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Grahams Trading Co. (India) Ltd. Vs. Income-tax Officer, Central and ors. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberF.M.A. No. 391 of 1971
Judge
Reported in[1976]105ITR1(Cal)
ActsIncome Tax Act, 1961 - Sections 147 and 148; ;Constitution of India - Article 226
AppellantGrahams Trading Co. (India) Ltd.
Respondentincome-tax Officer, Central and ors.
Appellant AdvocateD. Pal, ;P.K. Pal and ;Monisha Seal, Advs.
Respondent AdvocateB.L. Pal and ;N.L. Pal, Advs.
Cases ReferredPoonjabhai Vanmalidas & Sons v. Commissioner of Income
Excerpt:
- m.n. roy, j.1. this appeal is directed against a judgment and order dated february 26, 1971, passed in civil rule no. 2262(w) of 1966 by p.k. banerjee j. by the said order the learned judge was pleased to discharge the rule obtained by the appellant against initiation of proceedings under section 148 of the income-tax act, 1961, for the assessment years 1950-51 to 1961-62, by the income-tax officer, central circle i, respondent no. 1.2. the appellant, which carries on business, inter alia, in export and import and also trade in general merchandise, is alleged to have been regularly assessed under the indian income-tax act. it has been alleged that for the assessment year 1950-51 they were assessed on march 29, 1955, under section 23(3) of the indian income-tax act, 1922, and the total.....
Judgment:

M.N. Roy, J.

1. This appeal is directed against a judgment and order dated February 26, 1971, passed in Civil Rule No. 2262(W) of 1966 by P.K. Banerjee J. By the said order the learned judge was pleased to discharge the rule obtained by the appellant against initiation of proceedings under Section 148 of the Income-tax Act, 1961, for the assessment years 1950-51 to 1961-62, by the Income-tax Officer, Central Circle I, respondent No. 1.

2. The appellant, which carries on business, inter alia, in export and import and also trade in general merchandise, is alleged to have been regularly assessed under the Indian Income-tax Act. It has been alleged that for the assessment year 1950-51 they were assessed on March 29, 1955, under Section 23(3) of the Indian Income-tax Act, 1922, and the total income was computed at Rs. 5,52,829. Similarly, for the assessment years 1951-52 and 1952-53, they were assessed under the said section and the total income was computed at Rs. 34,562 and Rs. 2,09,486, respectively. The appellant has also alleged that similarly for the assessment years 1953-54, 1954-55, 1955-56 and 1956-57, assessments were made under the said section and the Income-tax Officer concerned determined the loss at Rs. 4,57,239, Rs. 6,12,343, Rs. 3,03,073 and Rs. 91,453, respectively. It has also been alleged that for the assessment year 1957-58, although the total income was computed at Rs. 1,54,696, ultimately there was a nil assessment for the said years after carrying forward the loss in respect of the earlier assessment years, and for the assessment year 1958-59 a loss to the tune of Rs. 1,07,988 was determined under the said section. It has further been alleged that for the assessment year 1959-60, assessment was completed under Section 23(4) of the Act of 1922 and the income was determined at nil. It has also been alleged that for the assessment year 1960-61 the income was computed at nil after setting off the loss of Rs. 2,25, 196 in respect of the assessment year 1953-54 and Rs. 3,40,813 representing a portion of the loss for the assessment year 1954-55.

3. Thereafter, notices under Section 148 of the Income-tax Act, 1961, were issued by the respondent No. 1 asking the appellant to submit returns of its income for the assessment years 1950-51 to 1961-62 as he had reasons to believe that the income of the appellant chargeable to tax for the said assessment years hat! escaped assessment within the meaning of Section 147 of the Income-tax Act, 1961, and as such the said Income-tax Officer proposed to reassess the income of the appellant for the assessment years in question. The brief reasons for starting the proceedings under Section 147(1) of the said Act of 1961, a specimen copy whereof has been disclosed with the affidavit-in-opposition dated November 24, 1966, is reproduced here-under as reference will have to be made to the same for the purpose of determining the points that were urged, the more so, as the validity, bona ikies and sufficiency of the reasons stated therein and the formation of the belief on the basis thereof have been challenged. The brief reasons as disclosed are in the following terms :

'The premises of M/s. Grahams Trading Co. Ltd. were searched by the officials of the Enforcement Directorate and Customs Department in February, 1964, and a large number of files and documents were seized. The company was selling Ovaltine in India on consignment basis on behalf of M/s. A. Wander Ltd., London, and was also in charge of the Ovaltine propaganda department of the non-resident.

A scrutiny of the seized documents has shown that for the period 1949 to 1955 the expenses of the Ovaltine propaganda department were debited by the Indian Co. in their books under appropriate headings. The dues from the non-resident on this account amounting in all to Rs. 12,28,054 for the 6 years from 1949 to 1955 were not brought into the assessee-company's books thereby deflating the aggregate profits for the period by an equal amount. There is, therefore, reason to believe that income aggregating to Rs. 12,28,054 has escaped assessment for the assessment years 1950-51 to 1956-57 on account of the assessee's failure to furnish fully and truly material facts relating to its assessment.

Similarly, for the period 1956 to 1959, Rs. 2,59,570 due from A. Wander Ltd. was collected in July, 1960, but remained outside the books of the assessee. The aggregate profits of the period were, therefore, understated by that amount. There is, therefore, reason to believe that income has escaped for assessment years 1957-58 to 1960-61 also. As the amounts received in July, 1960, could possibly be also considered for the assessment year 1961-62, action is necessary for that year also.

In the circumstances mentioned above the approval of the Board/Commissioner of Income-tax is solicited under Section 151(1)/(2) for issue of a notice under Section 148 for assessment years 1950-51 to 1956-57.

I have reason to believe that the income escaping assessment is likely to amount to Rs. 50,000 for the year.'

4. It appears that notices under Section 148 of the Act of 1961 for the assessment years 1950-51 to 1957-58 were issued by the Income-tax Officer concerned after obtaining the necessary satisfaction and sanction of the Central Board of Direct Taxes and those for the assessment years 1958-59 to 1960-61 were issued after obtaining the necessary sanction and satisfaction of the Commissioner of Income-tax (Central), Calcutta, respondent No. 2.

5. On receipt of the notices it has been alleged that the appellant through several letters made representations against initiation of those proceedings and contended further that income chargeable to tax in their hands had not escaped assessment and that, alternatively, even if there was any escapement of income, the same was not in consequence of or as a result of any omission or failure on their part to disclose fully and truly all material facts necessary or relevant for the assessment within the meaning of Section 147(a) of the Act of 1961. It has further been alleged that the appellant also demanded the disclosure of the reasons, via., the basis for the formation of the belief that any income had escaped assessment and they further made it clear that unless the basis was disclosed or shown they would not be in a position to represent their case in the proceeding so initiated under Section 148 of the said Act. The respondents in their turn did not disclose the reasons but directed the appellant to file their returns and made it categorically clear that in the event of non-compliance or failure to comply with such directions, assessments would be made ex parte. The appellant made further representations to the effect that Section 148 of the said Act in the case has been sought to be used and utilised as a mere cloak or pretence for making a roving or fishing enquiry or investigation and in fact they, without filing the returns as directed, moved an application under Article 226 of the Constitution of India against the notices under Section 148 of the Act of 1961 and obtained the said Civil Rule No. 2262(W) of 1966 and also an ad interim order restraining the respondents, their servants and agents from proceeding with the assessment pursuant to the said impugned notices dated July 5, 1966, issued under Section 148 of the Act of 1961 for the assessment years 1950-51 to 1961-62 and also from taking any steps pursuant to the said notices.

