The petitioner is a Hindu undivided family consisting of two members, Jumna Lal and Gopal Rai, Jumna Lal being the karta of the family. The petitioner owned a residential house and a dal mill at Kalibari. It carried on the business of manufacturing dal and also earned income from speculation and commission agency. On April 16, 1959, the last date of the Ram Naumi year, relevant to the assessment year 1959-60, it is said that a partial partition of the business carried on by the petitioner was effected, the residential house property and the dal mill at Kalibari were left intact in the ownership of the petitioner. The business so far carried on by the petitioner was apparently taken over by a partnership firm, Messrs. Jumna Lal Gopal Rai. The income from the business for the previous relevant to the assessment year 1960-61 was assessed in the hands of the partnership firm, which was granted registration under section 26A of the Indian Income-tax Act, 1922. Similar assessments were made on the partnership firm for the assessment years 1961-62 to 1964-65. For the assessment year 1964-65, however, the partnership firm claimed a deduction of Rs. 3,000 on account of rent paid by it to the petitioner for the hire of the dal mill, which had all along been employed by the partnership firm for the purpose of the business. The claim was disallowed by the Income-tax Officer. The petitioner appealed, but the appeal was dismissed by the Appellate Assistant Commissioner. The Appellate Assistance Commissioner took the view that as the assets of the business partitioned in part, it must be taken that all the assets of the business including the dal mill had been divided, and therefore the claim to deduction was not permissible. The petitioner then proceeded in appeal to the Income-tax Appellate Tribunal. The Appellate Tribunal allowed the appeal. It held that the dal mill, which is referred to as the Kalibari godown, had not included in the partition and that the rent had been paid for its use by the partnership firm to the petitioner, and, therefore the claim must be allowed. Thereafter it seems that the Income-tax Officer applied to the Commissioner of Income-tax suggesting that the case may be carried in reference to this court or , in the alternative, proceedings under section 147 of the Income-tax Act 1960, be initiated for the assessment year 1960-61. The Commissioner, it appears, did not approve the former course and instead expressed his satisfaction of the reasons recorded by the Income-tax Officer that it was a fit case for the issue of a notice under section 148. Accordingly, the Income-tax Officer issued a noticed dated February 24, 1966, under section 148 to the petitioner stating that he had reason to believe that the petitioners income chargeable to tax for the assessment year 1960-61 had escaped assessment, that he proposed to reasses the income for that assessment year, and he called upon the petitioner to furnish a return of its income assessable for that year. It was also stated that the notice was being issued after obtaining the satisfaction of the Commissioner. Thereafter, assessment proceedings pursuant to that notice were commenced by the Income-tax Officer. The petitioner applies for certiorari against the notice under section 148 and for prohibition against further assessment proceedings pursuant to that notice.
Section 147 of the Income-tax Act, 1961, contemplates two distinct classes of cases in which the Income-tax Officer may take proceedings to assess or reassess income chargeable to tax which has escaped assessment. One class of cases is that falling under clause (a) where 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 for any assessment year to the Income-tax Officer or to disclose fully and truly all material facts necessary for assessment for that year, income chargeable to tax has escaped assessment for that year. The other class is contemplated by clause (b) where 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 an assessment year. Before proceeding to make the assessment or reassessment under section 147 , the Income-tax Officer is required by section 148 to serve a notice on the assessee . Sub-section (2) of section 148 obliges the Income-tax Officer before issuing any notice under the section to record his reasons for doing so. Now no notice can be issued by the Income-tax Officer unless, as required by section 151 , the Board is satisfied that it is a fit case for issue of such notice in a case where notice has to be issued after the expiry of eight years from the end of the relevant assessment year, and in a case where notice has to be issued after the expiry of four years from the end of the relevant assessment year, unless the Commissioner is satisfied that it is a fit case for issue of such notice. But whether it is the Board or the Commissioner, the satisfaction must proceed on the reasons recorded by the Income-tax Officer.
