Subramonian Poti, Actg. C.J.
1. Exhibit P-13 order passed by the ITO, D Ward, Cannanore, under Section 132|(5) of the I.T. Act, 1961, is challenged in the original petition on three grounds : (1) An order under Section 132(5) of the Act is to be passed only on proceedings taken up in accordance with Section 132A(1) of the I.T. Act, and in this case though such action was purported to be taken under Section 132A(1)(c) by the Commissioner of Income-tax, Kerala, that is not in accordance with law. It cannot be said, on the materials available, that the Commissioner had reason to believe that the assets represent either wholly or partly income which had not been, or would not have been disclosed for the purpose of the I.T. Act, 1961, by the person from whose possession or control such assets had been taken into custody; (2) in regard to a part of the sum recovered by the Special Customs Preventive Unit from the petitioner, the explanation offered was not even noticed by the ITO when he passed the order under Section 132(5); and (3) the officer had evidently collected materials as a result of the enquiry held by him under Rule 112A(3) of the I.T. Rules, 1962, bat before using such material in Ex. P-13 order he had not put them to the petitioner so that the petitioner could show cause why such materials could not be used against him.
2. As a result of vehicle checks conducted by the Special Customs Preventive Unit, Kasaragod, on May 15, 1981, Indian currency worth Rs. 4,66,502, and a draft and a cheque each for Rs. 25,000 were seized from the Car KLN 5282 in which the petitioner along with three others were travelling. Later the Customs Officers evidently found that no offence was made out and consequently they had to release the currency to the petitioner. But they seem to have contacted the I.T. dept., who on such information looked into the case of the assessee. The Commissioner purporting to have reason to believe that a proceeding should be taken up under Section 132A(1)(c) of the Act issued an order to the ITO, Cannanore, authorising him to take over the currency from the authority which was holding it, namely, the Customs Officers. Thereupon notice was issued to the petitioner. After receiving his reply the matter was enquired into and the impugned order, Ex. P-13, was passed. The petitioner had given an explanation for the bulk of the amount, namely, Rs. 4,50,000, as having been taken by him from three of the customers of the firm, of which he was a partner. It was not an amount due or payable by those customers, but amounts taken as advances from the three of the firm's customers in Bombay. Each one, according to him, had paid him Rs. 1,50,000. The explanation with regard to a sum of Rs. 14,172 was that it was amount received from one Abdullakunhi of M/s, Sabina Enterprises, Bombay, to be handed over to two others at Pappinisseri. The rest of the money is claimed to belong to the petitioner's firm. The officers seem to have made enquiries and it is evident from the order of the officer, Ex. P-13, that such enquiries revealed that the three parties whowere said to have advanced asum of Rs. 1,50,000 each were not financially sound, and they would not have advanced such funds without there being an obligation to do so. On these facts he found that the explanation could not be accepted and that the petitioner failed to prove the real source of the sura of Rs. 4,64,172. This sum was treated as undisclosed income for the assessment year 1982-83. His share of income from the firm was estimated at Rs. 35,000. The tax on the undisclosed income was Rs. 3,06,572 and that was directed to be retained for adjustment against the tax due from the petitioner for the assessment year 1982-83. The balance amount was directed to be refunded.
3. The grievance of the petitioner is that in initiating action under Section 132A(1)(c) the Commissioner did not disclose the reasons that weighed with him for issuing the order. Even in the counter-affidavit he has not disclosed the reasons. When the statute provides that action be taken only when there is reason to believe in a state of things and the order is challenged on the ground that there is no objective approach to the question it is necessary that the material on the basis of which the Commissioner formed the reason is placed before the court. That is not done in the counter-affidavit. But the file was handed over to us by the learned counsel for the Revenue and we find from such file that there was material available to the Commissioner other than the information passed on by the Customs Officers. Evidently what seems to have happened is that on getting the information about the petitioner, Sri B.P. Abdul Gaffoor, from the Customs authorities his assessment files were checked to find the extent or volume of his business and consequently the extent of his income. It was noticed that for the assessment year 1978-79 the income of the petitioner as assessed was only Rs. 20,840, for 1979-80 Rs. 18,480 and for 1980-81 the assessment was not completed, but the party had estimated the income at Rs. 21,000. Taking into account the smallness of the income that was brought to tax during the previous years, the amount found in his possession was considered to be substantial. That the amount represented sale proceeds of accounted transactions was not proved. These are the materials on the basis of which the Commissioner seems to have come to his belief on matters required by Section 132A(1)(c).
4. Section 132A(1)(c) reads:
' 132A. Power to requisition books of account, etc.--(1) Where the Director of Inspection or the Commissioner, in consequence of information in his possession, has reason to believe that--...
