S.S. Chadha, J.
1. Civil Writ Petitions Nos. 2581 to 2587 of 1983 seek the quashing of the proceedings initiated under section 148 of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'), by the respondents for the assessment years 1963-64 to 1965-66 and 1967-68 to 1970-71.
2. The petitioner is a company registered under the Companies Act, carring on business as traders, manufacturers and agents. For the assessment years 1963-64 to 1965-66 and 1967-68 to 1970-71, the petitioner had submitted its returns of income under section 139 of the Act before the Income-tax Officers who, at that time, were holding jurisdiction over the petitioner's assessments. The assessments for these years were completed under section 143(3) of the Act after scrutiny of books of account, balance-sheets, profit and loss accounts and other evidence produced before the Income-tax Officers from time to time in support of the returns. The copies of the assessment orders for the above assessment years have been filed on the record of the writ petitions.
3. Later on, the jurisdiction in the case of the petitioner was transferred to the Income-tax Officer, Central Circle I, New Delhi. The Income-tax Officer, Central Circle I, issued notices dated September 17, 1979, for the assessment years 1963-64 to 1965-66 and 1967-68 to 1969-70 and dated January 25, 1980, for the assessment year 1970-71, under section 148 of the Act proposing reassessment of the petitioner's total income for the assessment years 1963-64 to 1965-66 and 1967-68 to 1970-71 on the ground, as indicated in the said notices under section 148, that the Income-tax Officer had reasons to believe that income chargeable to tax for the said assessment years had escaped assessment within the meaning of section 147 of Act. It was also stated that the said notices under section 148 were being issued after obtaining necessary satisfaction of the Central Board of Direct Taxes, respondent No. 2.
4. The petitioner made a request for information, if any, in the possession of the Income-tax Officer leading to the formation of a belief on the part of the Income-tax Officer that income assessable for the said years of assessment had escaped assessment. The petitioner also sought for the reasons leading to his belief that any income for the said assessment years had escaped assessment. The information was not furnished by the Income-tax Officer despite several requests. The petitioner ultimately filed the present writ petitions seeking the aforesaid relief.
5. The Income-tax Officer in charge of the assessment of the petitioner has filed a counter-affidavit and has also brought the original records as return to the Rule. A copy of the reasons recorded for the issue of the notices is annexed as annexure 'R-1' to the counter-affidavit, for the assessment year 1963-64, reading as follows :
'During the course of the previous year relevant to the assessment year 1963-64, the assessed company credited in its books of account amounts in the names of various parties. In view of the enquiries made in the cases of some of the depositors named below, it is apparent that the cash deposits in their names in the books of account of the assessed are not genuine :
----------------------------------------------------------------------S. No. Name of the Amount Reasonsdepositor deposited----------------------------------------------------------------------1. M/s. Damodar Das 1,50,000 The name of this partyHeman Das appears in the list ofbogus hundi brokers andbankers circulated by D.I.(Inv.) at page D-3/43.2. M/s. Fateh Chand 5,000 As per Circular No. 80& Sons /Bogus Hundi Loansdated 13-5-65 circulatedby C.I.T., BombayCity-III,the party hasadmitted that most of hisbusiness was that ofhawala name-lending.3. M/s. Gokul Das Har 5,000 According to Circular No.Bhagwan Das 56 dated 7-4-65 issued byC.I.T., Bombay City-III,Shri Ram Chand Megh RajMathreja admitted that heused to sign slips onbehalf of the brokers andbankers for bogus hundis.He has mentioned the nameof Seth Gokul Das HarBhagwan Das as one of theparties on whose behalfslips were signed by him.4. M/s. Hassa Singh 5,000 The name of this partyLal Singh & Sons appears at Seriall No. 26of page H-1 of the printedlist of bogus hundibrokers and bankerscirculated by the D.I. Ithas been mentioned therethat Rs. 35,000 wasappearing in the name ofthis party in the books ofM/s. Hasan Ali Fizza Aliwho came forward for asettlement after thebrokers were summoned withthe books of a/c. Furtherthe name of this partyalso appears at Seriall No.52 in the list circulatedby the D.I., vide CircularNo. AP/Misc/(5)/DI/ 63-64dated 29-8-64.5. M/s. Nand Ram Das 5,000 The name of this partyKanhaiya Lal appears at Seriall No. 84of page N-5 of printedlist circulated by theD.I.----------------------------------------------------------------------
6. As these deposits are not genuine, the conclusion is irresistible that the deposits in the name of these persons represent the income of the assessed company from undisclosed sources which has to be assessed for the assessment year 1963-64, in view of the provisions of section 68 of the Income-tax Act, 1961. I have, thereforee, reason to believe that on account of omission or failure of the assessed company to disclose fully and truly all material facts necessary for its assessment for the assessment year 1963-64, income chargeable to tax as computed above has escaped assessment for the assessment year 1963-64.
