R.N. Misra, J.
1. This is an application under Article 226 of the constitution for a writ of certiorari to quash the notices issued under Section 148 of the Income-tax Act of 1961 (hereafter referred to as 'the Act') in respect of the five assessment years being 1965-66 to 1969-70.
2. The assessee-petitioner is a firm constituted under the Indian Partnership Act of 1932. For the assessment years 1954-55 and 1955-56, the firm was accorded registration under the Indian Income-tax Act of 1922, but thereafter registration was refused. Certain sister concerns of the assessee-firm were treated not to be genuine and the assessee-firm itself got entangled in various proceedings of assessment, penalty, et cetera. Thereupon, with a view to bringing about a settlement, the assessee approached the Director of Inspection (Investigation) of the Central Board of Direct taxes. According to the assessee, its application was examined at great length with reference to the books of account with particular emphasis on the contract business, as a flat rate on percentage basis of the gross receipts was sought to be adopted for determining the assessable income and ultimately on 28th of August, 1970, the terms of settlement ,were communicated to the petitioner. In regard to the contract business, it was stipulated that ten per cent. of the gross receipts would represent the assessable income. On the basis of the terms of settlement, assessments for the five years in question were completed as per the particulars provided below :
Assessment yearDate of returnDate of completion of assessment
3. The Income-tax Officer (opposite party No. 1) took up the assessment for 1970-71, and completed the same by order dated February 12, 1973. He came to hold that the 'work-site account' in which an amount of Rs. 10,45,934 appeared was not genuine and, therefore, added the entire amount as income from undisclosed sources. The petitioner carried an appeal to the Appellate Assistant Commissioner, who came to hold that the work-site account was running from previous years and the opening balance under the head on April 1, 1969 (the date of commencement of assessment year 1970-71) was Rs. 10,38,447. On this finding he sustained an addition of Rs. 7,487 only and deleted the balance observing :
'...on the basis of the yearwise break-up of the fictitious work-site account now filed at the appellate stage, it may be open for the Income-tax Officer to take appropriate action for earlier years in which years the fictitious work-site liability also appeared, but from the assessment of this year a sum of Rs. 10,38,447 shall have to be deleted.'
4. The petitioner preferred a further appeal to the Appellate Tribunal challenging the finding of the fictitious nature of the work-site account and the observation of the Appellate Assistant Commissioner that the sum of Rs. 10,38,447 running from previous years was liable to be brought into the net of taxation in the respective previous years. The Tribunal by judgment dated June 2, 1973, came to hold that the work-site account was not fictitious. It also deleted the observation of the Appellate Assistant Commissioner relating to reopening of assessments of earlier years. The revenue thereupon asked the Tribunal to state a case to this court formulating the following question said to be of law :
'Whether, on the facts and in the circumstances of the case, the learned Tribunal was justified in deleting the addition of Rs. 7,487 in 'work-site' account as income from undisclosed sources when the assessee admittedly failed to prove that the liability was a real one?'
5. The Tribunal refused to state a case by its order dated 20th of September, 1973, and as the revenue took no further steps, the decision of the Tribunal became final. In the meantime, the Income-tax Officer sent up proposals to the Commissioner of Income-tax for reopening the assessmentsfor the previous five years and actually issued the notices for the five years and these notices are under challenge in this proceeding.
6. The petitioner has contended :
(i) The assessee had disclosed all primary facts to the Income-tax Officer when assessments were completed for these years. Therefore, action under Section 147(a) of the Act was not open to be taken aS far as the notices are concerned, they are claimed to be barred by limitation as per the provisions of Section 149(1)(b) of the Act.
(ii) The Income-tax Officer has no reason to believe that on account of omission or failure on the part of the petitioner to disclose fully and truly all material facts necessary for the assessment, income chargeable to tax had escaped assessments for the years in question. Accordingly, the notices are without jurisdiction and liable to be quashed.
(iii) The report of the Income-tax Officer to the Commissioner of Income-tax was upon untenable grounds and the true picture of the matter had not been disclosed to the Commissioner of Income-tax when proposal was sent up for reopening the assessments and Commissioner's consent was asked for. Thus, the entire proceeding is vitiated by mala fides of the Income-tax Officer. Again, the Commissioner of Income-tax having acted mechanically in according sanction by putting of a rubber-stamp, the bald sanction is vitiated on that ground also.
(iv) The settlement entered into between the assessee and the revenue covered the matter relating to work-site account and, as such, the proceedings for reopening the assessments are not tenable in law.
7. The Income-tax Officer who issued the notices filed the counter-affidavit on behalf of the opposite parties and sought to justify his action. The plea raised in the counter affidavit regarding maintainability of this petition without exhausting the procedure laid down under the Act was also pressed at the time of hearing.
8. We think it appropriate to deal with the question of maintainability first. According to learned standing counsel appearing for the opposite parties, the writ application should not be entertained as the assessee is entitled to resist the proceeding before the Income-tax Officer and upon failure to obtain relief from the Income-tax Officer, it is entitled to prefer an appeal to the Appellate Assistant Commissioner and then approach in Second appeal, the Appellate Tribunal, and ultimately agitate any question of law arising out of the matter before this court and the Supreme Court. In view of such specific provisions of law, there is no justification to entertain the writ application. Besides, the matter involves factual disputes which can be appropriately ascertained and determined by the statutory tribunals.
