P. K. Nair v. Income Tax Officer A Ward Alwaye — 1972 DIGILAW 137 (KER)

JUDGMENT P. Govinda Nair, J. 1. This petition under Art.226 of the Constitution seeks to set aside notices Exs. P3, P3(a), P3(b), P3(c) and P3(d) issued under S.148 of the Income Tax Act, 1961 (hereinafter referred to as the Act) for the years 1950-51, 1951-52, 1952-53, 1953-54 and 1954-55 respectively. Very briefly stated, the grounds are that the Income Tax Officer had no reason to believe and had no material before him for that belief that the income amounting to Rs. 50,000/- had escaped assessment or was likely to have escaped assessment for any of the years mentioned above and had therefore no jurisdiction to reopen the assessments that had been completed long years ago. This has come up before us on an order of reference by Mathew J. in view of the question whether a remedy by an application under Art.226 of the Constitution would be available to an assessee in regard to notices issued under S.148 of the Act for reassessment as envisaged by S.147 of the Act. At the time the learned Judge heard the case assessment orders had been passed and appeals had been filed by the assessee and those appeals were pending. It was therefore urged on behalf of the revenue that the petition should be dismissed as the assessee had right to have the matter decided by the Appellate Assistant Commissioner and had a further right in second appeal and even on a reference to this Court. Counsel for the assessee relied on the decision of the Supreme Court in Calcutta Discount Co. Ltd. v. Income Tax Officer, Companies District I. Calcutta and another ( 1961 (41) ITR 191 ) and contended that this Court has not only jurisdiction but that this is a fit case where this Court should interfere if it is satisfied that there was no material available before the Income Tax Officer on which it was reasonably possible to infer that the income of the requisite amount had escaped assessment as detailed in S.149 of the Act. We shall deal with this question first. 2. The circumstances under which this Court will have jurisdiction to deal with applications of this nature have been detailed in the Supreme Court decision in Commissioner of Income Tax, Gujarat v. A. Raman and Co. ( 1968 (67) ITR 11 ). We shall deal with this question first. 2. The circumstances under which this Court will have jurisdiction to deal with applications of this nature have been detailed in the Supreme Court decision in Commissioner of Income Tax, Gujarat v. A. Raman and Co. ( 1968 (67) ITR 11 ). We shall extract a part of the head note which correctly depicts the dicta in the case. "The High Court exercising jurisdiction under Art.226 of the Constitution has power to set aside a notice issued under S.147(b) of the Income Tax Act, 1961, if the condition precedent to the exercise of the jurisdiction does not exist. The court may, in exercise of its powers, ascertain whether the Income Tax Officer had in his possession any information: the court may also determine whether from the information the Income Tax Officer may have reason to believe the income chargeable to tax has escaped assessment. But the jurisdiction of the court extends no further. Whether on the information in his possession he should commence proceedings for assessment or reassessment, must be decided by the Income Tax Officer and not by the High Court. The Income Tax Officer alone is entrusted with the power to administer the Act: if he has information from which it may be said, prima facie, that he had reason to believe that income chargeable to tax had escaped assessment, it is not open to the High Court exercising powers under Art.226 of the Constitution to set aside or vacate the notice for reassessment on a reappraisal of the evidence. In a petition under Art.226 of the Constitution the tax payer may challenge the validity of a notice under S.147 of the Income Tax Act, 1961, on the ground that either of the conditions precedent does not exist, but an investigation whether the inferences raised by the Income Tax Officer are 'correct of proper' cannot be made." 3. It is on the same principle that the Supreme Court in Calcutta Discount Co. Ltd. v. Income Tax Officer, Companies District I, Calcutta and another (41 ITR 191) Interfered in proceedings under Art.226 of the Constitution and quashed not only the notice under S.34 of the Indian Income Tax Act, 1922 corresponding to S.147 of the Act but quashed the assessment which had taken place pursuant to that notice after the institution of the proceedings under Art.266 of the Constitution. 4. 4. We may also extract a passage from another decision of the Supreme Court in Madhya Pradesh Industries Ltd. v. Income Tax Officer, Nagpur (1970 (77) ITR 268). "It is of course open for the assessee to contend that the Income Tax Officer did not hold the belief that there has been such nondisclosure. In other words, the existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. Therein it was observed that the expression "reason to believe" in S.34 does not mean purely subjective satisfaction on the part of the Income Tax Officer. The belief must be held in good faith: it cannot be merely a pretence. It is open to the court to examine whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section. To this limited extent, the action of the Income Tax Officer in starting proceedings under S.34 of the Act is open to challenge in a court of law." The above observations were made after referring to an earlier decision of the Supreme Court in S. Narayanappa v. Commissioner of Income Tax ( 1967 (63) ITR 219 ). We may extract a part of the judgment in (63 