It is clear that the Income-tax Officer is bound to record the reasons for issuing a notice under section 148. The requirement is mandatory Before the assessment can be had, the Income-tax Officer must issue a notice under section 148 and before that notice can be issued, he must record his reasons for doing so and must also upon those reasons obtain the satisfaction of the Board or the Commissioner. The recording of the reasons is, in my opinion, a pre-requisite to the assumption of jurisdiction by the Income-tax Officer for initiating the proceedings, for assessing or reassessing income which has escaped assessment. Those reasons are of particular significance when action is taken under clause (a) of section 147 because they indicate the reasons which the Income-tax Officer has in mind for believing that income has escaped assessment for an assessment year by reason of one or the other default of the assessee specified in that clause. Sub-section (2) of section 148 requires the Income-tax Officer to record his reasons for issuing a notice under that section and it is necessarily envisaged that he will record all the reasons he has in mind. This consideration acquires importance when question is raised as to what were the reasons on the basis of which the Income-tax Officer invoked the jurisdiction conferred under clause (a) of section 147. To justify action by reference to clause (a) of section 147 it is not open to the Income-tax Officer, in my opinion, to refer to reasons other than those recorded by him pursuant to sub-section (2) of section 148. If those reasons are such that on their basis it can possibly be said that income chargeable to tax has escaped assessment for a certain assessment year because of the omission or failure on the part of the assessee to make a return for that year or to disclose fully and truly all material facts necessary for such assessment, there is a valid case for invoking the jurisdiction conferred by clause (a) of section 147. If, on the contrary, the reasons recorded by the Income-tax Officer cannot possibly lead to such conclusion, the proceedings initiated by the Income-tax Officer by reference to that clause must be struck down as invalid. In the instant case, the Income-tax Officer recorded his reasons. Those reasons are set out in a supplementary affidavit filed by the petitioner. How, and in what circumstances he succeeded in coming to know of the reasons is not a matter for consideration for the purposes of the case before me. What is relevant is that fact that they are the reasons recorded by the Income-tax Officer, and that not disputed by the Income-tax Officer. I have also perused the relevant file of the Income-tax Officer, and it does appear that the reasons set out in the supplementary affidavit are indeed the reasons recorded by the Income-tax Officer.
The Income-tax Officer said, in the reasons recorded by him, that is was the case of 'the assessee' before the income-tax authorities and the Income-tax Appellate Tribunal that even though there was a partial partition of the Hindu undivided family business and its conversion into a partnership firm, the main assets of the business, namely, the building and the machinery, were not partitioned and they continued to belong to the Hindu undivided family. He pointed out that it was established law that there could be partial partition of a Hindu undivided family only if all the assets of that particular business had been partitioned. Proceeding, he observed that as admittedly all the assets of that particular business had not been partitioned, it followed that there was no actual or genuine partition of the Hindu undivided family business and that the business in fact continued to belong to the Hindu undivided family. Consequently, he considered it necessary to reopen the assessment of the Hindu undivided family for the assessment year 1960-61 onwards. Now it is pertinent to note that the assessee before the income-tax authorities and the Income-tax Appellate Tribunal, to whom reference was intended by the Income-tax Officer, was the partnership firm and not the Hindu undivided family. The claim to deduction on account of the rent paid in respect of the hire of the dal mill was made by the partnership firm and the successive appeals filed thereafter were preferred by that firm. The Hindu undivided family was not a party of those proceedings. Analysed, the reasons recorded by the Income-tax Officer amount to this, that inasmuch as the case of the partnership firm before the income-tax authorities and the Appellate Tribunal was that some of the assets of the business, namely, the building and the machinery, had not been partitioned but continued to belong to the Hindu undivided family and that as such a partial partition was not permissible in law, it must be inferred that there was no actual or genuine partition of the business which continued to belong to the Hindu undivided family. There is nothing here to suggest any default on the part of the petitioner. The entire basis is the case taken by the partnership firm in support of its claim in respect of the rent said to have been paid by it. On the basis of that case and in the light of the law as understood by the Income-tax Officer, he considered that the entire business was liable to be treated as belonging to the Hindu undivided family. If the Income-tax Officer had in mind any default on the part of the petitioner when he recorded the reasons, clearly it failed to find expression to those reasons. I am unable to find any thing in those reasons which attracts the terms in which clause (a) of section 147 is set out so far as the petitioner is concerned. It is not stated that action under that provision is being taken against the petitioner because he did not file a return for the assessment year 1960-61 or that the petitioner did anything justifying the conclusion that it omitted or failed to disclose fully and truly all the material facts necessary for its assessment for that year. An attempt has been made in the counter-affidavit filed by the Income-tax Officer to support the validity of his action by pointing out that the petitioner misled the Income-tax Officer by withholding the fact that the building and the machinery had not being partitioned and that the impression conveyed all along by the petitioner was that all the assets as been partitioned. That is a case completely inconsistent with the reasons recorded by the Income-tax Officer. It is one thing to say that the admitted case is that all the assets of the business were not partitioned and therefore in law there was no partition of the business, and quite another thing to say that the fact had been concealed that some of the business assets had not suffered partition. As I have pointed out above, the Income-tax Officer must be confined to the reasons given by him to support the validity of his action under clause (a) of section 147. In my judgement, the proceedings taken by the Income-tax Officer commencing with the notice dated February 24, 1966, under section 148 are without jurisdiction and invalid.
The petition is allowed. The notice dated February 24, 1966, issued under section 148 of the Income-tax Act, 1961, and the proceedings taken pursuant thereto are quashed. The petitioner is entitled to its costs.