1. This appeal is directed against the judgment and order dated November 3, 1976, dismissing the application filed by the applicant and discharging the rule nisi issued under Article 226 of the Constitution.
2. The appellant is an assessee under the I.T. Act. The appellant used to take loans on khata peta, accounts in the usual course of business. In the aforesaid accounts, there were entries in the names of M/s. Surajmall Brijlal, M/s. Bharat Purchasing Company and M/s. Jhunjhunwalla & Sons Pvt. Ltd. in the accounting years relevant for the assessment years 1953-54 and 1954-55 which are the subject-matter of this appeal.
3. The appellant duly filed its return of income for the aforesaid assessment years. The ITO issued notices calling upon the appellant to furnish full details and particulars regarding the loans on the aforesaid khata peta accounts and interest paid on those loans. In compliance with those notices the appellant disclosed and furnished those particulars and details to the ITO.
4. On March 27, 1958, the ITO passed the assessment order for the assessment year 1953-54 and on March 19, 1959, he also passed the assessment order for the assessment year 1954-55. He also issued demand notices and in compliance thereof the appellant paid the assessed tax.
5. On January 31, 1968, the successor-ITO issued two notices under Section 148 of the I.T. Act, 1961, for the aforesaid assessment years, for, according to him, the income of the appellant had escaped assessment becauseof the failure of the appellant to disclose truly and faithfully all particulars relevant for the purpose of those assessments.
6. The appellant through its advocate wrote a letter to the ITO saying that all the primary facts were disclosed by the appellant to the ITO long before he completed the original assessments. By the aforesaid letter the appellant also demanded justice and requested the ITO to drop the proceedings. The appellant also filed returns for the aforesaid assessment years under protest.
7. The ITO did not accede to the said demand. Hence, the rule nisi was issued under Article 226 of the Constitution at the instance of the appellant. As already stated, the aforesaid application was dismissed and the rule nisi was discharged. The appellant has, therefore, filed this appeal.
8. It may now be noted here that the confessions of Shri Dwarka Prosad Agarwalla and his son were not placed before the learned judge and accordingly he did not get any opportunity to deal with those confessions in his judgment which is now under appeal before us.
9. The case of the ITO as stated in the affidavit is that on August 19,1966. Dwarka Prosad made a confession before the income-tax department that he had done name-lending business without actually advancing any money in the names of M/s. Surajmal Brijlal, M/s. Bharat Purchasing Company and M/s. Jhunjhunwalla & Sons Pvt. Ltd. which were under his direct control. The said confession was received by the ITO in September,1967, and on the basis of the said confession he had reopened the assessments.
10. As already stated, the confession of Dwarka Prosad was not produced before the learned judge who did not get any opportunity to deal with it. In these circumstances and in view of the aforesaid case of the ITO, we called for the aforesaid confessional statement of Dwarka Prosad which was produced before us by the department.
11. In his confessional statement Dwarka Prosad has not even mentioned the name of the appellant nor he has said anything about the loans on the khata Peta accounts. Dwarka Prosad has not also specifically said that he had done name-lending business in the names of the aforesaid concerns in the accounting periods which are the subject matter of the reassessment proceedings, although he has said that transactions prior to 1966 of the aforesaid concerns were bogus.
12. In his confessional statement, Dwarka Prosad has also referred to the confession of his son. The department has also produced the confession of the son of Dwarka Prosad before us. The son in his confessional statement, inter alia, said that the transactions of the aforesaid concerns with the appellant in the aforesaid accounting years were all bogus.
13. Reliance was placed by the learned counsel for the respondents on the aforesaid confessional statement of the son of Dwarka Prosad in support of the argument that the ITO not only took into consideration the confession of Dwarka Prosad but also of that his son and on the basis of these materials he had reopened the assessments.
14. But no such case has been made out in the counter-affidavits. The confession of the son of Dwarka Prosad is not even mentioned in the counter-affidavits. Further, the only case made out in the counter-affidavits is that the assessments were reopened on the basis of the confession of Dwarka Prosad. The argument of the learned counsel for the revenue that the ITO also took into consideration the confession of the son of Dwarka Prosad must, therefore, fail.
15. Dwarka Prosad in his confession has not even mentioned the name of the appellant. Further, there is nothing in his confession to show that it related to the loans to the appellant. These two facts, in our opinion are of pivotal importance, for, substantially on similar facts, assessment was sought to be reopened in the case of ITO v. Lakhmani Mewal Das : 103ITR437(SC) .