7. Sanction of the Central Board of Direct Taxes is, thereforee, solicited that it is a fit case for the issue of notice under section 148.'
8. For the other assessment years, the names of the depositors and the amount deposited is different but the reasons recorded for the issue of notice are in identical words or almost in identical language. Either it is that the name of the party appears in the list of bogus hundi brokers and bankers circulated or that the party has admitted that his business was that of hawala name-lending or there are confessions that the named hundi brokers and bankers were issuing or caused to be issued bogus hundis. It is, thereforee, not necessary to repeat the reasons of all cases.
9. Before considering the material on the record containing the reasons for the belief recorded by the Income-tax Officer that income has escaped assessment before issue of impugned notices under section 148, it is necessary to advert to the material provisions contained in section 147 of the Act which reads as under :
'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 assessed 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
(b) not withstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessed, 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 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 section 148 to 153 referred to as the relevant assessment year).
Explanationn 1. - For the purpose 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 underassessed; 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 (XI of 1922); or
(d) where excessive loss or depreciation allowance has been computed.
Explanationn 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.'
10. The statutory provisions make it plain that two conditions must co-exist before the Income-tax Officer acquires jurisdiction to form the belief that income has escaped assessment and then issue notice under section 148, namely, the Income-tax Officer must have reason to believe that income chargeable to tax has escaped assessment and, secondly, he must have reason to believe that such income has escaped assessment by reason of omission or failure on the part of the assessed either to make a return under section 139 for the assessment year to the Income-tax Officer or to disclose fully or truly all material facts necessary for his assessment for that year. Both these conditions are conditions precedent and have to be satisfied before the Income-tax Officer gets jurisdiction to reopen an assessment under section 147/148 of the Act.
11. The material that the Income-tax Officer had before him for issuing a notice under section 148 refers to the circulars issued by the D.I. containing the name of the depositor in the list of bogus hundi brokers and bankers circulated. Then, there is an admission of certain persons other than the assessed that those persons used to sign slips on behalf of the brokers and bankers for bogus hundis. The name of the depositor is mentioned. Besides mentioning that the name of the depositor appears in the list, that the persons are name-lenders and that the transactions on that account are bogus, there is no further material or information available before the Income-tax Officer when he formed the belief. There is no indication in the material that the name-lending was in connection with the loans involved in the assessments under consideration. There is nothing to show that it related to a loan to the assessed which is the subject-matter of reassessment. Besides referring to the name of the party appearing in the list of bogus hundi brokers and bankers, etc., the Income-tax Officer has not set out any material on the basis of which he has arrived at such belief.