9. In Calcutta Discount Company Ltd. v. Income-tax Officer : 41ITR191(SC) , a similar objection was overruled by observing :
'Mr. Sastri mentioned more than once the fact that the company would have sufficient opportunity to raise this question, viz., whether the Income-tax Officer had reason to believe that under-assessment had resulted from non-disclosure of material facts before the Income-tax Officer himself in the assessment proceedings and, if unsuccessful there, before the appellate officer or the Appellate Tribunal or in the High Court under Section 66(2) of the Indian Income-tax Act. The existence of such alternative remedy is not however always a sufficient reason for refusing a party quick relief by a writ or order prohibiting an authority acting without jurisdiction from continuing such action.'
10. When a writ application challenging the issue of a similar notice was rejected in limine by the High Court, the Supreme Court in Madhya Pradesh Industries Ltd. v. Income-tax Officer : 57ITR637(SC) , observed :
'Jurisdiction of the Income-tax Officer obviously arises when he has reason to believe that by reason of omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment, income of the assessee has escaped assessment, or has been under-assessed, and when the party claiming relief challenges on oath the existence of the conditions, which confer jurisdiction, and sets out facts which may, unless disproved, support his case, an order dismissing his petition in Limine may not properly be made.'
11. Several instances where the court has entertained applications under Article 226 of the Constitution have been indicated to us. For instance, Chhugamal Rajpal v. S.P. Chaliha : 79ITR603(SC) and Union of India v. Rai Singh Deb Singh Bist : 88ITR200(SC) are cases where notwithstanding alternative relief available under the statute, the application was entertained and relief was even granted. The preliminary objection must, therefore, stand overruled.
12. We shall now deal with the several contentions of the assessee. Contention No. 1
13. Section 147 of the Act provides :
(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 Section 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......
he may, subject to the provisions of Sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereafter in Sections 148 to 153 referred to as the relevant assessment year)......
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.'
14. In Calcutta Discount Co.'s case : 41ITR191(SC) , Das Gupta J., speaking for the majority, observed:
'The words used are 'omission or failure to disclose fully and truly all material facts necessary for his assessment for that year'. It postulates a duty on every assessee to disclose fully and truly all material facts necessary for his assessment. What facts are material and necessary for assessment will differ from case to case. In every assessment proceeding, the assessing authority will, for the purpose of computing or determining the proper tax due from an assessee, require to know all the facts which help him in coming to the correct conclusion. From the primary facts in his possession, whether on disclosure by the assessee, or discovered by him on the basis of the facts disclosed, or otherwise, the assessing authority has to draw inferences as regards certain other facts ; and ultimately, from the primary facts and the further facts inferred from them, the authority has to draw the proper legal inferences, and ascertain on a correct interpretation of the taxing enactment, the proper tax leviable......
There can be no doubt that the duty of disclosing all the primary facts relevant to the decision of the question before the assessing authority lies on the assessee. To meet the possible contention that when some account books or other evidence has been produced, there is no duty on the assessee to disclose further facts, which on due diligence, the Income-tax Officer might have discovered, the legislature has put in the Explanation, which has been set out above. In view of the Explanation, it will not be open to the assessee to say, for example--'I have produced the account books and the documents : You, the assessing officer, examine them, and find out the facts necessary for your purpose : My duty is done with disclosing these account books and the documents.' His omission to bring to the assessing authority's attention those particular items in the account books, or the particular portions of the documents, which are relevant, will amount to 'omission to disclose fully and truly all material facts necessary for his assessment'. Nor will he be able to contend successfully that by disclosing certain evidence; he should be deemed to have disclosed other evidence, which might have been discovered by the assessing authority if he had pursued investigation on the basis of what has been disclosed. The Explanation to the section gives a quietus to all such contentions ; and the position remainsthat, so far as primary facts are concerned, it is the assessee's duty to disclose all of them--including particular entries in account books, particular portions of documents, and documents and other evidence which could have been discovered by the assessing authority, from the documents and other evidence disclosed.
Does the duty, however, extend beyond the full and truthful disclosure of all primary facts In our opinion, the answer to this question must be in the negative. Once all the primary facts are before the assessing authority, he requires no further assistance by way of disclosure. It is for him to decide what inferences of facts can be reasonably drawn and what legal inferences have ultimately to be drawn. It is not for somebody else--far less the assessee--to tell the assessing authority what inferences, whether of facts or law, should be drawn. Indeed, when it is remembered that people often differ as regards what inferences should be drawn from given facts, it will be meaningless to demand that the assessee must disclose what inferences--whether of facts or law--he would draw from the primary facts.'
15. These weighty observations have never been differed from and have in terms been approved by the Supreme Court in the case of Commissioner of Income-tax v. Burlap Dealers Ltd. : 79ITR609(SC) and in the case of Income-tax Officer v. Barkat Ali Khan : 97ITR239(SC) .
16. In the case of Commissioner of Income-tax v. Bhanji Lavji : 79ITR582(SC) , dealing with the matter, Shah C.J. spoke thus:
'It was again no duty of the assessee to disclose to or instruct the Income-tax Officer that there were 'profits embedded in the receipt' of the money at Bombay. Section 34(1)(a) does not cast any duty upon the assessee to instruct the Income-tax Officer on questions of law.'
