A.P. Sen, J.
1. These are six applications under Section 256(2) of the Income Tax Act, 1961, by which the Commissioner of Income Tax, Rajasthan I, Jaipur, has applied for a direction to the Income Tax Appellate Tribunal, Jaipur Bench, Jaipur, to state a case and make a reference of certain questions of law said to arise from its order in Income-tax Appeals Nos. 631, 670, 671, 683, 769 and 770/JP all of 1972-73 dated 7-3-1974 to the High Court for its opinion.
2. The facts giving rise to these applications for reference, briefly stated, are as follows :. M/s Tarachand Subhkaran, Sri Ganganagar (herein alter referred to as 'the assessee') is a registered firm which was assessed to tax on income derived from its business in sale of gold and silver ornaments: The original assessments for the years, 1962-63 and 1963-64 were completed on 13-9-1963 and 23-7-1966 respectively. It appears that sometime in the month of March 1970, the Income Tax Department came in possession of a duplicate set of books of account maintained by the assessee during the relevant years viz., ledger and cash book for the assessment year 1962-63 and ledger for the assessment year 1963-64 wherein several transactions pertaining to the assessee which were not shown in its original books of account on the basis of which the assessments were made, were noticed.
3. The Income Tax Officer accordingly issued notices under Section 148 of the Income Tax Act to show cause why the assessee should not be assessed on the escaped income.
4. On 11-9-1970, the Income Tax Officer after examining the books of account which had come in his possession, issued a detailed show cause notice to the assessee indicating to it the various additions which he proposed to make. Therefore, on 14-8-1970 the Income Tax Officer issued a notice under Section 142(1) of the Act asking, the assessee to produce before him the books of account on the basis of which the original returns were filed. The assessee failed to comply with the requirements of the notice under Section 141(1) for production of its books and consequently, the Income Tax Officer can celled the registration of the firm under Section 186(2). On the basis of the books of account which had come in his possession, the Income Tax Officer by his order of assessment dated 31-1-1972 came to a best judgment assessment under Section 144 of the Act.
5. In appeal, the Appellate Assistant Commissioner of Income Tax., Bikaner Range, Bikaner upheld the action of the Income-tax Officer in making a re-assessment of the firm under Section 148 of the Act, but deleted certain additions in the assessment years 1962-63 and 1963-64 as made by him. The Appellate Assistant Commissioner of Income-tax, however, set aside the order of the Income Tax Officer tinder Section 186(2) holding that the cancellation of the registration of the firm was in the circumstances, not justified, Both the Additional Commissioner of Income-tax and the assessee preferred appeals against the order passed by the Appellant Assistant Commissioner before the Income Tax Appellate Tribunal, Jaipur Bench, Jaipur. The Appellate Tribunal allowed the appeals of the assessee, while rejecting those preferred by the Department, holding:
In the present case, it was pointed out to us by the learned Departmental Representative that the Income Tax Officer had compared the books handed over to the Asst. Director with the statements filed by the firm at the time of original assessment and thus had come, to the condition that the books of account, which were handed over by the informant to the Asst. Director of Inspection. (Intt.) belonged to the assessee and that therefore, he was maintaining duplicate set of books of account.
xxx xxx xxx xxx xxxThere is no application of mind by the Income-tax Officer on the basis of which it could be said that he had reasons to believe that the hooks produced belonged to the assessee. We, therefore, hold that the Income-tax Officer could not, as a man of ordinary prudence, have entertained bonafide the belief on the basis of the material before him that the books in question belonged to the assessee and that the same were maintained by the assessee in the normal course of its business. That being so, in our opinion, the very fundamental basis of starting proceedings Under Section 147(a) namely that the Income-tax Officer should have reasons to believe is lacking and, therefore, the assessment proceedings have been vitiated ab initio.
6. Feeling aggrieved, the Commissioner unsuccessfully applied to the Appellate Tribunal to have certain questions referred to the Court, as arising out of the order of the Tribunal. The Tribunal, however by its order dated 10-10-74, declined to make a reference on the ground that no questions of law arise therefrom, stating:
The principle of law, which we have derived the inference regarding the action of the Income-tax Officer as being void ab initio, is a principle, which has been settled as good law by the various decisions of the Hon'ble Supreme Court, referred to above. A reference of this question of law would, therefore, be merely academic and hence, unwarranted.
