R.K Agarwal, J.:— By means of the present writ petition filed under article 226 of the Constitution of India, the petitioners seek a writ, order or direction in the nature of certiorari calling for the record of assessment of M/s. Indra Prastha Chemicals (P) Ltd., petitioner No. 1, for the assessment years 1993-94 and 1994-95 and quashing the entire proceedings including the notices under section 148 of the Income-tax Act, 1961, hereinafter referred to as “the Act”, and other consequential reliefs.
2. Briefly stated, the facts giving rise to the present petition are as follows: Petitioner No. 1 is a private limited company incorporated under the provisions of the Companies Act, 1956. It was incorporated in the year 1989. Its registered office is situate at Isha Nagli, Mawana Road, Meerut. Petitioner No. 1 had established its factory for the manufacture of ethyl acetate, a chemical used in the manufacture of paints, etc., during the financial year 1993-94. It commenced production on January 16, 1995. Petitioners Nos. 2 and 3 became directors of petitioner No. 1 during the assessment year 1993-94. However, they resigned from the directorship of petitioner No. 1 on March 25, 1996, the fact which was recorded by the Registrar of Companies, in March, 1996, itself. Petitioner No. 1 had received share application money from its directors and other individuals to the extent of Rs. 38,66,000 during the previous year relevant to the assessment year 1993-94. Petitioner No. 1 also borrowed money from various sources during this period aggregating Rs. 12,23,000. Similarly, during the previous year relevant to the assessment year 1994-95, petitioner No. 1 had received share application money from its directors and other individuals to the extent of Rs. 19,34,000 and borrowed money from various other sources aggregating Rs. 2,19,000.
3. According to the petitioners, as no income had been earned during the assessment years 1993-94 and 1994-95, petitioner No. 1 did not file any return of income for these assessment years. It is alleged by petitioners Nos. 2 and 3 that they had not been served with any notice for the assessment of petitioner No. 1 for the assessment years 1993-94 and 1994-95 and when they went to the State Bank of India, Branch Palhera, Meerut, to withdraw the pension from the account of petitioner No. 3 in May, 2003, they were informed that the pension account has been attached in recovery of arrears of demand of income-tax of petitioner No. 1 for the assessment years 1993-94 and 1994-95. On enquiry they came to know that the Assistant Commissioner of Income-tax, Circle 1, Meerut, respondent No. 2, has vide order dated March 26, 2002, assessed the income of petitioner No. 1 for the assessment years 1993-94 and 1994-95. After obtaining copies of the assessment order they preferred revisions before the Commissioner of Income-tax, Meerut, under section 264 of the Act. The Commissioner of Income-tax, Meerut, respondent No. 1, vide order dated November 21, 2003, had allowed the revisions and after setting aside the assessment order dated March 26, 2002, remanded the matter to the assessing authority for making assessment afresh in accordance with law in the light of the directions contained in the order. After the matter was remanded, it is alleged by the petitioners that they had inspected the assessment record for the two assessment years in question and have found that on the basis of a report submitted by the income-tax inspector on April 20, 1999, proceedings under section 147 of the Act have been initiated. The report of the income-tax inspector, dated April 20, 1999, as also the note put up by the Assistant Commissioner of Income-tax, Circle 1, Meerut, dated April 26, 1999, has been filed as annexure 5 to the writ petition. The order dated November 21, 2003, passed by the Commissioner of Income-tax, Meerut, is under challenge in the present writ petition on the ground that he had not decided the plea of the petitioner that notice issued under section 148 of the Act had not been served upon petitioner No. 1. Certain additional grounds have also been raised in the present writ petition regarding jurisdiction assumed by the Assistant Commissioner of Income-tax, Circle 1, Meerut, respondent No. 2, for taking proceedings under section 147 of the Act. The main ground of challenge is that the Assistant Commissioner had not recorded any reasons for initiating the proceedings under section 147 and issuance of the notices under section 148 of the Act. Moreover, the reasons given in the report of the income-tax inspector did not constitute relevant material for initiating the proceedings under section 147 and issuance of notices under section 148 of the Act.
4. We have heard Sri S.P Gupta, learned senior counsel assisted by Sri S.D Singh on behalf of the petitioners, and Sri Ashok Kumar, learned standing counsel appearing for the respondents.
5. Sri S.P Gupta, learned senior counsel, submitted that as the notices issued under section 148 of the Act had not been served upon petitioner No. 1, the entire reassessment proceedings are void and liable to be quashed. In the alternative he submitted that the present proceedings under section 147 of the Act have been initiated on the basis of the report dated April 20, 1999, submitted by the income-tax inspector and the Assistant Commissioner of Income-tax, Circle 1, Meerut, without any application of mind had directed for issuance of notices under section 148 of the Act for these two assessment years. Relying upon a decision of the hon'ble Supreme Court in the case of Chhugamal Rajpal v. S.P Chaliha, [1971] 79 ITR 603, he submitted that the proceedings under section 147/148 of the Act cannot be initiated as the assessing authority had not set out any reasons for coming to the conclusion that it is a fit case for issue of notices under section 148 of the Act.
