1. This is an application under Article 226 of the Constitution impugning the validity of a notice of reassessment under Section 148 of the Income-tax Act, 1961, in respect of the assessment year 1959-60. The petitioner, Ganga Saran & Sons (P.) Ltd., is a private limited company which was incorporated in March, 1947, with Ganga Saran Sharma as its managing director while the other directors of the company were Deo Dutt Sharma, A.C. Agarwal and Sankarlal Sharama, For the assessment year 1948-49, the Income-tax Officer, 'B' Ward, Companies District I, Calcutta, who made the assessment, disallowed a large part of the amounts claimed as deduction as payments to the directors on account of their commission, bonus and other perquisites. No appeal was filed from the assessment for this year. In the assessment for 1949-50, the Income-tax Officer again disallowed their claim for deduction of the sums paid to the directors including the managing director on account of commission and bonus. In this year the commission paid to the three directors other than the managing director was Rs. 15,674 and the bonus was Rs. 6,000 in addition to the salary paid to the directors. It should be mentioned that in addition the director, Deo Dutt Sharma, used to get a remuneration of Rs. 1,000 per month. On appeal by the company, the Appellate Assisstant Commissioner allowed the entire amount claimed to have been paid as bonus and commission to the directors of the petitioner-company. The Appellate Assistant Commissioner observed that Deo Dutt Sharma carried on thevery business at Delhi in the name of Sharma Trading Company which was purchased by the petitioner-company. He gave the figures of the income assessed in the assessment of Deo Dutt Sharma in the immediately previous four years of assessment. He also found that the said director managed entirely the Delhi branch of the petitioner-company. The Appellate Assistant Commissioner concluded that considering the antecedents of this director and the part he had taken in the business of the company the entire remuneration paid to him should be allowed. Following the said decision of the Appellate Assistant Commisssioner, in the assessments for the years 1950-51 to 1955-56 the claim of the petitioner for deduction on account of payments made to its directors as remuneration were allowed in full. But, in the assessment year 1956-57, the Income-tax Officer disallowed a substantial portion of the remuneration paid to the managing director, which was substantially confirmed by both the Assistant Commissioner and the Income-tax Tribunal on appeal. A reference was made to this court under Section 66(1) of the Indian Income-tax Act, 1922, and the High Court answered the reference in favour of the assessee and held that the disallowance of a portion of the remuneration paid to the managing director under Section 10(4A) was not justified. For the assessment year 1957-58, the Income-tax Officer again disallowed Rs. 18,000 out of the managing director's remuneration and also the interest paid to the directors on the balance of their credit for undrawn remuneration in the accounts of the company. On appeal, the Appellate Assistant Commissioner held that the interest paid on the undrawn balances to the directors were an allowable expenditure and allowed thesame but he sustained the disallowance of a portion of the remuneration paid to the directors. In this year the total amount of commission, salary and bonus paid to the directors amounted to Rs. 94,060. On further appeal, the Tribunal pointed out that during the accounting year, of 8,500 issued shares of the company, the managing director, G. S. Sharma, personally held 5 shares, while 3,500 shares were held by a private company which was controlled by him and his wife. The director, D. D, Sharma, held 1,703 shares. D. D. Sharma was paid a salary of Rs. 1,000 per month plus a commission of 1 per cent. on the total sales. Salary and commission at different rates were also paid to the other two directors. After elaborately considering all the circumstances the Tribunal held that the disallowance of any part of the remuneration paid to the directors was not justifiable and deleted the amount disallowed. It appears that for each of the aforesaid years of assessment elaborate statements were filed by the petitioner-company before the assessing Income-tax Officer, of the details of the expenditure incurred by the company in each year, the ledger accounts of the several directors showing the amounts of salary, commission and bonus being credited and the amounts as paid to such directors being debited and the balance carried forward to the subsequent year. It is in respect of these balances that the company paid interest to the directors which was disallowed by the Income-tax Officer but allowed by the Appellate Assistant Commissioner on appeal. It also appears that on a query from the Income-tax Officer the company by its letter dated the 10th May, 1958, furnished the Income-tax Officer with the assessment file numbers of the director, D.D. Sharma, who was being assessed at New Delhi, and also similar file numbers of Narendra Sharma and Debendra Sharma. The department appealed against the atlowance by the Appellate Assistant Commissioner of the claim for deduction of the interest paid to the directors on the balance in their account and this was also rejected by the Tribunal in respect of the assessment year 1958-59. The petitioner's assessment for the subsequent years 1959-60 to 1961-62 were completed and in these assessments the deductions claimed by the petitioner in respect of the remuneration paid to the directors were allowed in full.