6. In their affidavit-in-opposition dated November 24, 1966, filed by respondent No. I, the respondents have challenged the right of the appellant to have the reasons which prompted the initiation of the proceedings under Section 147 of the said Act read with Section 148 of the same, disclosed or communicated. They have further alleged that there were due and proper reasons to believe on the part of the Income-tax Officer concerned that income chargeable to tax had escaped assessment and such escapement was due to the failure or omission on the part of the appellant to disclose fully and truly all material facts necessary for the assessment and such due formation of belief justified the issue of the impugned notices. It has also been alleged that it was not incumbent on the officer concerned to divulge the materials at the preliminary stage and in fact the appellant would get ample opportunities to defend their case in the course of the assessment proceedings. The respondents, however, denied that there was no material on the basis of which the Income-tax Officer concerned could have reasons to believe that any income chargeable to tax had escaped assessment. It has been asserted that in fact the officer concerned had ample reasons to believe that large amount of income had escaped assessment for the several assessment years in dispute on account of the appellant's failure to furnish fully and truly material facts relating to and relevant to the assessments. The allegations of initiating fishing enquiries by the officer concerned were denied and it has been stated that the escapement of income for each of the years from 1950-51 to 1957-58 would be more than Rs. 50,000. The brief reasons for initiating the proceedings in the instant case, as disclosed by the respondents, have already been stated hereinbefore.

7. In reply to the said affidavit-in-opposition the appellants reiterated the invalid and illegal character of the notices under Section 147(a) of the Act and they further reiterated that the reasons disclosed by the respondents do not establish the allegations of escapement of assessment by reason of any omission or failure on the part of the appellant to disclose fully and truly all relevant and material facts necessary for the assessments for the years in question and, therefore, the provisions of Section 147(a) were not attracted. It was further denied that the sum of Rs. 12,28,054 represented dues from M/s. A. Wander Ltd. on account of expenses of Oval-tine propaganda department debited in the appellant's books as alleged. The appellants contended that at the material time they purchased Oval-tine in the United Kingdom through their own branch at Manchester and in fact the said amount has been shown in the audited balance-sheets of their Manchester branch on the respective dates under the head of 'Bills payable suspense account.' It was further contended that identical sums were shown under the head of 'Bills payable suspense account' in the balance-sheet of the Calcutta branch of the appellant and in that view it was contended that the allegation that the said dues were not brought into the books of account were not only without any basis but were based on incorrect statement of facts and as such there could not be any material for the Income-tax Officer concerned to have reasons to hold the belief that the income of the appellant has escaped assessment. With regard to the other sum of Rs. 2,59,570 it was denied that the said sum was due to the appellant or was collected in July, 1960. It was further stated that the relevant accounts were duly placed before the assessing Income-tax Officer at the time of original assessments and the sums in dispute were duly included in the total returned income of the appellant and the said officer duly assessed the sums as part of the appellants' profit.

8. Before the learned trial judge it was contended on behalf of the appellant that the purported reasons for reopening the assessment were untrue, baseless, illegal and void. It was also contended that different balance-sheets were duly filed before the officer concerned along with the notes by the auditors, Messrs. Lovelock & Lewes, and pointed attention was drawn to the balance-sheet for the period ending on December 31, 1953, and to the said note therein and it was also contended that if the auditors' letter was looked into or the officer concerned had cared to read the relevant balance-sheet along with the letter then he would have seen that the appellant had truly and fully disclosed all material facts for assessment and that there was no omission on their part at all. It was also contended on behalf of the assessee that when the reason to believe has been challenged before a court it was for the respondents to satisfy the court about the sufficiency of the materials for the formation of the belief and mere production of the report would not be enough. Materials must be produced on the basis of which such reasons to believe were based. In fact it was contended before the learned trial judge that the reasons to believe as disclosed were non-existent because the assessee was not selling Ovaltine in India on consignment basis on behalf of M/s. A. Wander Ltd., and the more so when they were not also in charge of the Ovaltine propaganda department. It was submitted that unless the authorities concerned can produce materials for the prima facie satisfaction of the court and prove that there was some material for the formation of the reason to believe, the notices under Section 148 should fail. In any event, it was also contended that on a challenge being thrown, the authorities must produce the records for establishing the foundation for the reasons to believe. Contrary claims about the existence of the materials for the necessary satisfaction and formation of the relevant opinion was put forward by the revenue and it was submitted that the court should not go into the adequacy or sufficiency of the reasons and if reasons exist and are not a pretence, the court should accept such reasons as given by the revenue for initiating the proceeding under Section 147. It was submitted that the reasons given in the affidavit-in-opposition and the documents disclosed furnish a basis for the Income-tax Officer concerned to issue the notice under Section 147. Those reasons are relevant and are not a mere pretence to issue the notices under Section 147 of the Act. It was further argued that at this stage the jurisdiction of the court is very limited. If the court is satisfied that some reason exists for the issue of the notices, the court will not go into the question of sufficiency or adequacy of the reasons given. It was further argued that the balance-sheet produced by the assessee was not a correct copy of the balance-sheet which was filed before the Income-tax Officer inasmuch as the same did not contain the note of the chartered accountant. It was, therefore, contended on behalf of the revenue before the learned trial judge that there being in existence reasons to believe and the said reasons not being irrelevant or a mere pretence, the rule should be discharged.

9. The point that arose for decision by the learned trial judge, on the pleadings, was whether it was incumbent on the part of the respondents while issuing a notice under Section 147 read with Section 148 of the Act to give or disclose the reasons or the existence of the reasons to believe that the income of the assessee had escaped assessment due to omission of material facts in the assessment proceedings before the officer concerned. After referring to and discussing the principles laid down in the cases of Calcutta Discount Co. Ltd. v. Income-tax Officer : [1961]41ITR191(SC) . and Kantamani Venkata Narayana & Sons v. First Additional Income-tax Officer : [1967]63ITR638(SC) , respectively, the learned judge discharged the rule. His Lordship, on consideration of the records was prima facie satisfied that the officer concerned had reasons to believe that income had escaped assessment. In the said proceedings, with the concurrence of the learned advocate for the assessee, the original balance-sheet for the year ending December 31, 1953, was looked into from the records which were produced by the revenue and on scrutiny it also transpired that the balance-sheet which was filed along with the affidavit-in-reply differed from the one which was filed before the Income-tax Officer. It appeared that the balance-sheet which was filed befere the officer concerned being certified to be a true copy by the secretary of the assessee-company did not contain the note of the auditors.

10. In the appeal before us, after placing the reasons as set out hereinbefore, the reply of the appellant to the same and other documents as disclosed before the learned trial judge, it has been argued that the basis for the formation of the belief must be disclosed. It has also been argued that the alleged charge in respect of omission or failure of the assessee to disclose fully and truly the amount of Rs. 12,00,000 is not correct and in fact the said amount has been fully and truly disclosed in the account and furthermore such amount has also been taken into consideration at the time of the preparation of balance-sheet and in computing the profit and loss account. It has further been argued that since the balance-sheet forms a part of the return, therefore, a duty or obligation was cast on the Income-tax Officer concerned to scrutinise the account properly. The said officer for his failure to act as he should have acted, cannot take shelter behind the Explanation to Section 147 of the Act. It was further contended that the said Explanation would apply only in those cases where reliance is placed on documents other than return. In support of the above contentions, reliance was first placed on the case of Union Carbide (India) Ltd. v. Income-tax Officer : [1973]87ITR529(Cal) .. In that case the assessee which manufactured dry electric batteries set up a new unit for manufacture of zinc strips. The zinc strips were used mainly for the production of the dry batteries. For the accounting years relevant to assessment years 1958-59 to 1961-62, the assessee claimed and was granted leave under Section 15C in respect of the new unit. In 1967 the assessee received notice under Section 148 in respect of those years on the ground that the leave under Section 15C had been wrongly granted. The records showed that the assessee had filed the profit and loss account and the director's report for the accounting years concerned, and specific figures of sales of the same company had been given. The affidavit filed by the Income-tax Officer showed that the notice had been issued in pursuance of the directions by the Central Board of Direct Taxes, that the new units set up for the manufacture of components for self-consumption would not qualify for exemption Under Section 15C. On those facts it has been held that there were no materials to indicate that the assessee had not disclosed fully and truly all material facts necessary for his assessment and the notice had been issued in pursuance of a direction by the Central Board of Direct Taxes and as a result of the desire to re-examine facts from an altered notion of law. Therefore, the reassessment proceedings had not been validly initiated and were liable to be quashed. It has further been held that a notice for reassessment can be issued under Section 147(a) only if the following conditions are satisfied:

(1) the Income-tax Officer issuing the notice must hold the belief that, due to the omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for the assessment, income in fact has escaped assessment; and

(2) there must be materials or reasons for the aforesaid belief. Existence of the belief and existence of materials for the belief can both be challenged in proper proceedings and if the challenge is thrown, it is for the income-tax authorities to satisfy the court that the Income-tax Officer held the belief and that there were reasons to hold such belief. If there are reasons or materials, the sufficiency of such reasons or materials cannot be investigated by the court and production of books of account or other evidence would not absolve the assessee from the obligation to fully and truly disclose all material particulars relevant for the assessment. Whether there were materials before the Income-tax Officer or whether he formed the belief or not must be judged by the court either from the affidavit filed by the Income-tax Officer or from the records of the department, if produced before the court.

11. The other case which was relied on in support of the above contentions is the case of Income-tax Officer v. Calcutta Chromotype Ltd. : [1974]97ITR55(Cal) . In that case the Income-tax Officer issued notice to the assessee-company under Section 148 of the Act, in respect of the assessment years 1960-61, on the ground that the profits on sale of machinery were not disclosed by the assessee. The assessee obtained a rule challenging the notices on the ground that there was no omission or failure to disclose that item in the course of the original assessment because in the balance-sheet which was submitted as part of the return for the relevant year, there was not only an entry showing on the liabilities side under the head 'machinery sales suspense' an amount of Rs. 2,17,214.50, but also in that balance-sheet there was a note in these terms: 'Machinery sales suspense Rs. 2,17,214.50. This amount represents the sale proceeds of certain old machinery. The original cost of the machinery is not available at the moment and, therefore, the profit or loss on the said amount cannot be ascertained for the present; the management prefers not to show this amount as a deduction from the value of the relative assets, until the said profits or loss is ascertained', and below that note on the auditor's report to the shareholders in that balance-sheet, it had been said that the balance-sheet and the trading and profit and loss account were in agreement with the books of account. It was also contended that during the original assessment proceedings, as desired by the Income-tax Officer, a representative of the assessee gave a list of the machinery which were sold during the relevant previous year and the officer duly considered the accounts and the statements which were produced in the course of the assessment proceedings. On these facts it was held that the contentions of the revenue were rightly negatived on the basis of the Explanation to Section 147 that production before the Income-tax Officer of the books of accounts and other evidence from which imteripal evidence could with due diligense have been discovered by the Income-tax Officer will not necessarily amount to disclosure within the meaning of Section 147. Explanation 2 to Section 147 was confined to cases of books of account and other evidence which are produced in the course of assessment proceedings but the balance-sheet had to be filed along with the return by virtue of the provisions of Rule 19 of the rules framed under the Indian Income-tax Act, 1922, and that makes the balance-sheet so filed part of the return itself. It was further held in the facts of that case that even if the balance-sheet was viewed as no more than a statement of accounts or evidence, even then the note that had been appended to the balance-sheet concerningthat particular entry which the auditors in the report had certified to be in accordance with the books of account by itself would be much more than the mere books of account and the disclosure of the state of things to the further knowledge of the assessee. Moreover, during the assessment proceedings as desired by the Income-tax Officer, a detailed list of the old machinery sold was produced. That detailed list, taken with what appeared in the balance-sheet both in the entry and in the note appended, were enough to show that the assessees had done their duty to disclose all material facts within their knowledge, and the officer had formed his opinion as to how to act on those materials. A person cannot be said to have omitted or failed to disclose something when of such thing he had no knowledge. Lack of knowledge of any further detail was asserted before the Income-tax Officer at the original assessment and he had accepted that confession of ignorance and acted upon it. By saying that he should not have acted that way, the Income-tax Officer who issued the notice under Section 148 was really acting on a different opinion regarding the same facts and as such it was found that there had not been any omission to disclose material facts to entitle the officer to reopen the assessment.

12. It was thereafter argued that a belief which in the instant case is the basis for initiation of the proceedings must be the belief of an honest and a reasonable man and since the reasons for such initiation are non-existent, there could not be any belief as, admittedly, the officer concerned in the instant case has stated reasons or facts which are non-existent. In short, it was argued that, on the materials as available, no reasonable person could have formed the belief that income has escaped assessment and in fact there is no omission, failure or escapement. It was contended that the existence of the belief is justiciable. In support of the above contentions reliance was placed on the case of S. Narayanappa v. Commissioner of Income-tax : [1967]63ITR219(SC) . In that case it has been held that two conditions must be satisfied in order to confer jurisdiction on the Income-tax Officer to issue the notice under Section 34 of the Indian Income-tax Act, 1922, in respect of assessments beyond the period of four years, but within a period of eight years, from the end of the relevant year, viz., (i) the Income-tax Officer must have reasons to believe that income, profit or gains chargeable to income-tax had been under-assessed ; and (ii) he must have reasons to believe that such 'underassessment' had occurred by reason of either, (a) omission or failure on the part of the assessee to make a return of his income under Section 22, or (b) 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 noticeunder the section. 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-Officer to issue the notice under Section 34 of the Act. 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 beliel. It has also been held that the expression 'reason to believe' in Section 34 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. It is open to the court to examine whether the reasons for the belief have a rational connection with 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. It has also been held that proceedings for assessment or reassessment under Section 34(1)(a) start with the issue of a notice and it is only after the service of the notice that the assessee, whose income is sought to be assessed or reassessed, becomes a party to those proceedings. The earlier stage of the proceedings for recording the reasons of the Commissioner are administrative in character and are not quasi-judicial. There is no requirement in any of the provisions of the Act or any section laying down as a condition for the initiation of the proceedings that the reasons which induced the Commissioner to accord sanction to proceed under Section 34 must also be communicated to the assessee. The Income-tax Officer need not communicate to the assessee the reasons which led him to initiate the proceeding under Section 34. The next case on which reliance was placed in support of the above contentions is the case of Calcutta Discount Co. Ltd. v. Income-tax Officer : [1961]41ITR191(SC) ., wherein it has been held per majority that:

(i) The question whether sale of shares were by way of changing the investments or by way of trading in shares had to be decided on a consideration of different circumstances, including the frequency of the sales, the nature of the shares sold, the price received as compared with the cost price, and several other relevant facts. It was the duty of the assessee-company to disclose all the facts which have a bearing on the question; but whether the assessee had the intention to make a business profit as distinguished from the intention to change the form of the investments, wasreally an inference to be drawn by the assessing authority from the material facts taken in conjunction with the surrounding circumstances. The law did not require the assessee to state the conclusion that could reasonably be drawn from the primary facts. The question of the assessee's intention was an inferential fact and so the assessee's omission to state its 'true intentions behind the sale of shares' could not be considered to be a failure or omission to disclose any material fact within the meaning of Section 34.

(ii) Whether the sales by an investment company should in law be treated as trading transactions and the profits made from the sales are trading profits liable to tax, was a matter which it was the Income-tax Officer's task to decide and no duty lay on the company to admit that these transactions were by way of a trade.

(iii) The Income-tax Officer who issued the notices under Section 34 did not have any material before him for believing that there had been any material non-disclosure by reason of which an under-assessment had taken place. The Income-tax Officer had no jurisdiction to issue the notices after the expiry of four years from the end of the assessment year, and the company was, therefore, entitled to an order directing the Income-tax Officer not to take any action on the basis of the notices.

