Sabyasachi Mukharji, J.
1. In this application under article 226 of the Constitution the petitioner, which is a company registered under the Companies Act, 1956, challenges the notice dated the 29th of March, 1968, issued under Section 148 of the Income-tax Act, 1961, re-opening the assessment for the assessment year 1959-60 under the Income-tax Act, 1961. The petitioner contends that there is no material for the issuance of the said notice. Inasmuch as the said notice was issued beyond the period of four years from the end of the relevant assessment year the said notice must have been issued under Clause (a) to Section 147 of the Income-tax Act, 1961. The provisions of the said section are well known and the material part of the said section provides as follows :
(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
(b) notwithstanding that there has been no omission or failure as mentioned in Clause (a) on the part of the assessee, the Income-tax Officerhas in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year,
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 (hereinafter in sections 148 to 153 referred to as the relevant assessment year).'
2. In the assessment order for the relevant assessment year the assessing officer, inter alia, observed as follows :
'In response to notice under Section 23(2) Sri S. C. Sarkar, authorised representative and the accountant for the assessee, appears and states that the assessee-company lost its books of accounts in the hands of his ex-employee who has stolen them and destroyed them while action was being taken against him. Necessary evidence have been furnished in this respect relating to suits filed against that employee. However, the assessee filed audited balance-sheet and profit and loss account. The assessee's books of accounts lost (sic).'
3. In the affidavit-in-opposition filed by the respondent. Income-tax Officer, in answer to the rule nisi issued herein, it was stated as follows :
'I say that during the course of the original assessment proceedings Sri S. C. Sarkar, the authorised representative and accountant of the assessee, appeared and submitted that the assessee had lost its books of accounts and connected bills, vouchers, etc., in the hands of its ex-employee who had stolen and destroyed them. Thus, I say the assessment in the instant case was completed under Section 23(3) of the Indian Income-tax Act, 1922, without reference to the books of accounts and documents. I say that subsequently a search was duly conducted on February 10, 1966, and as per the seizure list the following books of accounts and documents relating to the assessment year 1959-60 were discovered in the assessee's premises:
Premises where the books of accounts and documents were found and seizedParticulars of the seized documentsSI. No. of InvPage ref
12A Netaji Subhas RoadOne Note Book of the B.T.C. '58-59 to '60-61
717do.One file Bharati (P.) Ltd. I.T. 1958-59
3010do.One Note Book showing cement stock, Bharati (P) Ltd. from Jan. '58 to 31st March '59.
2411do.Cash Book (vol. 1) 1958-59321do.Advance Ledger 1958-59.42112A Netaji Subhas RoadDebtor's and Creditor's Ledger 1958-59.
621244 Upper Chitpur RoadRegistered book of Bharati (P) Ltd. from 5-3-59.
1130BongaonA/c. book for 1958-59 Pink cover Exercise Book.
549do.A/c. book for '58-59 (yellow cover).
I say that at the relevant time when the reassessment proceedings were initiated under Section 147(a) of the Income-tax Act, 1961 (hereinafter referred to as the 'said Act'), the seized documents could not be opened. I say that although the seized documents could not be opened owing to the prohibitory order from this hon'ble court it was evident from the inventory of the seized books that the books of accounts and documents of the petitioner for the accounting year 1958-59, which is relevant for the assessment year 1959-60, were in the possession of the assessee and by not producing them during the course of assessment proceedings and by making a wrong statement that the books of accounts were stolen and destroyed, the assessee's income had escaped assessment or had been under-assessed. I say further that the balance-sheet and profit and loss account for the said accounting period ending March 31, 1959, as submitted by the auditor and chartered accountant was based on a trial balance which was prepared by the company and the auditor could not verify the said trial balance with the relevant books of accounts, vouchers and documents, the latter being not available at any point of time to the auditor. I say that this fact would be clear from the auditor's report which runs thus :
I am reported that the books of accounts could not be recovered. The managing director, however, claimed that a trial balance for the aforesaid period (for the year ending March 31, 1959) for head office and branches had been prepared before the theft from the books of accounts of the company ...... In the absence of details and the supporting vouchers,documents, lists and schedules, I could not verify any of the figures as shown therein and have taken the figures as they are. Thus I say that the audited balance-sheet and profit and loss account in the instant case were not conclusive proof in determining the petitioner's true income.
