The Judgment of the Court was delivered by

Sethuraman, J.:— Under section 256(1) of the Income-tax, 1961, at the instance of the assessee the Income-tax Appellate Tribunal, Madras Bench, has referred the following question for the opinion of this court:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the action under section 147(a) of the Income-tax Act, 1961, in respect of the reassessments of the assessee for the assessment years 1957-58 and 1958-59 was valid in law?”

2. The assessee is carrying on business for which books of accounts were kept and closed at the end of 31st July. In the books of account kept for the business for the years ended July 31, 1956, and July 31, 1957, there were entries relating to certain loans said to have been borrowed from Multani bankers on the strength of hundis. Interest said to have been paid on these loans was adjusted by debit to the profit and loss account for arriving at the business income and was thus claimed as deduction in the computation of business income. The assessee filed along with the returns the profit and loss account and also a statement of affairs or a balance-sheet as on the relevant dates. With reference to the assessment year 1957-58, there was a balance-sheet as at July 31, 1956, and on the liabilities side of the balance-sheet an amount of Rs. 55,000 was displayed as referable to certain loans taken on, the strength of hundis. The assessee filed also particulars of the said hundi loans the total of which came to Rs. 50,000 and they did not show a loan of Rs. 5,000 in the name of one Madhawdas Kalyandas. For the assessment year 1958-59 also, the assessee filed a balance-sheet or statement of affairs as at July 31, 1957, wherein on the liabilities side a sum of Rs. 2,70,000 was shown as loans payable. The assessee filed particulars of hundi loans which included loans of Rs. 10,000 each from five persons, viz., Seth Tulsidas Lalchand, Seth Naraindas Jeth-anand, Seth Khumchand Vishumal, Seth Hariram Tiloomal and Seth Ramchand and Sons. The assessments for 1957-58 and 1958-59 were made under section 23(3) of the Indian Income-tax Act, 1922, on December 31, 1957, and December 30, 1958, respectively. The assessment orders did not refer to any aspect regarding the genuineness or otherwise of the aforesaid loan transactions. The assessments were subsequently reopened by notices issued under section 148 of the Income-tax Act, 1961. These notices were served on March 18, 1966, and February 6, 1967, respectively, for the two years. The action was initiated by the Income-tax Officer under section 147(a) of the Act. Before taking action under that provision the Income-tax Officer had submitted reports to the Commissioner of Income-tax and secured the sanction of the Commissioner for reopening of the said assessments. In the course of the reassessments, the Income-tax Officer came to the conclusion that hundi loans to the extent of Rs. 20,000 were not genuine with reference to the assessment year 1957-58. He included the said sum of Rs. 20,000 as income from undisclosed sources. Further, he added a sum of Rs. 620 being the interest referable to the said hundi loans. For the assessment year 1958-59, the Income-tax Officer added a sum of Rs. 65,000 with reference to the hundi loans as not having been proved to be genuine. He added a sum of Rs. 8,175 being the interest with reference to the said hundi transactions. The assessee appealed to the Appellate Assistant Commissioner against these reassessments, and the point taken up before him was regarding the validity of reassessments. The Appellate Assistant Commissioner rejected this contention. Against the order of the Appellate Assistant Commissioner the assessee appealed to the Tribunal in respect of each of these two years. Before the Tribunal also the only contention taken up and pressed was that the Appellate Assistant Commissioner had erred in failing to accept that the reopening of the assessment under section 147(a) of the Act and the reassessments made in pursuance of the notices were bad in law. The Tribunal disposed of both the appeals together. It considered the question of reopening of the assessment in the light of the facts that were available to the Income-tax Officer at the stage when he reopened the assessments, and it came to the conclusion that the assessee had not disclosed or even indicated the nature of the transactions in the balance-sheets submitted at the original assessments for these years. By merely placing before the Income-tax Officer certain statements in which figures relating to the impugned transactions were included, in the view of the Tribunal the assessee could not be taken to have fully and truly disclosed all material facts relating to the assessments. The Tribunal, therefore, upheld the validity of the reassessments for these two years under section 147(a) of the Act. It is this conclusion of the Tribunal which is challenged in the form of the question extracted already. The assessment proceedings have been reopened as mentioned already under section 147(a) of the Act. That provision, in so far as it is material, runs as follows:

“If the Income-tax Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under section 139 for any assessment year to the Income-tax Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year,…… he may, subject to the provisions of sections 148 to 153 assess or reassess such] income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereinafter in sections 148 to 153 referred to as the relevant assessment year).”

3. In order to enable the Income-tax Officer to act under this provision it is necessary that he should have reason to believe that by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that year income chargeable to tax has escaped assessment for that year. The question that has, therefore to be considered in the present case is whether the assessee has disclosed fully and truly all material facts necessary for his assessment for that year. We may advert to one feature at this stage. From the consistent conduct of the assessee right from the stage of appeal to the Appellate Assistant Commissioner, it is clear that the assessee did not challenge the reassessment on merits but only challenged the validity of the proceedings taken for reassessment. Therefore, on the facts it is clear that the conclusion that the respective sums assessed in these two years are really the assessee's own funds which were shown in the books as if they had been borrowed from strangers and in respect of which interest had been paid is no longer open for consideration. In the light of these facts the question is whether the assessee has actually disclosed fully and truly all material facts relating to the assessment and the Income-tax Officer had consequently reason to believe that income had escaped assessment. If the assessee had placed any facts relating to these hundi transactions at the original stage and if the Income-tax Officer had not drawn proper inferences therefrom, then the position regarding reassessment may be different. But the finding here is that the mere filing of certain statements did not amount to disclosure. This is essentially a finding on a question of fact.