13. It was also held that:

(1) to confer jurisdiction under Section 34 to issue notice in respect of assessments beyond the period of four years, but within the period of eight years, from the end of the relevant year, two conditions had to be satisfied. The first was that the Income-tax Officer must have reason to believe that the income, profits or gains chargeable to income-tax had been underassessed. The second was that he must also 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 return of his income under Section 22, or (ii) omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment for that year. Both these conditions were conditions precedent to be satisfied before the Income-tax Officer could have jurisdiction to issue a notice for the assessment or reassessment beyond the period of four years but within the period of eight years, from the end of the year in question ;

(2) the words 'omission or failure to disclose fully and truly all material facts necessary for his assessment for that year' used in Section 34 postulated a duty on every assessee to disclose fully and truly all material facts necessary for assessment which differed from case to case. In every assessment proceeding, the assessing authority would, for the purpose of computing or determining the proper tax due from an assessee, require to know all the facts which help him in coming to a correct conclusion. From the primary facts in his possession, whether on disclosure by the assessee, or disclosure by him on the basis of the facts disclosed, or otherwise, the assessing authority had to draw inferences as regards certain other facts; and ultimately from the primary facts and the further facts inferred from them, the authority had to draw proper legal inferences and ascertain, on a correct interpretation of the taxing enactment, the proper tax leviable; so far as primary facts were concerned, it was the assessee's duty to disclose all of them including particular entries in account books, particular portions of documents, and documents and other evidence which could have been discovered by the assessing authority from the documents and other evidence disclosed. The duty, however, did not extend beyond the full and truthful disclosure of all primary facts. Once all primary facts were before the assessing authority, it was for him to decide what inferences of facts could be reasonably drawn and what legal inferences had ultimately to be drawn. It was not for anybody else--far less the assessee--to tell the assessing authority what inferences, whether of facts or law, should be drawn;

(3) If there were in fact some reasonable grounds for the Income-tax Officer to believe that there had been any non-disclosure as regards any primary 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 were adequate or not for arriving at the conclusion that there was a nondisclosure of material facts, was not open for the court's investigation. In other words, all that was necessary to give this special jurisdiction was that the Income-tax Officer had, when he assumed jurisdiction, some prima facie grounds for thinking that there had been some non-disclosure of material facts. It was the duty of the assessee, inviting the court to hold that jurisdiction was lacking, to establish that the Income-tax Officer had no material at all before him for believing that there had been such non-disclosure; and

(4) the question whether the Income-tax Officer had reason to believe that under-assessment had occurred by reason of non-disclosure of material facts was not a mere question of limitation only but was a question of jurisdiction which could be investigated by the High Court in an application under Article 226 of the Constitution.

14. It was next argued by Dr. Pal that Section 147 of the Act speaks of compliance with the provisions of Sections 142 to 153 of the Act and in the instant case such compliance is lacking. Referring to the reasons for the initiation of the proceeding as quoted hereinbefore, it was further contended by him that there is also no material for justifying initiation of proceeding in respect of ground (2) at least and in that case also the alleged materials on which belief has been formed and as disclosed in the said reasons do notexist in fact. It has further been argued by him that when the existenceof the materials has been challenged, the officer concerned must satisfy thecourt that such reasons do exist, the more so, when challenge has beenthrown on this jurisdictional fact, the court must investigate the same. Insupport of his above submissions Dr. Pal first relied on the case ofP.K. Nair v. Income-tax Officer : [1973]90ITR512(Ker) . In that case the petitioner filed a writpetition challenging the notices under Section 148 in respect of certain assessment years. The basis on which the notices were issued to the assesseewas that the Income-tax Officer had reasons to believe that income amounting to Rs. 2,54,740 had escaped assessment for the five assessment yearsfrom 1950-51 to 1954-55 and that such amount had to be assessed asincome and the escapement for the assessment years concerned had been atthe rate of Rs. 50,950 for each year. It has been held on the facts of thatcase that the notices were issued on October 12, 1965, viz., eight yearsafter the close of the latest of the assessment years in question. In such acase, under Section 149 reassessment proceedings can be commenced only ifthe Income-tax Officer had reasons to believe that income chargeable totax which had escaped assessment amounted or was likely to amount toRs. 50,000 or more for that year. For any action for any assessment year,the omission or failure must relate to that year and income that escapedassessment must also be 'for that year'. It has not been found thatincome amounting to Rs. 50,000 or which is likely to amount to Rs. 50,000had escaped assessment for that year and on the facts it has further beenfound that the requirements under Section 147(a) read with Section 149 hadnot been satisfied and the Income-tax Officer as such had no jurisdictionwhatsoever to initiate reassessment proceedings for the said 5 years. Suchview was taken as there was nothing to indicate that in any particularyear, out of the years 1950-51 to 1954-55, income in excess of Rs. 50,000had escaped assessment. In view of the above the court quashed thereassessment notices and the consequent assessments which were made. Insupport of his submissions that 'materials must be there', Dr. Palrelied on the case of Manik Chand Nahata v. Income-tax Officer : [1970]78ITR204(Cal) , wherein ithas been observed that the expression 'likely to amount to' a lakh ofrupees or more in Section 34 of the Act of 1922 means that the Income-taxOfficer must form some kind of belief or even a suspicion that the amountof escaped income for the year may amount to rupees one lakhor more in the aggregate before the notice under Section 34 is issued.Where there is material in the records 'of the case to establish that theamount of escaped income amounted to rupees one lakh or more, theIncome-tax Officer would have no right to reopen the proceedings under the ,old Act beyond the expiry of eight years from the relevant assessment year.It has thus been observed that the Income-tax Officer cannot issue a noticetinder Section 148, in order to reopen the assessment of an assessee in acase where the right to reopen the assessment was barred under the 1922Act at the date when the new Act came into force, i.e., April 1, 1962, andSection 297(2)(d)(ii) of the 1961 Act does not revive the right of an Income-tax Officer to reopen the assessment which is already barred under the Actof 1922. This view has been followed by the Punjab and Haryana HighCourt in the case of Fateh Chand Jairam Das v. Commissioner of Income-tax on which Dr. Pal has also placed reliance. In that case it has been saidthat the language of Clause (ii) of Sub-section (1) of Section 149 is veryclear that where the Income-tax Officer has reasonable grounds to believethat the income that was likely to have escaped assessment would be morethan Rs. 50,000 and issues notice under Section 149, the reassessment proceedings would be valid even if the ultimate assessed income is less thanRs. 50,000. On the question of the 'existence of the materials', Dr. Palfirst relied on the case of Raza Textiles Ltd. v. Income-tax Officer [1973] 87 ITR 939 . He citedthe case on the question of the High Court's power to interfere in a proceeding as initiated under Sections 147 and 148. In that case the appellant-company had remitted a sum of Rs. 2 lakhs as selling commission to a firmin Indonesia. Rejecting the appellant's contention that the firm was not anon-resident firm, the Income-tax Officer passed an order under Section 18(3B) and (7) of the Indian Income-tax Act, 1922, to pay tax on theamount remitted to the firm holding that the firm was a non-resident firm.The appellant's appeal to the Appellate Assistant Commissioner was rejectedas not maintainable since it had not complied with the conditions laid downin Section 30(1 A), viz., that the appellant should have deducted the tax andpaid the tax so deducted to the Government; and the Appellate Tribunalconfirmed the order of the Appellate Assistant Commissioner. The appellant filed a petition under Article 226 of the Constitution in the High Courtand the learned single judge, after going into the matter in detail, held thatthe firm was not a non-resident firm and the appellant was not required todeduct the tax at source from the remittance under Section 18(3B), andaccordingly set aside the order of the Income-tax Officer. A DivisionBench of the High Court, on appeal, held that the Income-tax Officer hadjurisdiction to decide the question whether the firm was non-resident andeither way there was material before him on that question and it could notbe said the officer assumed jurisdiction by a wrong decision on that question,and dismissed the writ petition. On'appeal, the Supreme Court held reversing the decision of the Division Bench, that the Income-tax Officer was notthe sole judge of the fact whether the firm was resident or non-resident,since that was a jurisdictional fact. If the High Court came to the conclusion, as the learned single judge had done in this case, that the Income-tax Officer had clutched at the jurisdiction by deciding the jurisdictional fact erroneously, then the appellant was entitled to a writ of ccrtiorari. It was further held that the provisions of Section 30(1A) which required that a person seeking to file an appeal thereunder must have first deducted tax at source and paid the tax deducted to the Government, could not apply to the case of a person contending that the person to whom he made the payment was not a non-resident. No authority, much less a quasi-judicial authority, can confer jurisdiction on itself by deciding a jurisdictional fact wrongly. The question whether the jurisdictional fact has been rightly decided or not is a question that is open for examination by the High Court in an application for a writ of certiorari. It is incomprehensible that a quasi-judicial authority like the Income-tax Officer can erroneously decide a jurisdictional fact and thereafter proceed to impose a levy on a citizen. On the scope of investigation in a proceeding like these with which we are concerned under Article 226 and in support of his submission that when existence of the belief has been challenged the High Court can look into the same, Dr. Pal relied on the case of Kanji Ranchhod v. Commissioner of Income-tax : [1966]61ITR339(Guj) .. In that case in a proceeding for reassessment under Section 34 of the Indian Income-tax Act, 1922, it was contended that though the court cannot investigate into the adequacy or otherwise of the grounds on which the reasons to believe on the part of the Income-tax Officer rests, the assessee is entitled to show that there was no material at all on which the Income-tax Officer could found such belief, that is, have reason for such belief. If, therefore, an assessee is in a position to show that he had disclosed at the time of the original assessment all that he was bound to disclose, i.e., all the primary facts relevant to or having a bearing on his assessment, there would be no ground for the Income-tax Officer to have reason to believe that there was any omission or failure on the assessee's part to disclose. Similarly, if an assessee can show that though there was failure or omission to disclose on his part, such failure or omission had resulted in any non-assessment or under-assessment, etc., there would be no ground for the Income-tax Officer to have reason to believe that there was non-assessment or under-assessment, etc., consequent upon such omission or failure and the proceedings initiated on such wrong belief would be invalid.