(c) any assets represent either wholly or partly income or property which has not been, or would not have been, disclosed for the purposes of the Indian income-tax Act, 1922 (11 of 1922), or this Act by any person from whose possession or control such assets have been taken intocustody by any officer or authority under any other law for the time being in force, then the Director of Inspection or the Commissioner may authorise, any Deputy Director of Inspection, Inspecting Assistant Commissioner, Assistant Director of Inspection or Income-tax Officer (hereafter in this section and in Sub-section (2) of Section 278D referred to as the requisitioning officer) to require the officer or authority referred to in Clause (a) or Clause (b) or Clause (c), as the case may be, to deliver such books of account, other documents or assets to the requisitioning officer. '
5. The only question before us is whether on the materials now disclosed from the file it could be said that the Commissioner had ' reason to believe'. The words ' has reason to believe ' in a statute express the idea of objectivity in the matter of satisfaction more emphatically than if the words used in the statute were ' is satisfied '. The belief must not be a blind or irrational belief, but one based on reasons which are relevant and material. Materials which may only bo remotely or distantly relevant may not be sufficient to satisfy the test of relevance. But this need not be taken to mean that sufficiency or adequacy of the reasons can be examined by a court. The question a court would naturally ask is whether there is an application of the mind of the authority concerned and whether that application has been on the basis of material which bears a nexus to the matter which the authority is called upon to decide. The position is now well settled so that it may not be necessary to advert in detail to the decisions. Reference need only be made to the decisions in Ganga Saran & Sons P. Ltd. v. ITO : 130ITR1(SC) , ITO v. Lakhmani Mewal Das : 103ITR437(SC) and Ganga Prasad Maheshwari v. CIT : 139ITR1043(All) .
6. On the facts of this case we are not prepared to say that the materials which the Commissioner had before him were irrelevant. A person who had not been assessed to any substantial amount of tax in the previous years is found to be in possession of a huge amount of money and normally one would be right in assuming that but for the circumstances under which the amount came into the possession of the Department the person would not have voluntarily disclosed such income for the purpose of income-tax. We, therefore, see no reason to interfere on that ground.
7. The case of the petitioner that the ITO ignored the explanation in respect of a part of the funds is borne out by the counter-affidavit itself. In para. II(ii) of the counter-affidavit of the 2nd respondent the failure to notice the explanation of Abdullakunhi to whom the ITO had issued notice is admitted. It is said that this was due to inadvertence. May be so. But that could not make a wrong order right. The compositeorder has specified the amount to be retained on the basis of the assumption that the entire amount represented undisclosed income. Part of it is not shown to be. The matter requires to be set aside, as the order, as it is, would not be justified.
8. The last of the contentions also has to be accepted. That turns on the application of Rule 112A(4) of the I.T. Rules. We will extract Sub-rules (3) and (4) of the said Rules which read as follows:
'112A. (3) The Income-tax Officer may examine on oath any other person or make such other inquiry as he may deem fit.
(4) Before any material gathered in the course of the examination or inquiry under Sub-rule (3) is used by the Income-tax Officer against the person referred to in Sub-rule (1), the Income-tax Officer shall give a reasonable notice to that person to show cause why such material should not be used against him.'
9. It is agreed that the ITO did in this case hold an enquiry to collect materials which were used in the order, Ex. P-13. It is a rule of natural justice that materials used against a person should necessarily be put to him to give him an opportunity to answer. In the I.T. Rules this has found a place as a statutory provision. The learned counsel for the Revenue contends that this is only a directory provision and not mandatory and, therefore, a mere violation of this rule need not vitiate the order. Reference has been made by the learned counsel to the decision in Director of Inspection of Income-tax (Investigation) v. Pooran Mall & Sons : 96ITR390(SC) . The question considered by the Supreme Court in that case is entirely different. Rule 112A(1) provides a time-limit of 15 days which is in contravention of the section itself which provides a period of 90 days. Taking this into account the Supreme Court held that the requirement of the issue of notice within 15 days under Rule 112A(1) cannot be mandatory. They were not concerned in that case with any question of the use of evidence or material collected at an enquiry against the party behind his back. On that, we have no hesitation to hold that there must be notice and that Rule 112A(1) is certainly mandatory. In this view the order calls for interference. Hence, we set aside Ex. P-13 order. The learned counsel for the petitioner prays that the amount may be directed to be returned. Normally, that should be the consequence, but in this case we have found that the initiation of action was proper, but the order is vitiated. In these circumstances we do not want to issue any direction by way of return of the money seized. That may be decided by the ITO in accordance with law, taking note of our decision. But we make it clear that this is an appropriate case where the second proviso to Section 132(5) must operate. Now that there is no order in force it is only fair that the amount is refunded. Since that may prejudice the Revenue incase it is proposed to pursue action and the interest of the Revenue would be sufficiently safeguarded by resort to the second proviso to Section 132(5) we direct that in case the petitioner either furnishes security to the satisfaction of the Revenue or bank guarantee for the amount to be returned, the ITO, D-Ward, Cannanore, shall with the previous approval of the Commissioner release the amount which has been retained. We direct that this shall be done within two months from the date the bank guarantee or other security is furnished.