17. A Full Bench of the Gujarat High Court in the case of Poonjabhai Vanmalidas & Sons v. Commissioner of Income-tax : 95ITR251(Guj) dealt with this aspect of the matter at great length. Divan J. spoke for the court in the following terms :
'Though the court cannot investigate into the adequacy or otherwise of the grounds on which the reason to believe on the part of the Income-tax Officer rests, the assessee is entitled to show that there was no material at all on which the Income-tax Officer could found such belief, that is, have reason for such belief. If, therefore, an assessee is in a position to show that he had disclosed at the time of the original assessment all that he was bound to disclose, i.e., all the primary facts relevant to and having a bearing on his assessment, there would be no ground for the Income-tax Officer to have reason to believe that there was any omission or failure on the assessee's part to disclose. Similarly, if an assessee can show that, though there was omission or failure to disclose on his part, such failure or omissionhad not resulted in any non-assessment or underassessment, etc., surely there would be no ground for the Income-tax Officer to have reason to believe that there was any non-assessment or under-assessment, etc., consequent upon such omission or failure. It would, therefore, follow that primary facts necessary for a proper assessment are objective facts, the existence or non-existence of which is not a matter of reasonable belief on the part of an Income-tax Officer. An Income-tax Officer cannot say that he had reason to believe that a certain fact which was relevant for assessment, and, therefore, a primary fact, existed and that it was not disclosed by an assessee if such a fact did not factually exist.'
18. What the primary facts in a given case would be, must depend on the facts of that case and it would not be appropriate to make any generalisation. In this case, action has been taken seeking to reassess the amounts appearing in the work-site account during the five years in question. The Income-tax Officer in his report to the Commissioner indicated that while he was dealing with the assessment year 1970-71, the assessee failed to produce accounts to support the genuineness of the amounts appearing under the account. Therefore, he was of the view that the assessee had not produced all the accounts relating to the work-site which constitute primary facts relating thereto. In paragraphs 5, 6 and 7 of the writ application, the petitioner has pleaded:
'5. That in each of these years the Income-tax Officer fixed several dates of hearing, issued notices under Section 142 as also under Section 143 of the Act, looked into all the records including the balance-sheets filed by the petitioner-firm. The copies of orders of assessment for each of the years are produced along with the petition for reference of the hon'ble court (annexure-5 series). The petitioner begs to particularly refer to the orders of assessment for the assessment years 1965-66 and 1968-69 wherein it has been clearly indicated that the profit and loss account and balance-sheet were produced before the Income-tax Officer and were examined by him. As a matter of fact in respect of each of these years the balance-sheets, profit and loss statements as also all accounts were produced. As already indicated, assessment proceedings for the last three years were taken up together and the accounts were being checked up also simultaneously; the final orders were given on the same day. In each of these years, assessment was completed under Section 143(3) of the Act.
6. That in the balance-sheet of each year appertaining to contract business was a head known as 'amounts due to branches: work-site account'. Copies of balance-sheets for each of these five years are filed herewith as annexure-6 series, showing the said entry. From the assessment year 1962-63, similar item has been appearing in the balance-sheet. Thus,work-site account has been featuring in all the assessment years commencing from 1962-63 up to assessment year 1970-71. In the first year the closing balance under this head was Rs. 16,737 while at the close of the assessment year 1970-71, it stood at Rs. 10,45,934. For convenience of this hon'ble court, a summary of the position is indicated in annexure 7.
7. That during each of these years the assessee had disclosed all primary facts relating to the accounts to the Income-tax Officer. The balance-sheets had been scrutinised with great care in view of the fact that the income to be assessed in the hands of the assessee was substantial and it constitutes one of the important assessees of the Income-tax Officer's circle.'
19. In paragraph 2 of the counter-affidavit, the deponent, Income-tax Officer, who made the assessment for the assessment year 1970-71, mainly dealt with the factual position in relation to that year. The counter-affidavit dealt with paragraphs 5, 6 and 7 of the writ petition in the following way:
'7. That the allegations made in para. 5 of the writ petition are not disputed. But the accounts of all the branches were not produced before opposite party No. 1. The Income-tax Officer (opposite party No. 1) was not furnished with any list of creditors in relation to the work-site account. Thus, on the facts and in the circumstances of the case, proceedings under Section 147 of the Act are maintainable.
8. That the facts stated in para. 6 of the writ petition are not disputed.
9. That the facts stated in para. 7 of the writ petition are disputed and denied. The petitioner had not disclosed the primary facts necessary for the assessment for the assessment years in question for which proceedings have been initiated under Section 147.'
20. In paragraphs 7 and 8 of the rejoinder filed by the petitioner, it has been averred :
'7. That as would presently be shown by this deponent the balance-sheets of each of the years had been duly produced along with the returns for each of the years under consideration and 'work-site account' featured as a head therein. The entire accounts on the basis of which the balance-sheet had been drawn up had been produced at the time of examination of the records during the assessment proceedings of each of the years and the respective Income-tax Officer had, in token of examination of the same, endorsed his signature in some of the account books of the petitioner-firm which the deponent undertakes to make available for-inspection of this hon'ble court at the time of hearing.
8. That production of the books of accounts and the clear mention in the balance-sheet of the work-site account are adequate disclosure of necessary primary facts as required of the assessee under the law...'
21. The counter-affidavit in this case has been filed by the Income-tax Officer who did not make the assessments for the years in question. As already indicated, the counter-affidavit has been given by that Income-tax Officer who assessed the petitioner for the assessment year 1970-71 and took steps to issue notice under Section 148 of the Act. The petitioner's assertion that all the accounts were duly produced and examined by the Income-tax Officer who made the assessment for the five respective years was open to challenge by the Income-tax Officer who had occasion to handle the assessment proceedings for those years. The petitioner in the affidavit by way of rejoinder in paragraph 4 has taken the stand :
'That Sri B. C. Mohanty, the opposite party No. 1 has no personal competency to swear in regard to matters to which he was not a party and the averments of denial in the counter-affidavit in the absence of relevant records, the deponent begs to submit, are not acceptable in law.'