15. In that case the Income-tax Officer discovered that the assessee had omitted to disclose a credit entry of Rs. 21,352 during the accounting year, and believing that owing to this non-disclosure the income had escaped assessment, reopened the assessment under Section 34. He found that the entry of Rs. 21,352 was not a receipt during the year but was only a carry forward entry of a deposit made in earlier years. He did not include this item on reassessment but added a different sum of Rs. 13,300 being the total of cash credits standing in the assessee's books to the credit of a member of the assessee's family treating these credits as income of the assessee from undisclosed sources. It was held that as the belief of the assessee that income had escaped assessment was based on the fact that the assesses had failed to disclose a particular entry and the nature of the entry was such that its disclosure could have had no bearing on the amount to be assessed, the belief of the Income-tax. Officer that income had escaped was based on no material and the proceedings under Section 34 in which the reassessment including the sum of Rs. 13,300 was made were invalid. In support of his argument on the question of the. formation of the belief, Dr. Pal also relied on the case of Sheo Nath Singh v. Appellate Assistant Commissioner of Income-tax : [1971]82ITR147(SC) . In that case, in 1944, the assessee, who was a shareholder of a number of companies and also the director and managing director of various companies, sold his shareholding in the Associated Hotels for Rs. 20,65,705. Similarly, in 1949, he sold his holdings in another hotel. He disclosed to the Income-tax Officer during the assessment year 1945-46 receipt of that sum which was held to be a capital receipt. Subsequently, the Income-tax Officer issued notices under Section 34(1A) of the Indian Income-tax Act, 1922, in respect of assessment years 1940-41 to 1946-47 and in spite of the objection of the assessee that the Income-tax Officer had no jurisdiction to issue notices, the officer made assessments in respect of assessment years 1942-43, 1943-44, 1944-45 and 1945-46. On appeal, the Appellate Assistant Commissioner called for a report, inter alia, regarding what fresh material was before the Income-tax Officer to satisfy him that a sum of Rs. 20 lakhs which was previously treated as capital should be treated as income. In 1961, the assessee filed a writ petition in this court claiming that the only material before the officer consisted of the fact of the receipt of a sum of about Rs. 22 lakhs which had already been disclosed, and that there was no other material before him. The department merely denied this in its affidavit. The High Court sustained a preliminary objection that because the assessee had filed appeals to the Appellate Assistant Commissioner, he could not pursue the writ petition, and yet decided the question regarding satisfaction of the pre-conditions under Section 34(1A). On appeal to the Supreme Court, the department produced the report of the Income-tax Officer to the Central Board of Revenue which contained the following reasons :

'(i) the assesses who is or was at the relevant time the managing director in about a dozen limited companies along with 'Oberois' is believed to have made some profits which were not offered for assessment.

(ii) the assessee is believed to have received a sum of Rs. 22 lakhs from 'Oberois' and this sum or at least a part of which represents income which has escaped assessment.'

16. It was held by the Supreme Court that the two reasons given for the belief formed by the Income-tax Officer hopelessly failed to satisfy the requirements of Section 34(1A). The so-called reasons were stated to be beliefs thus leading to an obvious self-contradiction. There was no material or fact which had been stated on which any belief could be founded of the nature contemplated under Section 34(1A) and the notices were liable to be quashed. It was further found that the words 'reasonto believe' suggest that the belief must be that of an honest and reasonable person based upon reasonable grounds and that the Income-tax Officer may act on direct or circumstantial evidence, but not on mere suspicion, gossip or rumour. The Income-tax Officer would be acting without jurisdiction if the reason for his belief that the conditions are satisfied does not exist or is not material or relevant to the belief required by the section. The court can always examine this asp-jet though declaration or sufficiency of the reasons to believe cannot be investigated by the court. Lastly, Dr. Pal relied on the Full Bench decision in this court in the case of Lakhmani Mewal Das v. Income-tax Ojficer : [1975]99ITR296(Cal) [FB]. In that case, in the income-tax assessment for the assessment year 1958-59 made on June 14, 1960, the petitioner-assessee's claim for deduction of Rs. 10,494-4-3 said to have been paid as interest to certain creditors was allowed. On March 14, 1967, the asscssee received a notice dated March 8, 1967, issued under Section 148 by the Income-tax Officer, calling upon him to submit a return for the aforesaid assessment year as the Income-tax Officer had reason to believe that the income of the petitioner had escaped assessment within the meaning of Section 147. The petitioner filed a writ petition challenging the notice. The case of the revenue was that, subsequent to the assessment for the assessment year 1958-59, it was discovered that there were hundi loan credits in the names of various persons who were known namelenders, and also a hundi loan credit in the name of one M, who had since confessed that he was doing only name-lending, that in the original assessments these credits were not investigated in detail and that in view of the subsequent information about the bogus nature of the credits, action under Section 147(a) was called for. The assessee's case was that at the time of the original assessment, he had produced his balance-sheet and profit and loss account for the relevant year, that he had also produced the loan account of each and every creditor from whom hehad taken the loans and the confirmatory letters of the said creditors and the discharged hundies and that the assessee had discharged his duty completely as soon as he disclosed all the material facts necessary for the assessment, and that he was under no obligation to help the Income-tax Officer in making his original assessment. If the Income-tax Officer committed an error, he could not, on subsequent information, make use of the machinery under Section 147(a) for reopening the assessment. Whether the said failure of the assessee to disclose facts truly and fully was sufficient ground or not for initiation of the proceeding under Section 147(a) came up for consideration and it was held by the Full Bench of this court that Section 34(1)(a) of the Indian Income-tax Act, 1922, and Section 147(a) of the Income-tax Act, 1961, cast a duty upon an assessee not merely of disclosing fully and truly all material facts but also of disclosing them truly. It has been observed that the assessee is under obligation not to mislead the assessing officer by disclosing certain things which do not represent facts. If the Income-tax Officer finds reason to believe that escapement of income is caused by the fact that the assessee did not disclose the material facts truly, it would give him jurisdiction to reopen the assessment. It has also been held in that case that where the Income-tax Officer treats certain hundi transactions as genuine on the basis of the documents disclosed but after the closure of the assessment he finds reason to believe that the documents produced in support of the transaction are spurious and the creditors are merely name-lenders, assessment can be reopened. It has also been held that where notice under Section 148 is issued without proper satisfaction of the Commissioner on the reasons recorded by the Income-tax Officer, though not made out specifically in the petition, can be allowed to be raised at the time of hearing. This serious defect in the proceedings cannot be ignored on the technical ground of not including it in the petition. It has also been held that before a notice to reopen the assessment is issued, the Income-tax Officer must apply his mind to the facts of the case and must state that by reason of information mentioned in the report he has come to the conclusion that certain income has escaped assessment. The Commissioner must also record his satisfaction that the case is fit for reassessment. The notice issued without application of mind and with the substitution of the form for substance is without jurisdiction. Dr. Pal also relied on the case of State of Madhya Pradesh v. Sardar D.K. Yadav, AIR 1968 SC 1186 for the proposition that where the jurisdiction of an administrative authority depends upon a preliminary finding of fact, the High Court is entitled, in a proceeding for a writ, to determine upon its own independent judgment whether or not that finding is correct. Dr. Pal also argued that on the reasons as disclosed no belief could be formed.

