1. T.C. No. 119 of 1975 is a consolidated reference by the Income-tax Appellate Tribunal under Section 256(1) of the I.T. Act, 1961, hereinafter referred to as 'the Act', for the assessment years 1957-58 to 1963-64. The question of law that has been referred at the instance of the assessee runs as follows :
' Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the notice issued under section 147(a) of the Income-tax Act, 1961, by the Income-tax Officer for each of the assessment years 1957-58 to 1963-64 was proper and in exercise of jurisdiction validly assumed '
2. For the assessment years 1957-58 and 1958-59, at the instance of the Commissioner, the following question has been referred :
' Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Income-tax Officer was not justified in withdrawing development rebate of Rs. 38,918 for the assessment year 1957-58 and Rs. 17,730 for the assessment year 1958-59 in the respective assessments made under the provisions of section 147(a) '
3. We shall deal with the question referred at the instance of the assessee before going into the question referred at the instance of the Commissioner. The assessee, who was alive till the stage of the disposal of the appeal by the Appellate Tribunal, was N. Sathianathan. He was running a business of bus transport in Salem under the name and style of ' N. S. Motor Service '. He was assessed to income-tax originally for all these years. The following table gives the dates of the original assessment as against the respective years ;
Assessment yearDate of completion of originalassessment
4. Apart from producing the books of account for the relevant previous years, the assessee had also given a list of various creditors from whom borrowings had been effected on the security of hundis. The interest paid to them was also shown. Their full adresses were furnished.It appears that the discharged hundis were also produced before the ITO before the completion of the original assessment.
5. In the original assessments themselves, there were additions made to the total income. The ITO added a sum of Rs. 20,000 with reference to certain credits in the assessee's own capital account totalling Rs. 51,778. The assessee's claim was that this amount came from his agricultural holdings. The ITO made enquiries and considered that only a sum of Rs. 30,000 could have been earned from his agricultural holdings and added back the balance of Rs. 20,000 as income from undisclosed sources. Similarly for the assessment year 1958-59 the ITO added a sum of Rs. 30,000. In that year the assessee had shown in his capital account credit of Rs. 59,978. The agriculturarincome which could have been earned by the assessee was taken to be only Rs. 30,000 and the balance of Rs. 30,000 in round figures was added apart from another credit of Rs. 30,000 in the name of one Henry Isidore, Pondicherry. But there was no evidence to show the genuineness of the said credit. In addition a sum of Rs. 5,000 was added, as the assessee's drawings were very poor and he should have spent further amounts on his family, which should have come only from undisclosed income. Thus, the total addition for 1958-59 was Rs. 65,000. There were similar other additions of disallowance in the other years under consideration. There was, however, no addition on account of any credits of loans on hundis.
6. The genesis of the reassessment proceedings is as follows I A number of the creditors, who had advanced monies on the security of hundis, had admitted, before the income-tax authorities that they had given only accommodation loans and that the credits in their names were all of them or most of them bogus. There was a circular issued by the Commissioners in Madras dated September 18, 1965. This circular itself is not before us. But there is a summary of what it contains in the order of the Tribunal. In annex. ' A ' to the said circular there was a list of bankers at Madras who, on their own admission, had done business in havala and who had only lent their names as bankers in respect of hundi and promissory note transactions, which were bogus. There was also another list appended to the circular of the Commissioner as-annex. ' X ' in which the moneylenders themselves had not given any statement, but some other borrowers from them had done so.
7. The Inspector of Income-tax made a report on January 28, 1966, to the ITO for the assessment years 1957-58 and 1961-62 after receipt of the circular. In the report for these years he gave a list of four persons in respect of whom monies were said to be outstanding in the accounts of the assessee and to whom interest was said to have been paid. These creditors had been ' blacklisted '. The term ' blacklisted ' apparently means that they were not genuine money-lenders and that, therefore, the transactions with them deserved to be scrutinised.
8. Similarly, for the assessment years 1962-63 to 1964-65 also, he gave a report on January 28, 1966, in which there were similar credits. With reference to those years, after referring to the outstandings, the Inspector stated as follows:
' A number of these bankers have admitted in writing that they have only given accommodation loans as per the CIT's circular C. No. 122(58)65 dated 18-9-1965. Some of the remaining bankers' names figure in annex 'X' of the same circular.'
9. He gave a list of the total amounts category-wise and also the interest paid in respect of the transactions with persons named in annex ' X '. In the report, he has further added :
' From the fact that the total amount outstanding in the name of suspected bankers vary from year to year and from the fact that the total outstanding does not vary for a number of years, it can be said that the credit in the name of the remaining banker whose name is yet to figure is also doubtful...
The assessment in this case has been completed up to 1963-64 and is pending thereafter. In view of the evidence available as to the nature of the bogus credits, it may be considered whether the assessment has to be reopened for 1961-62 to 1963-64.'
10. The ITO took proceedings under Section 147(a) for all these years. The earliest entry in the order sheet, which can be taken to be the starting point of the proceedings in respect of the several years, may be given as follows :
Assessment YearOrder sheet entry
11. It may be seen from the above table that the assessments for the years 1957-58 and 1962-63 to 1963-64 were sought to be re-opened in February-March 1966 for 1958-59 in March, 1967 and for 1959-60 and 1960-61 in February, 1969.
