[1983] 140 ITR 1010 (CAL.)
HIGH COURT OF CALCUTTA
S.P. Agarwalla
v.
Income-tax Officer
A.N. SEN, CJ. AND M.M. DUTT, J.
ORIGINAL ORDER NO. 45 OF 1976
JULY 28, 1980
JUDGMENT
M.M. Dutt, J.—In this appeal, the appellant, S.P.
Agarwalla, carrying on a business under the name and style of M/s. S.P.
Agarwalla & Co., has challenged the propriety of the judgment of a learned single
judge of this court discharging the rule nisi obtained by the appellant on his
application under article 226 of the Constitution.
In the writ petition, the appellant had
challenged the validity of the notice dated September 26, 1969, issued by the ITO,
respondent No. 1, under section 148 of the I.T. Act, 1961. In the notice it was
stated by the ITO that the income of the appellant chargeable to tax for the
assessment year 1962-63 had escaped assessment within the meaning of section
147 of the I.T. Act, 1961. The appellant was directed to file a return of his
income for the said assessment year within 30 days of the date of the service
of the notice. Further, it was stated in the notice that the necessary sanction
of the Commissioner of Income-tax, West Bengal-III, had been obtained before
the notice was issued.
It was the case of the appellant that he had
truly and fully disclosed all -material facts in the return filed by him for
the assessment year 196263, and had produced all evidence in support of the
return before the ITO at the time of hearing of the assessment proceedings. The
ITO was satisfied and made the assessment accordingly. It was contended by the
appellant that there was no material before the ITO, respondent No. 1, to form
the reasonable belief that the income of the appellant had escaped assessment
on account of the failure of the appellant to disclose truly and fully all
material facts. The appellant challenged the said notice under section 148 of
the I.T. Act, 1961, as illegal, inoperative and void. It was contended that the
ITO had no jurisdiction to issue the impugned notice.
Respondent No. 1, who issued the impugned
notice under section 148, opposed the rule nisi issued on the writ petition of
the appellant by an affidavit-in-opposition. In para 11 of the
affidavit-in-opposition sworn to-by the ITO concerned, it has been stated as
follows:
"With
reference to paragraph 11 of the petition, I say that the assessee had shown to
have obtained an alleged loan of Rs. 63,000 from one Prahlad Roy Almal during
the previous year relevant to the assessment year 1962-63. The assessee had
filed a statement of account of the said Prahlad Roy Almal during the period
2017-18 Dewali, relevant for the assessment year 1962-63, accepting the said
Purported loan from Prahlad Roy Almal as genuine without any verification and
consequently alleged interest thereon was also allowed. In course of the
assessment proceedings of the subsequent years information was received from
the Inspecting Assistant Commissioner, Survey Range, Calcutta, inter alia,
to the effect that the said Prahlad Roy Almal had made a confession on 24th
November, 1965, admitting that he and his father were acting as namelenders in
order to accommodate the other parties to introduce in their books their own
unaccounted income in the form of bogus loans and all the loan transactions
shown in the name of Prahlad Roy Almal were bogus. The said Inspecting
Assistant Commissioner, Survey Range, Calcutta, also forwarded the copy of the
confession made by the said Prahlad Roy Almal. Further, on enquiry, it
transpired that the case meant for the assessment year 1962-63 of the said
Prahlad Roy Almal was completed by the Income-tax Officer, Special Circle-II,
on 27th February, 1967, under section 144 and in the assessment order for the
assessment year 1962-63 of the said Prahlad Roy Almal the said Income-tax
Officer had also recorded that the said Prahlad Roy Almal had confessed that he
did not carry on genuine moneylending business and lent his name without
lending any money for which he received commission from 3 annas to 4 annas per
hundred per annum. After considering the aforesaid materials I prima facie came
to the conclusion that the said alleged loan in the name of Prahlad Roy Almal
to the extent of Rs. 63,000 and the alleged interest thereon to the extent of
Rs. 1,652 was the suppressed income of the assessee which he purported to have
introduced by way of alleged loan through the medium of the said Prahlad Roy
Almal. In the premises aforesaid I had prima facie reasons to believe and I bona fide believed that due to the
omission and/or failure on the part of the petitioners to disclose fully and/or
truly all material facts necessary for the said assessment the income
chargeable to tax for the said assessment year 1962-63 had escaped assessment
and/or had been under-assessed. I, therefore, duly sent the proposal under
section 147 of the Income-tax Act, 1961, to the Commissioner of Income-tax,
West Bengal III, along with the letter dated 26th August, 1969. After obtaining
the necessary approval of the Commissioner of Income-tax, West Bengal III, I
duly issued the said notice under section 148 of the Income-tax Act, 1961, to
the assessee for the said assessment year 1962-63. Before issuing the said
notice I duly recorded my reasons. I shall crave leave to refer to the
communications received from the Inspecting Assistant-Commissioner, Survey
Range, Calcutta, confession made by the said Prahlad Roy Almal, assessment
order of Prahlad Roy Almal for the assessment year 1962-63, and the letter
dated 26th August, 1969, whereunder the proposal under section 147(a)
was forwarded to the Commissioner of Income-tax, West Bengal III, Calcutta, at
the hearing of this application.
