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Deputy Commissioner of Income Tax Vs. Narendra Mohan Bagroy - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Patna
Decided On
Judge
Reported in(2004)84TT(JP.)at570
AppellantDeputy Commissioner of Income Tax
RespondentNarendra Mohan Bagroy
Excerpt:
1. it is a departmental appeal against the order dt. 16th april, 1996 of the cit(a). the assessment was reopened under section 147 on 14th march, 1995. the reasons recorded by the ao are reproduced below : "in course of inquiry for asst. yr. 1994-95 following persons were found to be non-existent : transaction with certain other persons like satpal singh, mazid khan, etc. have been found to be non-genuine. i have reason to believe that the income of the assessee has escaped assessment. issue notice under section 148 of the it act. though a list of sundry creditors were disclosed in the return of the income but notice under section 148 is being issued in view of the enquiries which revealed that transactions with the abovementioned sundry creditors were non-genuine or bogus or does not.....
Judgment:
1. It is a Departmental appeal against the order dt. 16th April, 1996 of the CIT(A). The assessment was reopened under Section 147 on 14th March, 1995. The reasons recorded by the AO are reproduced below : "In course of inquiry for asst. yr. 1994-95 following persons were found to be non-existent : transaction with certain other persons like Satpal Singh, Mazid Khan, etc. have been found to be non-genuine. I have reason to believe that the income of the assessee has escaped assessment.

Issue notice under Section 148 of the IT Act. Though a list of sundry creditors were disclosed in the return of the income but notice under Section 148 is being issued in View of the enquiries which revealed that transactions with the abovementioned sundry creditors were non-genuine or bogus or does not represent correct nature of transaction and the notice is being issued in view of this new facts and fresh information and in view of the decision of the Supreme Court in case of Phoolchand Bagranglal v. ITO (1993) 203 ITR 456 (SC)".

1.2 It is seen from para 3 from the consolidated appellate order for asst. yrs. 1990-91 to 1994-95 that reopening of the assessments for asst. yrs. 1990-91 to 1993-94 has been held to be bad in law and accordingly the reopened assessments have been cancelled. The CIT(A) has taken the following grounds for doing so : (i) In the reassessment order no escaped income has been taxed. The AO has rejected the books of account on the basis of his observations in the assessment order for asst. yr. 1994-95 and has estimated the income at a higher figure.

(ii) An assessment which was made under Section 143(3), cannot be reopened unless there being any specific evidence regarding escapement of income. 'Reasons to believe' means that there is proper identification and quantification of the escaped income. No such identification and quantification has been made in the reopened assessment. This view of law is supported by the following decision : (b) Ganga Saran & Sons (P) Ltd. v. ITO and Ors. (1981) 130 ITR 1 (SC)Chhugamal Rajpal v. S.P. Chaiiha and Ors.

(h) East Coast Commercial Co. Ltd. v. ITO and Ors. (1981) 128 ITR 326 (Cal) 2. The Departmental Representative refers to the following documents relating to asst. yr. 1994-95, copies of which are filed before us : (iv) 8-3-1995--AO's letter to the assessee allowing time upto 14-2-1995 and also making inquiries.

(i) Phoolchand Bajrang Lal and Anr. v. ITO and Ors. (1993) 203 ITR 456 (SC)ITO v. Selected Daluiband Coal Co. (P) Ltd. (1996) 217 ITR 597 (SC) (iii) CIT v. Sun Engineering Works (P) Ltd. (1992) 198 ITR 297 (SC) and (iv) Praful Chunilal Patel v. M.J. Makwana, Asstt. CIT (1999) 236 ITR 832 (Guj) 3. The Authorised Representative of the assessee relies on the following decisions : The Authorised Representative contends that it is a must that there are reasons to believe that taxable income of the concerned year has escaped assessment. That it is not sufficient that there are materials for the subsequent year showing escapement of income; such material should be there for the relevant year also. That the ITI's report is for asst. yr. 1994-95 and it does not mean that the same also applies to asst. yr. 1993-94. That the materials before the AO in this case have no nexus with 1993-94. According to the Authorised Representative inspector's report is vague. That the inspector's report is not final for which reason the AO was still calling for information from the assessee even after the receipt of the inspector's report. The Authorised Representative referred to the decision of Calcutta High Court in Reform Flour Mill (P) Ltd. v. CIT (1973) 88 ITR 150 (Cal). The successor AO had taken a different view on the same materials which were available before the AO who had made the original assessment. On the basis of this decision, the Authorised Representative wanted to contend that the AO could not base his reasons to believe on the report of inspector being a lower authority. But we must say that this decision is not relevant for the contention taken by the Authorised Representative. The. Authorised Representative also referred to the decision of Gujarat High Court reported in Hotel Apollo v. P.S.Rashtrapal, ITO (1995) 213 ITR 762 (Guj) that an assessment could not be reopened on the basis of inspection report of the controlling officer of the AO. In our opinion this decision is also not relevant for deciding the issue before us.

3.2 The Authorised Representative points out that in the reasons recorded for reopening the assessment, the following two grounds have been taken for treating certain sundry creditors as bogus : (ii) Certain other persons like Shri Satpal Singh and Mazid Khan were not found to be genuine. That the AO's letters to the assessee or the ITI's report do not deal with the said Satpal Singh and Mazid Khan. That the ITI's report regarding the so-called 8 non-resident persons are vague.