ITR 219). "If there are in fact some reasonable grounds 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 the notice under S.34. Whether these grounds are adequate or not is not a matter for the court to investigate. In other words, the sufficiency of the grounds which induced the Income Tax Officer to act is not a justiciable issue. It is of course open for the assessee to contend that the Income Tax Officer did not hold the belief that there has been such nondisclosure. In other words, the existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief." 5. It is unnecessary to multiply more references. It is of course open for the assessee to contend that the Income Tax Officer did not hold the belief that there has been such nondisclosure. In other words, the existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief." 5. It is unnecessary to multiply more references. But the same principle has been applied in the decision in Madhya Pradesh Industries Ltd. v. Income Tax Officer, Nagpur (77 ITR 268) and Chhugamal Rajpal v. S. P. Chaliha and others ( 1971 (79) ITR 603 ) by the Supreme Court. It is therefore clear that this Court has the jurisdiction to examine the question as to whether a belief in the Income Tax Officer existed or not. This is so even if due to fortuitous circumstances an assessment order intervened between the dates of moving this Court and the disposal of the original petition. This is clear from the decision in Calcutta Discount Co. Ltd. v. Income Tax Officer, Companies District I, Calcutta and another (41 ITR 191). We therefore hold that the contention on behalf of the Revenue that this Court has no jurisdiction in the matter and should not entertain the application cannot be sustained. 6. Now passing on to the question as to whether the Income Tax Officer had reason to believe that income had escaped assessment which would justify proceedings being taken for reassessment, we have to read S.147, 148, 149 and 151 of the Act. "147. 6. Now passing on to the question as to whether the Income Tax Officer had reason to believe that income had escaped assessment which would justify proceedings being taken for reassessment, we have to read S.147, 148, 149 and 151 of the Act. "147. Income escaping assessment:- If (a) the Income Tax Officer has reason to believe that by reason of the omission or failure on the part of an 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 (a) notwithstanding that there has been no omission or failure as mentioned in Clause (a) 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, he may, subject to the provisions of S.148 to 153 assess or reassess such income of recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereafter in S.148 to 153 referred to as the relevant assessment year. Explanation 1: 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 income chargeable to tax has been under assessed; or (b) where such income has been assessed at too low a rate; or (c ) where such income has been made the subject of excessive relief under this Act or under the Indian Income Tax Act, 1922, (11 of 1922); or (d) where excessive loss or depreciation allowance has been computed. Explanation 2: Production before the Income Tax Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Income Tax Officer will not necessarily amount to disclosure within the meaning of this section. 148. Explanation 2: Production before the Income Tax Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Income Tax Officer will not necessarily amount to disclosure within the meaning of this section. 148. Issue of notice where income has escaped assessment:-- (1) Beforemaking the assessment, reassessment or recomputation under S.147, theIncome Tax Officer shall serve on the assessee a notice containing all or anyof the requirements which may be included in a notice under sub-s.(2) ofS.139; and the provisions of this Act shall, so far as may be, apply accordinglyas 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. 149. Time limit for notice: (1) No notice under S.148 shall be issued. (a) in cases falling under Clause (a) of S.147: (1) for the relevant assessment year, if eight years have elapsed from the endof that year, unless the case falls under sub clause (ii); (ii) for the relevant assessment year, where eight years, but not more than sixteen years, have elapsed from the end of that year, unless the income chargeable to tax which has escaped assessment amounts to or is likely to amount to rupees fifty thousands or more for that year; (b) in cases falling under Clause (b) of S.147, at any time after the expiry offour years from the end of the relevant assessment year. (2) The provision of sub-s.(1) as to the issue of notice shall be subject to theprovisions of S.151. (3) If the person on whom a notice under S.148 is to be served is a persontreated as the agent of a non resident under S.163 and the assessment, reassessment or recomputation to be made in pursuance of the notice is to be made on him as the agent of such non resident, the notice shall not be issued after the expiry of a period of two years from the end of the relevant assessment year. 151. Sanction for issue of notice: No notice shall be issued under S.148 after the expiry of eight years from the end of the relevant assessment year, unless the Board is satisfied on the reasons recorded by the Income Tax Officer that it is a fit case for the issue of such notice. 