2. A notice purported to be under Section 148 of the Income-tax Act, 1961, dated the 28th March, 1968, issued by the Income-tax Officer, Central Circle XV, Calcutta, to whom in the meantime the petitioner's assessment file had been transferred, proposing to reassess the petitioner's income for the year 1959-60 as it had escaped assessment within the meaning of Section 147 of the Act was served on the petitioner, who was directed to file its return within 30 days from the date of service. As the notice was issued after obtaining the necessary satisfaction of the Commissioner of Income-tax, Central Calcutta, and was also issued more than four years after the end of the relevant assessment year, it must be taken that the impugned notice was intended to be one under Section 147(a) of the Act.
3. As repeated requests from the petitioner to the Income-tax Officer issuing the notice failed to elicit a replay stating the reasons which had led the said Income-tax Officer to believe that the petitioner's income for that year had escaped assessment, the petitioner by its letter dated the 8th April, 1968, without prejudice to its rights and contentions, asked the Income-tax Officer to treat the original return filed for the said year as the return in response to the notice under Section 148. This rule was obtained on the 11th April, 1968, calling on the respondents, (1) the Income-tax Officer, Central Circle XV, Calcutta, (2) the Commissioner of Income-tax, Central, Calcutta, (3) Income-tax Officer, 'B' Ward, Companies District I, Calcutta, and (4) Union of India, to show cause why appropriate writs should not be issued to cancel, rescind and/or quash the aforesaid notice and command the respondents to forbear from taking any further action thereon.
4. After the rule was obtained and possibly after the rule was served, aletter was addressed by the first respondent to the petitioner dated the29th June, 1968, stating that the assessment has been reopened becausepayment oi remuneration to Sri Deo Dutt Sharma, an employee of thecompany, is considered as bogus and false. The reason given in the aforesaidletter has been elaborated in paragraph 6 of the affidavit-in-oppositionfiled on behalf of the respondents in showing cause and it would be necessary to set out the aforesaid paragraph in full:
'(a) At the time of the original assessments the company had claimed that one Deo Dutt Sharma, manager of Delhi branch of the company, was paid salary, commission, bonus and perquisites by the company. The total amount of such payment was claimed to be Rs. 27,000 per year. It was stated that Deo Dutt Sharma was paid a salary of Rs. 12,000 per year, commission at the rate of 1% on the sales of the Delhi branch, annual bonus equal to three months' salary and fixed perquisites of Rs. 480 per year. Between 1st April, 1949, and 31st March, 1962, the company was given deduction on account of such payments to the said Deo Dutt Sharma amounting to Rs. 3,51,000.
(b) After these assessments of the company for the said period were completed, the assessment file of the company and the various persons connected with the company were brought together and compared. Certain facts emerged from the perusal of all the files which were not known at the time of the assessments which are stated hereunder.
(c) The said Deo Dutt Sharma is the brother-in-law of Ganga SaranSharma, the managing director of the company. The company was reallya one-man show of the said Ganga Saran Sharma.
(d) After centralisation of the files of this group it was found from the records of the other assessees of this group that the said Deo Dutt Sharma had disposed of his income from the company in the following ways :
On 31st July, 1957 : Rs.(i)On 31st July, 1957, he made a gift to Shri Narendra Sharma, son of Shri Ganga Saran Sharma, managing director of the company. 12,550.00(ii)On 25th August, 1958, he made a loan to the said Ganga Saran Sharma.2,25,000.00
(e) Out of a total income of Rs. 3,51,000 the said Deo Dutt Sharma paid tax to the tune of about Rs. 65,000. A sum of Rs. 2,37,550 was spent on gifts and loan as stated hereinabove. Over the aforesaid period of 13 years, Deo Dutt Sharma spent on himself a sum of Rs. 51,000 which is less than Rs. 4,000 per year.
