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PETITIONER: INCOME TAX OFFICER & ORS.

       Vs.

RESPONDENT: M/S. MADNANI ENGINEERING WORKS LTD., CALCUTTA

DATE OF JUDGMENT04/01/1979

BENCH: BHAGWATI, P.N. BENCH: BHAGWATI, P.N. KOSHAL, A.D.

CITATION:  1979 AIR 1450            1979 SCR  (2) 905  1979 SCC  (2) 455  CITATOR INFO :  R          1987 SC1897  (30)

ACT:      Income Tax  Act, 1961-S.  147(a)  Scope  of-Income  Tax Officer at  first refused to give reasons for believing that income escaped  assessment-In the  second affidavit  did not set out  any material  for the  basis of his belief-Validity of.

HEADNOTE:      In respect  of the assessment year 1959-60 the assessee was allowed  deduction of  interest paid  to creditors  from whom it  claimed to  have  borrowed  moneys  on  hundis.  In January, 1968  the Income Tax Officer issued a notice to the assessee under  s. 147(a) of the Income-tax Act, 1961 on the ground that  the transactions  of loans  represented by  the hundis were  bogus and  no interest was paid by it to any of the creditors  shown in  the hundis,  that  it  was  wrongly allowed  as   a  deduction  and  therefore  a  part  of  the assessee’s income  had escaped  assessment by  reason of its failure to  disclose fully  and  truly  all  material  facts necessary for the assessment.      In the  assessee’s writ  petition before the High Court the Income  Tax Officer  at first  declined to  disclose the facts which had weighed with him in reaching the belief that income had  escaped assessment  on the  ground that  if they were  disclosed  it  would  cause  great  prejudice  to  the interests of  revenue and  would  frustrate  the  object  of reopening the assessment. Later however, realising that this stand was  untenable he  gave his  reasons for  issuing  the notice.      A  Single   Judge  of  the  High  Court  dismissed  the assessee’s writ  petition. On  appeal a  Division Bench held that there  was no  failure on  the part  of the assessee to disclose fully  and truly all material facts and that in any event the  Income Tax  Officer had no reason to believe that any part  of the  income had escaped assessment by reason of such failure on the assessee’s part. Dismissing the appeal, ^      HELD:      There was  no failure  on the  part of  the asscssee to disclose fully  and truly  all material  facts necessary for

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its assessment and the condition for the applicability of s. 147(a) was  not satisfied.  The notice  in the circumstances was void. [1910 A]      (1) In  CIT v.  Burlop Dealers  Ltd., 79  ITR 609  this Court held  that there  was no obligation on the part of the assessee to  disclose that the documents produced by it were bogus and that the entries made in its books of account were false. The  assessee discharged its obligation by disclosing its books of accounts and evidence from which material facts could be  discovered and it is for the Income Tax Officer to decide whether the documents were genuine or false. [909 F] 906      In the  instant case  the assessee could not be said to have failed to make true and full disclosure of the material facts by  not confessing  before the Income Tax Officer that the hundis  and the entries in the books of account produced before him were bogus. [909 G]      CIT v. Burlop Dealers Ltd. 79 ITR 609; applied.      (2) All  that the  Income Tax  Officer  stated  in  his affidavit was  that he  discovered that  the transactions of loan against  security of  hundis were  not genuine and that the credits  against the  names of  certain persons who were alleged to  have advanced  the loans  were bogus.  He merely stated his  belief but  did not  set out any material on the basis of which he had arrived at such belief. [910 C]      (3) The  existence of  reason to believe on the part of the Income  Tax Officer is a justiceable issue and it is for the court  to be  satisfied whether  in fact  the Income Tax Officer had  any material  on the  basis of  which he  could reasonably entertain such belief. [907 D]

JUDGMENT:      CIVIL APPELLATE  JURISDICTION: Civil  Appeal No. 829 of 1975.      From the  Judgment  and  Order  dated  11-4-74  of  the Calcutta High  Court in  Appeal from  original  Order  dated 221/70.      S.  C.  Manchanda,  and  Miss  A.  Subhashini  for  the Appellant      V. S.  Desai, Sanjay  Bhattacharya and  Rathin Dass for the Respondent.      The Judgment of the Court was delivered by      BHAGWATI, J.-This  appeal by  certificate  is  directed against an  order passed  by a  Division Bench  of the  High Court of Calcutta allowing an appeal against a decision of a Single Judge dismissing the writ petition of the respondent. The facts giving rise to the appeal may be briefly stated as follows:      The respondent  was  assessed  to  income-tax  for  the assessment year  1959-60 and  certain interest  paid by  the respondent  to  creditors  from  whom  it  claimed  to  have borrowed  monies   on  hundis,  was  allowed  as  deductible expenditure. The  assessment of the respondent was completed on 23rd  August, 1960.  On  or  about  25th  January,  1968, however, a Notice was issued by the Income Tax Officer under Section 148  of the  Income Tax  Act, 1961  to  re-open  the assessment of  the respondent  for the assessment year 1959- 60. The  Notice was  obviously under  Section 147(a) since a period of  four years  had already elapsed from the close of the assessment  year 1959-60  and no  Notice could be issued under Section  147(b). The  Income Tax  Officer claimed that the transactions  of loan  represented by  the  hundis  were bogus and  no interest  was paid by the respondent to any of