22. The objection raised by the petitioner is germane. It is not the case of the department that the assessing officers of the respective five years are not available. Even if their affidavits were not produced to support the stand of the revenue, public records to support the plea raised in the counter-affidavit were expected to be produced for effectively opposing the stand of the petitioner. Though some of the records were before the court having been called for at the instance of the petitioner, learned standing counsel did not indicate to us any material at the time of hearing to support the stand of the revenue that there had been concealment of primary facts.
23. Petitioner's assertion in paragraph 5 of the writ application that all the accounts were produced and were duly checked up has been accepted in paragraph 7 of the counter-affidavit. Whether the accounts of the branches were produced or not, was not within the knowledge of the deponent of the counter-affidavit. Even if a list of creditors in relation to the work-site account may not have been produced, if all other details as claimed had been placed before the Income-tax Officer, non-production of a list of creditors cannot amount to non-disclosure or concealment of primary facts. Before us, the ledger of 1968-69 (relating to assessment year 1969-70) has been produced in support of the contention that the books of account had been placed before the Income-tax Officer and Mr. Rath, for the petitioner, indicated to us that this was only an instance to support the contention and the petitioner did not intend to re-produce the entire accounts. It was also indicated by Mr. Rath that this document has been selected by the petitioner as it bears the signatures of the Income-tax Officer at several places. At page 9 of this account book, the work-site account begins. The various heads of expenditure have been indicated and one of them is messing expenses to the tune of Rs. 4,925.50. At page 92 of the account book, this head hasbeen specifically entered and on this very page, the Income-tax Officer's admitted signature appears.
24. Admittedly, the work-site account featured in the balance-sheets for each of the years and these balance-sheets were before the assessing officer at the assessment stage for the relevant years. All the accounts are claimed to have been produced. This aspect has not been disputed in the counter-affidavit. It may be that the list of creditors has not been furnished. We have already indicated how the opposite parties have not been able to place appropriate denial by the concerned Income-tax Officer or by production of any documentary evidence. Even if the list of creditors may not be furnished, production of the rest of the materials and examination thereof by the Income-tax Officer as asserted in paragraph 5 of the writ application would constitute sufficient disclosure of necessary primary facts in relation to the work-site account.
25. In the case of Commissioner of Income-tax v. Bhanji Lavji : 79ITR582(SC) the court observed :
'In our judgment, the High Court was right in holding that the Tribunal misconceived the nature of the proceedings and the duty imposed upon the assessee by Section 34(1)(a). It is not for the assessee to satisfy the Income-tax Officer that there was no concealment with regard to any question; it is for the Income-tax Officer, if that issue is raised, to establish that the assessee had failed to disclose fully and truly certain facts material to the assessment of income which had escaped assessment.'
26. Keeping the legal position in view and taking the facts of the case into consideration in the light of the materials indicated above, we have no hesitation in our minds to conclude as a fact that the primary facts relating to the work-site account had been disclosed to the Income-tax Officer in each of the five years at the time assessment was done and for the reasons best known to the assessing officers, the amounts appearing in the worksite account were considered not to be taxable. There was thus no failure on the part of the assessee to discharge his duties as required under the law. Learned standing counsel for the revenue has conceded before us that if the finding be that the accounts had been produced and primary facts had been disclosed, subsequently the Income-tax Officer was not entitled to initiate a proceeding under Section 147 of the Act merely upon a change of his opinion. The concession is based upon the settled position in law and it is not necessary to refer at length to precedents. See Income-tax Officer v. Barkea Ali Khan : 97ITR239(SC) . Obviously, therefore, steps for reassessment under Section 147(a) of the Act are not tenable.
27. On behalf of the assessee, reliance has been placed on Section 149(1)(b) of the Act in support of the contention that the notices are barred bylimitation prescribed under that provision. Section 149(1) of the Act provides :
'(1) No notice under Section 148 shall be issued,--
(a) in cases falling under Clause (a) of Section 147-
(i) for the relevant assessment year, if eight years have elapsed from the end of 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 thousand or more for that year ;
(b) in cases falling under Clause (b) of Section 147, at any time after the expiry of four years from the end of the relevant assessment year.'
28. We have already accepted the position that Clause (a) of Section 147 has no application to the facts of the case. Even if Clause (b) of Section 147 applies, notices in question in respect of the first four years would be barred by limitation under Section 149(1)(b) of the Act, as the notices were issued in January, 1974, in respect of assessment years 1965-66 to 1968-69. Action under Section 147(b) of the Act would be barred for the first four years by being out of time while there would be no limitation in respect of the last year. The assessee's contention that in respect of all the years the notices were beyond the time-limit provided in Section 149(1)(b) of the Act to the extent indicated is, therefore, not correct.
Contention No. 2
29. The assessee has challenged the jurisdiction of the Income-tax Officer to issue the notices under Section 148 of the Act on the ground that the Income-tax Officer had 'no reason to believe that on account of omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for the assessment, income chargeable to tax had escaped assessment' during the years in question. As was indicated by the majority view in Calcutta Discount Co.'s case : 41ITR191(SC) , '(i) the Income-tax Officer having reason to believe that there has been underassessment ; and (ii) his having reason to believe that such under-assessment has resulted from non-disclosure of material facts', must exist before the Income-tax Officer has jurisdiction to start a proceeding. A Bench of this court in the case of Munilal Ramdayal v. Income-tax Officer : 76ITR151(Orissa) , while indicating the law on the point observed that before issue of notice under Section 148, two conditions precedent are to be fulfilled, namely:
'(a) The Income-tax Officer must have reason to believe that theincome, profits or gains chargeable to income-tax have been under-assessed ;
(b) He must also have reason to believe that such under-assessmentoccurred by reason of omission or failure on the part of an assessee todisclose fully and truly all material facts necessary for his assessment forthat year,'
30. Sub-section (2) of Section 148 of the Act requires that-
'the Income-tax Officer, shall, before issuing any notice under this section, record his reasons for doing so.'