16. In the aforesaid case, there was an entry about the payment of Rs. 74-3-0 annas as interest in the books of the assessee in the name of Mohan Singh Kanayalal who made a confession that he was doing only name-lending. There was nothing to show that his confession related to the loan to the assessee and not to someone else, much less to the loan of Rs. 2,500 which was shown to have been advanced by Mohan Singh to the assessee. There was also no indication as to whether the confession of Mohan Singh related to the period which was the subject-matter of the assessment sought to be reopened. Now, at pages 448-9 of the report, the Supreme Court says thus :
' As stated earlier, the reasons for the formation of the belief must have a rational connection with or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Income-tax Officer and the formation of his belief that there has been escapement of the income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts. It is no doubt true that the court cannot go into the sufficiency or adequacy of the material and substitute its own opinion for that of the Income-tax Officer on the point as to whether action should be initiated for reopening assessment. At the same time we have to bear in mind that it is not any and every material, howsoever vague and indefinite or distant, remote and farfetched, which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment. Thefact that the words 'definite information' which were there in Section 34 of the Act of 1922, at one time before its amendment in 1948, are not there in Section 147 of the Act of 1961, would not lead to the conclusion that action can now be taken for reopening assessment even if the information is wholly vague, indefinite, farfetched and remote. The reason for the formation of the belief must be held in good faith and should not be a mere pretence.
The powers of the Income-tax Officer to reopen assessment, though wide, are not plenary. The words of the statute are ' reason to believe ' and not ' reason to suspect'. The reopening of the assessment after the lapse of many years is a serious matter. The Act, no doubt, contemplates the reopening of the assessment if grounds exist for believing that income of the assessee has escaped assessment. The underlying reason for that is that instances of concealed income or other income escaping assessment in a large number of cases come to the notice of the income-tax authorities after the assessment has been completed. The provisions of the Act in this respect depart from the normal rule that there should be, subject to right of appeal and revision, finality about orders made in judicial and quasi-judicial proceedings. It is, therefore, essential that before such action is taken the requirements of the law should be satisfied. The live link or close nexus which should be there between the material before the Income-tax Officer in the present case and the belief which he was to form regarding the escapement of the income of the assessee from assessment because of the latter's failure or omission to disclose fully and truly all material facts was missing in the case. In any event, the link was too tenuous to provide a legally sound basis for reopening the assessment. '
17. As already stated, there is nothing to show that the confession of Dwarka Prosad is in any way related to the loans to the appellant. Dwarka Prosad has not said anything about the entries appearing in the khata peta accounts of the appellant in the names of the aforesaid concerns which were the subject-matter of the assessments sought to be reopened by the ITO. There is also no livelink, not even any nexus, between the materials and the belief which the ITO is required to form under Section 147 of the Act.
18. The confession of Dwarka Prosad could not have, therefore, led to the formation of the belief that the income of the appellant had escaped assessment because of its failure or omission to disclose fully and truly all material facts. It must also be held that the pre-condition for reopening the assessments under Section 147(a) of the Act has not been satisfied in this case.
19. We, therefore, allow this appeal and set aside the judgment and order under appeal by following the aforesaid judgment of the Supreme Court.
20. The rule nisi is also restored and made: absolute. The impugnednotices and the subsequent proceedings under the impugned notices arealso quashed and set aside.
21. There will be no order as to costs.
22. The learned counsel for the revenue now frames the following questions and applies orally for leave to appeal to the Supreme Court :
' 1. When in the confessional statement Dwarka Prosad Jhunjhunwalla has stated that the transactions prior to 1966 were bogus, whetherunder such circumstances the confession can be relied upon as the materialfor reopening the assessment prior to 1966
2. When the confession of Dwarka Prosad Jhunjhunwalla refers to another confession of his son which has not been referred to in the affidavit of the Income-tax Officer, whether such confession can be looked into by the writ court under Article 226 of the Constitution particularly when in the said confession the specific year of the bogus transactions and the parties including the assessee are mentioned ?'
23. We reject the aforesaid application, for, we have looked into the confessional statement of the son of Dwarka Prosad and we have allowed this appeal by following the aforesaid judgment of the Supreme Court.
24. Operation of the ordering portion of this judgment will remain stayedonly for six weeks as prayed on behalf of the revenue.
R.N. Pyne, J.
25. I agree.