4. The Departmental Representative took us through the impugned assessment order. Paras 2 and 3 of the assessment order mention that for asst. yr. 1994-95, 25 persons, out of 49 sundry creditors were found to be not genuine. That a number of sundry creditors for asst.

yr. 1994-95 also appeared in the list of sundry creditors for asst.yr.

1993-94. He also took us through the AO's letters dt. 23rd Feb., 1993 and 8th March, 1995 for asst. yr. 1994-95 addressed to the assessee. A copy of the inspector's report was sent to the assessee. As regards the 26 persons not found at the given addresses, the correct addresses thereof were sought as also an explanation why wrong addresses had been given. The assessee was called upon to produce evidence to prove the transactions resulting in the sundry creditors, etc. The cases of 12 persons were discussed with reference to their ledger accounts appearing in the books of the assessee. It mentions that many of these sundry creditors had denied having done any work for the assessee and had explained that their letterheads had been misused by the assessee for claiming transactions in the names of these persons.

5. We first take up some of the case laws relied upon by the Departmental Representative.

Phoolchand Bajranglal (supra). The assessment had been reopened on the basis of subsequent information where the managing director of the creditor-company had denied the loan. The apex Court in this case has held that the information with the AO should be reliable and relevant.

To quote from the placitum on p. 458 : "Since the belief is that of the ITO, sufficiency of the reasons for forming the belief is not for the Court to judge, but it is open to an assessee to establish that there, in fact, existed no belief or that the belief was not a bona fide one or was based on vague, irrelevant and non-specific information. To that limited extent, the Court may look into the conclusion arrived at by the ITO and examine whether there was any material available on the record from which the requisite belief could be formed by the ITO and further whether that material had any rational connection with or a live link for the formation of the requisite belief".

By the Court : "One of the purposes of Section 147 is to ensure that a party cannot get away by wilfully making a false or untrue statement at the time of the original assessment and when that falsity comes to notice, to turn around and say :" you accepted my lie, now your hands are tied and you can do nothing". It would be travesty of justice to allow the assessee that latitude." The assessment had been reopened on the basis of a letter from the chief mining officer that there had been no reporting of the coal raised. It was held that at the stage of reopening it was not necessary to go into the correctness or otherwise of the content of the said letter as it had been issued by the concerned Government Department, also mentioning the basis as to how there was no reporting of production. Thus it was held that the information could be made the basis for reason to believe for the purpose of Section 147. The Court observed that the material should be such on the basis of which a reasonable person could have formed the requisite believe. That the material obviously has to be relevant. That the formation of belief by the AO "is essential within his subjective satisfaction." Now we take up the decision of the apex Court reported in (1976) 103 ITR 437 (supra) relied upon by the Authorised Representative of the assessee which were Mowed in (1993) 202 ITR 978 (All) (supra) and (1993) 203 ITR 368 (Cal) (supra). It is held on p. 448 that the material must have a "rational connection with or relevant bearing on the formation of the belief". It means "that there must be a direct nexus or live link between the material" and the formation of belief as to the escapement of income for that particular year. The Court further observed that there can be no reopening "if the information is wholly vague, inadequate, 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". The Court further pointed out that the powers under Section 147 are extraordinary in nature and are intended to tax the income which had escaped assessment at the first instance, That the AO's power though wide are not plenary. That 'reason to believe' does not mean 'reason to suspect'.

6. While applying the case laws discussed above, we have also to keep in mind that under Section 147 amended w.e.f. 1st April, 1989, it is only to be seen whether the AO had adequate materials on the basis of which he could have reasons to believe that taxable income had escaped assessment. At that initial stage he should have such material from which he could make a bona fide inference that taxable income had escaped assessment. At the initial stage the matter need not be so conclusive and yet there should be some substance in it. The material required at the initial stage cannot be as exhaustive and complete as the material required during the subsequent assessment of the income.

The fact that during the assessment proceedings the AO gets satisfied that there was no escapement of income will not also show that the reopening of the assessment itself was wrong or on the basis of inadequate material.

6.2 In the facts of this case, we find that for the asst. yr. 1994-95 certain inquiries, etc. had been made which showed that the sundry creditors shown by the assessee were not correct. As many of the sundry creditors for this year were covered by the said finding for the following year, so it could be said that the AO was quite justified in forming his reasons to believe for this year on the basis of inquiries, etc. done for the next year. For asst. yr. 1994-95 the Income-tax Inspector who had visited the given address of a large numbers, of sundry creditors in February, 1995 had gathered the information that many of them were not residing at the given address. Many of the sundry creditors had also given information/had stated before the AO that they were falsely being shown as sundry creditors by the assessee. That the assessee had misutilised their letter heads for this purpose.

In our opinion, the fact that the reasons recorded are sketchy or do not fully reflect the materials available before the AO, will not vitiate the correctness of the reason to believe. On going through the facts of this case, we are satisfied that there was adequate material on the basis of which the AO had formed his belief as to the escapement of income. Therefore, the reopening of the assessment under Section 147 is upheld and the order of the CIT(A) on this point is reversed.

1. I have gone through the order of my learned brother but failed to pursue myself to agree with his findings and that is why I am recording this separate order.

2. In this appeal the Revenue has called in question the order dt. 16th April, 1996 of the CIT(A), Ranchi annulling reassessment under Section 147 of the IT Act. In grounds of appeal, the Revenue has taken as many as six grounds but as said above in effect, it is against the striking out reassessment proceedings under Section 147 of the IT Act.

