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PETITIONER: CHHUGAMAL RAJPAL

       Vs.

RESPONDENT: S.   P. CHALIHA & ORS.

DATE OF JUDGMENT21/01/1971

BENCH: HEGDE, K.S. BENCH: HEGDE, K.S. SHAH, J.C. (CJ) GROVER, A.N.

CITATION:  1971 AIR  730            1971 SCR  (3) 342  1971 SCC  (1) 453  CITATOR INFO :  F          1971 SC2451  (9)  R          1974 SC 478  (5)  RF         1976 SC1753  (3,9)

ACT: Income-tax  Act, 1961, s. 147, 148 and 151-Issue  of  notice under s. 148-Assessment of escaped income-Requirement of  s. 147(a) and (b) must be satisfied and reasons recorded before the  issue  of notice under s.  148-Report  to  Commissioner under s. 151(i) must disclose existence of grounds for issue of  notice-Commissioner  must  apply  mind  before  granting sanction.

HEADNOTE:  The  appellant,  a  partnership firm, filed  its  return  of  income  for  the assessment year  i960-61  and  subsequently  produced before the Incometax Officer its relevant books  of  accounts  and  papers.   It also  produced  before  him  the  statement  showing  various  creditors  from  whom  it   had  borrowed  on Hundis during the accounting year in  question,  giving  full names and addresses of the  alleged  creditors.  After enquiry the Incometax Officer made an assessment.   On  June 3, 1966 the Income-tax Officer issued to the  appellant  a  notice  under s. 148 of the Income-tax  Act,  1961.   The  notice was issued after four years but before 8 years of the  end   of  the  original  assessment  year.   The   appellant  challenged  the  validity  of  the notice  as  well  as  the  proceedings  taken on the strength of that notice in a  writ  petition  under Arts. 226 and 227 of the Constitution.   The  High Court dismissed the petition.  By special leave  appeal  was  filed in this Court.  On direction given by  the  Court  the  report  submitted  by the  Income-tax  Officer  to  the  Commissioner  and  the  Commissioner’s  order  thereon  were  produced.   In the report it was said that it appeared  that  the alleged creditors of the appellant were name lenders and  transactions   were   bogus;  hence   proper   investigation  regarding those loans was necessary.  Question No. 8 on  the  report  was whether the Commissioner was satisfied that  the  case was fit for the issue of notice under s. 148.   Against  this the commissioner had noted ’yes’.  On these facts  this  Court,

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HELD  :  Under s. 148 and s. 151(2) the  Income-tax  Officer  Must record his reasons for issuing the notice under s. 148.  There must be prima facie grounds for taking action under s.  148  Further before issuing such a notice the provisions  of  cis. (a) and (b) of s. 147 must be satisfied. [447 B, E]  In  this case the Income-tax Officer appears to have  had  a  vague feeling that the transactions were bogus and that  the  alleged creditors were only name lenders.  According to  him  proper  investigation  regarding the  loans  was  necessary.  That is not the same thing as saying that there ,are reasons  to issue notice under s. 148. [447 A-C]  In these circumstances it could not be held that the Income-  tax Officer had any material before him which could  satisfy  the  requirements  of either cl. (a) or cl. (b) of  s.  147.  Therefore  he could not have issued a notice under  s.  148.  Further the report submitted by him under s. 151(2) did  not  mention any reason for coming to the conclusion that it  was  a  fit case for the issue of the notice under s.  148.   The  Commissioner  also mechanically accorded  permission.   Thus  the  important safeguards provided in ss. 147 and  151  were  lightly treated by the income-tax Officer as well as by  the  Commissioner. [447 F-448 B]  The appeal must accordingly be allowed.  443