151. Sanction for issue of notice: No notice shall be issued under S.148 after the expiry of eight years from the end of the relevant assessment year, unless the Board is satisfied on the reasons recorded by the Income Tax Officer that it is a fit case for the issue of such notice. (2) No notice shall be issued under S.14S 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." The notices Ex. P3 series were issued on 12-10-65. These notices were clearly after eight years after the close of the latest of the assessment years with which we are concerned in this case namely, 1954-55. In such cases S.149 of the Act is attracted and reassessment proceedings can be commenced only if the Income Tax Officer had reason to believe that the income chargeable to tax which had escaped assessment amounted or was likely to amount to rupees fifty thousand or more for that year. 7. Under S.142 the Income Tax Officer is obliged to record his reasons before issuing the notice under S.148(1) of the Act and from S.151 (1) it is clear that the Board has to be satisfied on the reasons recorded by the Income Tax Officer that the case is a fit one for issue of notice under S.148. The assessee the petitioner before us had filed returns for the year in question and had also furnished material before the original assessment orders were made. It is admitted that those assessment orders were sought to be reopened for the reason mentioned in S.147(a); the latter part of S.147(a) which speaks of omission or failure on the part of the assessee to disclose fully and truly all materials facts necessary for his assessment for that year as a consequence of which income chargeable to tax had escaped assessment for that year. We would like at this stage to emphasise that for any action for any assessment year the omission or failure must relate to that year and income that had escaped assessment must also be "for that year". It is necessary to postulate that the income amounting to Rs. 50,000 or which is likely to amount Rs. 50,000/- had escaped assessment for that year. It is necessary to postulate that the income amounting to Rs. 50,000 or which is likely to amount Rs. 50,000/- had escaped assessment for that year. This is a safeguard that has been introduced by the statute so as to give a quietus to an assessment order though it is an assessment order not assessing the entire income of an assessee but only part of it and clearly postulates that if the income that had escaped assessment is below Rs. 50,000/- or is not likely to be Rs. 50,000/- or above, no notice under S.148 can be issued for any assessment year which was prior to eight years to the issue of notice. This is an important factor for the decision of this case; a factor which we consider had not been borne in mind by the authority concerned. We shall now refer to the averments in the petition. The petitioner in Para.19 (A) of the petition has made the following averments. "19 (A). The jurisdiction to issue notices under S.148 (1) of the Income Tax Act, will be available to the Income Tax Officer only if the conditions specified under S.147(a) S.149, S.151 of the Indian Income Tax Act, 1961 are satisfied. In the present case the Income Tax Officer has no reason to believe that by reason of omission or failure on the part of the petitioner to make a return under S.139 for any assessment year or to disclose fully and truly all material facts necessary for his assessment for that year the Income chargeable to tax amounting to Rs. 50,000/- or more has escaped assessment for that year. This will be clear on a prima facie perusal of the proposal by the 1st respondent and the explanation given by the petitioner and from the connected records. It can be seen from Ex. P1 that in making the calculation of the income the 1st Respondent has taken into account the income which arose before the year 1949. This in any view of the matter cannot be taken into account for assessing the income of the petitioner for the year 1950-51 onwards. So also the fact that the petitioner had received a capital gain of Rs. 51,500/- on the sale of a house property for the assessment year 1948-49 is clearly established on facts. No fact in respect of this transaction was suppressed by the assessee. So also the fact that the petitioner had received a capital gain of Rs. 51,500/- on the sale of a house property for the assessment year 1948-49 is clearly established on facts. No fact in respect of this transaction was suppressed by the assessee. The 1st respondent is now coming to a different conclusion on the same materials placed before the assessing authority at the time of the original assessment. This is not to be treated as a ground for reopening the assessment. Another ground which weighed with the 1st respondent for reopening the assessment is that the petitioner did not disclose in his wealth statement as on 31-12-1953 an amount in fixed deposit in Indian Bank, Mattunga, Bombay. The deposit matured in the year 1953 and was received back by the petitioner in October, 1953 itself, and so this was not stated in the wealth statement as on 31-12-1953 as an item of wealth of the petitioner. There are no materials available before the Income Tax Officer on which he can come to a conclusion that this deposit was still a wealth available with the petitioner as on 31-12-1953. So also payments towards Chitty with the Cochin Nair Bank where the Chitty itself matured or terminated in the year 1952 is treated by the Income Tax Officer as an item of wealth available as on 31-12-1953. There are similar patent mistakes in the proposal for reassessment which on a scrutiny with the explanation given would make it clear that there was no suppression of any of these assets. If the above and similar items are excluded it is clear that the additional income chargeable to tax will in any view of the matter be less than Rs. 50,000/-. If this is the position the Income Tax Officer has no jurisdiction to issue the Notice under S.148." 