In the circumstances I had reasons to believe that if the books of accounts had been produced they would have gone against the assessee-petitioner, i.e., they would have shown much bigger income than what the assessee-petitioner had shown in the return of income. I, therefore, had reasons to believe and I actually believed and I was satisfied that due toomission and/or failure on the part of the assessee-petitioner to disclose fully and truly all material facts necessary for the assessee-petitioner's assessment for the said year, income chargeable to tax had escaped assessment for that year. '
4. In the petition under article 226 of the Constitution, in paragraph 2, the petitioner stated that in the course of the said assessment proceeding the petitioner's authorised representative appeared before the assessing Income-tax Officer and stated that the petitioner had lost its books of account because its ex-employee had stolen the books of accounts and had destroyed them and action was taken against the said ex-employee by the authority of the petitioner-company. In support of the above statement evidence was produced relating to suits filed against the said employee. It was further stated by the petitioner in the said paragraph 2 that the petitioner had prepared an audited balance-sheet and profit and loss account on the basis of the books of account prepared by the petitioner from the evidence, memos, bank accounts, etc. Therefore, it appears that the assessee's case was that the assessee's employee had stolen the books of account. The assessee had prepared certain books of accounts on the basis of the evidence available. The said evidence was produced before the assessing authority at the time of the original assessment. The case of the respondent. Income-tax Officer, in this rule is that at the time of the original assessment it was stated on behalf of the assessee that the books of accounts had been stolen. Therefore, assessment, though completed under Section 23(3) of the Indian Income-tax Act, 1922, was completed in the absence of the books of accounts which could not be produced because of being stolen. Thereafter, the Income-tax Officer stated that it appeared from the seizure list in respect of the search held subsequently on the 10th of February, 1966, that there were books of accounts available. The Income-tax Officer, therefore, inferred that had these books of accounts been produced then a larger taxable income would have been found out. On this ground action under Section 148 has been taken.
5. The question is, whether on the materials can it be said that there were reasons for the Income-tax Officer to initiate proceedings under Clause (a) to Section 147 of the Income-tax Act, 1961. I have set out hereinbefore the relevant provisions of Clause (a) of Section 147. On a challenge being thrown it is necessary for the Income-tax Officer to establish that there are materials from which he could form the belief that income has escaped assessment or has been under-assessed. Therefore, there must be material for the formation of the belief that income has escaped assessment. Clause (a) stipulates further that that conclusion must be based upon a further condition, that is to say, failure or omission on the part of the assessee to disclose fully or truly at the relevant time all material facts. Ithas been reiterated by the Supreme Court on occasions more than once that the belief must be held in good faith. Reliance in this connection may be placed on the observations of the Supreme Court in the case of Sheo Nath Singk v. Appellate Assistant Commissioner of Income-tax : 82ITR147(SC) and the observations appearing at page 153 of the report, where the Supreme Court reiterated that the belief must be of an honest and reasonable person based upon reasonable ground, and though it was possible to rely on circumstantial evidence the Income-tax Officer was not justified in acting on mere suspicion or gossip or rumour. There is some dispute as to whether the books of accounts were available at the time of the assessment. The assessee's case is that the books of accounts which were seized were books reconstructed from the evidence available in view of the books having been stolen and it was those reconstructed books which were subsequently seized. The Income-tax Officer proceeds on the statement made in the original order of assessment that the books were not produced and explanation given was that the books were stolen, while the subsequent seizure indicated that the books were available at the time of the original assessment. Therefore, it can be said that there was some evidence for the Income-tax Officer to believe that at the time of the original assessment the statement made by the assessee was not correct or true. From that point of view it is possible to hold in this case that there are materials that there was failure or omission on the part of the assessee to disclose fully and truly all material facts. But that by itself does not conclude the matter. Even if there are materials to hold that there were omissions or failure to disclose fully or truly on the part of the assessee all relevant or material facts or evidence, there must be further facts to justify the conclusion or belief that there has been an escapement of income. In this case I find no basis for that conclusion. Furthermore, it is not clear whether the Income-tax Officer had formed the belief that income had escaped assessment. What he has stated in fact was that had the books of accounts been disclosed, a larger income would have been found out. That is not, in my opinion, holding a belief in terms of Clause (a) to Section 147 of the Income-tax Act, 1961. In the premises, I am of opinion that the condition precedent for the issuance of the notice is not fulfilled in the instant case. The notice is, therefore, quashed and set aside.
6. The rule is made absolute to the extent indicated above. If any assessment has been made in pursuance of the said notice, the same is also set aside. There will be no order as to costs in this rule.
7. On the prayer of the respondents, the operation of this order is stayed for six weeks from date.