6. He further submitted that the very jurisdiction and the validity for taking proceedings can be raised at any stage. He referred to and relied upon a Division Bench decision of this court in the case of Commissioner of Sales Tax v. Ram Chand, [1978] 42 STC 432 : [1978] UPTC 399 and a Full Bench decision of this court in the case of Laxmi Narain Anand Prakash v. CST, [1980] 46 STC 71 : [1980] UPTC 125.
7. Sri Ashok Kumar, learned counsel for the Revenue, submitted that the notice under section 148 of the Act was issued on April 26, 1999. It was served upon the company on May 20, 1999. A notice under section 142(1) of the Act was served upon petitioner No. 3 and he had also appeared on March 20, 2002. Thus, it is incorrect to say that notices were not served. He further submitted that the Commissioner of Income-tax, Meerut, had passed the order under section 264 of the Act on November 21, 2003, and in compliance with the order, the notices under section 142(1) of the Act were issued on January 8, 2004. The petitioner had approached this court and filed the present writ petition on February 17, 2004. Thus, there is delay and laches and they cannot be permitted to challenge the notices issued under section 148 of the Act at this belated stage. He relied upon a Division Bench decision of this court in the case of Shyam Babu Vaishya and Co. v. Asst. Commr. of Trade, [2004] UPTC 210 and of the apex court in the case of GKN Driveshafts (India) Ltd. v. ITO, [2003] 259 ITR 19. He further submitted that this court cannot consider the sufficiency of material which led to the reopening of the assessment. He relied upon a decision of the apex court in the case of Raymond Woollen Mills Ltd. v. ITO, [1999] 236 ITR 34.
8. Having heard learned counsel for the parties, we find that for the assessment years 1993-94 and 1994-95, notices under section 148 had been issued on April 26, 1999, i.e, well within the period of limitation provided under section 149 of the Act. It is not required to be served within the period of limitation. The apex court in the case of R.K Upadhyaya v. Shanabhai P. Patel., [1987] 166 ITR 163 and Cit v. Major Tikka Khushwant Singh, [1995] 212 ITR 650 (SC) has held that from the 1922 Act the position regarding service of notice under section 148 has undergone a sea change in the 1961 Act and the only requirement for taking action for issuance of notice under section 148 is that the notice should be issued within the period of limitation. Thus, the notices issued is held to have been issued within the prescribed period of limitation under section 148 of the Act.
9. Under section 147 of the Act the proceedings for the reassessment can be initiated only if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year. The question whether the Assessing Officer had reasons to believe is not a question of limitation only but is a question of jurisdiction, a vital thing, which can always be investigated by the court in an application under article 226 of the Constitution as held in Daulatram Rawatmal v. ITO, [1960] 38 ITR 301 (Cal); Jamna Lal Kabra v. ITO, [1968] 69 ITR 461 (All); Calcutta Discount Co. Ltd. v. ITO, [1961] 41 ITR 191 (SC); C.M Rajgharia v. ITO, [1975] 98 ITR 486 (Patna) and Madhya Pradesh Industries Ltd. v. ITO, [1965] 57 ITR 637 (SC).
10. The words “has reason to believe” are stronger than the words “is satisfied”. The belief entertained by the Assessing Officer must not be arbitrary or irrational. It must be reasonable or, in other words, it must be based on reasons which are relevant and material as held by the apex court in Ganga Saran and Sons P. Ltd. v. ITO, [1981] 130 ITR 1.
11. The expression “reason to believe” in section 147 does not mean purely subjective satisfaction on the part of the Assessing 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 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 Assessing Officer in starting proceedings under section 147 is open to challenge in a court of law as held in S. Narayanappa v. CIT, [1967] 63 ITR 219 (SC); Kantamani Venkata Narayana and Sons v. First Additional ITO, [1967] 63 ITR 638 (SC); Madhya Pradesh Industries Ltd. v. ITO, [1970] 77 ITR 268 (SC); Sowdagar Ahmed Khan v. ITO, [1968] 70 ITR 79 (SC); ITO v. Lakhmani Mewal Das, [1976] 103 ITR 437 (SC); ITO v. Nawab Mir Barkat Ali Khan Bahadur, [1974] 97 ITR 239 (SC); CST v. Bhagwan Industries (P.) Ltd., [1973] 31 STC 293 (SC) and State Of Punjab v. Balbir Singh., (1994) 3 SCC 299.
