J.M. Shelat, C.J.
1. This petition is for a writ of mandamus and/or prohibition or any other appropriate writ or orders, quashing or setting aside three notices dated March 28, 1964, issued under section 147 of the Income-tax Act, 1961, relating to the assessment years 1959-60, 1960-61 and 1961-62, and prohibiting the respondent from proceeding with any reassessment pursuant to the said notices.
2. The petitioner-firm was assessed to income-tax for the assessment year 1959-60 by the Income-tax Officer, Circle II, Ward I, Ahmedabad, and for the assessment years 1960-61 and 1961-62 by the Income-tax Officer, Circle I, Ward A, Ahmedabad. For the assessment year 1962-63, the petitioner-firm filed its returns before the Income-tax Officer, Circle I, Ward A, Ahmedabad, but its case was transferred to the Income-tax Officer, Group Circle J, and at present the respondent is in charge of the assessments of the petitioner-firm for the assessment years 1962-63 and 1963-64.
3. The petitioner-firm has been carrying on business in mill stores and has also been importing certain goods, such as chucks, brass rules, steel rules, diesel engine parts, ball-bearings, etc., besides dealing in other mill stores and general merchandise goods. In the course of its business, the firm has been selling these goods to several mills and merchants and also to Messrs. A.M. Shah and Co. and Messrs. R. Ambalal and Co., which firms are Hindu undivided family firms, the respective kartas whereof are the two partners in the petitioner-firm. The two Hindu undivided family firms started their business in the account year 1958-59 and they also have been importing mill stores and other goods. The two Hindu undivided family firms are established importers in respect of the aforesaid mill stores and general merchandise goods and are dealing with several merchants besides the petitioner-firm. Since the assessment year 1959-1960, the two Hindu undivided family firms are being assessed to income-tax.
4. In the course of its business, the petitioner-firm has been maintaining regular books of account, such as cash book, ledger, purchase journals, sales journal and a stock ledger. It also maintains bills and invoices for the goods purchased by the petitioner-firm and sales bills which are issued to customers from bound books with chronological numbers printed thereon. The practice followed by the petitioner-firm is to give the original bill to the purchaser and to retain the carbon copy in the said bound books. The stock ledger maintained by the petitioner-firm is an item wise quantitative record. Whenever any purchase is made or imported by the petitioner-firm, such as purchase is entered into the stock ledger with the quantity of the item purchased, the date of its purchase or import and the purchase price or the import price, as the case may be. When such an article is sold, it is debited in the with particulars as to the date when it is sold, the party to whom it is sold, the rate or profit at which it is sold, the quantity of sale, the total sale price and the number of the bill issued to the customer. According to the petitioner-firm, at the time of the original assessments for the assessment years 1959-60 to 1961-62, all these books of account, including the stock ledger and the records, were produced before the Income-tax Officer and the Income-tax Officer had accepted the book results after scrutiny of all the books of account including the stock ledger. For the assessment years 1959-60 to 1961-62, the petitioner-firm as also its two partners as individuals and the two Hindu undivided family firms have been assessed to income-tax.
5. By his letter dated March 20, 1964, the respondent informed the petitioner-firm that from scrutiny of the assessment records of the petitioner firm, its two partners and the said two Hindu undivided family firms, he was satisfied that the partners of the petitioner-firm had contrived to divert the profits of the petitioner-firm to the said two Hindu undivided family firms and had thereby tried to evade proper taxation leviable upon the petitioner-firm in respect of the aforesaid three assessment years, and called upon the firm to show cause why its assessment for the aforesaid three years should not be re-opened and the total income not re-determined. The petitioner-firm replied by its letter dated March 26, 1964, denying that there was any diversion of profits and stating that the gross profits earned by the petitioner-firm on sales made to the Hindu undivided family firms had gone on increasing during the aforesaid three years, that all the material facts and the books of account with quantitative details of purchase or to whom the goods were sold in large quantities, were furnished to the Income-tax Officer at the time of the original assessments and that, consequently, the respondent did not possess any information which would justify him to re-open the aforesaid assessments and that the respondent had no jurisdiction to do so. The respondent, however, issued the three impugned notices dated March 28, 1964, under section 148 of the Act, alleging that the income of the petitioner-firm and that, therefore, he proposed to reassess its income for the said three years and required the petitioner-firm to file its returns of income within thirty days from the receipt of the said notices.