The
learned judge came to the finding that there were sufficient materials before
the Income-tax Officer for the formation of the reasonable belief for reopening
the assessment for the assessment year 1962-63. In that view of the matter, the
learned judge discharged the rule nisi and dismissed the writ petition. Hence
this appeal."
Mr. Sanjoy Bhattacharjee, learned counsel
appearing on behalf of the appellant, has strenuously urged that there was
nothing on record to show that the ITO had in his possession relevant materials
to reopen the assessment for the assessment year 1962-63. He has specifically
drawn our attention to the reasons as recorded by the ITO before he issued the
notice under section 148. The learned judge also has referred to the following
reasons as recorded by the ITO:
"I
have reason to believe that by reason of failure on the part of the assessee to
disclose truly and fully all material facts necessary for this assessment at
the time of original assessment for the assessment year 1962-63, income
chargeable to tax has escaped assessment to the extent of Rs, 64,652 for that
year."
The reasons as recorded by the ITO do not
disclose the existence of any material on which he relied for the formation of
a reasonable belief for reopening the assessment for the assessment year
1962-63. It has been urged by Mr. Bhattacharjee that the recorded reasons must
disclose the material which is the foundation for the formation of the belief
of the ITO justifying the service of a notice under section 148 of the I.T.
Act, 1961. While, in our opinion, it is desirable that the material on which
reliance has been placed by the ITO for the issuance of a notice under section
148, the non-disclosure of such a material in the recorded reasons will not,
however, vitiate the notice, provided such material appears from the record and
there is evidence to show that the ITO had placed reliance on such material. Be
that as it may, we, however, fail to understand why the ITO has not referred to
the material in, the recorded reasons. In our opinion, merely quoting the
section will not satisfy the requirement of law. The reopening of an assessment
should not be lightly treated and the court will insist on the strict
compliance of the provision of law. No explanation has been given before us on
behalf of the respondents why the ITO did not refer to the material on evidence
upon which he had placed reliance before he issued the notice under section
148.
It is contended on behalf of the appellant
that the Commissioner should not have accorded sanction on the basis of the reasons
as recorded by the ITO. The appellant has, accordingly, challenged that the
sanction of the Commissioner permitting the ITO to issue the impugned notice
under section 148 was granted without Jurisdiction and the impugned notice
should be struck down on that ground alone.
The material that has been relied on by the
ITO in issuing the notice under section 148 appears to be the confessional
statement made by one Prahlad Roy Alma. It is apparent on the face of the
statement made by the ITO in para 11 of the affidavit-in-opposition that the
assessment has been sought to be reopened on the ground that the sum of Rs.
63,000 entered in the books of account of the appellant for the assessment year
1962-63, as loan taken from the said Prahlad Roy Almal including a sum of Rs.