(g) The said Deo Dutt Sharma was never allowed to draw his full salary and his emoluments were being credited in the books of the company in his name and he was allowed to draw in driblets never aggregating more than Rs. 4,000 as mentioned above.'
5. Before I deal with the rival contentions in the application, I should mention that in the order of the Appellate Assistant Commissioner, in appeal from the assessment for the year 1958-59, the credit balances in the accounts of the directors on account of undrawn remuneration were considered. So, it cannot be urged that the fact that the remuneration payable to the directors was credited in these individual accounts in the books of the company and that only the amounts paid either to such directors or paid on account of such directors were debited in each year was not known to the department at the time of making the original assessment for the said years. As a matter of fact the department went up on appeal against the allowances by the Appellate Assistant Commissioner, of interest on these undrawn balances of the directors. It should further be noticed that except for the four years, viz., 1950-51 to 1955-56, the Income-tax Officer making the original assessments had for each of these years not only scrutinised the accounts of the directors and the amounts of the salary, commission and bonus paid to them but had actually disallowed the major portion of such remuneration and the assessee had to go up on appeal for each of these years to get relief. In one year it had to come right up to this court in a reference to have the disallowance of a part of the remuneration paid to these directors restored. It further appears from the annexures to the affidavit-in-reply, which had set out all the relevant facts, that, at the time of the filing of the petition, the petitioner was not awara of the reasons for the issue of the notice under Section 148, though in each year, on and from the assessment year 1956-57, statements giving details of the remuneration paid to Sri Deo Dutt Sharma by way of salary, commission and bonus was being filed before the Income-tax Officer together with the copies of the ledger accounts of the said Deo Dutt Sharma in the books of the company showing the opening balance, the amount credited, the amount debited, the balance carried forward in each year, etc. So, the allegation of fact that the balance of the remuneration was merely credited to Deo Dutt Sharma and was not paid to him was not known to the department is not correct.
6. In spite of a very valiant effort made by Mr. Sen to sustain the impugned notice, I am of the opinion that this rule should be made absolute and the purported notice under Section 148 should be quashed. Mr. Sen submitted that, though the failure to disclose any material facts necessary for the assessment may be either active or passive, if any matter which is material is not brought to the notice of the Income-tax Officer during the relevant proceedings, the assessee would have failed to disclose though such failure might be only passive. Mr. Sen contended that, if the Income-tax Officer had at the time of making the assessment been aware of the relationship 'between Deo Dutt Sharma and Ganga Saran Sharma, he would have been more vigilant in scrutinising the payments made to Deo Dutt Sharma and, according to him, the fact of such non-disclosure together with the subsequent discovery of the gifts made by Deo Dutt Sharma to the wife and children of Ganga Saran Sharma and of the loan to Ganga Saran Sharma of practically the major part of the remuneration paid to him by the petitioner-company would constitute a sound basis for the Income-tax Officer to suspect that the payments made to Deo Dutt Sharma as remuneration were not payments genuinely made for the pur pose of the petitioner's business. Undoubtedly, in this case the gifts and the loan made by Deo Dutt Sharma were long after the end of the relevant accounting year; yet if these subsequent events throw a different light on the transaction, the Income-tax Officer would have jurisdiction to take action under Section 147 of the Act. Mr. Sen pointed out that under Section 147 under-assessment includes a case where income has been made the subject of excessive relief under the Act and in this case the Income-tax Officer has reasons to believe that the allowance of the alleged remuneration paid to Deo Dutt Sharma was not correct and the petitioner had received excessive relief which could be corrected by way of reassessment. The usual authorities dealing with the provision of Section 34 of the repealed Act of 1922 and of Section 147 were cited by learned counsel in this case. Mr. Sen particularly relied on the observation in the case of S. Narayanappa v. Commissioner of Income-tax, : 63ITR219(SC) where the Supreme Court succinctly laid down the conditions which must be satisfied in order to confer jurisdiction on the Income-tax Officer to issue a notice of reassessment beyond the period of 4 years but within a period of 8 years from the end of the relevant year. Thus :
'The first condition is that the Income-tax Officer must have reason to believe that the income, profits or gains charageable to income-tax had been under-assessed. The second condition is that he must have reason to believe that such 'under-assessment' had occurred by reason of either, (i) omission or failure on the part of an assessee to make a return of his income under Section 22, or (ii) omission or failure on the part of the assessee to disclose fully and truly all the material facts necessary for his assessment for that year. Both these conditions are conditions precedent to be satisfied before the Income-tax Officer acquires jurisdiction to issue a notice under the Section. 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 non-disclosure as regards any fact, which could have a material bearing on the question of under-assessment, 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 expresion '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.'