6. The respondent's case, on the other hand, was that the petitioner-firm has two partners, one R. S. Dave and A.M. Shah. The firm was originally assessed by the Income-tax Officer, Circle I, Ward A, while its partners and the said two Hindu undivided family firms were assessed separately by different Income-tax Officers. The Hindu undivided family firm, of which R. S. Dave is the karta, has been carrying on business in the name of R. Ambalal and Co., and the other Hindu undivided family firm of which A.M. Shah is the karta has been carrying on business in the name of A.M. Shah and Co. The Inspecting Assistant Commissioner, in the course of his inspection of assessments, came to notice that though these concerns were allied concerns, the petitioner-firm, its two partners and the said two Hindu undivided family firms were being assessed by different officers and therefore suggested that the cases of all these assessees should be assigned to the same Income-tax Officer, and it was as a result of this suggestion that the work of assessment of the petitioner-firm, its two partners and the two Hindu undivided family firms was assigned to him in or about March, 1963. According to him, in or about January, 1964, he started the work of assessment of the petitioner-firm for 1962-63 and also started looking into the assessments of the petitioner-firm for the earlier years. While he was doing so, he had several meetings between January and March, 1964, with the said R. S. Dave and the chartered accountant of the petitioner-firm. In the course of the assessment proceedings for 1962-1963, he found that the petitioner firm 'had resorted to evasion of tax by first selling highly profitable items to the Hindu undivided family business of its partners who could in their turn sell the same commodities at very high profits. It was in this manner that the petitioners were diverting their profits ' In the course of the aforesaid proceedings, he found, for instance, that the petitioner-firm had imported sixty chucks and out of these sixty chucks admeasuring 7 1/2 inches the petitioner-firm had sold one of such chucks to Messrs. Metal Products at Rs. 525 against its cost of about Rs. 100, thereby making a profit of more than Rs. 400. He found that the remaining fifty-nine chucks however were sold to the two Hindu undivided families at a price varying between Rs. 150 to 225. The total sale price of those fifty-nine chucks came to Rs. 10,575, i.e., at a profit of about Rs. 4,800 as against a possible profit of about Rs. 23,000 which the petitioner firm would have made had the fifty-nine chucks been sold to customers other than the two Hindu undivided families at the same price which it charged from the aforesaid Metal Products. He also found that in the quantity account, the size of the chuck which was sold to Messrs. Metal Products had been wrongly stated to be of the measurement of 16 1/2 inches, though on scrutiny he found that the size of the chuck was the same, namely, 7 1/2 inches, as that of the other chucks. This was done deliberately in order to mislead the scrutinizing officer and to show that there was no disparity between the price realised from the said Messrs. Metal Products and the price charged to the two Hindu undivided families. According to the respondent, in the course of discussions which he had with the representatives of the petitioner-firm, he learnt 'that in the earlier years also the petitioners had effected such sales to the said Hindu undivided families and that over and above the margin of profits earned by the petitioners from the Hindu undivided families, the Hindu undivided families had earned substantial profits on the resale of such goods. I, therefore, came to the conclusion that the creation of the Hindu undivided family business was merely a subterfuge or a contrivance by the partners of the petitioner-firm to divert the huge profits made by the partners of the petitioner-firm on imported articles. As a matter of fact in the course of the meetings before me, the said D. B. Shah, chartered accountant for the petitioners, filed statements before me showing the sales effected by the petitioners to the Hindu undivided families of the two partners and the diversion of profits achieved thereby'. The statements produced by the said D. B. Shah before the respondent have been annexed as exhibit No. 1 to the affidavit in reply. It is clear from the affidavit in reply that the information upon which the respondent initiated proceedings under section 147 of the Act was the information contained in paragraph 4 of his affidavit and summarised above.
