D.K. Mahajan, C.J.
1. The Income-tax Appellate Tribunal, Chandigarh Bench, has referred the following question of law for our opinion :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the proceedings under Section 147(a) of the Income-tax Act, 1961, were not validly initiated ?'
2. The assessee is a registered firm. It deals in art silk and woollen fabrics. The assessee filed its return of income on June 28, 1965, declaring an income of Rs. 71,331 for the assessment year 1965-66, accounting year commencing on July 31, 1963, and ending on July 18, 1964. The assessment was completed on July 22, 1965, and the income as declared was accepted on January 25, 1967. The Income-tax Officer received a circular letter dated January 17, 1967, from the Inspecting Assistant Com-missioner, Amritsar. This letter was in connection with M/s. Shiv Parkash Janak Raj group. This group was alleged to be indulging in bogus purchases and hawalas through different parties. A list showing details of hundi loans which came out of concealed income of Shiv Parkash Janak Raj group was enclosed v/ith this circular. In the list, the name of the assessee was mentioned as one of the parties that had advanced a sum of Rs. 25,000 to M/s. Simplex Woollen Mills and Rs. 40,000 to Fine Spinners. Both these firms belonged to Shiv Parkash Janak Raj group. The Income-tax Officer examined the cash book for the assessment year 1965-66 and noticed that for advancing the said amounts to Shiv Parkash Janak Raj group, the assessee had built up the cash balance by showing certain amounts received from different parties which either did not exist or were bogus. The Income-tax Officer also noticed that some of the parties mentioned in the list from whom purchases had been made also appeared in the circular letter. Accordingly, the Income-tax Officer formed the belief that income of the assessee had escaped assessment under Section 147(a) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'). He, therefore, issued notice under Section 148 of the Act, The assessee, thereafter, filed a fresh return on March 6, 1967, and repeated the same income which was assessed in the original assessment. Reassessment was completed on May 15, 1970, and a sum of Rs. 28,112 was added as the assessee's concealed income in wool-tops account. The assessee was aggrieved by this order and filed an appeal which failed. The Appellate Assistant Commissioner held that the Income-tax Officer had reason to believe that the assessee's income had escaped assessment and the reopening of the assessment was justified. He also confirmed the addition of Rs. 28,112 in wool-tops account made by the Income-tax Officer. The assessee preferred second appeal to the Tribunal and two matters were agitated before it, namely :
(a) that the notice under Section 147(a) of the Act was invalid, and
(b) that the addition of Rs. 28,112 was not justified on facts.
3. In so far as the first matter is concerned, the Tribunal observed as follows:
'The circular received by the Income-tax Officer contained the information that Shiv Parkash Janak Raj group had arranged bogus hundiloans and the name of the assessee was found in that list. The list indicated that the assessee had advanced a loan of Rs. 25,000 to Simplex Woollen Mills. The assessee in its balance-sheet as on July 30, 1963, had shown an amount of Rs. 25,000 due from M/s. Simplex Woollen Mills and Rs. 20,000 due from Fine Spinners and except a suspicion that some income had escaped assessment there was no positive information to form a belief for reopening the assessment. The Income-tax Officer did not even verify that the assessee had shown the amount due in the balance-sheet for the assessment year 1964-65. After seeing the cash book for this year (after computing the original assessment) he only held that some items introduced in the cash book were suspicious. The items which were considered to be suspicious did not at all form the basis for the reassessment. There was, therefore, no reason to believe that income in this year had escaped assessment. The notice issued under section 148 was, therefore, not valid.'
4. In regard to the second matter, the Tribunal observed as follows :
'The learned counsel for the assessee had argued that, even on facts, there was no justification for holding that the assessee had made an extra profit of Rs. 28.112 on the sale of wool-tops and this amount was not shown in the books of account. It is, however, unnecessary for us to go into the facts because of our finding that the reassessment itself is invalid. We may make it clear that we do not express any opinion on the factual position on the addition of Rs. 28,112.'
5. The result was that the reassessment proceedings were quashed. The department being dissatisfied with the order of the Tribunal moved an application under Section 256(1) of the Act for referring the following two questions of law for the opinion of this court:
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the proceedings under Section 147(a) of the Act were not validly initiated ?
(2) If the answer to question No. 1 is in the negative, whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the reassessment of the assessee was invalid? '
6. The Tribunal was, however, of the opinion that only the first question arose and it, accordingly, referred that question for the opinion of this court.
7. It will be apparent from the facts found before the Tribunal that the only material in the hands of the Income-tax Officer was the circular letter. In that letter, there was no allegation that the assessee was dealing in any bogus business. All that was mentioned there was that there were certain advances which had been discovered as having been made by the assessee to M/s. Shiv Parkash Jauak Raj group. The short question,therefore, that reuqires consideration is whether there was material on the basis of which the Income-tax Officer could come to the conclusion that the assessee's income had escaped assessment. It may be mentioned that the amounts mentioned in the circular letter were shown by the assessee in its balance-sheet which was filed with the return on the basis of which assessment had followed and which assessment was sought to be reopened. The fact of the matter is that the Income-tax Officer had not bothered to examine the return before issuing the notice under section 148 of the Act.
8. So far as the legal position is concerned, it is settled and in that connection reference may be made to the decision of their Lordships of the Supreme Court in S. Narayanappa v. Commissioner of Income-tax : 63ITR219(SC) , wherein it was observed as follows :
'.....two conditions must be satisfied in order to confer jurisdictionon the Income-tax Officer to issue the notice under section 34 in respect of assessments beyond the period of four years, but within a period of eight years, from the end of the relevant year. The first condition is that the Income-tax Officer must have reason to believe that the income, profits or gains chargeable to income-tax had been under-assessed. The second condition is that he must have reason to believe that such 'underassessment' had occurred by reason of either, (i) omission are failure on the part of an assessee to make a return of his income under Section 22, or (ii) omission or failure on the part of the assessee to disclose fully and truly all the material facts necessary for his assessment for that year. Both these conditions are conditions precedent to be satisfied before the Income-tax Officer acquires jurisdiction to issue a notice under the section. But the legal position is that 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 under-assessment, that would be sufficient to give jurisdiction to the Income-tax Officer to issue the notice under section 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 had been such non-disclosure. In other words, the existence of the belief can be challenged by the assessee, but not the sufficiency of the reasons for the belief. Again, the expression 'reason to believe' in Section 34 of the Income-tax Act does not mean a 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. To put it differently, it is open to the court to examine the question whether the reasons for the belief have a rational connection or a relevant hearing 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 Section 34 of the Act is open to challenge in a court of law.'
9. It cannot be said that, on the facts found, to use the language of their Lordships of the Supreme Court, there was material for the formation of the belief inasmuch as the belief had a rational connection to the facts found. Therefore, in our opinion, the Tribunal was justified in coming to the conclusion that the requirements of Section 147(a) of the Act were not satisfied and, as such, notice issued under Section 148 of the Act was invalid.
10. For the reasons recorded above, we answer the question referred to us in the affirmative, that is, in favour of the assessee and against the department. There will be no order as to costs.
Pritam Singh Pattar, J.
11. I agree.