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the 907 creditors shown  in the hundis and it was wrongly allowed as a deduction and hence a part of the income of the respondent had escaped  assessment by  reason of  the  failure  of  the respondent to  disclose fully  and truly  all material facts necessary for  its assessment. The respondent challenged the validity of  the Notice  issued by the Income Tax Officer by filing a  writ petition  in the  Calcutta  High  Court.  The respondent contended  that there  was no failure on its part to disclose fully and truly all material facts necessary for its assessment  and that in any event the Income Tax Officer had no  reason to believe that any part of the income of the respondent had  escaped assessment by reason of such failure on the part of the respondent. The Income Tax Officer in the affidavit in  reply filed  by  him  on  5th  December,  1968 declined to disclose the facts which had weighed with him in reaching the  belief that  the income  of the respondent had escaped assessment  by reason  of its  failure  to  disclose fully and  truly all  material facts,  on the ground that if such facts  were disclosed to the respondent, it would cause great prejudice  to the  interests of  the Revenue and would frustrate the  object of re-opening the assessment. This was obviously an untenable stand because the existence of reason to believe  on the  part of  the Income  Tax Officer  was  a justiceable 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 by reason of failure of the respondent  to make  a full  and  true  disclosure.  The Income Tax  Officer realising  this position filed a further affidavit on 27th January, 1970 stating as follows:      "In January 1968 I was the Income Tax Officer ’I’ Ward, Hundi Circle,  Calcutta. On or about the 25th January 1968 I issued a  notice under  Section 148  of the  Income Tax Act, 1961 on  the petitioner.  My reasons for issuing such notice were these.  In the  course of  assessment of the petitioner for assessment  year 1963-64  it was discovered that various items shown  as loans  against the security of hundis in the petitioner’s books of account for the previous year relevant to assessment  year 1959-60 were in fact fictitious. Credits against the  names of  certain persons  as  having  advanced loans  viz.   Amarlal  Moolchand,   Girdharidas,  Reghoomal, Murlidhar,  Kanhaiyalal   and   Deudaram   Basdeo   in   the petitioner’s books were found not to be genuine. It appeared during assessment  proceedings for 1963-64 that none of such loans were  genuine. In the premises, it appeared to me that the petitioner  had failed  to disclose  fully and truly all material facts  necessary for  its assessment, and a portion of the  petitioner’s income had escaped assessment by reason of such failure". 908      The writ  petition was  heard by  a Single Judge of the High Court  and he  took the  view that the affidavit of the Income Tax  Officer dated  27th January, 1970 clearly showed that he  had reason to believe that income of the respondent had escaped  assessment by reason of its failure to disclose fully and  truly  all  material  facts  and  he  accordingly dismissed the  writ petition.  The respondent  preferred  an appeal and  a Division  Bench of  the High Court disagreeing with the  view taken by the Single Judge held that there was no failure  on the  part of the respondent to disclose fully and truly  all material  facts and in any event there was no material on  the basis  of which  it could  be said that the Income Tax  Officer had  reason to  believe that any part of the income  had escaped assessment by reason of such failure