7. The contention of the petitioner-firm was that the respondent did not possess any information upon which he could have reason to believe that there was any escapement of assessment and that what the respondent purported to do by the aforesaid notice was to reassess the petitioner-firm on the basis of an opinion different from that of the Income-tax Officer who had passed the original assessment orders but the different opinion held by him was on the same set of facts as were present before the said Income-tax Officer. Mr. Nanavati for the petitioner-firm contended before us that all the relevant facts were known to the Income-tax Officer who passed the original orders of assessment and that the respondent did not have in his possession any information which can be said to have been gathered by him after the original assessments were concluded. He further contended that at the time of the original assessments for the aforesaid three years, the balance-sheets and the ledger produced by the petitioner-firm were scrutinised and that the Income-tax Officer had in fact enquired and was informed that the said A.M. Shah was the karta of the Hindu undivided family which carried on business in the name of Messrs. A. M. Shah and Co., and that he was a partner in the petitioner firm and was assessed by the Income-tax Officer, Circle I, Ward E, for the assessment years 1959-60 and 1960-61. That Hindu undivided family firm was assessed by the Income-tax Officer, Circle IV, Ward E, for the assessment year 1961-62. He also found out that similar information had been given to that Income-tax Officer in respect of the Hindu undivided family firm of Messrs. R. Ambalal and Co. These statements have been averred in paragraph 16 of the petition and we may observe at this stage that none of these averments has been denied by the respondent in his affidavit in reply. Mr. Nanavati submitted that the information that can be the basis for initiation of reassessment proceedings under section 147 must be one which is acquired by the Income-tax Officer after the original assessments were concluded, but since all this information, upon which the respondent had relied, was already with his predecessor as a result of the books of account, including the said stock ledger having been produced before him, and the Income-tax Officer who had originally assessed the petitioner-firm having already seen the rates at which the petitioner-firm had sold the goods to the two Hindu undivided family firms, there was no question of the respondent having acquired any information other than that which had been brought to the notice of the predecessor. Therefore, the Income-tax Officer, who passed the original orders of assessments having been satisfied that there was no diversion of profits from the petitioner-firm to the two Hindu undivided family firms the respondent has no jurisdiction to act under section 147, for initiation of proceedings thereunder by him would constitute no more than a mere change of opinion. The learned Advocate-General, on the other hand, argued that in the course of assessment proceedings for the assessment year 1962-63, the respondent had noticed sales of imported goods, namely, the aforesaid chucks, to the two Hindu undivided family firms and that those sales had been effected by the particular firm with a view to divert profits and that that constituted information which would be sufficient for re-opening of the assessments even of the earlier years and, therefore, the impugned notices were valid and warranted under section 147. We may observe at this stage that though in the affidavit in reply the respondent relied upon both the clauses (a) and (b) of section 147, in the course of his arguments the learned Advocate-General made it clear that he was not relying upon clause (a) but that he would rest his case under clause (b) of section 147 only.
8. Under section 147, the requisite conditions, so far as they are relevant in this case, are :
(i) that there must be escapement of assessment,
(ii) that the Income-tax Officer must have reasons to believe that income has escaped assessment on account of omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment of the year, or
(iii) that the Income-tax Officer had reason to believe in consequence of information in his possession that there was escapement of assessment.