3. It is to be noted that the assessee is engaged in contract business and for the assessment year under consideration he filed his return of income on 23rd Dec., 1993 declaring total income of Rs. 2,42,150. The assessment was however, completed on a total income of Rs. 2,57,150 on 22nd March, 1994 under Section 143(3) of the IT Act. There were certain additions which the assessee disputed before the CIT(A) who deleted the same. The AO, however, reopened the said assessment under Section 147 of the IT Act and finally computed the total income at Rs. 5,24,070 under Section 147/143(3) of the IT Act. Assessee has challenged that reopening of the assessment, which the CIT(A) has held to be had in law and that is why now the Revenue is in appeal against that order.

4. By his cross-objections the assessee has supported the order of the CIT(A).

5. As to reopening of the assessment proceedings the AO made the following observations : "During the course of assessment proceedings for the asst. yr.

1994-95, enquiries with respect of 49 sundry creditors for the asst.

yr. 1994-95 were made. It was found that transactions with 25 persons were not genuine. The persons appearing in the list of sundry creditors were stated to have supplied various materials, etc. to the assessee. The assessee has shown transactions with a number of persons out of the 25 persons, the transaction with whom were found to be not genuine for asst. yr. 1994-95; in the present assessment year I had reason to believe that income of the assessee has escaped assessment for the asst. yr. 1993-94. Notice under Section 148 was issued on 14th March, 1995 and was served on assessee on 15th March, 1995. In response to the notice, the assessee filed a letter dt. 10th April, 1995 stating that the return already filed under Section 139(1) may be treated as filed in compliance to the notice under Section 148." 6. For resorting to proviso under Section 147 of the IT Act he recorded as follows ; "In course of inquiry for asst. yr. 1994-95 following persons were found to be non-existent : transaction with certain other persons like Satpal Singh, Mazid Khan etc. have been found to be non-genuine. I have reason to believe that the income of the assessee has escaped assessment. Issue notice under Section 148 of the IT Act. Though a list of sundry creditors were disclosed in the return of the income but notice under Section 148 is being issued in view of the enquiries which revealed that transactions with the abovementioned sundry creditors were non-genuine or bogus or does not represent correct nature of transaction and the notice is being issued in view of this new facts and fresh information and in view of the decision of the Supreme Court in case of Phoolchand Bajranglal v. ITO (1993) 203 ITR 456 (SC)".

7. Before the AO, the assessee having filed a letter dt. 30th June, 1995 contended that reopening of the assessment under Section 147 of the IT Act was bad in law. It was particularly said that only because some sundry creditors for the asst. yr. 1994-95 appeared to be not genuine, it should not necessarily be taken that the creditors for this asst. yr. 1993-94 should also be treated as not genuine. However, that contention did not weigh with the AO. After examining the books of account and other creditors he finally rejected the books of account and determined the contract income at Rs. 5,10,375 having adopted G.P.rate at 8 per cent in view of provision under Section 44AB of the IT Act. The CIT(A), however, annulled the said order of the AO as said above. The learned CIT(A) made the following observations : "For reopening of these assessments the AO must have "reason to believe" that some income has escaped assessment. But in none of 4 years any escaped income has been identified and brought to tax. The AO only rejected the books of account on the basis of his observations made by him in asst. yr. 1994-95 and made higher estimate of income. According to me, by making estimate of income the AO cannot take stand that any income has escaped assessment.

Once the book results has been accepted. After scrutiny the assessment cannot be reopened on the plea that books of account had to be rejected and the income has to be estimated. The reopening can only be done if there is some specific evidence regarding escapement of income. In other words proper identification and quantification of such escaped income is absolutely necessary for forming "reason to believe". I am afraid no such identification and quantification has been made in the appellant's case in any of the four years for which the escapements (sic-assessments) have been reopened. In this view of the matter I do not find any valid reason for reopening of the assessments by taking action under Section 147 of the IT Act for asst. yrs. 1990-91 to 1993-94." 8. This order has been challenged by the Revenue. Shri S. Ghosh, learned Departmental Representative of the Revenue, vehemently objected to the order of the CIT(A). He submitted that the learned CIT(A) did not examine the matter correctly and in right perspective. It was not correct that the AO did not have any material to form a reasonable belief that there was no escapement of income in this assessment year.

He submitted that while making enquiry for the asst. yr. 1994-95 the genuineness of the creditors was examined and verified. An Income-tax Inspector was deputed to serve notices. Out of 49 creditors 25 creditors were found to be non-genuine and those non-genuine creditors were also listed for this assessment year. That material was sufficient for the AO to form a belief that there escaped assessment of income.

According to the learned Departmental Representative of the Revenue the reopening was justified.

9. On the other hand, Shri K.N. Jain, learned Authorised Representative of the assessee, supported the order of the learned CIT(A) and vehemently retorted to the submissions of the learned Departmental Representative of the Revenue. He submitted that AO did not have any material on the basis of which be could have formed a reasonable belief that there escaped assessment of income for the assessment year under consideration. According to him whatever enquiries were made by the AO was for the asst. yr. 1994-95. It was a mere speculation or conjecture on the part of the AO to come to a conclusion or to form belief that because in asst. yr. 1994-95 certain trade creditors were found to be bogus, it must be that in asst. yr. 1993-94 also the creditors were non-genuine or bogus. In the course of his arguments the learned Authorised Representative of the assessee having referred to letter dt.