1,652.38 alleged to be the interest paid by the appellant on the said sum was a
bogus transaction and the said Prahlad Roy Almal was dealing in a name-lending
business of fictitious loan transactions. The question whether such a
confessional statement constituted a material for the formation of the belief
by the ITO will be considered later. Now, we are concerned with the: question
whether the Commissioner was justified in according sanction for the issuance
of the impugned notice under section 148. If the records had not contained
anything except the recorded reasons of the ITO in that case, it should be held
that the Commissioner was not at all justified in according sanction. It may be
observed that the sanction, should not be granted by the Commissioner only,
mechanically, but before such sanction is accorded it is incumbent upon the
Commissioner to apply his mind to the material relied on by the ITO asking for
such sanction. The Commissioner is to consider the sufficiency and the relevance
of the material before he grants, or refuses to grant, the sanction. In the
instant case, the ITO had also sent a forwarding letter to the Commissioner
along with the recorded reasons. The body of the letter dated August. 26, 1969,
reads as follows:
"The
assessee named above had introduced a sum of Rs. 63,000 in his books of account
for the year 2018 Dewali, relevant for the assessment year 1962-63 in the name
of Prahlad Roy Almal of 35, Burtolla Street, Calcutta. The total credit in this
account was Rs. 64,652.38 including Rs. 1,652.38 charged as interest. As the
assessee did not disclose the true particulars regarding this account the same
was, accepted. It now reveals that Prahlad Roy Almal was not a genuine party
but only a name-lender. In the circumstances, I am enclosing herewith a
proposal under section 147(a) for reopening the assessment for the
assessment year 1962-63 for your kind approval."
The letter undoubtedly contains some more
particulars, but it is contended on behalf of the appellant that the letter
does not also refer to the confessional statement of the said Prahlad Roy
Almal. The existence of such a confessional statement is not in dispute and it
can be reasonably presumed that such a statement was in the records when the
Commissioner considered the grant of sanction for the issuance of the impugned,
notice under section 148. Indeed, the said confessional statement was received
by the ITO from the Commissioner. In these circumstances, it can also be
presumed that the Commissioner was in the know of such a confessional statement
made by the said Prahlad Roy Almal. We do not, therefore, think that the
sanction accorded by the Commissioner for the impugned notice under section 148
was granted without jurisdiction.
Now, we come to the more important point,
namely, whether the said confessional statement of Prahlad Roy Almal can be
said to be a relevant material justifying the ITO to issue the impugned, notice
under section 148. The confessional statement was not filed by the respondents
in the trial court. Mr. Sengupta, learned counsel appearing on behalf of the
respondents, has, however, produced before us a copy of the said confessional
statement. It appears that the statement made by the said Prahlad Roy Almal was
recorded in the form of questions and answers. The statement is dated November
24, 1965. According to the said Prahlad Roy Almal, his father was a registered
broker in gunny, hessians, etc., and he died on May, 16, 1965. His father also
had a bank account in the United Bank of India till two or three, months before
the date of the statement. The bank account was operated, by Prahlad Roy Alma1
even after his father's death. It is not clear from his statement how it was
possible for him to operate the bank account standing in the name of his
father. It was, however, alleged by him that he had been carrying on
name-lending business since 1958-59. He did not maintain any books of account
for such business. When he was asked to state the names and addresses of some
of the alleged borrowers who were still showing credits in his name in their
books of account, he only referred to the names of two companies and could not
mention the name of any other alleged borrowers on the ground that it was not
possible for him to say so, without looking into the files containing the
confirmatory letters, which had been seized by the I.T. Dept on November 17,
1965. It also appears from his statement that he had a good credit in the
market inasmuch as he could get an aggregate amount of loan of Rs.81,000 from one
Srinivas Bullewa in l953-54. Further, he had contracted other loans from the
market but he could not give the names of the parties from whom he had taken
such loans. Relying on the said confessional statement, the ITO, respondent No.
1, issued the impugned notice under section 148. The question that naturally
arises is whether this confessional statement is a material for the formation
of a reasonable belief by the ITO that the income of the appellant had escaped
assessment on account of his omission or failure to disclose truly and fully
all relevant facts. The principle of law in this regard is now well settled. In
the case of ITO v. Lakhmani Mewal Das [1976] 103 ITR 437, the
Supreme Court observed as follows (p. 448):
"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."
In Lakhmani Mewal Das's case [1976]
103 ITR 437 (SC), referred to above, one of the alleged name-lenders was one
Mohansingh Kanayalal. He also made a confessional statement on the basis of
which the assessment was reopened. The Supreme Court, while upholding the
majority view of the High Court striking down the notice reopening the
assessment, observed as follows (p. 447):
"We
may now deal with the first ground mentioned in the report of the Income-tax
Officer to the Commissioner of Income-tax. This ground relates to Mohansingh
Kanayalal against whose name there was an entry about the payment of Rs. 74,
annas 3, as entered in the books of the assessee, having made a confession that
he was doing only name-lending. There is nothing to show that the above
confession related to a 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 that person
to the assessee-respondent. There is also no indication as to when that
confession was made and whether it relates to the period from April 1, 1957, to
March 31, 1958, which is the subject-matter of the assessment sought to be
reopened. The report was made on February 13, 1967. In the absence of the date
of the alleged confession it would not be unreasonable to assume that the
confession was made a few weeks or months before the report. To infer from that
confession that it relates to the period from April 1, 1957, to March 31, 1958,
and that it pertains to the loan shown to have been advanced to the assessee,
in our opinion, would be rather farfetched."