9. As already stated, we are concerned in this petition with clause (b) of section 147 which requires that the Income-tax Officer must have reason to believe in consequence of information in his possession that there has been escapement of assessment. Therefore, information leading to a reasonable belief of escapement of assessment is sufficient to confer jurisdiction on the Income-tax Officer to act under section 147. Reasonable belief, however, means the belief of an honest and reasonable person based upon reasonable grounds. Therefore, an Income-tax Officer can act under this section on evidence, but not on mere surmise or suspicion. As stated in Bhimraj Panna Lal v. Commissioner of Income-tax, a decision under section 34 of the old Act corresponding to the present section 147, there must exist something, either supported by the assessee, or a fact or a point of law which is inadvertently or otherwise omitted to be considered by the Income-tax Officer before he can proceed to act under this section. But a mere change of opinion on the same facts or law is not covered by the section. The Income-tax Officer cannot also institute a fishing investigation or enquiry with the object of finding out facts which would entitle him to reopen a past assessment. But it would be enough, if he, on the information which he has with him and in good faith, considers that he was good ground for believing that the assessee's profits have, for some reason, escaped assessment or been assessed at too low a rate and a notice can be served if he is bona fide of the opinion that income has escaped. At the same time, though his powers are wide, they are not plenary, for the legislature has insisted on the Income-tax Officer having 'reasons to believe' and not 'reasons to suspect'. Explanation 2 to the section, however, lays down that production of account books or other records from which material evidence with due industry could have been found out by the Income-tax Officer would not necessarily amount to disclosure. That principle was accepted long ago by the courts and which has now been enacted in clear language by the legislature. Inadvertence or negligence or failure on the part of an Income-tax Officer to examine properly the books of account would not therefore preclude a subsequent reassessment if as a result of such inadvertence or negligence or failure there has resulted escapement. It is thus clear that where an Income-tax Officer relies on clause (b) of section 147, two conditions have to be fulfilled, (1) that he should have in his possession information which has come to him after the original assessment, and (2) that information must be such as to give him reasonable ground to believe that there has been escapement of assessment. But the information upon which an Income-tax Officer can act need not be merely factual information, for it would also include information as to the state of law, e.g., that a decision on which reliance was placed at the time of the original assessment has been overruled. Even information as to some subsequent events which bring to light circumstances unknown but existing at the time of the original assessment would justify proceedings under section 147(b). Thus, in Maharaj Kumar Kamal Singh v. Commissioner of Income-tax, the Supreme Court held that the word 'information' in section 34(1) (b) of the old Act included information as to the true and correct state of law and so would cover information as to relevant judicial decisions. Cases also may arise where an assessee might have produced materials, such as books of account or other documentary evidence at the time of original assessment proceedings, but the Income-tax Officer might have lost sight of the contents thereof, either through negligence or inadvertence or mistake. If such inadvertence or mistake has resulted in escapement of income-tax, institution of proceedings under section 147 would be justifiable. In Haji Ahmed Haji Esak and Co. v. Commissioner of Income-tax, while holding that suspicion, opinion or apprehension on the part of a subsequent Income-tax Officer was not enough, Chagla C.J. held that mere possession of materials by the original Income-tax Officer would not amount to information, for information must amount to knowledge or mental awareness of the facts revealed by such materials. The mere fact that account books were placed before the Income-tax Officer therefore is not sufficient to give him information as to their contents. Such a fact may amount to constructive notice of their contents but not an actual notice which is what is required by section 147. In a decision which we recently gave in Ambalal Jivabhai Patel v. Income-tax Officer, Ahmedabad, we construed the word 'information' and held that where the annual value of certain house property was returned by the assessee on the basis of the rateable value fixed by the municipal corporation and where the previous Income-tax Officer accepted that value believing that it represented the correct annual value of the property in question, if, subsequently on enquiry made by the Income-tax Officer, the latter officer were to come to know from the assessor and collector of municipal taxes that though, according to the principles of taxing, assessment of a property should be made by the municipal corporation on the basis of rent that a hypothetical tenant would pay if the property were to be let out from year to year and the municipal corporation had not strictly adhered to that principle in practice and had made concessional assessments, the information that such concessional assessments had been made would constitute information and the intimation received by the Income-tax Officer from the assessor and collector of municipal taxes would amount to information within the meaning of section 147(b). If on the basis of such information the officer comes to believe that the income of the assessee derived from such immovable property had escaped assessment, proceedings under section 147 would be justifiable. It is, therefore, clear that mere production of records or other documentary evidence would not preclude a subsequent officer from initiating reassessment proceedings unless the Income-tax Officer who passed the original assessment order had conscious knowledge of the contents of such materials. If a subsequent Income-tax Officer were to find that the former Income-tax Officer had failed to notice or was unaware of the contents of such materials and a subsequent officer were to find from such materials that there has been escapement, he would have the jurisdiction to proceed to re-determine the assessment.
10. The question therefore is whether it can be said in the present case that the respondent has in his possession such information from which he could have reasonable ground for a belief that there was escapement of assessment in respect of the assessment years 1959-60 to 1961-62.