17. Mr. B.L. Pal, the learned advocate appearing for the respondents, first took us through the order of the learned trial judge and submitted that the scope of investigation in this appeal is very limited and no determination should be made on points which were neither argued before the learned trial judge nor referred to or noted in his judgment. In any event, he submitted that no point having been taken or urged on the question of sanction or satisfaction of the Commissioner, such case can neither be agitated or adjudicated at this stage. Mr. Pal has raised the above point as the point regarding the Commissioner of Income-tax's satisfaction was not taken in the petition but the same was sought to be raised in the appeal. Mr. Pal next relied on the reasons as disclosed and stated that the same was based on the report of Shri D.R. Chakravartty, Deputy Director of Enforcement Branch. He submitted that as the Income-tax Officer was, prima facie, satisfied from a reference to the said report about the existence of primary materials for forming the belief that income of the assessee has escaped assessment and as it has also been found by the learned trial judge that there was no proper or lawful disclosure of relevant materials, this court should not at this stage pass such an order which would thwart the enquiry. He further submitted that if the petitioner succeeds in proving before the Income-tax Officer at the time of the hearing of the proceeding that the belief was not duly or properly formed or the belief which was formed could not be the belief of a reasonable man and in fact there is no material for the formation of any belief adverse to them then certainly the proceeding as initiated would fail. On the scope, jurisdiction and power of the High Court to interfere in a case of reopening a reassessment, Mr. Pal first relied on the case of S. Narayanappa v. Commissioner of Income-tax : [1967]63ITR219(SC) . and then on the case of Kantamani Venkata Narayana and Sons v. First Additional Income-tax Officer : [1967]63ITR638(SC) . In the latter case the assessee presented writ petitions directing the Income-tax Officer to refrain from proceeding in pursuance of a notice of reassessment issued under Section 34 of the Indian Income-tax Act, 1922, for the assessment years 1940-41 to 1951-52 and it appeared from the affidavit of the officer concerned that considerable increase since 1938 in the investments in the money-lending transactions of the assessee and in its wealth had been discovered, the increase in wealth being wholly disproportionate to the known source of income of the assessee and no attempt was made by the assessee to furnish some reasonable proof of source of the additional wealth.

18. In that case it has been held that it is not necessary or imperative that a notice under Section 34(1) must specify under which of the clauses, Clause (a) or (b), it is issued. The main notice to be issued in a case under Section 34 is the notice under Section 22(2) and Section 34 merely autho-rises the issue of such a notice. It has also been held that the assessee does not discharge his duty to disclose fully and truly material facts necessary for assessment of the relevant year by merely producing the books of account or other evidence. He has to bring to the notice of the Income-tax Officer particular items in the books of account or portions of documents which are relevant. Even if it be assumed that from the books produced that the Income-tax Officer, if he had been circumspect, could have found out the truth, he is not on that ground precluded from exercising the power to assess income which has escaped assessment. On the facts of that case it was held further that the Income-tax Officer had, prima facie, reason to believe that the assessee had omitted to disclose fully and truly all material facts and that in consequence of such non-disclosure income had escaped assessment; and he had, therefore, jurisdiction to issue the notices. It has further been held that in a proceeding under Article 226 of the Constitution of India challenging the jurisdiction of the Income-tax Officer to issue a notice under Section 34(1)(a), the High Court is only concerned to decide whether the conditions which invest the Income-tax Officer with power to reopen the assessment did exist; it is not within the province of the High Court to record a final decision about the failure to disclose fully and truly all material facts bearing on the assessment and consequent escapement of income from assessment and tax. The above view has been expressed by the Supreme Court after quoting the findings and determinations in the case of S. Narayanappa v. Commissioner of Income-tax. Since the case of Raza Textiles Ltd. v. Income-tax Officer is not a case either under Section 34 of the Act of 1922 or Section 147 of the Act of 1961, Mr. Pal distinguished the same on those accounts from the facts of the present case and contended that the findings and determinations made therein would have no application to the facts of the present proceedings. Similarly, Mr. Pal submitted that the case of State of Madhya Pradesh v. Sardar D.K. Yadav is not one involving question of 'reason to believe by the authority' and, furthermore, since on the question of 'prima facie belief' a finding has to be arrived at under Section 5(c) of the Madhya Bharat Abolition of Jagirs Act so the determinations made therein have also no application to the present case. Mr. Pal next contended that since the determinations in the case of Kanji Ranchhod v. Commissioner of Income-tax was made on October 1, 1966, and long prior to the date of determination of the case of Kantamani Venkata Narayana and Sons v. First Additional Income-tax Officer these determinations will not hold good now. It may be mentioned that although the determination in the latter case was made on October 27, 1966, but there was no reference in the judgment to the former case. Relying on the former case Mr. Pal submitted that even on the basis of the same, the existence of a primary fact will be an objective fact which the court can investigate, but once that fact is found to exist, and the Income-tax Officer reasonably believes that there was non-disclosure and that such non-disclosure resulted in non-assessment, under-assessment, etc., the court cannot investigate into the adequacy or otherwise of his reasons to come to that belief and the initiation of a proceeding for reopening and reassessment in such a case would be valid.

19. Mr. Pal next relied on the Full Bench decision of the Gujarat High Court in the case of Poonjabhai Vanmalidas and Sons v. Commissioner Income-tax, : [1974]95ITR251(Guj) for the purpose of establishing that the determinations made in the case of Kanji Ranchhod v. Commissioner of Income-tax, is also no longer good law and the same has specifically been overruled in and disapproved by the said Full Bench decision.