8th March, 1995 of the concerned AO submitted that in fact even for the asst. yr. 1994-95 the AO was yet to collect evidences by 14th March, 1995, so there was no question of having any material before the AO to have a reasonable belief that there escaped assessment of the income and so far asst. yr. 1993-94, it was much far beyond to make belief that if there escaped assessment of income. To be very specific the learned Authorised Representative of the assessee submitted that by letter dt. 8th March, 1995 the AO required the assessee to produce cash book, ledger and vouchers through which cash payments were made.

Assessee was further required to give the details of cheque numbers, bank account number along with the address of the bank and its branch, etc., including whether the cheques were crossed cheques or bearer cheques and who encashed the same. Those details were to be produced on 14th March, 1995. On 14th March, 1995, the AO recorded the reasons for reopening of the assessment for this assessment year. The learned Authorised Representative or the assessee, therefore, reiterated that reopening of the assessment was made merely on conjectures and speculations, He urged to sustain the order of the learned CIT(A).

10. I have heard the rival submissions and gone through the appeal record. For reopening of the assessment under Section 147, the AO must have reason to believe that there escaped assessment of income.

Earlier, the AO was required to make it in writing the same but after the amendment brought in provision of Section 147 of the IT Act, w.e.f.

1st April, 1988 no such record of satisfaction is required but there is introduction of strong words "has reason to believe" in provision of Section 147 of the IT Act. These words are stronger than the word "is satisfied". For forming the reasonable belief, therefore, the AO must have certain materials and his belief should not be arbitrary or irrational. It must be reasonable or in other words must be based on reasons which are relevant and material as held by the Hon'ble Supreme Court in the case of Ganga Saran & Sons Ltd. v. ITO (1981) 130 ITR 1 (SC). Similar view has been taken by the Hon'ble Calcutta. High Court in the case of Ramnarain Bhojnagarwalla v. ITO and Anr. (1970) 77 ITR 653 (Cad) though it was decided keeping in view the old provision but the principle of law is somewhat same. In that case it has been held that forming of belief is to be on the basis of certain materials. It is not enough for the AO to have the material in his possession. He must perform further necessary mental act of accepting the material and information as reliable and confirming the belief that can be acted upon. In view of these principles of law, one has to see what was the material before the AO to have a reasonable belief that there escaped assessment of income. It is to be noted that AO, while framing the assessment for asst. yr. 1994-95, examined some of the trade creditors and he found that some of the creditors were bogus. He finally rejected the books of account of the assessee and made assessments. Probably AO thought that the creditors found to be bogus in asst. yr. 1994-95, there must be bogus creditors for this asst. yr. 1993-94 also. Can this state of affairs be taken as a material which prompted the assessee to have a reasonable belief that there escaped assessment in this assessment year. I do not think so. In fact the material should be such that it should be identifiable as well as on that basis the escapement of income can be quantified. To my mind it looks that the AO simply speculated or imagined that because for the asst. yr. 1994-95 there were bogus creditors, for asst. yr. 1993-94 also there must be bogus creditors. If there would have been any preliminary enquiry or other materials gathered for this asst. yr. 1993-94 also as has been done for the asst. yr. 1994-95, the matter would have been different but for this asst. yr. 1993-94 before the AO there was no material to form the belief that there escaped assessment of income. In fact, for forming reasonable belief for the asst. yr. 1994-95 itself, the AO had no sufficient material as has been pointed out by the learned Authorised Representative of the assessee. In this regard, reference can be made to letter dt. 8th March, 1995 of the AO itself. This letter relates to enquiry that was being carried out by the AO for the asst. yr. 1994-95.

By this letter the AO required the assessee to file various informations to cross-verify the genuineness of the trade-creditors.

The information required was relating to cheque numbers, the bank account along with the address of the bank and further whether the cheques were crossed cheques or bearer cheques and who encashed those cheques. The assessee was asked to produce cash book, ledger, vouchers etc. by 14th March, 1995, 14th March, 1995 was the date on which the assessee was to produce those documents and informations. On 14th March, 1995 itself the AO recorded his reason to believe that there escaped assessment for the asst, yr. 1993-94. Since materials are yet to be collected for the asst. yr. 1994-95 and so on what basis it can be said that the AO formed a reasonable belief that there escaped assessment of income for the asst. yr. 1993-94. In my considered view the learned CIT(A) has rightly observed that the AO did not have material before him on the basis of which he could have entertained a reasonable belief that there escaped assessment and that is why he further observed that the reopening of the assessment by taking recourse to provision under Section 147 was invalid and bad in law. His observations are justified. There is no merit in the grounds raised by the Revenue.

Since there is difference of opinion amongst the members constituting the Division Bench, Patna, on the undermentioned issues and hence the same is referred to the Hon'ble President, Tribunal for necessary action : "1. Whether, in the facts and circumstances of the case and in law, the CIT(A) has erred to hold that reopening of the assessment under Section 147 of the IT Act is unjustified and bad in law? 2. Whether, on the basis of material collected for the asst. yr.

1994-95 that certain creditors were bogus, reopening of the assessment for the asst. yr. 1993-94 can be made under Section 147 of the IT Act?" 1. The appeal of the Revenue and the cross-objection of the assessee for the asst. yr. 1993-94 were heard by Division Bench at Patna, As a result of difference of opinion of the two members of the Bench, the Hon'ble President has nominated me as Third Member for a decision in regard to the point of difference between the learned members. The following points have been identified in respect of which there is difference of opinion between the learned members : "(1) Whether, on the facts and circumstances of the case and in law, the CIT(A) has erred to hold that reopening of the assessment under Section 147 of the IT Act is unjustified and bad in law? (2) Whether, on the basis of material collected for the asst. yr.