12. The proposals submitted to the Commissioner on March 15, 1966, for reopening the assessment for 1957-58 ran as follows :
'The assessee has during the year of account transactions in hundis with bankers whose, transactions are suspected to be 'havala', It is.
therefore, felt that there is escaped income of Rs. 1,25,000 on this account. Commissioner's sanction, is, : therefore, requested.' (underlined* by us).
13. For the assessment year 1958-59, the report to the Commissioner dated March 10, 1967, ran as follows :
' The assessee had during the year of account under consideration transaction in hundis with multani bankers whose dealings are suspected to be ' havala', or bogus in nature. I have reason to believe that there is escape of income to the extent of Rs. 1,65,608 including interest paid on these transactions. I have reason to believe also that there was underassessment of total income to the extent stated above due to failure on the part of the assessee to disclose fully and truly the nature of the transactions the assessee had with the multani bankers. After setting off of the loss originally determined in the assessment order, the total income which will be liable for taxation would come to Rs. 1,45,985 and tax effect will roughly come to Rs. 31,210. Sanction of the Commissioner to reopen the assessment under section 147(a) is, therefore, requested.' (underlined* by us).
14. For 1959-60, the report of the ITO to the Commissioner dated February 28, 1969, was as under :
' During the year of account, the assessee had borrowed Rs. 3,50,000 on hundis from multani bankers whose dealings are suspected to be 'havala' in nature. The assessee is not able to prove these loans. I have reason to believe that due to failure on the part of the assessee to disclose fully and truly the nature of the transactions, income to the tune of Rs. 4,04,620 (Rs. 3,50,000 plus interest of Rs, 54,620) has escaped assessment. The Board's sanction is requested to reopen the assessment under section 147(a) for 1959-60.' (emphasis* supplied)
15. For 1960-61, the report to the Commissioner dated February 28, 1969, was as follows:
' During the year of account, the assessee had borrowed Rs. 6,25,000 on hundis from multani bankers whose dealings are suspected to be ' havala' in nature. The assessee is not able to prove these loans. I have reason to believe that due to failure on the part of the assessee to disclose fully and truly the nature of the transactions, income to the tune of Rs. 6,88,300 (Rs. 6,25,000 plus interest of Rs. 63,000) has escaped assessment. The Commissioner's sanction is requested to reopen the assessment under Section 147(a) for 1960-61.' (emphasis* supplied).
16. For the later assessment years 1961-62 to 1963-64, the reports themselves have not been extracted in the order of the Tribunal. But they are more or less identical as based on the Inspector's report for the assessment year 1964-65 which is not before us.
17.After obtaining the sanction of the Commissioner, the assessments were reopened and the assessee was required to submit the returns. The dates of service of the notice as well as the dates on which the assessments were completed for the respective years are as follows:
Year of assessmentDate of issue or service of noticeunder section 148Date of completion of reassessmentunder section 147
18. In the reassessment proceedings so commenced the assessee challenged the applicability of Section 147(a) on the ground that he had disclosed fully and truly all material facts relating to the assessments and that there was no scope for applying Section 147(a). The ITO rejected this claim of the assessee for each of these years and completed the reassessments. The reassessment for 1957-58 was originally made under Section 144 read with Section 147(a). In the said reassessment, the ITO had originally added only a sum of Rs. 1,50,000. The assessee applied under Section 146 of the Act contending that there was no failure on his part to comply with any notice and for the inference drawn by the ITO as if he had any accounts which he had not produced was not correct. The ITO cancelled the assessment and made a fresh assessment as contemplated by Section 146. But in the reassessment he added in the place of the original sum of Rs. 1,50,000 a sum of Rs. 4,50,000.
19. The assessments for all these years made under Section 147 were contested on appeal before the AAC on two main grounds, viz., (i) that Section 147(a) could not have been applied, and (ii) that, in any event, the additions as made, were arbitrary and excessive. The AAC, after rejecting the contentions of the assessee, regarding the applicability of Section 147(a) accepted the second contention and gave certain reductions. The assessee thereafter appealed to the Tribunal and before the Tribunal also the same two main contentions were advanced. The Tribunal did not accept the assessee's submission that Section 147(a) was wrongly applied. The Tribunal discussed in its order the statements that had been given by some of the money-lenders which had been circulated to the ITO along with another circular dated August 11, 1960. In the words of the Tribunal ;
' The material is certainly one on the basis of which the belief could have been entertained by the Income-tax Officer that the transactions with the assessee may not have been genuine. It need not be that such should be the eventual conclusion. But the material is such that we certainly cannot hold that the Income-tax Officer as a reasonable person could not have entertained a belief that there was a non-disclosure as regards facts which have a material bearing at the time of the original assessment. The belief formed by the Income-tax Officer in the present case is not a mere pretence, and has been arrived at in good faith...The Income-tax Officer, in the present case, has come to a definite finding...that the reasons recorded by the Income-tax Officer which we have set out earlier are specific and are not vague...In the present case, the Income-tax Officer had formed an opinion that by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts income had escaped assessment.'
20. The result was that the assessee's objection to the application of Section 147(a) failed, but with reference to one of the creditors there was a reduction in the assessment. The Tribunal directed re-examination of the additions in the light of its own observations in the order. As the assessee, had substantially failed before the Tribunal, the matter has been brought on reference to this court raising the questions already extracted.