11. It is an admitted fact that the petitioner-firm has been carrying on business since 1942 and is being assessed to income-tax since then. It is also a fact, in respect of which there is no controversy, that the two Hindu undivided family firms started carrying on business for the first time in the account year 1958-59 and they, in their turn, are being assessed since the assessment year 1959-60. It is true that the petitioner-firm, its partners as individuals and the two Hindu undivided families were being assessed by different Income-tax Officers and that for the assessment year 1962-63 one common officer, namely, the respondent, was asked to take charge of the assessment work of all these parties. But that by itself would not mean any information which would justify action under section 147. There is also no dispute that at the time of the original assessment of the petitioner-firm, all books of account of that firm were produced and examined by the Income-tax Officer who passed the assessment orders. It is also not in dispute that amongst these books was the sales ledger which disclosed sales and purchases made by the petitioner-firm, quantities and prices both of sales and purchases, as also the parties to whom they were sold. From these books, and particularly from the sales ledger, it must have been clear to that Income-tax Officer that :
(a) the two Hindu undivided family firms had started business since 1958,
(b) that sales were made to them of goods imported by the petitioner-firm,
(c) the type of goods sold to them and their prices, and
(d) the type of good sold to the other merchants and their respective prices.
12. From these facts, it was open to the Income-tax Officer, if he could do so, to come to the conclusion that sales of certain imported goods were made to the two Hindu undivided family firms in such a fashion as to make it possible to divert profits. As already stated, no such conclusion was drawn by the then Income-tax Officer and that would be presumably so because he did not think he could come to such a conclusion although all the necessary facts were placed before him and, according to the petition, verified by him, namely, the prices at which the petitioner-firm had imported the said goods, the prices at which those goods were sold to the Hindu undivided family firms and the prices of those or similar goods sold to the other merchants. If there was disparity of prices charged from the two Hindu undivided family firms on the one hand and from the other merchants on the other in respect of the same type of goods, it was possible for that Income-tax Officer to reach the conclusion that such sales to the Hindu undivided family firms were made to divert profits from the petitioner-firm, or that the two Hindu undivided families were utilised by the petitioner-firm as a subterfuge to divert such profits. The fact that such an inference was not drawn would presumably mean that in spite of the relevant facts having been placed before him that officer declined to draw an inference that sales to the two Hindu undivided families were made with a view to divert profits of the petitioner-firm. If, therefore, on the same facts another Income-tax Officer were to draw such an inference at a subsequent date, it would no doubt a case of a mere change of opinion.
13. According to the case of the respondent in his affidavit, the information upon which he arrived at the belief that there was escapement of assessment came in his possession when for the assessment year 1962-63 he was placed in charge of the assessments of the petitioner-firm, its partners as individuals and of the two Hindu undivided family firms of which, as aforesaid, the partners were the kartas. The information which he was said to have come into possession consists of :
'(1) information gathered in the course of the assessment proceedings for the assessment year 1962-63 that in respect of that year the petitioner-firm had diverted profits in the matter of sales of chucks to the two Hindu undivided family firms;
(2) discussions in the course of those proceedings with the representative of the petitioner-firm, and
(3) the statement produced before him by those representatives.'
14. It is clear from his affidavit in reply that the information regard to the sales of chucks related to transactions which took place in respect of the assessment year 1962-63 and those transactions had no relation to the previous assessment years. It is equally clear that the only other information which he derived as a result of discussions with the representatives of the petitioner-firm consisted of :
'(1) the fact of sales of certain imported goods by the petitioner-firm to the Hindu undivided families in the earlier years in question, and
(2) the fact of these sales having been made at prices lower than those charged in respect of the same imported goods from other merchants and the two Hindu undivided families having made substantial profits on resale of such imported goods, besides the petitioner-firm having also made profit in the sale of such goods to the two Hindu undivided families.'