1994-95 that certain creditors were bogus, reopening of the assessment for the asst. yr. 1993-94 can be made under Section 147 of the IT Act? 2. Parties have been heard and record perused. In order to recapitulate, the relevant facts may be reiterated. The assessee is engaged in contract business. For asst. yr. 1993-94 return of income had been filed on 23rd Dec., 1993 declaring income of Rs. 2,42,150. The AO made an assessment under Section 143(3) on 22nd March, 1994 at income of Rs. 2,57,150. On appeal, the additions made by the AO were deleted by the CIT(A). subsequently, in the course of assessment proceedings for asst. yr. 1994-95, the AO had made enquiries in regard to the certain sundry creditors and suppliers. It was found that out of 49 persons in the list of sundry creditors on account of supplies made to the assessee, 25 persons were suspected not to be genuine. The Inspector had given a report to the AO in regard to such creditors. An enquiry was being made by the AO in connection with asst. yr. 1994-95.

Though the enquiry for asst. yr. 1994-95 was not completed and the assessment was still pending, the AO issued a notice under Section 148 to the assessee calling for the return of income for the assessment of escaped income. Following reasons were recorded by the AO before issue of notice under Section 148 : "In course of inquiry for asst. yr. 1994-95, following persons were found to be non-existent : and transaction with certain other persons like Satpal Singh, Mazid Khan etc. have been found to be non-genuine. I have reason to believe that the income of the assessee has escaped assessment.

Issue notice under Section 148 of the IT Act. Though a list of sundry creditors were disclosed in the return of the income but notice under Section 148 is being issued in view of the enquiries which revealed that transactions with the abovementioned sundry creditors were non-genuine or bogus or does not represent correct nature of transaction and the notice is being issued in view of this new facts and fresh information and in view of the decision of the Supreme Court in case of Phoolchand Bajranglal v. ITO (1993) 203 ITR 456 (SC)." The assessee pleaded before the AO that the reopening of assessment was bad in law. It was pointed out that merely because some sundry creditors for asst. yr. 1994-95 appeared to be non-genuine, it should not necessarily be taken that the creditors for asst. yr. 1993-94 would also not be genuine. The objection of the assessee was not accepted by the AO. He examined the books of account and after rejecting the book results estimated the income of the assessee from contract business at Rs. 5,10,374 by adopting a rate of gross profit at 8 per cent on the gross receipts. The assessee appealed to the CIT(A) and the latter found no justification for reopening of the assessment. It has been pointed out by the CIT(A) that the AO has not assessed any income on account of bogus creditors but has merely estimated the profits from contract business.

3. The assessee appealed to the Tribunal. Whereas the learned AM proposed the reversal of the order of the CIT(A) by holding the reopening of assessment and estimate of profit as valid, the learned JM has taken a view to the contrary.

4. The learned counsel for the Department contended that the CIT(A) was not justified in cancelling the reassessment made by the AO. The AO had made enquiries pertaining to asst. yr. 1994-95 and out of 49 creditors, 25 appeared to be bogus. The AO had received the report of the Inspector and the mere fact that the assessee was given an opportunity to rebut the report of the Inspector does not justify the view that the AO could not have believed that the income of the assessee had escaped assessment. My attention was drawn to the report of the Inspector dt.

22nd Feb., 1995, AO's letter to the assessee dt, 23rd Feb., 1995 and another letter dt. 8th March, 1995 allowing time to the assessee to rebut the report upto 14th March, 1995. According to the learned counsel for the Revenue, since the assessee had failed to furnish necessary evidence on 14th March, 1995, the AO recorded the reasons for reopening of assessment for asst. yr. 1993-94 as some of the creditors for asst. yr. 1994-95 appeared in the list of creditors for asst. yr.

1993-94 as well. Reliance was also placed on the following decisions in support of the contention that reopening of assessment on these facts was valid :ITO v. Selected Dalurband Coal Co. (P) Ltd. (1996) 217 ITR 597 (SC) It was, accordingly, pleaded that the view expressed by the learned AM may be preferred to the view taken by the learned JM.5. The learned counsel for the assessee, on the other hand, contended that the initiation of proceedings for asst. yr. 1993-94 is merely on the basis of suspicion and not on any relevant material pertaining to asst, yr. 1993-94. It was pointed out that in asst. yr. 1994-95 enquiry was conducted by the AO and admittedly the Inspector of the IT Department had given a report to the ITO about 25 creditors appearing to be bogus. According to the learned counsel, the report of the Inspector is vague and the very fact that the AO was making enquiries in regard to the sundry creditors for asst. yr. 1994-95 establishes the fact that the report of the Inspector was not conclusive. With reference to the order-sheet entries, it was contended that the enquiry on 14th March, 1995 had not been completed by the AO for the asst. yr.

1994-95 and, therefore, he could not have formed a reasonable belief that the income of the assessee had escaped assessment for asst. yr.