12. The formation of the required opinion and belief by the Assessing Officer is a condition precedent. Without such formation, he will not have jurisdiction to initiate proceedings under section 147. The fulfilment of this condition is not a mere formality but it is mandatory. The failure to fulfil that condition would vitiate the entire proceedings as held by the apex court in the case of Johri Lal (Huf), Agra v. Commissioner Of Income Tax., [1973] 88 ITR 439 (SC) and Sheo Nath Singh v. AAC of IT, [1971] 82 ITR 147 (SC). The reasons for the formation of the belief must have rational connection with or relevant bearing on the formation of belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Assessing Officer and the formation of his belief that there has been escapement of income of the assessee from assessment in the particular year. It is not any and every material, howsoever vague and indefinite or distant, remote and far fetched, which would warrant the formation of the belief relating to escapement of income of the assessee from assessment, as held by the hon'ble Supreme Court in the case of ITO v. Lakhmani Mewal Das, [1976] 103 ITR 437. If there is no rational and intelligible nexus between the reasons and the belief, so that, on such reasons, no one properly instructed on facts and law could reasonably entertain the belief, the conclusion would be inescapable that the Assessing Officer could not have reason to believe. In such a case, the notice issued by him would be liable to be struck down as invalid as held in the case of Ganga Saran and Sons P. Ltd. v. ITO, [1981] 130 ITR 1 (SC).
13. Thus, it is well settled that the “reason to believe” under section 147 must be held in good faith and should have a rational connection and relevant bearing on the formation of the belief and should not be extraneous or irrelevant. Further, this court in proceedings under article 226 of the Constitution of India can scrutinize the reasons recorded by the Assessing Officer for initiating the proceedings under section 147/148 of the Act. The sufficiency of the material cannot be gone into but relevancy certainly be gone into.
14. In the present case, the proceedings under section 147 of the Act have been initiated on the report of the income-tax inspector, dated April 20, 1999. The report dated April 20, 1999, has been brought on record as annexure 5 to the writ petition which is reproduced below:
“Report in the case of Indra Prastha Chemical (P.) Ltd., Quaroon House, P.L Sharma Road, Meerut.
15. No business was done in the assessment years 1993-94 and 1994-95. If the returns are filed in response to notice under section 148 the proceedings may be filed on providing the subscription to equity and cash credits. However, the penalty under section 271D in the assessment year 1994-95 which involves the amount of Rs. 4,00,000 is mandatory.
16. Since admittedly no returns were filed for the assessment years 1993-94 and 1994-95, notice under section 148 be issued. The escaped income is estimated below:
1993-94
Rs. 50,00,000
1994-95
Rs. 10,00,000
20-4-1999.”
17. This report has not been denied by the respondents and that the action has been taken on the basis of the said report. From the reading of the aforesaid “report” it is clear that even the income-tax inspector has not recorded any reasons that the income has escaped assessment. He has reported that no business was done in the assessment years 1993-94 and 1994-95 and if the returns are filed in response to the notice under section 148, the proceedings may be filed on providing the subscription to equity and cash credits. Thus, it does not give any material so as to form any reasonable belief that the income has escaped assessment. Merely noting “yes” for issuance of notice under section 148 would not give jurisdiction to the Assessing Officer to initiate proceedings.
18. In the case of Chhugamal Rajpal, [1971] 79 ITR 603 (SC) the following report was submitted by the Income-tax Officer, Muzaffarpur, to the Commissioner (page 607):
“During the year, the assessee has shown to have taken loans from various parties of Calcutta. From D.I's Inv. No. A/P/Misc.(5) D.I/63-64/5623, dated August 13, 1965, forwarded to this office under the Commissioner of Income-tax, Bihar and Orissa, Patna's letter No. Inv. (Inv.) 15/65-66/1953-2017, dated September 24, 1965, it appears that these persons are name-lenders and the transactions are bogus. Hence, proper investigation regarding these loans is necessary. The names of some of the persons from whom money is alleged to have been taken on loan on hundis are:
1. Seth Bhagwan Singh Sricharan,
2. Lakha Singh Lal Singh,
3. Radhakissen Shyam Sunder.
The amount of escapement involved amounts' to Rs. 1,00,000.
(Sd.) S.P Chaliha, 30-4-1966.
Income-tax Officer,
A-Ward, Muzaffarpur.”
19. The apex court had found that the report of the Income-tax Officer does not set out any reason for coming to the conclusion that this is a fit case to issue notice under section 148. The material that he had before him for issuing notice under section 148 is not mentioned in the report and he vaguely refers to certain communications received by him from the Commissioner of Income-tax, Bihar and Orissa. He has not even come to a prima facie conclusion that the transactions to which he referred are not genuine transactions and appears to have had only a vague feeling that they may be bogus transactions. Such a conclusion does not fulfil the requirements of section 151(2) of the Act. The apex court, therefore, held that the Income-tax Officer did not have any reason to believe that income chargeable to tax has escaped assessment, therefore, notice under section 148 of the Act could not have been issued.