7. Shri S.K. Mal Lodha, learned Counsel for the Commissioner, contends that the finding of the Appellate Tribunal that there was no material before the Income Tax Officer on the basis of which he could have 'reason to believe' within Section 147(a) of the Act that the income of the assessee had, in the relevant accounting years, escaped assessment or that in its observation the Income Tax Officer had not applied his mind to the question whether the books of account which had come in possession of the Department belonged to the assessee, was contrary to the evidence on record and otherwise unjustified.
8. The learned Counsel drew our attention to the fact that the Income Tax Officer had before initiating the proceedings recorded his reasons as below;
(A) For the assessment year 1962-63:
The assessee was maintaining duplicate sets of accounts. As per the account book handed over by the informant to the A.D.I., income of Rs. 49,041/- has escaped assessment.
(B) For the assessment year 1963-64:
The assessee was maintaining duplicate sets of account books. As per account books handed over by the informant to the A.D.I., income of Rs. 4,503/- has escaped assessment.
He also adverted to the fact that the Income Tax Officer after taking into account the submissions of the assessee and the evidence on record, came to the conclusion that the books which were in his posses-ion were the real books of the assessee and that the assessee was deliberately with-holding the books which, it had produced at the time of the original assessments. The learned Counsel. further adverted to the fact that during the pendency of the proceedings the assessee had addressed a letter dated 10-9-1970 to the Commissioner, making an offer in terms of Section 271(4A) of the Act, in the following terms:
That for the purpose of co-operation with the Department in settling their Income-tax matters once for all and to be able to carry on their business peacefully and as good citizens of Union of India your petitioners offer to pay tax on the income from even tin to books, though some are concocted or on the basis of the total Wealth of each partner taking into account their respective agricultural holding and; income therefrom and spreading such total income from 1936 to 1963 to avoid their ruin which is being planned by Om Prakash in connivance with (sic).
This clearly showed that the assessee accepted that the books which came in possession of the Department belonged to the assessee.
9. We are satisfied that the Appellate Tribunal was wrong in stating that there was no material before the Income Tax Officer on which he could have reason to believe that the income of the assessee had escaped assessment. It was also wrong in observing that the Income Tax Officer had not applied his mind to the question whether the books of account brought to light, belonged to the assessee which fact was, indeed, never in dispute. Whether, in the circumstances, the re-assessment of the income of the assessee was justified, is not for us to say, at the present stage. But we would like to observe that the findings reached by the Appellate Tribunal that there was no material on which the Income Tax Officer could have acted, was a mere surmise particularly when there was such material and when the assessee accepted the books of account to be its and offered to have an assessment of the income which had escaped assessment. Mahajan C.J., delivering the judgment of the Supreme Court in Dhirajlal Girdharilal v. Commissioner of Income-tax Bombay : 26ITR736(SC) observed:
If the court of fact whose decision of a question of fact is final, arrives at the decision by considering material which is irrelevant to the inquiry, or by considering material which is partly relevant and partly irrelevant, or bases its decisions partly on conjectures, surmises and suspicions, and partly on evidence, then in such a situation clearly an issue of law arises.
It is well established that when a court of fact acts on material, partly relevant and partly irrelevant, it is impossible to say to what extent the mind of the court was affected by the irrelevant material used by it in arriving at its finding. Such a finding is vitiated because of the use of inadmissible material and thereby an issue of law arises.
The question whether there was any material before the Appellate Tribunal to find that the Income Tax Officer could not have initiated re-assessment proceedings under Section 148 of the Act, is a question of law. See : 31ITR28(SC) .
10. The applications are, therefore, allowed. We direct the Tribunal to refer the following questions for the decision of the Court:
In D.B. Income Tax Cases No. 117 & 120 of 1975
Whether, on the facts and circumstances of the case, the Tribunal was justified to hold that the re-assessment proceedings were void ab initio and to reject the Departmental appeal on that ground?
In D.B. Income Tax Cases No. 118 & 122 of 1975
Whether, on the facts and circumstances of the case, including the facts that the ledger in respect of the assessment year 1962-63 was admittedly written by Tarachand, the Tribunal was justified to hold that the action under Section 147 of the Income Tax Act, 1961 was not validly initiated by the Income Tax Officer and to quash the re-assessment proceedings on chat ground?
In D.B. Income Tax Cases No. 119 & 121 of 1975
Whether, on the facts and circumstances of the case, the Tribunal was justified to hold that the action under Section 147 of the Income Tax Act, 1961 was not validly initiated by the Income Tax Officer to delete the additions made to the assessee's total income in re-assessment proceedings on that ground?
11. There shall be no order as to costs.