21. Before proceeding further we may mention that during the reassessment proceedings the assessee was required to produce evidence regarding the genuineness of these credits. The books of account and discharged hundi papers, it was stated by the assessee, had not been preserved and were not available. The assessee was examined on oath and his only statement before the ITO was that the books were not available. The ITO pointed out that the assessee could have attempted to approach the creditors to furnish the letters of confirmation regarding the credits. The assessee had not done so. The ITO himself made efforts of his own and in this connection he issued letters in the names of the multani bankers, whose names appeared in the various years under consideration. All these letters came back with the postal endorsement ' not known '. The ITO came to the conclusion on these facts that the hundi loans were not proved and, therefore, constituted the assessee's income. One aspect is clear from the above, viz., that even those who have been alleged to have given statements to the taxing authorities to the effect that the transactions were bogus, were not available for examination at the material time.
22. The contention of the learned counsel for the assessee before us was that he had done all in his power to disclose fully and truly all material facts relating to the assessment by producing his books, and the hundis themselves, and had also furnished the addresses of all the bankers who had advanced loans to them. According to him, only after a scrutiny of all the transactions, the ITO was satisfied at the initial stage about the genuineness of these credits. The assessment could not, therefore, be reopened on the ground that the assessee had not fully and truly disclosed all material facts. The only fact that is now sought to be relied on in support of the assessment, it was contended, was the circular issued by the Commissioners and according to the learned counsel, the circular did not have anything to do with any transaction of the assessee. He pointed out that at the stage when the reassessment proceedings were taken, the ITO had with him only the report of the Inspector, and not any of the statements recorded from any of the multani bankers and in this connection he drew our attention to the findings of the Tribunal in paras. 5 and 18. In both the paragraphs, the Tribunal has pointed out that the contents of the statements came to the knowledge of the ITO only after August, 1966, while the proposals for the assessment years 1957-58, 1958-59 and 1961-62 to 1963-64 for initiating the reassessments had been made much earlier. His further point was that even assuming that these statements were liable to be looked into, they did not in any manner affect the assessee, let alone specifically pin-point the hundi credits in the assessee's books. The case sought to be made out on the basis of the above was that the ITO had no relevant material on the basis of which he could be satisfied that the assessee had not fully and truly disclosed all material facts.
23. The learned standing counsel to the Commissioner, Mr. J. Jayaraman, submitted that the assessee in the present ease cannot go into the materials in support of the reassessments as no question had been raised challenging the existence of the materials in support of the reassessments. His further point was that the statements, as given by the respective multani bankers clearly showed that the assessee's statement at the original stage as if the loans were genuine was not true. His point was that the assessee had not truly disclosed all material facts relating to the assessment and that this failure did confer jurisdiction on the ITO to reopen the assessments under Section 147(a).
24. Section 147(a) in so far as it is material runs as follows i
(a) the Income-tax Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under section 139 for any assessment year to the Income-tax Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, or...he may, subject to the provisions of sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned...'
25. Two conditions must be satisfied in order to confer jurisdiction on the ITO to issue the notice under Section 147, viz., (1) the ITO must have reason to believe that the income chargeable to tax had escaped assessment, and (2) he must have reasons to believe that the income 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 his assessment for that year. These conditions, which are conditions precedent, are to be satisfied before the ITO, who acquires jurisdiction to issue a notice under this section. In dealing with Section 34(1)(a) of the Indian I.T. Act, 1922, corresponding to Section 147(a) of the Act of 1961, the Supreme Court in S. Narayanappa v. CIT : 63ITR219(SC) pointed out the scope of the jurisdiction of the appellate or other authorities at page 221 as follows :
' But the legal position is that if there are in fact some reasonable grounds for the Income-tax Officer to believe that there had been any nondisclosure as regards, any fact, which could have a material bearing on the question of underassessment, that would be sufficient to give jurisdiction to the Income-tax Officer to issue the notice under section 34. Whether these grounds are adequate or not is not a matter for the court to investigate. In other words, the sufficiency of the grounds which induced the Income-tax Officer to act is not a justiciable issue. It is of course open for the assessee to contend that the Income-tax Officer 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 Income-tax Act does not mean a purely subjective satisfaction on the part of the Income-tax Officer. 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. To this limited extent, the action of the Income-tax Officer in starting proceedings under section 34 of the Act is open to challenge in a court of law.'