20. In the said Full Bench case, the fact was that on July 1, 1944, inS.Y. 2000, the previous year relevant to the assessment year 1945-46, thekarta of an assessee-Hindu undivided family entered into an agreement tosell a portion of a plot of land to N and Co. of Wadhwan. A sum ofRs. 3,05,000 was to be paid as earnest money in two instalments. Thefirst instalment of Rs. 1,05,000 was paid on May 14, 1944, for which areceipt was passed. A further sum of Rs. 2,00,000 was paid on July 1,1944. Out of the aggregate sum of Rs. 3,05,000 received, the assesseeshowed in his books of account only a sum of Rs. 78,000 by a credit entrymade three days prior to the close of the accounting year. Under theterms of the agreement of sale, if the purchaser failed to complete the saleon or before October 1, 1944, the vendor was to be entitled to forfeit theearnest money paid to him and time was to be of the essence of the contract. The purchaser did not complete the contract on the date fixed. OnNovember 13, 1944, the assessee's pleader wrote to the purchaser that asthe purchaser had not completed the contract on the due date, the assesseehad exercised the right of forfeiture and the amount of Rs. 3,05,000 stoodforfeited on November 18, 1944. N, who was the sole proprietor of N andCo., replied that he was striving hard to raise the balance, that the assessee should grant an extension for 15 days from November 18, and that theforfeiture might stand good if the sale was not completed by then. At thetime when the original assessment was completed on January 23, 1947, theagreement under which the assessee had purchased the land, the agreementto sell a portion of this to N and Co., the receipt for the payment ofRs. 1,05,000 and the relevant correspondence and the reply were all produced before the Income-tax Officer. No reference was made in thatassessment order to the transaction of the amount of Rs. 3,05,000 but the Income-tax Officer placed among the records a note of the same date, January 23, 1947, referring to the explanation of the assessee for crediting in the accounts an amount of Rs. 78,000 only out of the total Rs. 3,05,000 and noting that the matter had not yet been finally settled between the assessee and the purchaser and that the assessee was still in possession of the land.

21. In 1953, after the integration of the State of Wadhwan with India, at the request of the Income-tax Officer of Ahmedabad, the Income-tax Officer of S, who had jurisdiction over Wadhwan town, recorded the statement of N to the effect that N had given a loan of Rs. 2,00,000 which had been repaid in the middle of S.Y. 2002, and that the loan had been given from his personal fund and not from N and Co. In view of this statement which was materially different from the materials furnished by the assessee at the time of the assessment, the Income-tax Officer served a notice on the assessee on March 30, 1954, under Section 34(1)(a) of the Act. The assessee filed a return under protest. The statements of N and his brother-in-law, K, were recorded on commission in the absence of the assessee. The karta of the assessee-family was also examined. The Income-tax Officer then made a reassessment order on March 19, 1955, taxing the sum of Rs. 3,05,000 as income from undisclosed sources. Ultimately, the Appellate Tribunal held that the quantum of undisclosed income in the year of account was Rs. 1,78,000 and the appeal was partly allowed. On a reference it was held that the issue of the notice under Section 34(1)(a) was not justified. The Income-tax Officer himself, when he made the original assessment, was not fully satisfied with the explanation given by the assessee regarding the receipt of Rs. 3,05,000 and the note placed by him in the records shows that he treated the whole transaction with a certain degree of suspicion. All the facts from which the necessary inference could be drawn were before him. It was not for the assessee to point out what possible inference could be drawn by the Income-tax Officer making the original assessment at the time when the assessment was made in 1947. The only obligation on the assessee was to place all the primary facts before the Income-tax Officer. It was open to the Income-tax Officer to draw an inference adverse to the assessee when he passed the order on January 23, 1947, and to bring to tax the amount of Rs. 3,05,000. In the circumstances, the question whether this particular transaction between the assessee and N and Co. was genuine or not was an inference of fact to be drawn from the primary facts placed before the Income-tax Officer at the time when he passed the order in 1947. The assessee was under no obligation to instruct the Income-tax Officer about the other inferences which it was possible for the Income-tax Officer to draw, viz., that the transaction between him and Nand Co. could possibly he held to be a bogus transaction. Merely because the Income-tax Officer in 1947 raised an inference which he subsequently regarded as erroneous, the proceedings under Section 34(1)(a) could not lie. The fact that it was because of the proceedings started by the Income-tax Officer at S that the matter came to the knowledge of the Income-tax department, would not enable the Income-tax Officer to invoke the provisions of Section 34(1)(a). So far as the provisions of Section 34(1)(a) are concerned, it is the conduct of the assessee that has to be looked into and not whether the Income-tax Officer subsequently came to know some facts. It was only under Section 34(1)(b) that it would have been open to the Income-tax Officer to bring to his aid the information received from the Income-tax Officer at S for reopening the proceedings which had been completed in January, 1947.

22. It is clear from the cases mentioned hereinbefore which were cited at the Bar that the disclosure required or intended under Section 147 must be a full and true disclosure of all material facts. If the Income-tax Officer has reasons to believe that income, profits or gains chargeable to income-tax has been under-assessed and has also reasons to believe that the same has happened by reason of either omission or failure on the part of the assessee to make a return of his income or there has been a failure or omission on his part to disclose fully and truly all the material facts necessary for the assessment, he would have jurisdiction to issue the notice under Section 147. Both the conditions mentioned hereinbefore are conditions precedent to conferment of jurisdiction or to acquire the same by the Income-tax Officer. It is clear that if there are some reasonable grounds for the Income-tax Officer to form the belief that there has been any non-disclosure as regards any fact which might have a material bearing on the question or touching the validity or affecting the quantum of assessment, that would be sufficient to give jurisdiction to him to issue notice under Section 147. It is also clear that whether these grounds are adequate or not is not a matter for the court to investigate and the sufficiency of the grounds which induced the Income-tax Officer to act in the matter of initiation of proceedings is not justiciable. The assessee will, of course, be at liberty to contend that the officer concerned did not hold the belief that there has been nondisclosure. The existence of the belief of the officer can be challenged by the assessee but not the sufficiency of the reasons for the same. The belief as required in the section does not mean formation on the basis of pure subjective satisfaction of the officer concerned Such belief must be held in good faith and should not be a mere pretence. The formation of the opinion on the basis of such belief must not also be arbitrary or mechanical but the same should be the belief of a reasonable man. It will be open to the court to examine whether such reasons for the belief have a rational connection with or a relevant bearing to the formation of the belief and such formation is not based on irrelevent or extraneous considerations.

23. There is no necessity or any requirement under the relevant statute that the reasons which induced the authorities to initiate the proceedings or to accord necessary sanction should, as a precondition, be made available or communicated to the assessee. Under the section it is the duty of the assessee to disclose all the material facts which have a bearing on the question of assessment. What facts are material and necessary for assessment would differ from case to case. But, in every assessment proceeding, the Income-tax Officer would, for the purpose of computing or determining the proper tax due from an assessee, be entitled to know all the relevant facts which would help him in coming to a correct conclusion. It is clear that from the primary facts in his possession, whether on disclosure by the assessee or by disclosure by him on the basis of facts disclosed, or otherwise, the assessing authority has to draw inferences as regards certain other facts and ultimately from the primary facts and the further facts inferred from them, proper legal inferences will have to be drawn and from a correct interpretation of the taxing enactment, the proper tax leviable on the basis of such primary facts will have to be ascertained. As observed earlier, it is the assessee's duty to disclose all the relevant and material facts touching or affecting the assessment including particular entries in account, books, documents and other evidence which could have been discovered by the assessing authority from the documents, records and evidence as disclosed. Such duty, however, will not extend beyond the full and truthful disclosure of all primary facts and, once such facts are before the assessing authority, it is for him to decide what inferences of facts can be reasonably drawn and what legal inferences will ultimately have to be drawn. It is not for anybody else, far less for the assessee, to inform the assessing authority what inferences, whether of facts or law, should be drawn. If there are in fact some reasonable grounds for the officer concerned to believe that there has been any non-disclosure or omission as regards any primary fact, which could have a material bearing on the question of underassessment, that would be sufficient to confer jurisdiction on the said officer to issue notices under Section 147. It is of course not open to the court to investigate whether the grounds are adequate or not for arriving at the conclusion that there has been non-disclosure of material facts. All that is required for exercising special jurisdiction under the section is that when the Income-tax Officer assumes jurisdiction he must have some prima facie grounds for thinking that there has been some non-disclosure of material facts. The question whether the Income-tax Officer had no material at all before him for believing that there has been non-disclosure or that the formation of the belief that under-assessment has occurred by reason of non-disclosure of material facts, is not a mere question of limitation only but is a question of jurisdiction which can be investigated by the High Court in an application under Article 226 of the Constitution of India.