15. It is also clear from the affidavit in reply that it was only from these facts that he felt satisfied that such sales were made to make it possible for the two Hindu undivided family firms to make profits and that the said sales were so made as to divert the profits of the petitioner-firm which the petitioner-firm otherwise would have derived if the petitioner-firm had sold those goods to other merchants. Prima facie, however, there is nothing wrong to effect sales to a particular party. There can be no doubt that so far as the Income-tax Act is concerned the petitioner-firm and the two Hindu undivided family firms constituted different entities and the department has assessed them as such different entities. Therefore, there does not appear to be anything wrong in the petitioner-firm having sold the imported goods even to concerns in which its partners were interested. There is equally nothing wrong in the two Hindu undivided family firms purchasing these goods from the petitioner-firm and making profits on resale of them. If the petitioner-firm had sold these goods to other merchants, profits realised from such sales would be earned by that firm or its partners, whereas the profits that the two Hindu undivided families earned as a result of such transactions were profits in which not only the two partners as the kartas of the two respective families, but the other members of those families, would be interested. Such sales would appear to be perfectly legitimate unless they are made with the object of avoiding any provision of the Income-tax Act or in breach of any such provision or if it is shown that the two Hindu undivided family firms were the benamidars of the petitioner-firm and, therefore, the profits earned by them as such benamidars were in reality the profits of the petitioner-firms. There is, however, not a little of evidence to suggest that the two Hindu undivided family firms were the benamidars of the petitioner-firm. The affidavit in reply merely suggests that these sales were made to the Hindu undivided family firms in order to make it possible for the Hindu undivided family firms to make substantial profits upon resale of the imported goods and thus to divert the profits which the petitioner-firm would have made if no such sales had been made and if the imported goods had been sold outright to other merchants.
16. As the record stands, the only incident of any alleged diversion of profits relied upon by the respondent was the sale of fifty-nine chucks made to the two Hindu undivided family firms. The facts relied upon by the respondent in that connection are that out of the sixty chucks imported, as many as fifty-nine were sold to the two Hindu undivided family firms, that only one of them was sold to an outsider, that the fifty-nine chucks were sold at prices lower than the price charged from the outsider, that the petitioner-firm had attempted to mislead the Income-tax Officer by wrongly describing the size of the chucks sold to the outsider and that the Hindu undivided family firms made substantial profits as a result of the resale by them of the aforesaid fifty-nine chucks. According to the petitioner-firm, however, the chucks sold to the outsider had additional fittings and that was why the firm had realised a higher price than the price realised from the Hindu undivided family firms. It is also the case of the petitioner-firm that it has challenged the assessment order for the assessment year 1962-63 and, in the appeal it has filed, this fact has been relied upon by it.
17. But, without going into the merits of that question, since it is a matter still pending before the appellate authority and even assuming that there was disparity in prices and the sale was made to divert the profits, the transaction cited is only a solitary one but relates to the assessment year 1962-63. If from such a solitary transaction which has been effected in a subsequent year, an inference were to be drawn that sales in the past years were also made with the object of diverting profits, such an inference in our view would amount to a mere surmise or suspicion. Such a surmise or suspicion without anything more would not be sufficient to invoke the jurisdiction under section 147.
18. Reliance, however, was placed by the respondent on a statement made in paragraph 4 of his affidavit where he has relied upon his having found out from the discussions that the petitioner-firm had effected such sales to the Hindu undivided families in the earlier years and that over and above the margin of profits earned by the petitioner-firm from the two Hindu undivided families, the two Hindu undivided families had also earned substantial profits on resale of the same goods. The respondent has also in his affidavit relied upon the statements furnished to him by the representatives of the petitioner-firm. According to him, from these discussions and the statements, he came to the conclusion that the creation of the Hindu undivided family business was merely a subterfuge or a contrivance to divert the huge profits made by the petitioner-firm on imported goods. Now, in order to appreciate the significance of this part of the affidavit, let us examine what the respondent learnt, (1) as a result of the discussions, and (2) from the statement filed before him by the petitioner-firm. It is clear from paragraph 4 of his affidavit that from the discussions he learned two facts, (1) that the petitioner-firm had effected sales to the Hindu undivided family firms of imported goods at lower rates, and (2) that the Hindu undivided family firms had made substantial profits on resale of these goods. But the first fact would not constitute any new information or an information of which the former Income-tax Officer was not aware, because the sales to the Hindu undivided family in the years in question were already disclosed together with the rates at which they were made to the Income-tax Officer who passed the original orders. Therefore, the fact that the petitioner-firm had made sales to the Hindu undivided family firm was neither a fact which was not disclosed nor information derived by the respondent which was not known to the former Income-tax Officer. However, the books of account produced by the petitioner-firm before that Income-tax officer would not reveal the substantial profits made by the Hindu undivided families firms from resale of these goods and, therefore, the knowledge that the Hindu undivided family firms had made profits on resale would amount to new information derived by the respondent. The question then is whether that by itself was such information as would raise reasonable ground to believe that there was escapement of assessment.