26. This statement of law is based on an earlier decision of the Supreme Court in Calcutta Discount Co. Ltd. v. ITO : 41ITR191(SC) . The same position has been reiterated by the Supreme Court in ITO v. Lakhmani Mewal Das : 103ITR437(SC) , the relevant passage occurs :
' The grounds or reasons which lead to the formation of the belief contemplated by section 147(a) of the Act must have a material bearing on the question of escapement of income of the assessee from assessment because of his failure or omission to disclose fully and truly all material facts. Once there exis,t reasonable grounds for the Income-tax Officer to form the above belief, that would be sufficient to clothe him with jurisdiction to issue notice. Whether the grounds are adequate or not is not a matter for the court to investigate. The sufficiency of the grounds which -induce the Income-tax Officer to act is, therefore, not a justiciable issue. It is, of course, open to the assessee to contend that the Income-tax Officer did not hold the belief that there had been such non-disclosure. The existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. The expression ' reason to believe' does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The reason must be held in good faith. It cannot be merely a pretence. It is open to the court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose of the section. To this limited extent, the action of the Income-tax Officer in starting proceedings in respect of income escaping assessment is open to challenge in a court of law (See observations of this court in the cases of Calcutta Discount Co. Ltd. v. Income-tax Officer : 41ITR191(SC) and 5. Narayanappa v. Commissioner of Income-tax : 63ITR219(SC) while dealing with the corresponding provisions of the Indian Income-tax Act, 1922). '
27. At page 448, it was further pointed out as follows :
' As stated earlier, the reasons for the formation of the belief must have a rational connection with or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Income-tax Officer and the formation of his belief that there has been escapement of the income of the 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 Income-tax Officer on the point as to whether action should be initiated for reopening 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 farfetched, which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment.'
28. In the same case, it was pointed out that the powers of the ITO to reopen the assessment, though wide, were not plenary and that the ' reason to believe ' did not mean ' reason to suspect'. The reasons why Parliament has created sufficient safeguards against assessments being reopened have been explained as follows (p. 448) :
' The reopening of the assessment after the lapse of many years is a serious matter. The Act, no doubt, contemplates the reopening of the assessment if grounds exist for believing that income of the assessee has escaped assessment. The underlying reason for that is that instances of concealed income or other income escaping assessment in a large number of cases come to the notice of the income-tax authorities after the assessment has been completed. The provisions of the Act in this respect depart from the normal rule that there should be, subject to right of appeal and revision, finality about orders made in judicial and quasi-judicial proceedings. It is, therefore, essential that before such action is taken the requirements of the law should be satisfied.'
29. The principle is thus clear that though sufficiency of the grounds is beyond the scrutiny of the courts, the rational connection between the materials and the reopening of the assessment is justiciable. There is no immunity from scrutiny by courts or appellate authorities for the reasons recorded by the ITO for reopening the assessment. It is in this light that we have to examine the preliminary objection of the learned standing counsel that the question in the present case is more or less of an academic nature, as the question referred does not enable examination of the reasons recorded by the ITO.
30. In the present case, the assessee had all along been contending from the stage of the assessment that he had disclosed fully and truly all material facts and that the ITO did not think it necessary to make any further enquiry at the original stage and that if he had accepted the assessee's case on the basis of such scrutiny as he made of the materials placed before him, then it would not be open to the succeeding ITO to reopen the assessments merely because he takes a different view on the same facts. It is with reference to this aspect that the Tribunal pointed out in its order after examining the materials available to the ITO that the jurisdiction under Section 147(a) was properly invoked in the present case. In effect the Tribunal's conclusion is that there were relevant materials which showed that what the assessee disclosed was neither full nor true. We shall discuss this aspect a little later. But the nature of the controversy that was before the Tribunal clearly shows that the assessee challenged the existence of relevant materials in support of the assumption of the jurisdiction by the ITO. In para. 19 of its order the Tribunal refers to the contentions urged on behalf of the assessee as follows :
' The argument of Mr. Srinivasan was that while the sufficiency of the reasons which weighed with the Income-tax Officer in considering that income had escaped assessment may not be justiciable the relevancy of such reasons had certainly to be looked into by every appellate authority and it had to be established that there was a rational connection between thereasons considered by the Income-tax Officer and Ms coming to the conclusion that income had escaped assessment.'
31. It is this aspect which was elaborately considered by the Tribunal and ' which was negatived. It is in the light of the above contention that the question of jursidiction of the ITO under Section 147(a) was raised by the assessee and was referred to this court. In the reference application made by the assessee, the question raised was as follows :
' Whether, on the facts and in the circumstances of the case, the reassessment made by invoking the provisions of section 147(a) of the Income-tax Act, 1961, for the assessment year in question was valid in law '
32. It is this question which was reframed by the Tribunal as follows :
' Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the notice issued under section 147(a) of the Income-tax Act, 1961, by the Income-tax Officer for each of the assessment years 1957-58 to 1963-64, was proper and in exercise of jurisdiction validly assumed '
33. In order to assume jurisdiction the ITO has to show that there has been a failure to disclose fully and truly all material facts relating to the assessment. It is this dispute which was raised before the Tribunal and which is covered by the question. The question may perhaps have been drawn up more artistically so as to pinpoint the controversy. But still the question as framed cannot be said to exclude the contention that there are no relevant materials in the possession of the ITO to entertain the requisite belief to reopen the assessment.