7. Mr. Sen pointed out that, if in fact there are some reasonable grounds for the Income-tax Officer to believe that there has been any non-disclosure as regards any fact which had a material bearing on the question of under-assessment that would be sufficient to give the Income-tax Officer jurisdiction. In this case the failure to disclose the relationship between Deo Dutt and Ganga Saran, who was in fact the company, was considered to constitute reasonable grounds for the Income-tax Officer's belief that the payments made to Deo Dutt by way of remuneration were not genuine payments. This court would not go into the question of adequacy of the reasons. Mr. Sen also relied on the case of Kantamani Venkata Narayana and Sons v. First Addditional Income-tax Officer, Rajahmundry, : 63ITR638(SC) where the Supreme Court, after quoting the aforesaid passage from S. Narayanappa's case, made the following observation :
'The High Court has pointed out that no final decision about failure to disclose fully and truly all material facts bearing on the assessment ofincome and consequent escapement of income from assessment and tax could be recorded in the proceedings before them. It certainly was not within the province of the High Court to finally determine the question. The High Court was only concerned to decide whether the conditions which invested the Income-tax Officer with power to reopen the assessment did exist, and there is nothing in the judgment of the High Court which indicates that they disagreed with the view of the trial court that the conditions did exist.'
8. Mr. Sen relied on the aforesaid observation for his contention that atthis stage there has been no decision as to whether there has actually beenany failure on the part of the assessee to disclose fully and truly almaterial facts necessary for his assessment. That would be decided at thetime of the assessment. The only point for consideration of the High Courtnow is whether there was any reason for the Income-tax Officer to come tothe belief that the petitioner has been allowed excessive relief due to nondisclosure of some material facts. A reference was also made to a decisionof the Andhra Pradesh High Court in the case of Seetharamamma,  50 I.T.R. 450 (A.P.). Inthat case the assessee received large amounts of cash and ornaments fromSeetha Devi, the wife of the Gaikwad of Baroda. Those were not includedoriginally in her assessment for the relevant years as the Income-tax Officeraccepted in her assessee's explanation that these were gifts made on accountof natural love and affection. Subsequently, it was discovered that theassessee had rendered certain services to Seetha Devi and the Income-taxOfficer started proceedings for reassessment for including these amounts inthe income of the assessee. On these facts the High Court held that therehas been a failure on the part of the assessee to disclose the material fact,namely, that he was either employed or was rendering service to SeethaDevi, and this non-disclosure of the most material fact bearing on the relationship between the assessee and Seetha Devi had misled the departmentinto the belief that the amounts were not income chargeable to tax. Thoughthis decision was reversed on appeal by the Supreme Court on merits, this part of the judgment was not disagreed with by the Supreme Court.
9. Mr. Sen submitted that in this case also the relationship betweenGanga Saran and Deo Dutt would have been very material in determiningwhether the remuneration paid to Deo Dutt by the company was genuineor not.
