1. This is an appeal preferred by the assessee, Shri Deep Chand Jain (Individual), against the order, dated 14-5-1981, of the Commissioner (Appeals), II, Kanpur. The question involved in this appeal relates to the validity of the reassessment.
2. The facts, which are not in dispute, are as follows : The assessee derives income from his share in two firms, namely, Deep Chand Naresh Chand and Bhagwan Das Shobha Lal Jain, Chameli Chowk, Sagar (MP). For the assessment year 1974-75, for which the accounting year ended 25-10-1973, the assessee furnished his return on 29-6-1974 declaring an income of Rs. 5,65,170. The original assessment was completed by the IAC (Assessment) on 14-8-1974 under Section 143(1) of the Income-tax Act, 1961 ('the Act'), on a total income of Rs. 5,65,790. The assessee had advanced a loan of Rs. 1,75,000 on 6-5-1967 to Bhagwan Das Shobha Lal Jain. The assessee became a partner in the said firm on 22-10-1968, relevant to the assessment year 1969-70. The interest which accrued to the assessee in respect of the said loan was credited to his loan account every year and was also added to his total income in the assessments made for the assessment years 1968-69 to 1973-74. However, the loan in question was transferred to the capital account of the assessee on 25-10-1973, i.e., on the last date of the previous year relevant to the assessment year 1974-75. The interest amounting to Rs. 31,005, which accrued on the said loan during the previous year ending 25-10-1973, relevant to the assessment year 1974-75, was neither included by the assessee in his return for the assess-merit year 1974-75 nor did the IAC (Assessments) include the same in the total income of the assessee. The audit party felt that income to the extent of the aforesaid amount of Rs. 31,005 had escaped assessment, resulting in a short charge of tax. In its reply dated August 1975, the department justified its action on the basis that there was no provision for allowing interest to the partners on their capital account. The local audit did not accept this explanation and felt that as the transfer of the loan to the capital account took place only on 25-10-1973, interest accrued for the assessment year 1974-75 and was includible in the assessee's total income for this year. The local audit, accordingly, framed an audit para on this point in the Local Audit Report. Thereafter, a notice dated 30-6-1978 was issued to the assessee under Section 148 of the Act in the prescribed form under the signature of the ITO, Circle 11(1), Kanpur, with the following unsigned footnote in Hindi: '1,75,000 KI DHAN RASHI PER ARJIT KIYE HUYE BYAJ KO, JO 31,000 HAI, US AMDAN1 KA RETURN DE JO KI KARNIDHARAN SB CHHUT GAI HAI.' (Furnish the return for the income of Rs. 31,000 which accrued as interest on Rs. 1,75,000, which has ascaped assessment.) In pursuance o f the said notice, the assessee filed a return declaring an income of Rs. 5,65,788 as originally assessed. The assessee also protested through a letter accompanying the return that the notice issued under Section 148 was invalid and bad in law. The assessee also explained that as he had become a partner in the firm, Bhagwan Das Shobha Lai Jain, the question of charging interest on the loan amount did not arise. He also contended that all the relevant information has been furnished during the original assessment proceedings and no new facts or materials having been brought on the record, it was merely a case of difference of opinion. It was also submitted on behalf of the assessee before the I AC (Assessments) that the reasons were not recorded in a proper way. The IAC (Assessments), however, held that there was no illegality in the notice, observing as under : The notice does not illustrate the reasons but it does not mean that the notice is invalid. Assessee's contention is also not correct that the notice should include the reasons for issue of it.
Therefore, the notice under Section 148 is legal and valid, hence, the contention of the assessee is rejected.
He assessed the interest by including it in the assessee's total income.
3. In the appeal before the Commissioner (Appeals), it was contended on behalf of the assessee that the reassessment was not sustainable as (1) the IAC had failed to record reasons under Section 148(2) for reopening the assessment, (2) the assessee had disclosed all primary facts at the time of the original assessment and there was no new information and so the reopening of the assessment was invalid under both the clauses (a) and (b) of Section 147 of the Act, and (3) the reassessment was not justified even on merits. The Commissioner (Appeals) held that though no reasons were recorded by the IAC (Assessments) in the order sheet, they were there in the notice under Section 148 (the note in vernacular quoted above). He took the view that though under the administrative instructions, it was not desirable to record the reasons in the notice itself, it satisfied the provisions of Section 148(2) as the IAC (Assessments) had recorded the reasons in writing and had applied his mind to the facts before issuing the notice. Next, he held that the audit note was 'information' on the basis of which assessment was validly reopened under Section 147(6) as the original assessment was completed under Section 143(1) without considering the said information. On merits too, he took the view that interest up to 24-10-1973 was taxable. Accordingly he dismissed the appeal filed by the assessee.