31. Whether the Income-tax Officer had sufficient grounds for entertaining a reason to believe is not justiciable, but where the assessee contends that the Income-tax Officer did not hold the belief at all, the court is entitled to look into the matter. The belief of the Income-tax Officer must be held in good faith and it cannot be a mere pretence. In other words, it is open to the court to examine the question whether the reasons for the belief have a rational nexus to the formation of the belief and are not irrelevant or extraneous to the purpose of the section. In the assessment records of the first four years, a common order has been made purporting to be dated August 21, 1973, while in respect of the last year, i.e., the assessment year 1969-70, the same order is dated January 18, 1974. A look at the order in all the five years would show that it had been made ready at one point of time. The Income-tax Officer has, however, put different dates therefor, that is, for the first four years, August 21, 1973, has been put while for the last year 18th January, 1974, has been inserted. The order recorded for the purpose of Section 148(2) of the Act is as follows :
'Ref : Records for assessment year 1970-71.
The balance-sheet of the assessee shows a liability 'work-site account' which would ordinarily mean that the work-site account is a creditor to the assessee by the amount mentioned therein. As it happens, the assessee, at no point of time, had produced the account of the work-site for verification of the Income-tax Officer, nor had filed accounts statements to show the resources of the work-site. The assessee has failed to name his creditors under this account. There is, thus, ample evidence to show that the amount introduced in this account during the year under, consideration represents the assessee's own investment from undisclosed sources. The work-site account is only a subterfuge to avoid detection of the true facts ........
32. As already indicated, the Income-tax Officer took the aforesaid view while making assessment for the year 1970-71. The Appellate Assistant Commissioner in appeal had concurred with him. But the Appellate Tribunal vacated these findings of the Income-tax Officer and the Appellate Assistant Commissioner by its order dated June 2, 1973. 'By the time the Income-tax Officer came to record the reasonings on August 21, 1973, the Tribunal's decision had already been pronounced more than 2 1/2 months before. The basic reason indicated in the order of the Income-tax Officer had vanished with the determination of the Appellate Tribunal in regard tothe position relating to the assessment year 1970-71. The basis for the reasonings of the Income-tax Officer having been dropped out from the records of the assessment year 1970-71, with the disposal of the appeal for that assessment year by the Tribunal, there was no scope for the Income-tax Officer to come to the view he has expressed in his order dated August 21, 1973. If the basis of his knowledge or information was otherwise than the records of the assessment year 1970-71, the position would have been certainly different and on the reasoning that the sufficiency is not justiciable, we would have declined to interfere in the matter.
33. The position, however, is very different.' The Income-tax Officer took into account the views expressed by him in the order of assessment for a subsequent year as upheld in appeal by the Appellate Assistant Commissioner to be the basis for initiation of a proceeding under Section 147 though by the time he came to record his reasons, the position had been substantially varied by the ultimate decision of the Tribunal in regard to that assessment year. In the case of Sheo Nath Singh v. Appellate Assistant Commissioner  82 ITR 146, the court indicated that the belief of the Income-tax Officer must be that of an honest and reasonable person, based upon reasonable grounds and that the Income-tax Officer may act on direct or circumstantial evidence, but not on mere gossip or rumour. He will be acting without jurisdiction if the reason for his belief that the conditions are satisfied does not exist or is not material or relevant to the belief required by the section. The court can always examine this aspect though the declaration or sufficiency of the reasons for the belief cannot be investigated by the court. After the Appellate Tribunal had recorded its finding with reference to the work-site account in regard to the assessment year 1970-71, it was not open to the Income-tax Officer to fall back upon his own conclusions which had been by then vacated by the Tribunal and those could not constitute honest belief of the Income-tax Officer to record the reason he has. The Tribunal came to hold in paragraph 8 of its appellate order :
' ...............In the circumstances, we hold that the Appellate AssistantCommissioner has no basis or material to declare that the impugned account titled as 'work-site account' is fictitious and the disputed passage, which is the subject-matter of this appeal, is expunged from the order of the Appellate Assistant Commissioner.'
34. The Tribunal further found :
'Next point in the appeal is against the additions of Rs. 7,847 in the 'work-site account'. Since the Appellate Assistant Commissioner himself has found that the credit has been raised in this account by adjustment entry in the journal by debiting the expenses account, tracing the genesis of the credit entries, which are intimately linked up with the expenses,genuineness of which are not suspected--rather he found that the expenses are acceptable by implications and as there was no fresh influx of cash into the account, the addition is not 'warranted and, therefore, is deleted.''
35. Absence of bona fide belief of the Income-tax Officer at the time when he recorded the aforesaid order and asked for sanction of the Commissioner receives support from the conduct of the Income-tax Officer while sending up the proposal to the Commissioner. We shall deal with that aspect of the matter a little later while dealing with the question of sanction and, therefore, though it is relevant for this aspect of the matter, for avoiding repetition, we do not deal with it here. Our conclusion, therefore, is that the Income-tax Officer had no reason to believe that there had been any escapement of income from the net of taxation within the meaning of Section 147(a) of the Act.