The confession, that was made by the said
Mohansingh Kanayalal in Lakhmani Mewal Das's case [1976] 103 ITR 437
(SC), was to the effect that he was doing only name-lending business. Mr. Sengupta
has sought to distinguish the confessional statement made by the said
Mohansingh Kanayalal in the Supreme Court case and that made by the said
Prahlad Roy Almal in the instant case. It is submitted by him that the
confession of Mohansingh Kanayalal that he was doing it only name-lending
"means that all his transactions were not bogus or name-lending
transactions. In other words, it is his contention that the word" only
"does not mean all"; on the other hand, he submits, Prahlad Roy Almal
has confessed that all the loan transactions were bogus. We are unable to
accept this distinction as sought to be made by the learned counsel. We do not
find any difference in meaning between the word only "used in the
statement of Mohansingh Kanayalal, and the word all" occurring in the
statement of Prahlad Roy Almal. In both the cases, in our opinion, the
confession was that all the loan transactions were not genuine and they carried
on name-lending business. Thus, the facts in the case of Lakhmani Mewal Das
[1976] 103 ITR 4371 (SC) and in the instant case are more or less similar so
far as the confessional statement in either case are concerned. Prahlad Roy
Almal did not at all refer to the name of the assessee who is the appellant
before us. There is, therefore, no direct nexus or live link between the
confessional statement of Prahlad Roy Almal and the formation of the belief of
the ITO that the income of the appellant has escaped assessment. In the absence
of a direct nexus or live link, such confessional statement will not constitute
a relevant material justifying the reopening of the assessment. In this
connection, it should not be lost sight of that one ITO had, after considering
the evidence that was produced by the assessee before him, believed his case of
incurring; of loan of the said sum of Rs. 63,000. Unless, therefore, there is
some material pointing to the assessee in regard to the alleged transaction,
the ITO will not be justified to reopen the assessment by a notice under
section 148. The belief that is referred to in section 147 of the I.T. Act,
1961, must be supported by some evidence or material justifying the formation
of such belief. In this connection, I may refer to the judgment of my Lord the
Chief justice (as he then was), presiding over the appeal court in the case of Madnani
Engineering Works Ltd. v. ITO (Appeal from Original Order No. 221 of
1970, disposed of on April 11, 1974). In that case, it was held that the ITO
had no material justifying the formation of a reasonable belief in reopening
the assessment. One of the questions that came up for consideration was
whether, in the facts and circumstances of that case, the assessee could be
said to have not disclosed fully and truly all material facts. My Lord made the
following observations:
"An
assessee who claims deductions for payment of interest in respect of any hundi
loans is to make the claim only on the basis that the hundi loan is
genuine and it becomes the duty of the assessee to establish the genuineness of
the loan by adducing necessary evidence and producing relevant materials. The
assessee is not presumed to make a false or fictitious claim and in any event
the assessee who has made such a claim is not expected to tell the assessing
authority that he has made a false and a fictitious claim. It is indeed the
duty of the assessing authority to consider the relevant materials and to
decide whether the loan transaction is genuine or not."
The Revenue went up to the Supreme Court
against the judgment in Madnani's case. The Supreme Court upheld the
judgment and also reiterated the same principle. It was observed by the Supreme
Court that the respondent produced in the original assessment proceeding all
the hundis on the strength of which it had obtained loans from creditors
as also entered in the books of account showing payment of interest and it was
for the ITO to investigate and determine whether these documents were genuine
or not; the respondent could not be said to have failed to make a true and full
disclosure of the material facts by not confessing before the ITO that the hundis
and the entries in the books of account produced by it were bogus (See ITO
v. Madnani Engineering Works Ltd. [1979] 118 ITR I (SC)). In the instant
case also, the appellant had made a disclosure of the loans that he had
obtained from the said Prahlad Roy Almal. He also produced before the ITO at
the hearing of the assessment proceedings the, confirmatory letters issued by
the said Prahlad Roy Almal. It was the duty of the ITO to investigate the
genuineness or otherwise of such loans or confirmatory letters. He was
satisfied about the genuineness of the transaction of loan that took place
between the assessee and the said Prahlad Roy Almal. There can be no doubt that
the ITO has the jurisdiction to reopen the assessment proceedings but such
reopening cannot be made on mere suspicion. There must be some material which
should have a direct nexus or live link with the formation of the belief that
the income of the assessee has escaped assessment as he has not made a true and
full disclosure of all material facts.