10.Whe I pointed out to Mr. Sen that the relationship was between DeoDutt and Ganga Saran, the managing director of the petitioner-company,but the payments were made by the petitioner-company to Deo Dutt, oneof its directors, for services rendered, Mr. Sen submitted or rather contended that in appropriate cases the veil of the corporate character can be lifted by the department and the true nature of a transaction can be investigated. According to him, in this case, the petitioner-company was the sole concern of Ganga Saran as he controlled the majority of the voting shares of the company. Lastly, Mr. Sen referred me to a Supreme Court decision in the case of Sowdagar Ahmed Khmad v. Income-tax Officer, Nellore, : 70ITR79(SC) . In that case, the Income-tax Officer reopened the assessee's assessment on the ground that certain cash credits in the name of the assessee's relations were not genuine. In support of his belief the Income-tax Officer gave details of bogus cash credit appearing in the account and required the assessee to furnish explanation why they should not be treated as his concealed business income. In the affidavit-in-opposition filed in the High Court, the Income-tax Officer pointed out that the assessee had failed to disclose the existence of a bank account in the name of his father-in-law which was maintained benami for the benefit of the assessee and to disclose fully and truly the basic facts in respect of the sources of the alleged cash credits. It was in that context that the Supreme Court said that it was of the opinion that there was some material before the Income-tax Officer on which he formed the prima facie belief that the assessee had omitted to disclose fully or truly all material facts and in consequence of such nondisclosure, the income had escaped assessment. I am afraid the facts of that case have no bearing on the facts of the present case.
11. As I have already pointed out, both in the previous' years and also in the subsequent years of assessment, the Income-tax Officer had been persistently trying to disallow sometimes the whole, and sometimes a substantial part of the remuneration credited to the directors of the petitioner-company on the ground that such remuneration was not justified by business reasons or, in other words, the expenditure was not incurred for the purpose of the petitioner's business. All such attempts had failed as in appeals either before the Appellate Assistant commissioner or the Tribunal the petitioner had obtained relief and the entire deductions have been deleted. In one of these years the matter came up before this court on a reference and this court held that the remuneration paid to its directors by the petitioner-company could not be disallowed under Section 10(4A) or, in other words, such remuneration was neither excessive nor in consideration otherwise than for business. The fact which had come to the knowledge of the Income-tax Officer apparently in 1968 on, according to him, centralisation of all the files of the person connected with the petitioner-company was that in the year 1957-58, Deo Dutt had made a gift of Rs. 12,550 to his nephew, the son of Ganga Saran, and had advanced a loan of Rs. 2,25,000 to Ganga Saran and that subsequently in the year 1960-61 substantial gifts were made to the wife and daughters-in-law of the said Ganaga Saran. I do not see how these facts could in any way form any ground for a belief that the payments made and/or credited to Deo Dutt as his remuneration as a director by the petitioner-company were bogus or fictitious. As I have pointed out in his appellate order for 1957-58, the Appellate Assistant Commissioner has given details of the work done by Deo Dutt in the Delhi branch and also the income he was earning as the owner of the said business in five previous years to the business being taken over by the petitioner-company. Further, in the affidavit-in-reply, it has been stated that each of the aforesaid gifts had been shown in gift-tax returns and gift-tax paid thereon while the amount of the loan to Ganga Saran had been shown in the wealth statements of Deo Dutt for his wealth-tax assessement. I am not told whether Deo Dutt has any relations of his own or his sister and her children constitute his only relations. If the latter is the case, there is nothnig unusual in his making gifts to his only relations. In any event, if any benefit has been derived such benefit has been derived by Ganaga Saran and the members of his family. The petitioner-company has not been shown to have gained anything by these alleged bogus payments to Deo Dutt as it is not the case of the department that this money has come back to the company in some other way. In my opinion this is a case where the court is entitled to hold that the reasons for the Income-tax Officer's belief have no rational connection or relevant bearing to the formation of the belief and are extraneous and irrelevant for the purpose of Section 147.
12. This rule must accordingly be made absolute and the impugned notice must be quashed. The respondents would also be restrained from proceedings or taking any further steps in terms of the said notice. The interim order stands vacated.
13. The stay of the operation of the order is asked for and such stay is granted till a fortnight after the vacation and in the meantime the respondents are not to give effect to the impugned notice.
14. There will be no order as to costs.
15. Dr. Pal points out that in issuing the rule, this court gave to the respondents liberty to continue and conclude the assessment proceedings but not to communicate the final orders, if any, to the petitioner. If, in fact, such an assessment has been completed, in view of the observations made by the Supreme Court in Calcutta Discount Company's case, : 41ITR191(SC) in addition to the order directing the Income-tax Officer not to take any action on the basis of the impugned notice, a further order is made quashing the assessment, if any, made under the liberty given by this court.