24. Section 147(a) of the Act of 1961 as also Section 34(1)(a) of the Act of 1922 casts an obligation upon an assessee not merely of disclosing fully and truly all material facts but also of disclosing them truly. The assessee is under an obligation not to mislead the assessing officer by disclosing certain things which do not represent true facts. If the officer concerned finds reason to believe that escapement of income has been caused by the fact that the assessee has not disclosed the material facts truly, that would give him jurisdiction to reopen the assessment. The assessment can be reopened even after the Income-tax Officer has treated certain transactions as genuine on the basis of the documents disclosed, but later on and even after the closure of the assessment, he finds that those documents were not genuine. It is necessary that before a notice to reopen the assessment is issued the officer concerned must apply his mind to the facts of the case. Any notice issued without due application of mind would be without jurisdiction.

25. Now, on the pleadings of the parties, the arguments as advanced and the determinations as mentioned hereinbefore, the first and foremost point or the moot point to be decided in this appeal is about the jurisdiction of the High Court in interfering with the initiation of a proceeding under Section 147. If the assessee succeeds in proving before the officer concerned at the time of the hearing that the belief was not duly or properly formed or the belief which was formed could not be the belief of a reasonable man and in fact there is no material for the formation of any belief adverse to the assessee, then the proceeding would fail. It is true that where the jurisdiction of an administrative authority depends upon a preliminary finding of fact, the High Court will be entitled, in a proceeding for a writ, to determine upon its own independent judgment whether or not that finding is correct. But in a proceeding under Article 226 of the Constitution of India challenging the jurisdiction of the Income-tax Officer, as has been found in the case of Kantamani Venkata Narayana and Sons v. First Additional Income-tax Officer, to issue a notice under Section 34(1)(a) of the Act of 1922, the High Court is only concerned to decide if the conditions which invested the officer with powers to reopen the assessment, did exist or not. As has been held in that case it will not be within the province of the High Court to record a final decision about the failure to disclose fully and truly all material facts bearing on the assessment and consequent escapement of income from assessment and tax. The determination in the case of State of Madhya Pradesh v. Sarday D.K. Yadav, as has been rightly submitted by Mr. Pal, is distinguishable on the facts of the present case. In a proceeding under Article 226 of the Constitution of India challenging the jurisdiction of the Income-tax Officer to issue a notice under Section 34(1)(a) of the Act of 1922, which is corresponding to Section 147 of Act of 1961, the High Court is only concerned to decide whether the conditions which invested the Income-tax Officer with power to reopen the assessment did exist or not and it is not within the competence or power of the High Court to record a final decision about the failure to disclose fully and truly all material facts bearing on the assessment and consequent escapement of income from assessment and tax. The existence of a primary fact will be an objective fact which the court can investigate but once that fact is found to exist and if the Income-tax Officer reasonably believes that there was non-disclosure and such nondisclosure has resulted in non-assessment or under-assessment, the court, Mr. Pal has rightly submitted, cannot investigate into the adequacy or otherwise of the reasons to come to such a belief. The decision in the case of Kanji Ranchhod v. Commissioner of Income-tax, as has been contended by Mr. Pal, can no longer be good law in view of the subsequent Full Bench decision in the case of Poonjabhai Vanmalidas & Sons v. Commissioner of Income-tax. In the said Full Bench decision it has again been reiterated that it is not for the assessee to point out what possible inference could be drawn by the officer concerned making the original assessment at the time when the same was made. The only obligation on the assessee is to place all the primary facts before the Income-tax Officer. The assessee is under no obligation to instruct the officer concerned about the inference which is possible to be drawn on the question of bogus nature of the transaction.

26. In this case, as will appear from the notice as set out hereinbefore, the basis for initiation of the proceedings under Section 147(a) was disclosure of some facts from the documents seized from the premises of the assessee-company for the periods as mentioned in the notice, particulars whereof have been set out hereinbefore. Mr. Pal, at the direction of this court, filed two documents dated 14th February, 1956, and 8th August, 1960, which according to him were the basis for formation of the bona fide belief by the Income-tax Officer about the non-disclosure of true and correct facts by the assessee which resulted in concealment of income and consequent evasion of tax. Mr. Pal made the said two documents available for inspection by the learned advocate for the assessee but made it categorically clear that the report of the Central Bureau of Investigation, which is also a basis for such formation of belief, cannot be made available to the assessee at this stage. Mr. Pal, of course, made it also clear that he has no objection to produce the said report for the perusal of the court for the purpose of assessing whether there is some material or any justification for the initiation of the proceedings. Claims and counter-claims were made at the Bar on the question of this court's power to look into those records and ultimately Dr. Pal, with his usual fairness, agreed that the court can, for an effective determination of the dispute, look into the said records to find out whether there is any material on record for enabling the Income-tax Officer to form the opinion or belief that there has been no true and faithful disclosure by the assessee as a result whereof there has been concealment and consequent under-assessment. Dr. Pal also agreed that this court, in these proceedings, should not look into or go into the sufficiency of evidence but if it is found that there is some evidence relevant to the issue, then the court cannot interfere. In view of the above submissions, Mr. Pal handed over to us the original report of the Central Bureau of Investigation, We have looked into the said records ourselves and we are satisfied that there are materials on the basis of which the Income-tax Officer could initiate the proceedings after having formed the required belief that an amount assessable to tax has escaped assessment by reason of the failure or omission of the assessee to make a true and faithful disclosure.

27. It may be mentioned that, apart from his argument that on the reasons as disclosed no belief could be formed, Dr. Pal further argued that no notice under Section 148 of the Act could be authoritatively issued in the instant case because of the restrictions imposed under Section 151(1) of the Act, the more so, as the sanction of the Board was not duly obtained. Dr. Pal, however, abandoned the said argument ultimately as it appeared that the Board was not made a party to the proceeding. We are also satisfied that the learned trial judge was right in holding that the non-disclosure of the 'Note' of the chartered accountants for the assessee at least in the balance-sheet as on December 31, 1953, can be considered as failure to disclose relevant and material facts fully and truly which could come within the mischief of the section for the purpose of reopening the assessment proceedings. We further hold that the subsequent disclosure of the report for initiating the proceedings and which constitutes the very basis for the formation of the belief is in substantial compliance with the requirements of the statute and the primary material, viz., the report of the Central Bureau of Investigation which is the basis for the formation of the belief and initiation of the proceedings, need not have been disclosed earlier. The said report shows that there is some basis for the Income-tax Officer to issue the notices under Section 147. From the said report and the pleadings of the parties it transpires that the Income-tax Officer had reasons to believe that the assessee was under-assessed due to the failure or omission to disclose truly and fully certain amounts which have escaped assessment. From the said report it further appears that there are allegations that the officer concerned had reasons to believe that the assessee was selling Oval-tine in India on consignment basis on behalf of Messrs. A. Wander Ltd. and was also (sic) of the Ovaltine propaganda department and so far as the allegations of such sale of Ovaltine on consignment basis on behalf of Messrs. A. Wander Ltd. In respect of the other portion of the report, in agreement with the learned trial judge, we hold that prima facie it cannot be said that there is no existence of some reason to believe that there was omission to disclose fully and truly some relevant materials during the assessment years in question, for which the assessee is said to be under-assessed.

28. In view of our findings, the contentions as raised by Dr. Pal fail and the appeal is dismissed. There will, however, be no order as to costs.

29. We, however, make it clear that we have not gone into the merits of the claims and counter-claims of the parties and we are not making any determination on the question of the proof or validity of the allegations forming the basis of the formation of opinion. As requested by Dr. Pal, we also make it clear that neither the assessee nor the learned advocates appearing for the assessee have been shown the report of the Central Bureau of Investigation.

S.K. Mukherjea, J.

30. I agree.


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