12. Apart from it, the assessment order clearly mentions in the order dated May 31, 1966, made under section 143(3) of the Act, a credit of Rs. 1,50,000, in the name of Shri Mathura Dass Sewak, karta of Hindu undivided family, Damodar Das Heman Das. It states that he has been physically examined by the Income-tax Officer along with his books of account and the loan is fully verifiable. It further states that the rest of the loan Of Rs. 50,000 is also proved being loan from regular businessmen and bankers. The original records of assessment have been produced. It shows that the Income-tax Officer has called upon the assessed to give the detailed particulars of the depositors. Notices were issued by the Income-tax Officer to the nine depositors including the five mentioned in the reasons for the purpose of verification of the loans. They filed certificates in response to the notices and, in fact, the statement of Shri Mathura Das Sewak was recorded. It is only thereafter that the loans were held to be proved being loans from regular businessmen and bankers. It is clear from the original assessment that the credits were investigated in detail. It is now recorded in the reasons that in view of the enquiries made in the cases of some of the depositors named therein, it is apparent that the cash deposits in their names in the books of account of the assessed are not genuine. There is no enquiry except the appearance of the names of the depositors in the list of bogus hundi brokers and bankers. There is no material to form the belief that these deposits are not genuine, more so, in the face of the investigation of the credits having been made at the time of the original assessment. Besides stating the contents of the information received by him in the reasons for the inclusion of the names of the depositors in the list of bogus hundi brokers and bankers, there is no further reason as to how his belief or tentative conclusion had been arrived at. In Chhugamal Rajpal v. S. P. Chaliha : 79ITR603(SC) , the reasons recorded were as under :
'During the year, the assessed has shown to have taken loans from various parties of Calcutta. From D.I.'s Inv. No. A/P/Misc. (5) D.I. / 63-64/5623 dated August 13, 1965, forwarded to this office under C.I.T., Bihar and Orissa, Patna's letter No. Inv. (Inv.) 15/65-66/1953 -2017 dated Patna, September 24, 1965, it appears that these persons are name-lenders and the transactions are bogus. Hence, proper investigation regarding these loans is necessary. The names of some of the persons from whom money is alleged to have been taken on loan on hundis are :
1. Seth Bhagwan Singh Sricharan.
2. Lakha Singh Lal Singh.
3. Radhakissen Shyam Sunder.
13. The amount of escapement involved amounts to Rs. 1,00,000.'
14. The Supreme Court pointed out that the material that the Income-tax Officer had before him for issuing a notice under section 148 is not mentioned in the report. He vaguely refers to certain communications received by him from the Commissioner of Income-tax, Bihar and Orissa. The Income-tax Officer does not mention the facts contained in those communications. All that he says is that from those communications, it appears that the persons are name-lenders and the transactions are bogus. Hegde J. was not satisfied that the Income-tax Officer was having any material before him which could satisfy the requirement of either clause (a) or (b) of section 147 and, thereforee, he could not have issued a notice under section 148. It was held that it is clear that the Income-tax officer could not have had reasons to believe that by reason of the assessed's omission to disclose fully and truly all material facts necessary for his assessment for the accounting year in question, income chargeable to tax has escaped assessment for that year, nor could it be said that he, as a consequence of information in his possession, had reasons to believe that the income chargeable to tax has escaped assessment for that year.
15. In ITO v. Lakhmani Mewal Das : 103ITR437(SC) , the Supreme Court had again considered the reasons for the formation of the belief contemplated by section 147(a) of the Act for the reopening of an assessment. The reasons recorded are these (at p. 441) :
'There are hundi loan credits in the name of Narainsingh Nandalal, D. K. Naraindas, Bagwandas Srichand, etc., who are known name-lenders, and also hundi loan credit in the name of Mohansingh Kanayalal, who has since confessed he was doing only name-lending. In the original assessment, these credits were not investigated in detail. As the information regarding the bogus nature of these credits is since known, action under section 147(a) is called for to reopen the assessment and assess these credits as the undisclosed income of the assessed. The assessed is still claiming that the credits are genuine in the assessment proceedings for 1962-63. Commissioner's sanction is solicited to reopen the assessment for 1958-59 under section 147(a).'
16. In that case before the Supreme Court, the named persons are stated to be known money-lenders. One of the alleged money-lenders was one Mohansingh Kanayalal. He also made a confessional statement on the basis of which his assessment was reopened. The Supreme Court, while upholding the majority view of the Calcutta High Court striking down the notice of reassessment, observed (at p. 447) :
'We may now deal with the first ground mentioned in the report of the Income-tax Officer to the Commissioner of Income-tax. This ground relates to Mohansingh Kanayalal, against whose name there was an entry about the payment of Rs. 74, annas 3 as interest in the books of the assessed, having made a confession that he was doing only name-lending. There is nothing to show that the above confession related to a loan to the assessed and not to someone else, much less to the loan of Rs. 2,500 which was shown to have been advanced by that person to the assessed-respondent. There is also no indication as to when that confession was made and whether it relates to the period from April 1, 1957, to March 31, 1958, which is the subject-matter of the assessment sought to be reopened. The report was made on February 13, 1967. In the absence of the date of the alleged confession, it would not be unreasonable to assume that the confession was made a few weeks or months before the report. To infer from that confession that it relates to the period from April 1, 1957, to March 31, 1958, and that it pertains to the loan shown to have been advanced to the assessed, in our opinion, would be rather farfetched.'