34. The learned standing counsel referred us to an unreported decision of this court in T.C. No. 74 of 1971 dated August 20, 1976, in the case of Aishabi v. CIT [Since reported at p. 293 infra]. In this case, the assessee had sold certain buses not only for a cash consideration of Rs. 60,000 but also for an additional consideration of Rs. 1,75,000 which was originally made to appear as a loan but which loan was waived by the purchaser as soon as the road transport authority recognised the transfer of the buses. Even at the original assessment stage, there were some materials to show that the assessee had received not only the said sum of Rs. 60,000, but in addition a sum of Rs. 1,75,000. The ITO, however, did not consider the assess-ability of the sum of Rs. 1,75,000. The assessment was reopened under Section 147(a) on the ground that the assessee had not disclosed fully and truly all material facts relating to the assessment in respect of Rs. 1,75,000. The assessee failed before the Tribunal. In the reference at the instance of the assessee, the assessee wanted to challenge in this court the validity ' of the assessment by contending that he had disclosed fully and truly all material facts and that if any income had escaped assessment it was only because of the failure of the ITO to investigate the facts and come to his own conclusions thereon. The assessee was not permitted to urge this part of the contention, as the question had not raised this part of the controversy. In that case, there was a clear finding that as regards the sum of Rs. 1,75,000 the assessee had not disclosed fully and truly all material facts. It is this fact which was examined by this court and the Tribunal's view that the assessee had not disclosed fully and truly all material facts was found to be proper. In fact, as pointed out in more than one place in the judgment, there was a concession before the Tribunal as regards the point that was sought to be raised before this court. It is only when the concession was withdrawn and an attempt was made to show that the assessee had disclosed all material facts, it was pointed out that the matter could not be raised at the stage of reference in the High Court. We do not, therefore, see any disability on the part of the assessee from going into the question of the relevancy of the material that was available to the ITO at the time when he sought to reopen the assessment. It is necessary to bear in mind the fact that in order to consider the validity of the jurisdiction on the ground of relevancy of the materials available to the ITO at the time of the initiation of the proceedings it is only those, materials that were available to him that would have to be looked into, and not any further materials that came to light in the course of the reassessment proceedings themselves. We, therefore, overrule the preliminary objection taken by the standing counsel for the Commissioner.
35. We have now to examine the materials that were available to the ITO at the time when he initiated the assessment. We have already seen that the assessment years 1959-60 and 1960-61 would stand in a different position from the other assessment years as the proposals therefor were made only in 1967 and 1969. As regards the other assessment years the circular of the Commissioner dated August 11, 1966, was not either available or had not been looked into by the ITO at the time when he reopened the assessment. For the assessment years 1957-58 and 1961-62 to 1963-64, the reopening was much earlier than the second circular of the Commissioner with which alone the statements made by the respective multani bankers were annexed. For the assessment year 1958-59, the entry in the order sheet itself shows that it was reopened on the basis of the materials available for 1957-58. This is also clear from para. 7 of the Tribunal's order. The entry in the order sheet is reproduced under date March 7, 1967, as follows :
' Please see 1957-58. Action under section 147(a) was taken. Files submitted for verification whether action under section 147(a) is called for 1958-59 assessment. Time barred by 31-3-1967. If so, proposal under section 147 may be dictated. '
36.On this the ITO has noted ' proposal dictated '. Thus, we have to consider only the circular that was issued by the Commissioners dated September 18, 1965, for these years. That circular contained only two lists, annex. ' A ' and annex. ' X ', annex. ' A ' representing a list of those who had made ' confessions ' regarding the transaction being in the nature of havala and annex. ' X ' being a list of creditors in respect of whom there were other statements available to show that they (creditors) were bogus in nature.
37. The question to be examined is whether the lists themselves constituted relevant materials for coming to the conclusion that the income had escaped assessment by reason of the failure on the part of the assessee to disclose fully and truly all material facts relating to the assessment. The matter appears to be concluded by two decisions of the Supreme Court. The first of the two cases is reported as ITO v. Lakhmani Mewal Das : 103ITR437(SC) . The original assessment for the assessment year 1958-59 was made in that case after allowing deduction of a sum of Rs. 10,494 as interest paid to certain creditors. Thereafter, the ITO by a notice dated March 8, 1967, sought to reopen the assessment. In his report submitted to the Commissioner for reopening the assessment under Section 147(a) it was mentioned, (1) that Mohansiogh Kanayalal, who was shown to be one of the creditors of the assessee, had since confessed that he was doing only name-lending, and (2) that D. K. Naraindas, Bhagwandas Srichand, etc., whose names also featured in the list of the creditors of the assessee, were known name-lenders. On receipt of the notices for reopening the assessment the assessee filed a writ petition and the High Court held that the condition precedent for the exercise of jurisdiction under Section 147 was not fulfilled. The Supreme Court confirmed the judgment of the High Court. It was pointed out in the judgment of the Supreme Court that two grounds were mentioned in the report made by the ITO for reopening the assessment. The first was that Mohansingh Kanayalal had since confessed that he was only a name-lender and the other was that three others were known name-lenders. As far as the second set of creditors were concerned the High Court had held that no basis had been indicated as to how it became known that these creditors were known name-lenders and when it was known. It was, therefore, held that the grounds mentioned by the ITO with reference to the three creditors could not have led to the formation of the belief that the income of the assessee chargeable to tax had escaped assessment because of his failure to disclose fully and truly all material facts. This conclusion reached unanimously by the Full Bench of the High Court was confirmed. As regards Mohansingh Kanayalal who was said to be a name-lender, it was pointed out that there was nothing to show that the confession related, to a loan made to the assessee and not to someone else. Therefore, in regard to Mohan singh Kanayalal also it was held that it was farfetched that the confession had anything to do with the assessee.