4. The assessee being still aggrieved, came up in further appeal before the Appellate Tribunal. With the consent of the learned counsel for both the parties, agruments were heard only on the question of the validity of the reassessment proceedings. No agruments were addressed on any other points. Reiterating the submissions already made before the Commissioner (Appeals), Shri H.P. Agrawal, the learned counsel for the assessee, referred to the decision of the Hon'ble Allahabad High Court in Jamna Lai Kabra v. ITO  69 ITR 461 and of the Hon'ble Calcutta High Court in East Coast Commercial Co. Ltd. v. ITO  128 ITR 326 and submitted that there was no application of mind and no reasons were recorded before the issue of the notice under Section 148 and that what was recorded in the notice was unsigned and did not amount to any 'reasons recorded', and it amounted, at best, to a direction to the assessee for filing the return. He also submitted that reassessment was also bad, being based on a subsequent reconsideration of the same material and that the audit note constituted the opinion of the audit rather than any 'information'. He, therefore, argued that the reassessment was invalid and deserved to be quashed. On the other hand, Shri R.K. Upadhyay, the learned departmental representative stoutly defended the reassessment order by placing reliance on the orders of the income-tax authorities.
5. We have considered the rival submissions of the parties as also the decisions referred to above.
6. Assessment was purported to be justified in this case under Section 147(6), i.e., on the ground that in consequence of the audit note, which was treated as 'information', the IAC (Assessments) had reason to believe that income chargeable to tax had escaped assessment for the assessment year in question. The scheme contained in Sections 147 and 148(2) is that first the reasons are to be recorded under Section 148(2), next the notice is to be issued to the assessee under Section 148(1) and lastly the reassessment is to be made. The recording of reasons in support of the belief formed by the reassessing office is an extremely important circumstance to find out whether he had jurisdiction. The formation of the required belief is a condition precedent. The recording of reasons under Section 148(2) is not an idle formality but a mandatory prerequisite to the assumption of jurisdiction by the officer for initiating proceedings for assessing or reassessing income which has escaped assessment. The satisfaction must necessarily proceed on the reasons recorded and the reasons cannot, therefore, be given after the issue of the notice. If there is a failure to record the reasons, the reassessment is vitiated. In reply to a pointed query from the Bench, the learned departmental representative stated that, in the order sheet neither any reasons were recorded by the IAC (Assessments) before the issue of notice nor was there any order sheet entry, even regarding issue of the notice under Section 148. The case of the department is that the vernacular footnote in the notice constituted the 'reasons recorded'. It is pertinent to notice that since there is no other indication in the said notice as to the paragraph or line to which it is related, we can only take it as a postscript. It is not signed or initialled by the ITO. Even if it were to be taken that this note was by the ITO, it is not explained as to how the reasons came to find place on the notice. The language of the said note shows that it cannot be called 'reasons recorded'. It is only in the nature of a direction to the assesse to file the return. The reference to escapement from assessment is in the nature of a description of the amount of Rs. 31,000 rather than any reason contemplated under Section 147 for reassessment. We, therefore, held that the note in question did not constitute the 'reasons recorded' and that there is no proof of application of mind by the reassessing officer on any reasons. In any case, the reasons had to precede the issue of the notice and they could not be contemporaneous or subsequent thereto. Thus the second prerequisite which is not established in this case is that reasons were recorded prior to the issue of the notice.
The department has placed on the, paper book a copy of the audit note dated 17-3-1978, a perusal whereof shows that the assessee had disclosed all the particulars at the time of the original assessment and that there was no new information. It also shows that the department had not brought the amount in question to tax for reasons mentioned there. The audit did not agree with that reasoning.
Therefore, the reassessment proceeded on the basis of a mere change of opinion on the basis of the same facts and materials, which is not permissible. The fact that the original assessment proceeded under Section 143(1) would not change the result. The assessing officer may have raised a wrong legal inference from the facts disclosed but on that account he is not competent to commence reassessment proceedings.
'Information' cannot be of facts of which the original assessing officer was aware at the time of the original assessment. Therefore, in the light of the foregoing facts and aspect it is clear that the essential prerequisites to the assumption of jurisdiction by the officer for initiating reassessment proceedings being absent, the reassessment order was invalid. We hold accordingly. Therefore, the reassessment order is quashed.
7. The appeal filed by the assessee is allowed and the order of reassessment is hereby quashed.