JUDGMENT:  CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1311 of 1967.  Appeal  by special leave from the judgment and  order  dated  January 17, 1967 of the Patna High Court in C.W.J.C. No. 952  of 1966.  M.   C. Chagla, N. D. Karkhanis, S. P. Chowdhury,  Bhuvanesh  Kumari, for the appellant.  S.   C. Manchanda, R. N. Sachthey and B. D. Sharma, for  the  respondent.  The Judgment of the Court was delivered by  Hegde,  J.  This is an assessee’s, appeal by  special  leave  against  the judgment of the High Court of Patna  dismissing  in  limini its writ petition under Arts 226 and 227  of  the  Constitution of India.  The  assessee  is having construction  contracts  under  the  Railways  as  well as the Government.  It is  a  partnership  firm.   For  the assessment year 1960-61,  relevant  to  the  accounting  year 1959-60, after the assessee  submitted  its  income-tax  return, it was asked by the  Income-tax  Officer  during  the  income-tax assessment  proceedings  to  produce  before  him  its  books of account and  the  other  relevant  papers.   The assessee also produced before him a  statement  showing  various  creditors  from whom it  had  borrowed  on  Hundis  during  the accounting year in  question.   In  that  statement it gave the lull names and address of the  alleged  creditors.   After enquiry, the assessee’s total income  was  assessed  at  Rs.  69,886/-.   On  June  3,  1966,  the  1st  respondent  (Income-tax  Officer  Ward  ’A’,,   Muzaffarpur)  issued  to the assessee a notice under s. 148 of the  Indian  Income-tax  Act, 1961.  The material portion of that  notice  reads as follows  "Notice under s. 148 of the Income-tax Act, 1961.    Income-Tax Officer, Muzaffarpur    Dated, the 3-6-1966.  TO  M/s.  Chugamal Rajpal, Muzaffarpur.  Whereas  (1)  have  reason  to  believe  that  your   income  chargeable  the income of 1960-1961 in respect of which  you

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are  assessable  to tax for the assessment year  19  19  has  escaped assessment within the  444  meaning of section 147 of the Income Tax Act, 1961.  I  therefore  propose to re-assess the income for  the  said  assessment  year and I hereby require you to deliver  to  me  within  30  days from the date of service of this  notice  a  return in the prescribed form of your income  The income assessable relevant to the assessment year  1960-  61                       of  in  respect  of  which  you are  assessable  for the  said  assessment year.  2.   The   notice  is  being  issued  after  obtaining   the  necessary  satisfaction  of the Commissioner  of  IncomeTax,  Bihar and Orissa, Patna.  Sd/- S. P. Chaliha  Income-Tax Officer,  Ward A, Muzaffarpur."  The assessee challenged the validity of that notice as  well  as  proceedings  taken  on the strength of  that  notice  on  various grounds.  As we are accepting the contention of  the  assessee that the impugned notice is invalid inasmuch as  it  did  not  comply with the requirements of s. 151(2)  of  the  Act,  we have not thought it necessary to examine the  other  contentions  advanced  on behalf of the assessee.   In  this  case the notice was issued after four years but before eight  years of the date of the original assessment.  Section 151 (2) of the Act reads  "No  notice  shall  be issued under Section  148  after  the  expiry of four years from the end of the relevant assessment  year,  unless the Commissioner is satisfied on  the  reasons  recorded by the Income-tax Officer that it is a fit case for  the issue of such notice."  Section 148 prescribes :  "(1)  Before  making the assessment,  re-assessment  or  re-  computation under Section 147, the Income-tax Officer  shall  serve  on the assesee a notice containing all or any of  the  requirements  which may be included in a notice  under  sub-  section (2) of Section 139 and  445  the  provisions of this Act shall, so far as may  be,  apply  accordingly as if the notice were a notice issued under that  sub-section.  (2)  The Income-tax Officer shall, before issuing any notice  under this section, record his reasons for doing so. "  Section 147 deals with income escaping assessment.  At  this  stage we need not refer to that section : We shall refer  to  that provision at a later stage.  Section 139(2) says :  "In  the case of any person who, in the incometax  Officer’s  opinion, assessable under this Act, whether on his own total  income  or, on the total income of any other  person  during  the  previous year, the Income-tax Officer may,  before  the  end of the relevant assessment year, serve a notice upon him  requiring  him to furnish, within thirty days from the  date  of  service  of the notice, a return of his  income  or  the  income of such other person during the previous year, in the  prescribed  form and verified in the prescribed  manner  and  setting forth such other particulars as may be prescribed."  (proviso is not necessary for our present purpose)  When  this appeal came up for hearing on the last  occasion,  as we found the affidavit filed by the Income-tax Officer to  ’be  vague and indefinite, we directed the  learned  Counsel  for  the Department to produce before us the records of  the  Incometax  Officer to show that the, Income-tax Officer  had