20. Similar is the position here in the present case. As already mentioned hereinabove, the report submitted by the income-tax inspector did not have any relevant material to point out that any income has escaped assessment for the assessment years 1993-94 and 1994-95. Thus, notices under section 148 are invalid and without jurisdiction.
21. So far as the question that the plea is being raised at such a belated stage is concerned, it may be mentioned here that the Assistant Commissioner of Income-tax, respondent No. 2, can only assume the jurisdiction under section 147 of the Act if he had reasons to believe that the income of petitioner No. 1 had escaped assessment of tax. This goes to the very jurisdiction of respondent No. 2 and can be raised at any stage as held by a Full Bench of this court in the case of Laxmi Narain Anand Prakash, [1980] 46 STC 71. Moreover, as held by the apex court in Calcutta Discount Co. Ltd., [1961] 41 ITR 191 and Madhya Pradesh Industries Ltd., [1965] 59 ITR 637 : [1970] 77 ITR 268 (SC) reasons recorded by the Assessing Officer for initiating the proceeding under section 147 can be scrutinized by this court in proceedings under article 226 of the Constitution of India.
22. In the case of GKN Driveshafts (India) Ltd., [2003] 259 ITR 19 (SC) has held as follows (headnote):
“When a notice under section 148 of the Income-tax Act, 1961, is issued, the proper course of action for the noticee is to file the return and, if he so desires, to seek reasons for issuing the notices. The Assessing Officer is bound to furnish reasons within a reasonable time. On receipt of reasons, the noticee is entitled to file objections to issuance of notice and the Assessing Officer is bound to dispose of the same by passing a speaking order.
On receiving notices under section 148 the appellant filed the returns. The appellant also received notices under section 143(2) calling for further information on certain points in connection with the returns. Thereupon the appellant filed writ petitions challenging the notices. The High Court dismissed the writ petitions holding that the petitions were premature and the appellant could raise its objections to the notices by filing reply to the notices before the Assessing Officer (see e.g [2002] 257 ITR 702). The appellant preferred appeals and the Supreme Court dismissed the appeals, observing that since the reasons for reopening of assessments under section 148 had been disclosed in respect of five assessment years, the Assessing Officer had to dispose of the objections, if filed, by passing a speaking order before proceeding with the assessments for those years.”
23. The Constitution Benches of the hon'ble Supreme Court, in K.S Rashid and Son v. Income-tax Investigation Commission, [1954] 25 ITR 167 : AIR 1954 SC 207; Sangram Singh v. 1. Election Tribunal, Kotah, AIR 1955 SC 425; Union Of India v. T.R Varma , [1957-58] 13 FJR 237 : AIR 1957 SC 882; State Of U.P v. Mohammad Nooh ., AIR 1958 SC 86 and K.S Venkataraman and Co. (P.) Ltd. v. State of Madras, [1966] 60 ITR 112 : [1966] 17 STC 418, held that article 226 of the Constitution confers on all the High Courts a very wide power in the matter of issuing writs. However, the remedy of writ is an absolutely discretionary remedy and the High Court has always the discretion to refuse to grant any writ if it is satisfied that the aggrieved party can have an adequate or suitable relief elsewhere. The court, in extraordinary circumstances, may exercise the power if it comes to the conclusion that there has been a breach of principles of natural justice or procedure required for decision could not be adopted.
24. In Harbanslal Sahnia v. Indian Oil Corporation Ltd., (2003) 2 SCC 107, the hon'ble Supreme Court held that the rule of exclusion of writ jurisdiction by availability of alternative remedy is a rule of discretion and not one of compulsion and the court must consider the pros and cons of the case and then may interfere if it comes to the conclusion that the petitioner seeks enforcement of any of the fundamental rights; where there is failure of principle of natural justice or where the orders of proceedings are wholly without jurisdiction or the vires of an Act is challenged.
25. As held by the apex court in the case of Calcutta Discount Co. Ltd., [1961] 41 ITR 191 and Madhya Pradesh Industries Ltd., [1965] 59 ITR 637 : [1970] 77 ITR 268 (SC) this court under article 226 is entitled to go into the relevancy of the reasons as also to scrutinize as to whether there was reasonable belief or not. Thus, the writ petition under article 226 is maintainable. In view of the foregoing discussion, we are of the considered opinion that the notice issued under section 148 of the Act for the assessment years 1993-94 and 1994-95 and the entire proceedings taken pursuant thereto are wholly without jurisdiction and hereby quashed.
26. In this view of the matter, the writ petition succeeds and is allowed. However, the parties shall bear their own costs.