Mr. Sengupta has placed reliance on a
judgment delivered by me in the appeal court in ITO v. Mahadeo Lai
Tulsyan [1978] 111 ITR 25 (Cal). In that case, the notice under section 148
of the I.T. Act, 1961, reopening the assessment proceedings was upheld. It has
been submitted by the learned counsel that though the facts of that case were
somewhat similar to those of the present case before us, the notice under
section 148 was upheld to be legal and valid. In our opinion the facts in the
case of Mahadeo Lal Tulsyan are different from those of the instant case. In
that case, in the assessment proceedings for the subsequent year, namely, for
the assessment year 1964-65 of the respondent-assessee, the loans from identical
hundi merchants were found to be not genuine after investigation. The
said hundi, merchants were found to be only name-lenders. In the
circumstances, the notice under section 148 was not issued by the ITO merely on
suspicion or without relevant material justifying the issuance of such a
notice. That case is, therefore, of no assistance to the Revenue.
Learned counsel for the respondents has also
placed reliance on a Bench of this court presided over by my learned Chief
justice (as he then was in Biju Patnaik v. ITO [1976] 102 ITR 96
(Cal). In that case also, there was a confessional statement by the hundi
merchants and it was held that the confessional statement was a relevant
material for the formation of the reasonable belief by the ITO for reopening the
assessment proceedings. In that case, the merchants concerned in their
statement mentioned the names of persons with whom they had entered into
genuine loan transactions, and it was confessed that all other transactions
were bogus transactions, that confessional statement was construed to have
impliedly contained a confession that the loans alleged to have been given by
them to the assessee were not in fact given by them. Thus, it appears that the
statement in that case was not a vague statement that they were only carrying
on name-lending, but a positive statement that except in the cases of certain
persons, the names of whom were mentioned, the hundi merchants did not
enter into any other genuine loan transactions. In our opinion, Biju
Patnaik's case [1976] 102 ITR 96 (Cal) does not lend any support to the
contention of the respondents.
Lastly, counsel for the Revenue, has placed
strong reliance on a Bench decision of this court in H.A. Nanji & Co.
v. ITO [1979] 120 ITR 593. It is contended that the principles of law
laid down in this case support the contention of the Revenue in the instant
case before us and also justify the notice under section 148. It is not
necessary for us to refer to the principles which have been laid down in Nanji's
case, for, all the principles are well settled by the Supreme Court. The
principles of law in this regard may be applicable to a particular set of facts
and may not be so applicable to a different set of facts. In Nanji's
case not only that there was a confessional statement by the hundi
creditors but also some of the hundi creditors of the assessee had
specifically confessed that they had been mere name-lenders for the purported
loans which were entered in the books of account of various assessees including
the assessee concerned for the assessment year in question. There can be no
doubt that if there be such a confession that would surely be a relevant
material on the basis of which the ITO can form a reasonable belief that the
income of the assessee has escaped assessment for his omission or failure to
disclose fully and truly all material facts. But in the instant case the facts
were not like that and, accordingly, Nanji's case [1979] 120 ITR 593
(Cal), has no application. No other point has been urged on behalf of either
party.
For the reasons aforesaid, we set aside the
judgment of the learned judge and make the rule nisi absolute. Let a writ in
the nature of certiorari issue quashing the impugned notice under section 148
of the I.T. Act, 1961. Further, let a writ in the nature of mandamus issue
commanding the respondents not to give any effect or further effect to the
impugned notice and not to proceed with the assessment proceedings reopened on
the basis of the impugned notice.
The appeal is allowed, but in the facts and
circumstances of the case, there will be no order for costs.
A.N. Sen, CJ.—I agree.