Contention No. 3 :
As already noticed, the Income-tax Officer sent up proposals to the Commissioner of Income-tax for obtaining sanction to initiate proceedings under Section 147(a) of the Act against the assessee for the five years in question by his letter dated August 21, 1973. For each of the years in question in the prescribed form, the Income-tax Officer sent up the proposal. For convenience, we extract below the entire proposal in relation to the assessment year 1965-66.
'FORM FOR RECORDING THE REASONS FOR INITIATING PROCEEDINGS UNDER SECTION 148 AND FOR OBTAINING THE APPROVAL OF THE COMMISSIONER OF INCOME-TAX/CENTRAL BOARD OF DIRECT TAXES.
1.Name and address of the assesses.M/s Govinda Choudhury &Sons;, Gosaninuagaon, Berhampur.2.G.I.R. No.302-G3.StatusRegistered firm4.District/CircleBerhampur, Ganjam5.Assessment year in respect of which it is proposed to issue notice under section 148
1965-666.The quantum of income which has escaped assessment
As per separate sheet attached.7.Whether the provisions of section 147(a) or 147(h) are applicable or both the sections are applicable.
147(a)8.Whether the assessment is proposed to be made for the first time. If the reply is in the affirmative, please state
No. (a)Whether any voluntary return has already been filed ; and
(b)If so, the date of filing the said return : 9.If the answer to item 8 is in the negative, please state -
(a)the income originally assessedRs. 3,10,270 (b)Whether it is a case of underassessment, assessment at too low a rate, assessment which has been madethe subject of excessive relief or allowing of excessive loss or depreciation
Underassessment10.Whether the provisions of sec. 150(1) applicable. If the reply is in the affirmative, the relevant facts may bestated against item No.11 and it may also be brought out that provisions of section 150(2) would not stand in the way of initiatingproceedings under section 148.
11.Reasons for the belief that income has escaped assessment
As per separate sheet attached. Date 21-0-1973(Sd) B. C. Mohanty Income-tax Officer, Ward ' A ', Berhampur12.Whether the Commissioner /Board is satisfied on the reasons recorded by theIncome-tax Officer that it is a fit case for the issue of a notice under section 148
Yes I am satisfied. (Sd) Illegible,
Commissioner of Income-tax,
The assessee is a firm of contractors consisting of four partners. In the course of assessment proceedings for the year 1970-71, it was found that the firm's balance-sheet showed an item of liability, viz., 'work-site account' amounting to Rs. 10,45,000, This account he labelled as 'amount due to branches'. Although the branch was nothing but the assessee's own concern, he neither produced the accounts of the branch for verification nor filed any accounts statements to reflect the affairs of the branch. He failed to explain as to who were the debtors and creditors of the branch or how the branch could be a creditor to the assessee himself.
2. The assessment was completed by adding the entire sum of Rs. 10,45,000 to his income as this amount counter-balanced the assets of the assessee. At the appellate stage, however, the assessee contested the additions mainly on the ground that the above account was built up by accretion's from year to year and hence the entire amount was not to be assessed as income for the year. While no attempt was made either to produce the accounts of the branch or to establish the genuineness of the liability, the assessee offered the following explanation in the written grounds of appeal filed before the Appellate Assistant Commissioner.
'8. For that the learned Income-tax Officer has omitted to consider the fact that the income available in the hands of the partners during the several years of assessment to which the said amount relates was much in excess of the amount shown under the head of work-site and merely because a separate head was maintained in the accounts, the addition in the manner made by the learned Income-tax Officer cannot be sustained.'
The Appellate Assistant Commissioner on the ground that the liability was a fictitious one, restricted the addition to the amount of accretion during the accounting year relevant to the- assessment year 1970-71 only and excluded the sum which had accrued in earlier years.
3. The assessee went before the Tribunal but there also no explanation was offered relating to the genuineness of the liability. All these facts lead to the inevitable conclusion that the liability is a fictitious one and the assessee is a debtor to none but himself. The 'work-site account' had been devised as a camouflage for introduction of his own secreted income, and this was his modus operandi of tax evasion successfully deployed from the assessment year 1962-63 onwards. Although the assessee filed balance-sheet for all these years, he did not disclose the material facts truly and fully which is evident from the following facts :
(i) This account he labelled as 'amount due to branches'. The 'branch' was nothing but the assessee's own concern. Hence the assessee was squarely responsible for disclosing full facts about the accounts of the branch which was not done. No accounts of the branch were ever produced nor any balance-sheet was filed at any time to show as to who were the debtors and the creditors of the branch.
(ii) The assessee had failed to disclose the primary facts relating to the transactions of the branch, namely, the names of its debtors and creditors, its resources, etc.
(iii) The name 'work-site account' can never be a truthful substitute for the names of the partners or the firm individually or collectively. Thus by naming the creditor as the 'work-site account' and by not producing the account of work-site for verification nor filing any statement of account thereof, the assessee had suppressed all material facts necessary for true assessment of his income.
In view of the above, I am of the opinion that an amount of Rs. 3,58,128 representing accretion to this amount during the financial year 1964-65, relevant for assessment year 1965-66, has escaped assessment for failure on the part of the assessee to disclose all material facts truly and fully necessary for his assessment for the year. This amount has been excluded by the Appellate Assistant Commissioner from the income of the assessee for the assessment year 1970-71. Hence, proposal for action under Section 147(a) read with Explanation 2 to Section 153 of the Income-tax Act, 1961, may please be approved.'