38. In coming to the above conclusion, the Supreme Court relied on an earlier decision in Chhugamal Rajpal v. S, P. Chaliha : 79ITR603(SC) . In that case, the ITO while submitting a report to the Commissioner for obtaining his sanction, stated that during the year the assessee had shown having taken loans from various parties and those persons were name-lenders and the transactions were bogus. It was, therefore, considered necessary by him to make a proper investigation regarding those loans. In dealing with this report of the ITO, the Supreme Court held as follows (p. 608) :
' From the report submitted by the Income-tax Officer to the Commissioner, it is clear that he could not have had reasons to believe that by reason of the assessee's omission to disclose fully and truly all material facts necessary for his assessment for the accounting year in question, income chargeable to tax has escaped assessment for that year ; nor could it be said that he, as a consequence of information in his possession, had reasons to believe that the income chargeable to tax has escaped assessment for that year. We are not satisfied that the Income-tax Officer had any material before him which could satisfy the requirements of either clause (a) or clause (b) of section 147. Therefore, he could not have issued a notice under section 148. '
39. It may be seen that such general statements were not taken to constitute even information so as to enable the ITO to reopen the assessment under Section 147(b).
40. In a recent judgment in ITO v. Madnani Engineering Works Ltd. : 118ITR1(SC) , the assessment for 1959-60, made on an assessee on August 23, 1960, was sought to be reopened on January 25, 1968, on the ground that the transactions of loan represented by the hundis were bogus, that no interest was paid by the assessee to any of the creditors and that interest was wrongly allowed. The assessee challenged the validity of the notice. In the counter-affidavit filed by the ITO in the writ proceedings it was stated that in the course of assessment of the assessee for the assessment year 1963-64, it was discovered that various items shown as loans against the security of hundis in the assessee's books of account relevant to the assessment year 1959-60, were in fact fictitious and that the credits in the names of certain persons as having made advances, viz., Amarlal Moolchand, Girdharidas, Raghoomal Murlidhar, Kanhaiyalal and Deudararn Basdeo were found not to be genuine. The Supreme Court applying another of its earlier decision in CIT v. Burlap Dealers Ltd. : 79ITR609(SC) rejected the case of the department and held that there was no failure on the part of the assessee to disclose fully and truly all materialfacts and that the condition precedent applicable to Section 147(a) was not satisfied.
41. In the case of CIT v. Burlap Dealers Ltd. : 79ITR609(SC) ' referred to above, the assessee, in the course of the assesement for 1949-50, produced a partnership deed with one Ratiram Tansukhrai and claimed that the profits earned from a limited company by name, H. Manory Ltd. had been divided between itself and Ratiram Tansukhrai equally. The assessee, therefore, offered for assessment only one half of the amount earned. The ITO accepted the partnership agreement and assessed the assessee on one half of the profits. Later on, the ITO found in the course of the assessment for another year that the partnership agreement was got up as a device to reduce the profits received from H. Manory Ltd., and that the assessee should have been taxed on the entire amount of income derived from H. Manory Ltd. The assessee challenged the reopening of the assessment contending that it had produced all the relevant accounts and documents necessary for completing the assessment and that it was under no obligation to inform the ITO about the true nature of the transaction. According to the assessee there was no failure on its part to disclose fully and truly all material facts. This contention of the assessee was accepted by the Supreme Court.
42. Thus, it is clear that it is necessary for the assessee to place before the ITO only the materials that were available with him. The assessee cannot be found fault with if he did not place before the ITO the statements recorded by the department from some of the multani bankers, as the assessee could not have and did not have those statements at any rate, at the time when the original assessments were completed. As far as the assessee was concerned he had placed all the materials in his possession, viz., account books, hundis and the addresses of the creditors. If the ITO was not satisfied with the correctness of the assessee's claim regarding these loans, he could have asked the assessee to substantiate the genuineness of these loans at the time of the original assessment. But the ITO did not do so. The assessee cannot be required to parade all his creditors before the ITO at the time when the original assessment was taken up even if the ITO raises no doubt about them. It is common knowledge that it is the ITO who requires the assessee to place before him any materials in support of any particular claim. It is open to the ITO to accept a return or any part thereof. It is only when he has any doubt, or when he requires any clarification, that he has to summon the assessee or others, or obtain clarification from the assessee, as required by Section 143(2). If in the present case, the assessee did not take any further steps apart from producing the materials already referred to, then it cannot be stated that the assessee had failed to place before the ITO all facts, or that the assessee had failed to disclose fully and truly all material facts.