1993-94. Reliance was placed on the following decisions of the Supreme Court in support of the claim that the reopening of assessment made by the AO is bad in law :S.P. Chhugamal Rajpal v. S.P. Chaliha and Ors. (1971) 79 ITR 603 (SC) 6. I have given my careful consideration to the rival contentions. It is well settled principle of law that an assessment made under Section 143(3) is not to be disturbed lightheartedly. Section 147 of the IT Act, 1961 empowers the AO to reopen an assessment subject to certain conditions contained in the said section. One of the conditions precedent for taking action under Section 147 is that the AO has "reason to believe" that the income of the assessee had escaped assessment. The AO is required to issue a notice under Section 148 to the assessee calling for the return of income. But before issue of notice under Section 148, the AO is required to record the reasons for reopening of an assessment. In this case it is not disputed that the AO had recorded the reasons for reopening of the assessment. The reasons recorded by the assessee (sic-AO) have been reproduced in para 2 above and it is evident therefrom that the AO had been conducting enquiry in regard to the sundry creditors for asst. yr. 1994j95. The Inspector of the IT Department had given a report in regard to the 25 creditors out of 49 creditors appearing in the list of sundry creditors in the case of the assessee for asst. yr. 1994-95. The report of the Inspector is on record and in most of the cases he has reported to the AO that the party was not found to exist at the place of address. On receipt of the report from the Inspector, the AO issued letter to the assessee calling for evidence and other material. Though the enquiry in regard to the cash creditors for the asst. yr. 1994-95 was in progress, yet the AO recorded reasons for asst. yr. 1993-94 that income has escaped assessment. The question involved in this appeal is as to whether the AO could have reason to believe that the income of the assessee had escaped assessment. At this stage, it may be relevant to refer to some reported decisions of Hon'ble Supreme Court relevant to the issue involved herein.

7. In the case of Johri Lal (HUF) v. CIT (1973) 88 ITR 439 (SC), their Lordships of the Supreme Court held as under : "The formation of the required belief by the ITO before proceedings can be validly initiated under Section 34(1)(a) is a condition precedent; the fulfilment of this condition is not a mere formality, it is mandatory, and failure to fulfil that condition would vitiate the entire proceedings. Further, the formation of the required belief is not the only requirement; the officer is further required to record his reasons for taking action under Section 34(1)(a) and obtain the sanction of the Central Board or the CIT, as the case may be.

8. In the case of ITO v. Lakhmani Mewal Das (supra), their Lordships of the Supreme Court held as under : "The reasons for the formation of the belief contemplated by Section 147(a) of the IT Act, 1961, for the reopening of an assessment must have a rational connection 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 ITO and the formation of his belief that there has been escapement of the income of the assessee 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 ITO 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 assessee 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 the 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." 9. In the case of CIT v. T.S.PL.P. Chidambaram Chettiar (supra), their Lordships of the Supreme Court held as under : "The assessee's father, a money-lender, had advanced various sums of money to P on promissory notes. On 6th July, 1932, the principal stood at Rs. 1,38,535 and interest thereon came to Rs. 1,34,965.

Taking a further loan of Rs. 2,500, P executed a mortgage of some of his properties for a sum of Rs. 2,76,000. Of this, only a small amount was repaid. In December, 1940, a suit was instituted against P for recovery of a sum of Rs. 5,50,573 inclusive of interest. In September, 1943, the claim was compromised and on 5th Oct., 1943, a compromise decree was passed for the sum of Rs. 3,50,000 in full satisfaction of the mortgagee's claim. The amount of the decree was payable by 1st Oct., 1944, and the debt due under the decree was subsequently discharged. For the asst. yr. 1944-45, the assessee was assessed to tax as karta of his HUF by the ITO, Trichy. Pending the assessment proceedings, that officer received information from the ITO, Erode, that P had paid secretly to the mortgagee during the relevant accounting period a sum of Rs. 1,50,000 which was not included in the compromise decree. The assessee, however, denied, having received that amount. Referring to the assessee's denial, the AO recorded in the order sheet on 27th May, 1945 : "The ITO, Erode, should be asked to give further details and to ask P to produce evidence of payment. In any event, this should come for consideration only in the asst. yr. 1945-46 as only the excess over Rs. 2,76,000 plus legal expenses can be treated as interest income in the hands of the assessee and so, the assessment for 1944-45 should not be held up pending further investigation." The AO completed the assessment on 12th Feb., 1946, without including that amount. Thereafter, the officer made further inquiry and on 9th March, 1953, issued a notice under Section 34(1)(a) of the IT Act, 1922 for reassessment and included the sum of Rs. 1,50,000 in the income of the assessee for the asst. yr. 1944-45. The AAC, on appeal, set aside the order and directed the officer to redo the assessment after giving the assessee an opportunity to cross-examine the parties examined by the officer. The ITO, without issuing a fresh notice of reassessment, enquired further into the matter : P's books of accounts were produced to prove the payment to the assessee, some witnesses were examined in the presence of the assessee, and a fresh order of assessment was made. This order was affirmed by the Tribunal. On a reference, the High Court held that the reassessment was valid, and that the officer had acted rightly in giving effect to the order of the AAC, but that the sum of Rs. 1,50,000 was not taxable income of the relevant year of account, because the amount secretly received must be deemed to have been kept in suspense and, as the debtor had not given any direction about the appropriation of that amount, it was open to the creditor to appropriate it towards the principal. On appeal to the Supreme Court by both the parties : Held, (i) that the reassessment proceedings were valid as the requirements of Section 34(1)(a) were fully satisfied. The fact that there was some vague information before the officer at the time of the original assessment that the assessee's father had secretly received a sum of Rs. 1,50,000 from the mortgagor was by itself not sufficient to bring to tax that amount particularly in view of the fact that the assessee had denied the fact. The fact that the officer could have made further inquiry into the matter but did not do so did not take the case out of Section 34(1)(a) as the assessee had failed to place truly and fully all the material facts before him. The remarks made by the officer in the order sheet did not amount to a decision taken by him on the basis of facts found but had to be treated as casual observations." 10. In the case of Sheo Nath Singh v. AAC (1971) 82 ITR 147 (SC), their Lordships of the Supreme Court held as under : "The words 'reason to believe' suggest that the belief must be that of an honest and reasonable person based upon reasonable grounds and that the ITO may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour. The ITO would 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." 11. The Hon'ble Supreme Court in the case of Sri Krishna (P) Ltd. v.ITO (1996) 221 ITR 538 (SC) held as under : "The ITO can issue notice under Section 148 of the IT Act, 1961, proposing to reopen an assessment only where he has reason to believe that on account of either the omission or failure on the part of the assessee to file the return or on account of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that year, income has escaped assessment. The existence of the reason(s) to believe is intended to be a check, a limitation, upon his power to reopen the assessment. Section 148(2) imposes a further check upon the said power, viz., the requirement of recording of reasons for such reopening by the ITO. Section 151 imposes yet another check upon the said power, viz., the CIT OT the Board, as the case may be, has to be satisfied, on the basis of the reasons recorded by the ITO, that it is a fit case for issuance of such a notice. The power conferred upon the ITO by Sections 147 and 148 is thus not an unbridled one. It is hedged in with several safeguards conceived in the interest of eliminating room for abuse of this power by the AO. The idea was to save the assessees from harassment resulting from mechanical reopening of assessments but this protection avails only to those assessees who disclose all material facts truly and fully.