36. We have already stated that the Tribunal's appellate decision in respect of the assessment year 1970-71 was pronounced on June 2, 1973. The assertion of the assessee that the Income-tax Officer had already a copy of the appellate order of the Tribunal by the time he sent up his proposal on August 21, 1973, is not disputed. The Income-tax Officer made no referenceto the disposal of the appeal by the Tribunal or the findings of the Tribunal reversing the Income-tax Officer's conclusions as also those of the Appellate Assistant Commissioner. Reference in the ultimate paragraph of the proposal to the fact that the Appellate Assistant Commissioner had excluded the amount in respect of which escapement was indicated was wholly unjustified, because, as a fact, by then the position was that the entire addition in relation to the work-site account stood deleted. Similarly, reference to Explanation 2 of Section 153(3) of the Act was totally unjustified. Explanation 2 is to the following effect:
'Where, by an order referred to in Clause (ii) of Sub-section (3), any income is excluded from the total income of the assessee for an assessment year, then, an assessment of such income for another assessment year shall, for the purposes of Section 150 and this section, be deemed to be one made in consequence of or to give effect to any finding or direction contained in the said order.'
37. The Income-tax Officer had incorporated reference to Explanation 2 obviously with reference to the observations of the Appellate Assistant Commissioner in regard to the assessment for the assessment year 1970-71. These observations had been vacated by the Appellate Tribunal more than ten weeks before the proposal emanated from the Income-tax Officer. The Income-tax Officer under these circumstances had absolutely no justification to refer to the direction of the Appellate Assistant Commissioner and rely upon Explanation 2 of Section 153(3) of the Act. Omission to refer to the position as decided by the Appellate Tribunal was not an honest act because the Income-tax Officer was obliged to place before the sanctioning authority the relevant materials and was not entitled to keep away the true state of affairs and put such facts as may assist in obtaining sanction.
38. Learned standing counsel for the revenue was not in a position to explain the conduct of the Income-tax Officer though repeatedly we called upon him to justify the stand of the Income-tax Officer in omitting reference to the latest position available with him and referring to provisions of the Act which had no application. Having failed to give an explanation on such score, the learned standing counsel argued that the Commissioner of Income-tax must have referred to the entire position before he accorded sanction. We have no definite material before us to uphold his contention. What papers were considered by the Commissioner of Income-tax before sanction was accorded is not known to us. That was a matter within the special knowledge of the Commissioner but we have not been told as to what he looked into before according sanction. On the other hand, in view of the facts stated in the proposal of the Income-tax Officer, we must uphold the contention of Mr. Rath for the assessee that true facts had not been stated and the bona fides of the Income-tax Officer in the matter of hisbelief that there existed reasons to believe that income of the assessee had escaped assessment were non-existent. Section 151 of the Act provides :
'(1) No notice shall be issued under Section 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 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.'
39. Admittedly, to the facts of this case, Sub-section (2) has application. Sanction of the prescribed authority is a condition precedent to issue of notice and if there be no sanction, the proceedings are invalid. See Commissioner of Income-tax v. Maharaja Pratapsingh Bahadur : 41ITR421(SC) . The statute requires the Commissioner to take into account the reasons recorded by the Income-tax Officer. The Income-tax Officer, therefore, is obliged under the law to make a full report of the correct state of affairs and furnish the Commissioner adequate material to enable him either to accord or withhold sanction. ....
40. In the case of Chhugamal Rajpal v. S.P. Chaliha : 79ITR603(SC) the court examined the provisions of Sections 148 and 151(2) of the Act. Dealing with this question at page 608 of the report, the court observed :
'Further, the report submitted by him under Section 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 Section 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 Section 148. To question No. 8 in the report which reads, 'Whether the Commissioner is satisfied that it is a fit case for the 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 come to the conclusion on the material before him that this is a fit case to issue notice under Section 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 imposed on them under these provisions as of little importance. They have substituted the form for the substance.'
41. As we have already stated, the Commissioner has not put in his own handwriting 'yes' in this case. On the other hand, that has been put by a rubber stamp. As there has been no disclosure to us as to what other documents the Commissioner of Income-tax took into account when he disposed of the question of sanction, we must hold that the Income-taxOfficer's report and reasons were made the basis and sanction was accorded in the manner indicated.
42. Mr. Rath for the petitioner placed before us a decision of a learned single judge of the Calcutta High Court in the case of Chanchal Kumar Chatterjee v. Income-tax Officer : 93ITR130(Cal) , where the following observation was made :
'On the point of sanction under Section 151 of the Income-tax Act, Mr. Bhattacharya's contention was that in this case there was no proper sanction as in the notice served on him and produced before me, the 2nd paragraph, which contemplates about sanction, was deleted. The Income-tax Officer has also stated in his affidavit that through inadvertence it was deleted. So he produced before me the original file where the Commissioner's signature appears bearing the date 30th March, 1971. In the cases, Chhugamal Rajpal v. S.P. Chaliha : 79ITR603(SC) and Commissioner of Income-tax v. Burlap Dealers : 79ITR609(SC) , the Supreme Court has said that if the Commissioner mechanically accorded sanction, that is not proper sanction. In the present case, as I have seen, there was only a rubber stamp above the signature of the Commissioner.'
43. These observations were used against the revenue. In the facts of the case in hand, we must, therefore, hold that there has been no valid sanction as required under Section 151(2) of the Act and, therefore, the initiation of the proceedings is without jurisdiction.