19. Now, it is not the case of the respondent that the usual practice of the petitioner-firm as an importer was to sell directly to the retailer or the consumer the goods imported by it, or that the petitioner-firm had, contrary to any such practice, sold the goods to the Hindu undivided family firms to enable the Hindu undivided family firms to resell then to the retailer and to make profits at the intermediate stage. Ordinarily, an importer would sell goods imported by him to wholesalers and the wholesalers would sell them in their turn to retailers or to the consumers. The wholesales would purchase such goods obviously with the object of reselling them at profit. Therefore the mere fact that the petitioner-firm sold these goods first to the Hindu undivided family firms and the Hindu undivided family firms resold then at profit would be a matter of ordinary trade. That fact was known, or must have been known, to the former Income-tax officer as the sales ledger produced before him would also know if the goods were sold at lower rates to the Hindu undivided family firms than the rates charged from other merchants. Yet that Income-tax Officer had not raised an inference that such sales were made for diversion of profits or that such sales were out of the ordinary or in any way unusual. In paragraph 10 of his affidavit, the respondent has admitted that he has not so far examined the stock ledgers for the three years in question and, therefore, he was not in a position to verify the statements of the petitioner-firm contained in those position to verify the statement of the petitioner-firm contained in those ledgers. Since the respondent has admittedly not scrutinised the stock ledgers, how could he say that the Income-tax Officer who made the original assessment orders failed to see the result of the sales to the Hindu undivided family firms or that such sales were made fictitiously with a view to divert profits. Such a conclusion would obviously be a mere surmise or suspicion.
20. The next question is as to what he learnt from the statement produced before him by the accountant of the petitioner-firm. The statement falls into two parts. The first part deals with the total sales to the Hindu undivided family during the years 1959-60 to 1963-64 and the profits earned by the petitioner-firm and the Hindu undivided family firms from resales. There is no doubt that as a result of these sales, both the petitioner-firm and the Hindu undivided family firms earned profits, and it would appear also that the percentage of profits earned by the Hindu undivided family was higher than that of the profits earned by the petitioner-firm. Such a statement would perhaps have been useful if the respondent had information showing that the other merchants to whom the petitioner-firm had sold these imported goods had not made profits at the same rates at which the Hindu undivided families made profits. As we said before, if an importer were to sell imported goods to a wholesaler, the wholesaler would purchase such goods with the motive to resell them and make profits. The fact, therefore, that both the petitioner-firm and the Hindu undivided family firms made profits out of these transactions is not such an unusual fact as would lead to a reasonable belief that the transaction were meant for diversion of profits or that the Hindu undivided family firms were mere benamidars of the petitioner-firm. The second part of the statement merely shows the total of profits made at the two stages, i.e., (1) at the stage of sale to the Hindu undivided family firms, and (2) at the stage of resale by the Hindu undivided family firms, and the conclusion drawn there as to the total amount of profits that might have been made by the petitioner-firm had that firm sold the goods directly to retailers or to consumers without the Hindu undivided family firms being the intermediaries. It also shows the total amount of income-tax that would have been payable at both the stages. That part of the statement, however, is at best a calculation based on the assumption that the petitioner-firm ought to have sold the goods directly to the retailer or to the consumers without selling them to the Hindu undivided families. Such an assumption is not warranted either under the Income-tax Act or under any other provision of law. What is important is that there is nothing in this statement to show that the petitioner-firm had sold these goods to other merchants at prices higher than those charged from the Hindu undivided family firms or that those merchants had no resold those goods at equivalent rates of profits. The statement also does not contain any information that profits charged from the discussions that the petitioner-firm had sold the goods to the two Hindu undivided family firms at rates lower than those charged from other merchants appears to be a conclusion drawn by the respondent learnt from the statement, exhibit No. 1, merely because that statement disclosed substantial profits having been made by the Hindu undivided family firms on a resale of the goods. Such a conclusion is not borne out by the statement as it does not contain any information : (1) as to the prices at which the goods were sold to other merchants by the petitioner-firm, and (2) the profits earned by those merchants on resale of those goods. If the respondent had scrutinised the sales ledgers, it would have perhaps been possible for him to find out whether the prices charged from the Hindu undivided family firms were lower than those charged from other merchants. But admittedly, he had not examined the ledgers and therefore he has no such information. The department could have also filed an affidavit of the Income-tax officer who made the original assessment and who had admittedly before him all the sales ledgers and who, if it was true, could have said (1) that the prices charged from the Hindu undivided families were lower or (2) that though the ledgers were produced before him, he had not noticed the disparity in prices charged by the petitioner-firm on sales to the Hindu undivided families and the sale the other merchants.