Every disclosure is not and cannot be treated to be a true and full disclosure. A disclosure may be a false one or a true one. It may be a full disclosure or it may not be. A partial disclosure may very often be a misleading one. What is required is a full and true disclosure of all material facts necessary for making assessment for that year. All the requirements stipulated by Section 147 must be given due and equal weight.

The enquiry at the stage of finding out whether the reassessment notice is valid is only to see whether there are reasonable grounds for the ITO to believe and not whether the omission/failure and the escapement of income is established. It is necessary to keep this distinction in mind." 12. In the case of Raymond Woollen Mills Ltd. v. ITO (1999) 236 ITR 34 (SC), their Lordships of the Supreme Court held as under : "In determining whether commencement of reassessment proceedings was valid, it has only to be seen whether there was prima facie, some material on the basis of which the Department could reopen the case.

The sufficiency or correctness of the material is not a thing to be considered at this stage.

Held, that the case of the Revenue was that the assessee was charging to its P&L a/c, fiscal duties paid during the year as well as labour charges, power, fuel, wages, chemicals etc. However, while valuing its closing stock, the elements of fiscal duty and the other direct manufacturing costs were not included. This resulted in undervaluation of inventories and understatement of profits. This information was obtained by the Revenue in a subsequent year's assessment proceedings. The commencement of reassessment proceedings was valid." 13. In the case of S. Narayanappa v. CIT (supra), it was held as under : "...........the sufficiency of the grounds which induced the ITO to act is not a justifiable issue. It is of course open for the assessee to contend that, the ITO 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 IT Act does not mean a purely subjective satisfaction on the part of the ITO. 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 bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section." 14. In the case of Ganga Saran & Sons (P) Ltd. v. ITO (supra), their Lordships of the Supreme Court held as under : "It is well settled as a result of several decisions of this Court that two distinct conditions must be satisfied before the ITO can assume jurisdiction to issue notice under Section 147(a). First, he must have reason to believe that the income of the assessee has escaped assessment and, secondly, he must, have reason to believe that such escapement is by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. If either of these conditions is not fulfilled, the notice issued by the ITO would be without jurisdiction. The important words under Section 147(a) are "has reason to believe" and these words are stronger than the words "is satisfied". The belief entertained by the ITO must not be arbitrary or irrational. It must be reasonable or in other words it must be based on reasons which are relevant and material. The Court, of course, cannot investigate into the adequacy of sufficiency of the reasons which have weighted with the ITO in coming to the belief, but the Court can certainly examine whether the reasons are relevant and have a bearing on the matters in regard to which he is required to entertain the belief before he can issue notice under Section 147(a). If there is no rational and intelligible nexus between the reasons and the belief, so that, on such reasons, no one properly instructed on facts and law could reasonably entertain the belief, the conclusion would be inescapable that the ITO could not have reason to believe that any part of the income of the assessee had escaped assessment and such escapement was by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts and the notice issued by him would be liable to be struck down as invalid." 15. In the case of Phool Chand Bajrang Lal v. ITO (supra), their Lordships of the Supreme Court held as under : "From a combined review of the judgments of this Court, it follows that an ITO acquires jurisdiction to reopen an assessment under Section 147(a) r/w Section 148 of the IT Act, 1961, only if on the basis of specific, reliable and relevant information coming to his possession subsequently, he has reasons, which he must record, to believe that, by reason of omission or failure on the part of the assessee to make a true and full disclosure of all material facts necessary for his assessment during the concluded assessment proceedings, any of his income, profits or gains chargeable to income-tax has escaped assessment." "We are not persuaded to accept the argument of Mr. Sharma that the question regarding truthfulness or falsehood of the transactions reflected in the return can only be examined during the original assessment proceedings and not at any stage subsequent thereto. The argument is too broad and general in nature and does violence to the plain phraseology of Sections 147(a) and 148 of the Act and is against the settled law laid down by this Court. We have to look to the purpose and intent of the provisions. One of the purposes of Section 147 appears to us to be to ensure that a party cannot get away by wilfully making a false or untrue statement at the time of original assessment and when that falsity comes to notice, to turn around and say 'you accepted my lie, now your hands are tied and you can do nothing'. It would be a travesty of justice to allow the assessee that latitude." 16. The legal principles that emerge from the aforementioned decisions may be summarised as under : (i) That for valid reopening of assessment after four years, the AO should have reason to believe that the income of the assessee had escaped assessment by reason of omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. It is a condition precedent for assumption of jurisdiction under Section 147(a).