43. The learned standing counsel submitted that the statements made by the several creditors bore upon the truth of the assessee's claim that he had borrowed loans from these persons. According to the standing counsel, their statements showed that they had not lent any money, but dealt only in havalas. The statements of the multani bankers as available in the records have been summarised by the Tribunal and the summary appears in paras. 8, 9 and 10 of its order. The Tribunal has discussed the statements in relation to the respective assessment years. A perusal of these statements clearly goes to show that none of them has made any distinct charge that he did not have any real transaction with the assessee. Some of them have merely stated that whenever they had transaction in excess of Rs. 5,000, they were all bogus. In the absence of any direct reference to the assessee implicating his transactions in hundis, this statement cannot be taken as relevant to the assessee so as to show that the assessee could not have had any genuine transactions with them. Some of these creditors have given lists of what they asserted as bogus transactions. Some of them gave lists of what they asserted were genuine transactions. But the Tribunal has pointed out that the assessee's name did not feature in either of the lists. When none of these lists or statements specifically implicated the assessee and Ms transactions in hundis it cannot be said that they constituted relevant evidence or even information to show that they did not have any genuine transaction with the assessee. One person by name Tulasidas had stated that he did not have any single genuine transaction and that all his transactions were in havalas. In the context of a similar statement the Supreme Court in ITO v. Lakhmani Mewal Das : 103ITR437(SC) has held that such a statement cannot be taken to be relevant material to demonstrate that the assessee had failed to disclose fully and truly all material facts. The learned standing counsel repeatedly contended that all these statements bore on the truth of the assessee's claim made originally in the assessments that he had borrowed monies from these creditors and that he had paid interests to them. His point was that the correctness of this claim stood discounted by reason of the confessions made by these individuals. Unfortunately for him in the absence of any statement from them regarding any transaction with the assessee, the ITO could not have come to a reasonable belief that the assessee's earlier stand was wrong and that income had escaped assessment by reason of the assessee's failure to disclose fully and truly all material facts relating to his assessment.
44. Our attention was drawn to the decision of a Bench of this court in M. Varadarajulu v. ITO : 97ITR476(Mad) . In that case, the assessee was assessed for the assessment years 1960-61 and 1961-62. Subsequently, these assessments were reopened on the ground that the borrowings made on . hundis from multani bankers were not genuine. The notices issued for the reassessment were challenged in the writ proceedings that came before this court. It was pointed out for the revenue that the statements made by the multani bankers justified the ITO in reopening the assessment. This contention was accepted. The High Court looked into the statements of those persons from whom the assessee had claimed to have borrowed money. Though there was no special reference to the dealings with the assessee or with any particular transaction in the account books of the assessee at least in one instance a person whose name found a place in the list of the creditors of the assessee, had given a statement that he never had any genuine transaction with anybody and all the transactions in his name were Havala transactions. This statement was taken to show that there was material, which could form some reasonable ground for thinking that there was a non-disclosure of such material facts. The later decision of the Supreme Court in ITO v. Lakkmani Mewal Das : 103ITR437(SC) was rendered more than 3 years after this decision, and the Supreme Court has pronounced on the validity of the action under Section 147(a) in the light of similar statements made by multani bankers. The decision of the Supreme Court takes a different view from what commended itself to the Bench, which decided the case in this court. In view of the conflict with the judgment of the Supreme Court, the decision of this court in M. Varada-rajulu v. ITO : 97ITR476(Mad) cannot be considered to be good law. The reliance placed on this decision cannot, therefore, be of any effective assistance to the contention urged on behalf of the department.
45. Support was sought from another decision of the Supreme Court in CIT v. Chidambaram Chettiar : 80ITR467(SC) . In that case, the assessee was a money-lender. He had advanced a large amount to a prominent landlord in Coimbatore District, on the strength of promissory notes. A suit was filed for the recovery of the amount from the debtor. The total amount claimed was Rs. 5,50,573. A compromise was effected in September, 1943, and a compromise decree was passed in October, 1943, for a sum of Rs. 3,50,500. The debtor's accounts, however, showed that he had paid in addition to the said sum of Rs. 3,50,500 due under the compromise decree, a sum of Rs. 1,50,000 separately in cash. Some information regarding this additional payment was available to the ITO at the time of the original assessment. He, however, completed the assessment on the basis that the assessee had received only Rs. 3,50,500. Subsequently, some enquiry was made with the debtor and proceedings for reopening the assessment were commenced. The assessee took up objections as regards the validity of the reassessment proceedings. The Supreme Court held that the assessee had not disclosed any information regarding the sum of Rs. 1,50,000 and that, therefore, the provisions of Section 34(1)(a) of the Indian I.T. Act, 1922, corresponding to Section 147(a) of the Act of 1961, were attracted. It was pointed out by their Lordships that the fact that the officer could have made further enquiry 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 fully and truly all the material facts before him. The position is wholly different in the present case. As far as the assessee was concerned he had placed all the materials before the ITO. As pointed out by the Calcutta High Court in Panchanan Hati v. CIT : 115ITR336(Cal) , it was impossible for the assessee to have disclosed to the ITO the confession made by creditors, which was made subsequently to the authorities and not to the assessee and which was not in existence during the original assessment. Section 147(a) covers only a case where an assessee having all the material facts deliberately witholds the information. (See CIT v. Balvantrai S. Jain : 72ITR59(Bom) .
46. It may be that in a given case a subsequent statement or information available in the hands of the ITO can cut at the root of the truth of the disclosure made by the assessee. In such a case, it would be open to the income-tax authorities to reopen the assessment under Section 147(a). But in the present case, there was actually no information available to the ITO which detracts from the truth of the assessee's disclosures as made originally in his assessment. The subsequent statements made by the multani bankers are at best vague and have no relation to any actual transaction with the assessee. In these circumstances, the ITO could not have entertained any bona fide and reasonable belief that, the income had escaped assessment by reason of any non-disclosure or untrue disclosure of any material facts by the assessee.
