuing a notice under s. 148, the ITO 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 s. 139 for any assessment year to the ITO 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, italicised in print, supplied]

The ITO in the aforesaid report under s. 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 s. 148 of the Act.

The aforesaid decision in the case of Chhugamal Rajpal vs. S.P. Chaliha (supra), was followed by the Supreme Court in the case of ITO vs. Lakhmani Mewal Das (supra). In the said case of Lakhmani Mewal Das (supra), the first ground mentioned in the report of the ITO to the CIT for initiating action under s. 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 hereinbelow : “We may now deal with the first ground mentioned in the report of the ITO to the CIT. 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 the confession was made and whether it relates to the period from 1st April, 1957, to 31st March, 1958, which is the subject-matter of the assessment sought to be reopened. The report was made on 13th Feb., 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 1st April, 1957, to 31st March, 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 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 ITO and the formation of his belief that there has been escapement of the 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 ITO 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 is s. 34 of the Act of 1922, at one time before its amendment in 1948, are not there is s. 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, italicised in print, supplied]

It is thus clear from the aforesaid two decisions of the Supreme Court in Chhugamal Rajpal vs. S.P. Chaliha (supra) and ITO vs. Lakhmani Mewal Das (supra), that for initiating action under s. 147 and for issuing notice to the assessee under s. 148(1) of the Act, the AO 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 AO 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 and a prima facie conclusion, the AO could not possibly have a reason to believe that income of the assessee has escaped assessment. But in the instant case, paras. 4 and 5 of the additional affidavit-in-opposition do not show such specific information or material and a prima facie conclusion by the AO that the payments of Rs. 27,25,600 made by Numdang Tea Company (I) Ltd to Rohini Properties (P) Ltd. and Gladiolai Estate (P) Ltd. were not for services rendered by the said two companies and were not genuine and were fictitious. The AO, therefore, in fact had no reason to believe that income of the said company had escaped assessment for the asst. yr. 1991-92.

9. In CIT vs. Bihar Cotton Mills Ltd. (supra), cited by Mr. Sarma, the Patna High Court had found that the ITO came to know on the basis of statements 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 s. 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 ITO regarding the two parties. In the present case, on the other hand, there is no specific information indicated in the reasons disclosed in paras. 4 and 5 of the additional affidavit-in-opposition by the AO that the particular transaction of Rs. 13,96,000 between Numdang Tea Company (I) Ltd. and Rohini Properties (P) Ltd. and the particular transaction of Rs. 13,36,600 between Numdang Tea Company (P) Ltd. and Gladiolai Estate (P) Ltd. were fictitious and were not genuine. The AO, therefore, could not possibly entertain a belief that the income of the said company had escaped assessment warranting initiating of action under s. 147 of the Act. I am, therefore, of the considered opinion that the AO in fact has no reason to believe that any income of the assessee chargeable to tax has escaped assessment for the asst. yr.1991-92 and that the initiation of the proceedings under s. 147 r/w s. 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 ss. 148 and 147 for the asst. yr. 1991-92 are accordingly quashed. Considering, however, facts and circumstances of the case, the parties shall bear their own costs.

[Citation : 243 ITR 540]

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