(ii) The condition that the AO had reason to believe that the income of the assessee had escaped assessment is question of jurisdiction, a vital thing which can always be investigated by Court. The words 'has reason to believe' in Section 147 are stronger than the words 'is satisfied'. The belief entertained by the AO must not be arbitrary or irrational. It must be reasonable or, in other words, it must be based on reasons which are relevant and material.

(iii) The 'reason to believe' does not mean 'reason to suspect'. The expression 'reason to believe' in Section 147 does not mean purely subjective satisfaction on the part of the AO. The belief must be held in good faith; it cannot be merely a pretence. There must be a rational connection between the reasons for the belief and the relevant material.

(iv) The belief of the officer should not be a product of imagination or speculation. There must be reason to induce the belief. The belief must be of an honest and reasonable person based upon reasonable grounds.

(v) The officer may act on direct or circumstantial evidence, but his belief must not be based on mere suspicion, gossip or rumour.

(vi) The belief that is required for reopening of assessment is that of the AO. The sufficiency of the reasons for the belief cannot be investigated by the Court.

(vii) At the time of issuing of reassessment notice, it is not necessary for the AO to come to a conclusive finding that the income has escaped assessment. Such belief obviously at that stage is a tentative belief on the materials before him to be examined and scrutinised on such evidence as may be available in the proceedings for reassessment. But there must be some ground for reasonable belief that there had been a non-disclosure, etc. of material facts resulting in escapement of income.

(viii) For determining whether initiation of reassessment proceeding was valid, it is only to be seen whether there was, prima facie, some material on the basis of which the Department could reopen the case.

(ix) The sufficiency or the correctness of the material is not a thing to be considered at this stage. Since the belief is that of the AO, the sufficiency of the reasons for forming the belief is not for the Court to judge, but it is open to an assessee to establish that there, in fact, existed no belief or that the belief was not at all a bona fide one or was based on vague, irrelevant and nonspecific information.

17. Applying the aforementioned principles of law laid down by the Hon'ble Supreme Court, it is not difficult to record a finding that the material available to the AO on the date of recording of the reasons was not sufficient for forming a belief that the income of the assessee for asst. yr. 1993-94 had escaped assessment. As pointed out earlier, the enquiry relating to asst. yr. 1994-95 itself was in progress and no final conclusion had been arrived at, at the time of recording the reasons for asst. yr. 1993-94. It is also observed from the reasons recorded for the asst. yr. 1993-94 that the AO has not pointed out that some of the creditors appearing for asst. yr. 1994-95 also appeared in asst. yr. 1993-94. Thus the only information available to the AO at the time of issue of notice and recording of reasons for asst. yr. 1993-94 was the report of the Inspector that some of the creditors appearing in the balance sheet for asst. yr. 1994-95 may not be genuine. This information may, in my opinion, at best be reason to suspect that for asst. yr. 1993-94 also some creditors may not be genuine. So, however, it is well established principle of law that the "reason to believe" for the purpose of Section 147 does not mean "reason to suspect". There should be something more than mere suspicion. Though the material may not be sufficient to establish conclusive concealment of income, yet such material should be of such a nature as to form a bona fide belief that the income of the assessee has escaped assessment. In my considered view, the reasons recorded by the AO for reopening of the assessment clearly demonstrate that the AO did not have sufficient material for forming a bona fide belief that the income of the assessee had escaped assessment for asst. yr. 1993-94. As already pointed out, the enquiry for asst. yr. 1994-95 had not even been completed by the date of issue of notice under Section 148. Even if a firm finding were recorded for asst. yr. 1994-95 about some of the creditors being bogus but unless nexus or live link was shown with asst. yr. 1994-95, the proceedings could not be reopened for asst. yr. 1993-94 merely because the income for asst. yr. 1994-95 had been concealed by the assessee.

Taking the totality of the facts and circumstances of this case into consideration, I hold that the CIT(A) was justified in cancelling the reassessment made by the AO. I thus concur with the view expressed by the learned JM in preference to the view expressed by the learned AM.On the basis of my order, the appeal of the Revenue shall be dismissed.

Since no fresh relief has been sought in the cross-objection over and above what the CIT(A) has given, the same is infructuous and dismissed as such.

18. The records may be placed before the Division Bench for announcing the majority judgment.

1. There was a difference of opinion between the members of the Bench and the following questions were referred to the 3rd member for his opinion.

"(1) Whether, on the facts and circumstances of the case and in law, the CIT(A) has erred to hold that reopening of the assessment under Section 147 of the IT Act is unjustified and bad in law? (2) Whether, on the basis of material collected for the asst. yr.

1994-95 that certain creditors were bogus, reopening of the assessment for the asst. yr. 1993-94 can be made under Section 147 of the IT Act?" 2. The learned Third Member has agreed with the order of the learned JM and held that the CIT(A) was justified in cancelling the reassessment made by the AO. Therefore, in accordance with the majority view, the issue is decided in favour of the assessee and the appeal of the Revenue is dismissed. Since no fresh relief has been sought in the cross-objection over and above what the CIT(A) has given, the same is infructuous and dismissed as such.


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