17. It was then observed (at p. 448) :
'As stated earlier, the reasons for the formation of the belief must have a rational connection with or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Income-tax Officer and the formation of his belief that there has been escapement of the income of the assessed from assessment in the particular year because of his failure to disclose fully and truly all material facts. It is no doubt true that the court cannot go into the sufficiency or adequacy of the material and substitute its own opinion for that of the Income-tax Officer on the point as to whether action should be initiated for reopening the assessment. At the same time, we have to bear in mind that it is not any and every material, howsoever vague and indefinite or distant, remote and far-fetched, which would warrant the formation of the belief relating to escapement of the income of the assessed from assessment. The fact that the words 'definite information' which were there in section 34 of the Act of 1922, at one time before its amendment in 1948, are not there in section 147 of the Act of 1961, would not lead to the conclusion that action can now be taken for reopening an assessment even if the information is wholly vague, indefinite, far-fetched and remote. The reason for the formation of the belief must be held in good faith and should not be a mere pretence.'
18. The powers of the Income-tax Officer to reopen an assessment are wide. The words of the statute are 'reasons to believe' which no doubt contemplates the reopening of the assessment if grounds exist for believing that income of the assessed has escaped assessment. But there must be a live link or close nexus in the material before the Income-tax Office and the belief which he has to form regarding the escapement of the income of the assessed from assessment. There is no indication in the material that the name-lending was in connection with the loans involved in the assessments under consideration in the cases before me. There is nothing to show that the material which was before the Income-tax Officer related to the deposits/loans to the assessed.
19. Mr. Wazir Singh, on the other hand, has relied upon the two decisions of the Calcutta High Court, namely, Murarka Paints and Varnish Works Ltd. v. ITO : 114ITR480(Cal) and H. A. Nanji & Co. v. ITO : 120ITR593(Cal) , to urge that the names of the creditors are included in the list of bogus hundi brokers and bankers and, thereforee, there was material before the Income-tax Officer to come to a tentative conclusion that the deposits are not genuine. In the first case, the assessed showed in his return for the relevant assessment year a loan of Rs. 1,10,000 alleged to have been received form one Manickchand Mohanlal and the assessment was made. The assessment was made on the basis of a confirmation letter relating to this loan. The Income-tax Officer forwarded the confirmation letter, furnished by the assessed, to the Income-tax Officer who was assessing M/s. Manickchand Mohanlal. Later on, the Income-tax Officer assessing M/s. Manickchand Mohanlal informed the Income-tax Officer of the assessed-petitioner in that case that the Income-tax Officer had issued a notice in terms of section 131 in the name of Manickchand Mohanlal and one Manick Chand Baid had appeared before the Income-tax Officer and confessed that in the business carried on in the name of Manickchand Mohanlal, he had indulged in name-lending business only and no money-lending business was carried on. A copy of the deposition was sent to the Income-tax Officer concerned. Later on, in a disclosure petition made by Shri M. P. Morarka, the amount of Rs. 1,10,000 appearing in the books of account of the company in the name of M/s. Manickchand Mohanlal, it was admitted that the amount of Rs. 1,10,000 is actually his concealed income which had been invested with the company in the name of Manickchand Mohanlal, the name-lender. With this material, the Calcutta High Court came to the conclusion that there was material for the issue of the notice. In Nanji's case : 120ITR593(Cal) , the Income-tax Officer had filed an affidavit that he had received from the Special Investigation Branch the material to the effect that in the course of the assessment proceedings of various hundi brokers and bankers and their alleged debtors before the Income-tax Officer, the bogus nature of the hundi trade and falsity of the loan were proved in most of the purported creditors of the assessed in that case. It was further mentioned that some of the alleged creditors whose names were mentioned specifically admitted and made confession that they had been mere name-lenders for the said purported loans which were entered in the books of account of various assesseds including the writ petitioner in that case for the said year on commission. There were two circulars dated March 7, 1967, and July 