21. In our view, the mere fact that the petitioner-firm had sold the imported goods to the Hindu undivided family firms and those firms had, on resale of those goods, made substantial profits, would not, even prima facie, lead to a reasonable belief that the sales to the Hindu undivided family firms were intended to divert the profits. To say that these sales were meant to be a subterfuge or a contrivance to divert profits would mean that the Hindu undivided family firms were the benamidars of the petitioner-firm. But, barring the statement that these sales were a subterfuge, there is not a little of evidence to show that the Hindu undivided family firms were the benamidars of the petitioner-firm. To allege that the two Hindu undivided family firms were the benamidars of the petitioner-firm would require some evidence which the respondent must possess before such an allegation can be accepted.
22. The learned Advocate-General, however, contended that we would not be justified in dissecting the information which the respondent received during the three aforesaid stages and that we should really appreciate the cumulative effect of the information he gathered during those three stages. But even if we were to follow that course, let us see what is the result. The fact that the Inspecting Assistant Commissioner entrusted the respondent to carry out the assessments of the petitioner-firm, its two partners and the two Hindu undivided family firms would not constitute any information. At the stage when he took up the assessment for the assessment year 1962-63, he found that during that year chucks were sold to the Hindu undivided family firms at lower rates than the rates charged to the outsider and the Hindu undivided family firms made substantial profits. But, as we have already stated, that transaction occurred in respect of the assessment year 1962-63. To say that such a thing had also occurred in the previous years would, in the absence of any information in respect of those years, be a mere conjecture or suspicion. But the respondent has said that having found the case of chucks, he examined the records of assessments of earlier years and then had discussion in the course of which at his instance the aforesaid statement was produced by the petitioner-firm. But the total result was that he learnt only two things : (a) that during the earlier years, sales were made to the Hindu undivided families and, we will assume, at lower rates, and (b) that the Hindu undivided families had made substantial profits. The first information, however, would not be information acquired subsequent to the orders of assessment as it was known to the former Income-tax Officer. It is safe to say that that officer had conscious knowledge of these sales, for there is no averment in the affidavit in reply that, though the books were produced, the former Income-tax Officer had not scrutinised them or had remained unaware of the contents thereof. No doubt, the information that the Hindu undivided family firms had made substantial profits as a result of resale of imported goods was not available to the former Income-tax Officer. But such information loses its significance on account of the absence of any averment that profits at equivalent rates had also not been made by other merchants to whom the petitioner-firm had sold these imported goods. To lead to a conclusion that because the Hindu undivided family firms made substantial profits the sales were intended to be a subterfuge to divert profits, or that the two Hindu undivided family firms were benamidars of the petitioner-firm, would be nothing more than conjecture or speculation. In our view, therefore, the only information that can be said to have been derived by the respondent, which information was not before the former Income-tax Officer, was with regard to substantial profits having been made by the two Hindu undivided family firms. But that information would not by itself give reasons for a belief that there was escapement of assessment. In this view, the respondent cannot be said to have complied with the condition precedent laid down by section 147(b) and, therefore, the notices must be held to have been without jurisdiction and, therefore, invalid. We will, therefore, make the petition absolute an issue a writ of mandamus, quashing and setting aside the aforesaid notices, and restraining the respondent from taking proceedings in pursuance of those notices. The respondent will pay to the petitioner-firm the costs of this petition.