44. Before we leave this aspect of the matter, we think it pertinent to notice the pleadings. In paragraph 16 of the writ application, the petitioner pleaded :
'.........In the face of such a finding the present proceeding is not onlywithout jurisdiction but smacks of the mala fides of the Income-tax Officer.There is thus no basis for initiation of the proceedings. Your petitionerreasonably believes it to be true and humbly submits that there has beenno failure on its part to disclose the necessary primary facts as alreadyindicated and the Income-tax Officer has no scope to be satisfied that therehas been any escapement at all. The assessee has gathered, which hereasonably believes to be true, that the Income-tax Officer did not make acomplete report to the Commissioner of Income-tax in the matter forobtaining the requisite sanction as required under Section 151 of the Actand the Commissioner of Income-tax has also not given an appropriatesanction for the purpose. The Commissioner has not applied his mind tothe matter appropriately and the sanction has been the outcome of more orless mechanical exercise of power which would vitiate the proceedings. Thereis thus no compliance with the requirements of law which are conditionsprecedent to exercise of jurisdiction.'
45. In answer to the contents of this paragraph, the Income-tax Officer against whom the allegations were thrown in paragraph 16 of the counter-affidavit stated :
'The facts stated in paras. 14 to 16 of the writ application are disputed and denied. There is no question of res judicata or estoppel in taxation matters and there can be no such plea on the facts and in the circumstances of the case.'
46. While the petitioner's assertions related to facts within the special knowledge of the Income-tax Officer, who was the deponent of the counter-affidavit, he did not choose to raise any specific plea. The learned standing counsel has not been able to satisfy us as to why there was no specific denial of the allegations raised in the writ application and why the true position has not been disclosed which in a case of this type with reference to the allegations made was very much necessary.
Contention No. 4 :
The last contention of Mr. Rath for the assessee is that the settlement entered into between the assessee and the revenue covered the matter relating to the work-site account and as such the proceeding for reopening the assessments is not tenable in law. In paragraph 17 of the writ application, it has been asserted :
'That the work-site account as already indicated related to the contract business at all material points of time and when for the purpose of reaching the settlement with the revenue the returns, balance-sheets, profit and loss statements, books of account of the assessee for each of the years were scrutinised, the genuineness of the work-site account had been taken into consideration and the assessee's books for the entire period now concerned had been duly scrutinised by high authorities of the revenue. Settlement was ultimately reached after taking note of the assessee's accounts. In agreeing to compute income from gross contract receipts at 10 per cent. the work-site account was certainly given its due consideration. The impugned action of the Income-tax Officer is bound to interfere with such settlement and disturb the matter. It is not open to him to exercise such jurisdiction without the necessary clearance from the board.'
47. In paragraph 17 of the counter-affidavit, the Income-tax Officer averred:
'That the facts stated in para. 17 of the writ petition are not, admitted as correct and true. The settlement proceeding before the opposite party No. 4 was limited to two points as stated above and the work-site account was not a subject-matter of settlement. It is not correct for the petitioner to say that the said account was examined by opposite party No. 4. The question of examination of work-site account did not arise at all before the opposite party No. 4 while arriving at the settlement.'
48. In paragraph 15 of the rejoinder filed on behalf of the petitioner, it has been asserted thus :
'That there is no dispute that the 'work-site account' pertained to the contract works of the assessee as asserted already. The question of fixation of a rate for computation of profits from contract business was directly under consideration in the settlement proceeding. Therefore in the long-drawn consideration of the matter relating to the settlement, the balance-sheets, detailed accounts and all other aspects were examined at great length. The deponent begs to submit that the 'work-site account' which related to the contract business had thus gone very much to the lime light and formed an important part of the consideration. This deponent had appeared during the settlement proceedings before the various authorities and it is out of his personal knowledge that he submits to this hon'ble court that the discussions that had been carried related to all these aspects as stated above.'
49. Mr. Rath for the assessee contends that the Income-tax Officer is not competent to say one way or the other as to what was done by opposite party No. 4. The Board of Direct Taxes or the Director of Inspection (opposite parties Nos. 3 and 4 respectively) have not chosen to file any counter-affidavit.
50. Learned standing counsel has not pointed out to any material in the records produced relating to the settlement that the work-site account had not been taken into account or a positive indication as to what had been taken into account. In regard to the records relating to settlement an order for production was made on March 25, 1974, on the assessee's application subject to claim of privilege. Several adjournments were taken for raising the claim of privilege and the hearing of this application had to be deferred for more than six months on that ground only. Ultimately, no privilege was claimed and as the first page of the settlement record would show (a letter by Mr. Raghavan, Secretary to the Board of Direct Taxes, addressed to the Director of Inspection) excluding certain papers, the other record has been produced. Keeping in view the manner in which the matter moved and in the absence of a counter-affidavit from a competent authority and in the face of assertions of the assessee that he was personally present and out of his own knowledge he is able to make the assertion, it is difficult for us to hold that the work-site account had not been taken into consideration at the time the settlement was reached.
51. Settlement was admittedly in relation to the adoption of an appropriate percentage basis for determination of assessable profits in relation to contract works. Work-site account related to the contract works. It is, therefore, legitimate to accept that while determining the percentage, the high authorities of the revenue must have taken into consideration thework-site account which was relevant and had legitimate bearing. We are prepared to give necessary credit to the high authorities from the directorate that the work-site account could not have escaped their attention. In these circumstances, it is appropriate to hold by accepting the petitioner's assertion that the work-site account had been duly taken into consideration at the time the settlement was reached. In view of our findings on the other aspects, it is, however, not necessary to deal with this point any further.
52. For the reasons indicated above, the writ application must succeed. We, accordingly, allow the application and quash the notices under Section 148 of the Act. The assessee shall have costs of the proceeding. Hearing fee rupees two hundred.
B.K. Ray, J.
53. I agree.