47. The learned standing counsel for the Commissioner submitted that the jurisdiction of the High Court is only advisory and not appellate and that the High Court cannot reappraise the evidence that was before the ITO. He cited in support of his contention two decisions of the Supreme Court in CIT v. Imperial Chemical Industries (India) (P.) Ltd. : 74ITR17(SC) and Karnani Properties Ltd. v. CIT : 82ITR547(SC) . We have attempted above only to examine whether there were grounds for any reasonable belief on the part of the ITO that income had escaped assessment by reason of the assessee's failure to disclose fully and truly all material facts. In the light of the several decisions of the Supreme Court referred to already, the court's jurisdiction to examine the relevancy of the materials cannot be gainsaid. Only in cases where the adequacy or sufficiency of the materials is examined, any objection against reappraisal of the evidence can be validly put forward. Where, however, the evidence is examined only to find out whether the relevant jurisdiction existed, it is not possible to entertain the complaint that the evidence cannot be examined at all by the High Court. We shall be abdicating our jurisdiction, if we accede to the contention of the learned standing counsel that we have to take the finding of the ITO on jurisdictional facts as sacrosanct. The assumption of jurisdiction on the part of the ITO has to be established on the facts and if there are no relevant facts, the revenue cannot seek to get away with the plea that the matter of jurisdiction is dependent on the facts and the facts are beyond the jurisdiction of this court. The reappraisal of evidence is one thing and examination of the materials for the purpose of finding out the existence of jurisdiction is another. It is not proper to mix up the two. The objection of the learned standing counsel that in examining the evidence in this case for the purpose of finding out the existence of jurisdiction the evidence is reappraised, is not well founded. We have only examined the existence of materials and have not weighed or appreciated any evidence on our own. It is only facts that give rise to the jurisdiction, and in relation to those facts the enquiry as regards the existence of jurisdiction would be necessary and called for. After examining the existence of the relevant materials for coming to the conclusion whether the ITO could have entertained the reasonable belief regarding the income having escaped assessment by reason of the assessee's failure to disclose fully and truly all material facts, we are satisfied that Section 147(a) was not properly invoked in the present case. The result is that the question referred at the instance of the assessee is answered in the negative and in favour of the assessee.
48. We now turn to the reference made at the instance of the Commissioner. The assessee in the course of his business of running passenger buses had purchased new buses which qualified for development rebate. In the assessment years 1957-58 and 1958-59, the assessee had obtained development rebate in respect of such buses. Subsequently, the assessee sold these buses. Under Section 35(11) of the Indian I.T. Act, 1922, which was in force at the time when the relevant allowance was granted, it was provided that where an allowance by way of development rebate has been made wholly or partially to an assessee in respect of a ship, machinery or plant in any year of assessment under Clause (vib) of Sub-section (2) of Section 10, and subsequently at any time before the expiry of ten years from the end of the year in which the ship was acquired or machinery or plant was installed, it was sold or otherwise transferred by the assessee to any person other than the Government, the development rebate originally allowed shall be deemed to have been wrongly allowed and the ITO might proceed to recompute the total income of the assessee for the relevant year, as if the recomputation was a rectification of the mistake apparent from the record within the meaning of Section 35. This rectification has to be made within a period of four years from the end of the year in which the transfer took place. It appears that the ITO did not take any action as contemplated by Section 35(11) of the Act for withdrawing the relief already granted. However, in the course of the proceedings under Section 147(a) he withdrew the development rebate that had been granted in these two years, i.e., 1957-58 and 1958-59. The assessee objected to the withdrawal of the relief in the reassessment under Section 147(a) and the Tribunal upheld the assessee's claim relying on a decision of this court in Veerappa Chettiar v. CIT : 91ITR116(Mad) . The revenue has challenged this part of the order of the Tribunal by raising the second question already extracted.
49. In the view of the Tribunal, the subsequent sale, which was within the statutory period, would authorise proceedings under Section 147(b) and if the department had not taken action within the said period, it could not withdraw the development rebate in the proceedings under Section 147(a). In the decision in Veerappa Chettiar v. CIT : 91ITR116(Mad) , it was pointed out that where the ITO validly initiated reassessment proceedings by issuing a notice under Section 34(1)(a) of the Indian I.T. Act, 1922, corresponding to Section 147(a) of the Act, 1961, in respect of a particular item, he could, during the reassessment proceedings, deal with all the items falling under Clause (a) though they might not have been dealt with specifically in the notice and his jurisdiction was not limited only to the item in respect of which a notice under Section 34(1)(a) was issued. However, the power to bring to charge income falling under Section 34(1)(b) in the reassessment proceedings validly initiated by the issuance of a notice under Clause (a) was held to be subject to the limitation that the reassessment proceedings should be initiated within the period of four years as mentioned in Clause (b). In effect the conclusion was that if the reassessment in respect of that particular item was barred by time-limit mentioned in Clause (b) of Section 34(1) or Section 147 read with Section 153, as the case may be, then the ITO cannot bring to tax the said item in the other proceedings under Section 34(1)(a) or Section 147(a). It is not in dispute that in the light of this decision the development rebate could not have been withdrawn in the reassessment proceedings, as the time limit within which action could be taken under Section 147(b) had already been crossed. In these circumstances, the Tribunal acted rightly in directing the deletion of these two items for the assessment years 1957-58 and 1958-59. The question referred at the instance of the Commissioner is answered in the affirmative and in favour of the assessee. As in both the questions the assessee has succeeded, the assessee will be entitled to his costs. Counsel's fee Rs. 500. One set.