8. The only answer to this averment is in Para.9 which also we may extract. "The statement made in Para.19(A) of the petition that there are patent mistakes in the proposal for reassessment is not correct. The escaped income chargeable to tax in respect of each of the assessment years 1950-51 to 1954-55 is likely to be more than Rs. 50,000/-. The proposals made by me for the purpose of initiating reassessment were made after a preliminary investigation of the material particulars regarding the petitioner's income. The escaped income chargeable to tax in respect of each of the assessment years 1950-51 to 1954-55 is likely to be more than Rs. 50,000/-. The proposals made by me for the purpose of initiating reassessment were made after a preliminary investigation of the material particulars regarding the petitioner's income. The clarifications and explanations furnished by the petitioner are not also satisfactory or acceptable. In any case there were sufficient materials on record to show that the escaped income for each of the assessment years is likely to amount to Rs. 50,000/- or more. The spreading out of Rs. 2,60,000/-which has been prima facie found to be the suppressed income was only for the purpose of showing that the escaped income for each of the years is likely to be Rs. 50,000/- or more." We may state now that the basis on which Ex. Pl letter was issued to the assessee as well as Ex. P3 series was issued was that the Income Tax Officer had reason to believe that the income amounting to Rs. 2,54,740/- had escaped assessment for the five years 1950-51 to 1954-55. It will be noticed from the contention of the assessee that in arriving at the figure of Rs. 2,54,740/- the - Income Tax Officer had taken into account the wealth of the assessee or his capital gains in years before the earliest of the accounting years for the assessment years concerned. In this state of the pleadings we suggested to counsel for the revenue that perhaps it would be justifiable on the basis of the decision of the Supreme Court in 77 ITR 268 to quash the notices Ex. P3 series on the ground that no materials had been placed before us from which an inference was possible that income amounting to Rs. 50,000/- or more was likely to have escaped assessment in each of the years. Reasons were recorded by the Income Tax Officer before the decision to issue notice under S.148. These reasons had not been produced. Counsel for the Revenue later produced the reasons. A glance at those reasons would show that money expended for the purchase of lands and other property from the year 1946 to 1948 both in elusive, had been taken into account in reaching the figure of Rs. 2,54,740/-. These reasons had not been produced. Counsel for the Revenue later produced the reasons. A glance at those reasons would show that money expended for the purchase of lands and other property from the year 1946 to 1948 both in elusive, had been taken into account in reaching the figure of Rs. 2,54,740/-. Items 1 to 7 at pages 4 and 5 of the document containing the reasons recorded by the Income Tax Officer which was produced before us amount to Rs. 30.578/-, all pertaining to purchase or acquisition of other property before the earliest of the accounting years namely, 1949 relating to the corresponding assessment year 1950-51. These are completely extraneous and irrelevant considerations and could never form the basis of any material which can supply information to formulate reasonable belief. Similarly page 7 of the document which we have marked Ex. "x" shows that a capital gain is said to have been earned by the assessee by the sale of a property of his in Bombay in 1947 for Rs. 1,25,000/-. The capital gain is said to be Rs. 56,000/- plus what the Income Tax Officer calls a loss of Rs. 12,500/-. The total thus amounting to Rs. 68,500/- has been added as the income of the assessee. The reasoning seems to be that there was no capital gain at all and the inclusion of Rs. 56,000/- as capital gain earned by the assessee was bogus. In fact there was really a loss of Rs. 12,500/- and therefore the sum of Rs 68,500/- must represent the income of the assessee. We are not impressed by the reasoning. Whatever that be, the capital gains if any, are in 1947 and is therefore not relevant. So the amount of Rs. 68,500/-will also have to be left out of account. If these two amounts are omitted the total income that had escaped assessment as calculated by the Income Tax Officer, the balance will be only Rs. 1,55,000 and odd. The assessee has his own case about the various items that had been taken into account by the Income Tax Officer to arrive at this figure of Rs. 1,55,000 as the escaped income for the five years. But it is unnecessary and perhaps not permissible for this Court to investigate as to whether the ' conclusions reached by the Income Tax Officer that the income to the extent of Rs. 1,55,000 as the escaped income for the five years. But it is unnecessary and perhaps not permissible for this Court to investigate as to whether the ' conclusions reached by the Income Tax Officer that the income to the extent of Rs. 1,55,000/- had really escaped assessment or not. Assuming that this much of income had escaped assessment for the five years, the question is whether Income Tax Officer was justified in issuing notice for all the five years as if for each of those five years there had been an escape of income of more than Rs. 50,000/-. This is the reason for the issue of notice. This is seen from the last paragraph of Ex. "x" which is in these terms: "Thus, as on 31-12-1953 the total income which escaped assessment comes to Rs. 2,54,740/-. Since the assessee is not in a position to explain the source of the above funds, this has to be assessed as income escaped assessment for the assessment years 1950-51 to 1954-55 at Rs. 50,948 per each year. Sanction may kindly be accorded for the issue of notice under S.148 for the assessment year 1954-55". 