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on  the   part  of   the  respondent.   The  Division  Bench accordingly allowed  the writ  petition and  quashed and set aside the  Notice for  re-opening the assessment. The Income Tax Officer  thereupon preferred  the present appeal to this Court after obtaining a certificate from the High Court.      The present  case is clearly covered by the decision of this Court in Commissioner of Income Tax, Calcutta v. Burlop Dealers Ltd.  There  the  assessee  in  the  course  of  its original assessment  to income-tax  for the  assessment year 1949-50  had  produced  a  partnership  agreement  with  one Ratiram Tansukhrai and claimed that the profits earned by it from H.  Manory Ltd.  had been  divided between  itself  and Ratiram Tansukhrai  under the  partnership agreement and its one-half share  of the  profit, namely, Rs. 87,937/- was the only amount assessable to tax in respect of this source. The Income Tax  Officer accepted  the partnership  agreement and assessed the assessee only on the profit of Rs. 87,937/-. It appears that while making assessment for the assessment year 1950-51 the  Income Tax  Officer found  that the partnership agreement between  the assessee and Ratiram Tansukhrai was a got up  device to  reduce the profit received from H. Manory Ltd. and  the assessee  was, therefore, liable to tax on the entire amount of profit coming from H. Manory Ltd. This view taken by  the Income  Tax Officer was confirmed on appeal by the Appellate  Assistant Commissioner  and  the  Income  Tax Tribunal. The High Court also on a reference agreed with the view of  the Tribunal.  The  Income  Tax  Officer  thereupon issued a  Notice under  Section 34(1)  (a) of the Income Tax Act to  re-open the  assessment  of  the  assessee  for  the assessment year 1949-50 in order to bring to tax the further amount of  Rs. 87,937/-  being the  half share of the profit from H.  Manory Ltd.  alleged to  have been  paid to Ratiram Tansukhrai under  the partnership  agreement.  The  assessee con- 909 tended that  it had  produced all  the relevant accounts and documents necessary for completing the assessment and it was under no  obligation to  inform the Income Tax Officer about the true nature of the transaction and there was accordingly no failure  on its  part to  disclose fully  and  truly  all material facts necessary for its assessment. This contention was negatived  by the  Income Tax  Officer and the income of the assessee  was re-assessed  by adding Rs. 87,937/- to the income returned  by the  assessee. The  Appellate  Assistant Commisioner confirmed the order of the Income Tax Officer on appeal, but  on further  appeal, the  Tribunal accepted  the contention of  the assessee  and  held  that  there  was  no failure on  the part of the assessee to make a full and true disclosure of  the material  facts and  hence the Income Tax Officer  was   not  justified  in  seeking  to  re-open  the assessment under  Section 34(1)  (a) of  the Income Tax Act. The Revenue  applied to the Tribunal for a reference but the application was  rejected and  the High Court also dismissed the application  of the  Revenue for calling for a reference from the Tribunal. The Revenue thereupon preferred an appeal to this  Court by  special leave. The appeal was rejected by this Court on the ground that the assessee had disclosed all its books  of account and evidence from which material facts could be discovered and it was under no obligation to inform the Income  Tax Officer  about the possible inferences which might be  raised against  him and hence there was no failure on its  part to  disclose the  preliminary facts relevant to the assessment  which  would  invite  the  applicability  of Section 34(1)  (a). It  will thus  be seen that according to this judgment,  there was  no obligation  on the assessee to

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disclose that  the partnership  agreement produced by it was bogus and  that the  entries made  by it  in  its  books  of accounts were  false. The assessee discharged the obligation which lay  upon it  by disclosing  its books  of account and evidence from  which material  facts could be discovered and it was  for the  Income Tax  Officer to  decide whether  the documents produced  by the  assessee were  genuine or false. Here also  the respondent  produced all  the hundis  on  the strength of  which it  had obtained  loans from creditors as also entries  in the  books of  account showing  payment  of interest  and   it  was   for  the  Income  Tax  Officer  to investigate  and  determine  whether  these  documents  were genuine or  not. The  respondent could  not be  said to have failed to  make a  true and  full disclosure of the material facts by  not confessing  before the Income Tax Officer that the hundis  and the entries in the books of account produced by it  were bogus.  We do  not see  any distinction  at  all between Burlop  Dealers case (supra) and the present one and the language  of Section 147(a) being identical with that of Section 34(1)(a),  the  ratio  of  the  decision  in  Burlop Dealers case (supra) must govern the decision of the present case. We 910 must, therefore,  hold that there was no failure on the part of the  respondent to  disclose fully and truly all material facts necessary for its assessment and the condition for the applicability of Section 147(a) was not satisfied.      We may  also point  out that though it was contended in the Writ  Petition that the Income Tax Officer could have no reason to  believe that  any  part  of  the  income  of  the respondent had  escaped assessment  by reason of its failure to make  a full  and true  disclosure of material facts, the Income Tax  Officer did  not disclose  in his  affidavit any material on  the basis of which it could be said that he had come to  the requisite  belief.  All  that  the  Income  Tax Officer stated  in his affidavit was that he discovered that the transactions of loan against security of hundis were not genuine and  that the  credits against  the names of certain persons who  were alleged to have advanced loans were bogus. The Income  Tax Officer merely stated his belief but did not set out any material on the basis of which he had arrived at such belief  so that  the  Court  could  decide  for  itself whether there  was any  material on  the basis  of which the Income Tax  Officer could  reasonably entertain such belief. We are,  therefore, not  at all  satisfied on  the affidavit that the  Income Tax  Officer had  reason to  believe that a part of  the income of the respondent had escaped assessment by reason  of its failure to make a true and full disclosure of the  material facts.  The Notice  under Section 147(a) of the Income Tax Act for re-opening the assessment must in the circumstances be held to be void.      We accordingly dismiss the appeal with costs. P.B.R.                                     Appeal dismissed. 911