21, 1966, which gave the names and particulars of the hundi loans. The Income-tax Officer thus, after the assessment, came into possession of the list of bogus creditors and, there from, he came to the tentative belief that in respect of the relevant years, the hundi creditors of the assesseds disclosed by him whose names appeared in the list, were bogus creditors. This fact could be ascertained only by a mere comparison of the list of bogus creditors with the creditors disclosed by the assessed in the course of the assessment. This was a fresh material which came into the possession of the Income-tax Officer after the assessment and for that reason the reopening of the assessment was upheld by the Calcutta High Court. Later on, the judgment in Nanji's case : 120ITR593(Cal) was itself distinguished by the Calcutta High Court in S. P. Agarwalla v. ITO : 140ITR1010(Cal) . It was noticed that in Nanji's case : 120ITR593(Cal) , not only there was a confessional statement of the hundi creditors but also some of the hundi creditors of the assessed had specifically confessed that they had been mere name-lenders for the purported loans which were entered in the books of account of various assesseds including the assessed concerned for the assessment year in question.
20. The facts in the case of Lakhmani Mewal Das : 103ITR437(SC) and the cases before me are almost similar. There also the names of the creditors were included in the list of bogus hundi brokers and creditors. In fact, in that case, there was a confessional statement by one of the creditors. As in that case as also in the cases before me, there is no indication that the name-lending was in connection with the loans involved in the assessment under consideration. thereforee, the belief of the Income-tax Officer is based on no material. Those lists circulated by the D.I. or others do not show that they related to the loans to the assessed. There is, thereforee, no direct nexus or live link between the material which was before the Income-tax Officer and the formation of the belief of the Income-tax Officer that income has escaped assessment. In the absence of a direct nexus or live link, that will not constitute a relevant material for the purpose of reopening of the assessments.
21. In fairness to Mr. Wazir Singh, I may notice another argument. He urges that the assessed is required by the statute to make a full and true disclosure of all primary facts material to the assessment and, in these cases, the assessed with improper motive has set up bogus creditors and loans for obtaining relief from income-tax. This action amounts to failure or omission to disclose fully and truly all material facts necessary for assessment in violation of the statutory obligations to disclose fully and truly all necessary facts, if found untrue. Reliance is placed on Ganga Saran & Sons Pvt. Ltd. v. ITO : 130ITR1(SC) and Nanji & Co. : 120ITR593(Cal) . I am assuming for the purpose of disposal of these cases that this legal proposition is correct. But the initiation of proceedings under section 147 is based on a reasonable belief. The question is whether the hundi creditors are wholly bogus or fictitious and the formation of the belief in that regard at the time of initiating the proceedings has to be based on some material which is lacking in this case.
22. I may also notice a preliminary objection that the remedy under article 226 of the Constitution of India is only the last resort and that too discretionary and this court should not interfere in the reassessment proceedings at this stage. Reliance is placed on New Bank of India Ltd. v. ITO : 136ITR679(Delhi) . In my view, the law is well-settled. The High Court exercising jurisdiction under article 226 of the Constitution has power to set aside a notice issued under section 147 of the Act if the condition precedent to the exercise of the jurisdiction does not exist. It is the duty of the court, in exercise of its powers, to ascertain whether the Income-tax Officer had in his possession any information or material. The court may then determine whether that information is correct and the Income-tax Officer could have reason to believe that income chargeable to tax had escaped assessment. As, in this case, I have formed the opinion that the condition precedent to the exercise of jurisdiction by the Income-tax Officer did not exist as there is no indication that the name-lending was in connection with the loans involved in the assessment under consideration or there was nothing to show that it related to a loan of the assessed, the condition precedent was lacking. I, thereforee, exercise my jurisdiction under article 226 of the Constitution of India to quash the impugned notices.
23. For the above reasons, the writ petitions succeed and are allowed. The impugned notices are quashed. On the facts and circumstances of the case, I make no order as to costs.