9. In the light of what we have stated above, for the figure of Rs. 2,54,740/-we have to substitute Rs. 1,55,740/-. It would then be clear that for each of the years the income that had escaped assessment would be much less than Rs. 50,000/-. if the method adopted by the Income Tax Officer of dividing the total income by five is adopted. There is nothing to indicate that on any particular year, out of the years 1950-51 to 1954-55, income in excess of Rs. 50,000/-had escaped assessment. This is also not seen from the records that were made available. There was no material it appears before the Income Tax Officer which would enable him to say that in any of the five years 1950-51 to 1954-55 income to the extent of Rs. 50,000/- or more had escaped assessment or was likely to have escaped assessment. In these circumstances we have to come to the conclusion that the requirements of S.147(a) read with S.149 had not been satisfied and the Income Tax Officer had no jurisdiction whatever to initiate proceedings for reassessment of the petitioner for the five years 1950-51 to 1954-55. 10. 50,000/- or more had escaped assessment or was likely to have escaped assessment. In these circumstances we have to come to the conclusion that the requirements of S.147(a) read with S.149 had not been satisfied and the Income Tax Officer had no jurisdiction whatever to initiate proceedings for reassessment of the petitioner for the five years 1950-51 to 1954-55. 10. We have already referred to the question whether we will be justified in interfering in view of the assessment orders having been passed for the five years after we issued notice on this petition. We think the procedure adopted by the Supreme Court in 41 ITR 191 will have to be followed by us. Any assessments completed during the pendency of this writ application we consider, must depend on the decision that we take in this case and if there was no jurisdiction to take action under S.147 of the Act the whole proceedings are vitiated as without jurisdiction and it necessarily follows that the assessment orders that followed such action cannot stand. We think that in the interests of justice the assessment orders should be set aside. More than 15 years have gone by now. To drive the assessee to further proceedings by way of appeal, second appeal and finally by way of reference if he did not succeed at any earlier stage would be harassing the petitioner in relation to the assessments which had become final. We therefore think that we should quash not only Ex. P3 series but also the assessment orders for the five years. 11. Counsel for the revenue contended before us that the notice Ex. P3 series were issued as early as 12-10-65 and that the writ application was filed only on the 9th June, 1969 nearly four years after the issuance of the notice and there is therefore inordinate delay in approaching this Court and on that ground this petition should be dismissed. Counsel for the petitioner replied that in answer to the notice information was called for from the petitioner by the Income Tax Officer and at one stage he was able to convince the Income Tax Officer that proceedings should be dropped and there is a specific averment in Para.15 of the petition that the Income Tax Officer decided to drop the proceedings and sent such a report saying that proceedings should be dropped. He has even averred that proceedings were continued by the Income Tax Officer thereafter because he was instructed by some officer to continue the proceedings and that the final decision was taken by the Income Tax Officer only when notice under S.143(2) of the Act was issued which was received by the petitioner on 3-6-69. What had happened in the intervening period after the issue of notice Ex. P3 series and before the receipt of the notice Ex. P9 series under S.143(2) by the petitioner has been detailed in Para.8 to 17 of the petition and references have also been made to Exs. P5, P6, P7 and P8. The averments in these paragraphs have not been denied in the counter affidavit that has been filed in the case excepting to state that the Income Tax Officer was not directed by any superior officer to revive proceedings under S.147. This really does not touch the question. The fact that no final decision had been taken to proceed with the notices Ex. P3 series till the notices Ex. P9 series under S.143(2) were issued to the petitioner is clear from the averments in Para.8 to 17 which stand unchallenged. We do not think that an assessee who had reasonable grounds to believe that the proceedings which were initiated by notice under S.148 by the Income Tax Officer should rush to this Court before his reason for such belief is shattered. He has come very promptly before this Court within a short time after the receipt of the notices under S.143(2). We are unable to accept the suggestion made on behalf of the revenue that this petition is belated. 12. We accordingly quash Exs. P3, P3(a), P3(b), P3(c) and P3(d) and the assessments made on the petitioner under S.147 of the Act for the years 1950-51, 1951-52, 1952-53, 1953-54 and 1954-55 and allow this writ application. We direct the parties to bear their respective costs.