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complied  with the requirements of s. 148 and s.  151(2)  of  the  Act.  When the appeal was taken up for hearing  on  the  18th January 1971, only the report submitted by the  Income-  tax  Officer  to  the  Commissioner and  the  order  of  the  Commissioner  was produced.  The order sheet  recording  the  reasons  of the Income-tax Officer as required by s.  148(2)  was not produced.  Hereinbelow we have sent out the  report  of  the  Income-tax  Officer as well as  the  order  of  the  Commissioner:  Report in Connection with the starting of proceeding"  under  Section 147 of the Income-tax Act, 1951.  Name of District  Ward of Circle                  A Ward, Muzaffarpur  G. I.R. No.                      303-C.  1.1. Name and address of the assessee  M/S.  Chugamal  Rajpal,  Muzaffarpur.  R.F.  2.Status  3.   Assessment year for which notice under  s. 1 48 is proposed to be issued                    1960-61.  446  4.   Whether it is a new case or one in which  re-assessment  (or recomputation)  has to be made                       Re-assessment  5.   If a case of reassessment (or recomputation) the income  (or    loss    or   depreciation    allowance)    originally  assessed/determined.                   Rs. 73,604/-  6.   Whether the case falls under cl. (a) or (b)       of s. 147                                    147(a)  7.   Brief reasons for starting proceedings under Kindly see  s. 147 (indicate the items which are Sd/- S. P. Chaliha.                                  I.T.O. 30-4-66  believed to have escaped assessment) A-Ward, Muzaffarpur.  8.Whether the Commissioner is satisfied that  Yes  it is a fit case for the issue of notice under Sd/- K.                         Narain    section 148.                      13-5-66                   Commissioner of Income-tax,                   Bihar and Orissa, Patna  9.   Whether the Board is satisfied that it is aSecretary,  Board  of Revenue.fit case for the issue of notice under  s.  148.  During the year the assessee hasshown to have taken loans  from various parties of Calcutta.  From D.I.s Inv.  No. A/P/  Misc.(5)D.I./63-64/5623  dated  13-8-65, forwarded  to  this  office  under  C.I.T. Bihar and Orissa, Patna’s  letter  No.  Inv.  (Inv.)15/  65-66/1953-2017  dated  Patna  24-9-65,  it  appears  that  these  persons  are  name  lenders  and   the  transactions   are   bogus.   Hence   proper   investigation  regarding these loans is necessary.  The name of some of the  persons from whom money is alleged to have taken on loan  on  Hundis are:  1.   Seth Bhagwan Singh Sricharan.  2.   Lakha Singh Lal Singh.  3.   Radhakissen Shyam Sunder.  The amount of escapement involved amounts to Rs. 100,000/-.  Sd/- S. P. Chaliha, 30-4-66.  Income-tax Officer,  A-Ward, Muzaffarpur."  In  his report the Income-tax Officer 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

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communications  received by him from the C.I.T.,  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  447  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 Income-tax  Officer  must  have  either  reasons to believe that by reason of the omission or failure  on the part of these assessee to, make a return under s. 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  or  alternatively  not-  withstanding  that there has been no omission or failure  as  mentioned above on the part of the assessee, the  Income-tax  Officer has in consequence of information in his  possession  reason to believe that income chargeable to tax has  escaped  assessment for any assessment year.  Unless the requirements  of clause (a) or (b) of s. 147 are satisfied, the Income-tax  Officer has no jurisdiction to issue a notice under s.  148.  From  the report submitted by the Income-tax Officer to  the  Commissioner, it is clear that he could not have had reasons  to  believe  that by reason of the  assessee’s  omission  to  disclose  fully and truly all material’ facts necessary  for  his  assessment for the accounting year in question,  income  chargeable to tax has escaped assessment for that year;  nor  could it be said that he as a consequence of information  in  his  possession,  had  reasons to believe  that  the  income  chargeable to tax has escaped assessment for that year.   We  are  not  satisfied  that the  Income-tax  Officer  had  any  material before him which could satisfy the requirements  of  either cl. (a) or cl. (b) of s. 147.  Therefore he could not  have  issued  a  notice under s. 148.   Further  the  report  submitted by him under s. 151(2) does not mention any reason  for  coming to the conclusion that it is a fit case for  the  issue of a notice under s. 148.  We are also of the  opinion  that the Commissioner has mechanically accorded  permission.  He  did not himself record that he was satisfied  that  this  was  a fit case for the issue of a notice under s. 148.   To  Question  No.  8  in the report which  reads  "Whether  the,  Commissioner is satisfied that it is a case for the I  issue  of notice under section 148", he just noted the word "yes"  and  affixed  his  signatures thereunder.   We  are  of  the  opinion  .that if only he had read the report carefully,  he  could never have  448  come to the conclusion on the material before him that  this  is  a fit case to issue notice under s. 148.  The  important  safeguards  provided  in sections 147 and 151  were  lightly  treated  by  the  Income-tax  Officer  as  well  as  by  the  Commissioner..  Both of them, appear to have taken the  duty

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imposed  on  them  under  those  provisions  as  of   little  importance.    They  have  substituted  the  form  for   the  substance.  In the result this appeal is allowed, the order of the  High  Court  is  set aside and the impugned notice  quashed.   The  Respondent  No. 2 shall pay the costs of the appellant  both  in this Court and in the High Court.  G.C.                          Appeal allowed.  449