4. However, learned counsel for the assessee, relying on certain decisions of the Supreme Court, contended that what we are concerned with is the question as at the time when the reassessment proceedings were commenced and that at the stage when the reassessment proceedings commenced, the Income-tax Officer could not have had reason to believe that income had escaped assessment by reason of the failure of the assessee to disclose fully and truly all material facts. For this purpose, he drew our attention to the decision of the Supreme Court in Income-tax Officer v. Lakhmani Mewal Das, [1976] 103 ITR 437. In that case, the original assessment for the assessment year 1958-59 was made on the assessee after allowing certain deductions towards interest to certain creditors. Thereafter, by a notice under section 148, the Income-tax Officer sought to reopen the assessment. In this report made to the Commissioner of Income-tax for reopening the assessment, two reasons were given, viz., (i) that M.K, who was shown to be one of the creditors of the assessee, had since confessed that he was doing only name-lending; and (ii) that N.M, D.K.N, B.S, and others, whose names too were mentioned in the list of the creditors of the assessee, were known name-lenders. The assessee thereafter filed a writ petition claiming that there was no material before the Income-tax Officer on which he could have reason to believe that income chargeable to the assessment for the year had escaped assessment by reason of the assessee's failure to disclose material facts, and stated that he had produced all books of account, bank statements and other necessary documents in connection with his return. This writ petition came before a Full Bench of the High Court and by a majority the Calcutta High Court held that the preconditions for the exercise of jurisdiction under section 147 were not fulfilled. On appeal, the Supreme Court confirmed the decision of the Calcutta High Court. Though there is a general discussion of the law relating to the reassessment under section 147 still the Supreme Court ultimately decided the particular case only on the facts. This is clear from the following passage occurring at pages 448 and 449 of the report. The Supreme Court pointed out;

“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. The majority of the learned judges in the High Court, in our opinion, were not in error in holding that the said material could not have led to the formation of the belief that the income of the assessee-respondent had escaped assessment because of his failure or omission to disclose fully and truly all material facts.”

5. It may be of interest to reproduce here the report which was submitted by the Income-tax Officer to the Commissioner of Income-tax in that case and this report is reproduced in the judgment of the Calcutta High Court in Lakhmani Mewal Das v. Income-tax Officer, [1975] 99 ITR 296 at 331 [FB], which is as follows:

“There are hundi loan credits in the name of Narayansingh Nandalal, D.K Naraindas, Bagwandas Srichand, etc., who are known name-lenders, and also hundi loan credit in the name, Mohansingh Kanayalal, who has since confessed he was doing only name-lending. In the original assessment these credits were not investigated in detail. As the information regarding the bogus nature of these credits is since known, action under section 147(a) is called for to reopen the assessment and assess these credits as the undisclosed income of the assessee. The assessee is still claiming that the credits are genuine in the assessment proceedings for 1962-63. Commissioner's sanction is solicited to reopen the assessment for 1958-59 under section 147(a).”

6. It may be seen from the extract of the report that the Income-tax Officer had not even expressed any prima facie view that the assessee's income had escaped assessment because the respective persons had not really lent moneys to the assessees but had only lent their names. The learned counsel for the assessee drew our attention also to an earlier decision of the Supreme Court in Chhugamal Rajpal v. S.P Chaliha, [1971] 79 ITR 603. For the assessment year 1960-61, the assessee in that case had produced its books of accounts and statements giving full names and addresses of the various creditors from whom moneys had been borrowed. The assessment was completed. Thereafter, the Income-tax Officer issued a notice under section 148 of the Act for initiating reassessment proceedings. The assessee filed a writ petition in the High Court challenging the validity of that notice on the ground that the requirements of section 151(2) were not complied with. The writ petition was dismissed by the High Court. On appeal, the Supreme Court directed the department to produce the records to show that the Income-tax Officer had complied with sections 148 and 151(2) of the Act. At that stage only the reports submitted by the Income-tax Officer to the Commissioner and the Commissioner's order were produced. In his report the officer referred to certain communications received by him from the Commissioner from which it appeared that the creditors were name-lenders and the loan transactions were bogus and that, therefore, proper investigation regarding the loans taken by the appellant was necessary. He did not mention in the report what material he had before him and his reason for coming to the conclusion that this was a fit case for issuing notice under section 148. The Commissioner had granted the sanction and the validity of the proceedings came up before the Supreme Court. The Supreme Court held that the Income-tax Officer had not even come to a prima facie conclusion that the loan transactions to which he referred were not genuine transactions, and that such action did not fulfil the requirements of section 151(2).

7. These two cases of the Supreme Court do not have any application to the facts of the present case because of the report we have before us submitted by the Income-tax Officer to the Commissioner of Income-tax in this particular case. With reference to the assessment year 1957-58, in the report submitted by the Income-tax Officer to the Commissioner of Income-tax the following is stated:

“The assessee has, during the accounting year relevant to the assessment year 1957-58, taken loans to the extent of Rs. 5,000 from one Seth Madhawdas Kalyandas, 8, Peria Naiyakaran Street, Madras-1, 427, Mint Street, Madras. There is information to show that this banker has been found to have indulged in hawala business. These loan transactions which the assessee claims to have had with the above banker are not genuine, and to that extent there has been concealment of income. I have reason to believe that there has been an escapement of income to the tune of Rs. 5,000. Permission is requested for reopening the assessment under section 147(a) for 1957-58 assessment year.”

8. Similarly, for the assessment year 1958-59, in the report of the Income-tax Officer to the Commissioner of Income-tax it is stated:

“The assessee has during the accounting year relevant to the assessment year 1958-59, taken loans to the extent of Rs. 50,000 from five Multani bankers, viz., (1) Seth Tulsidas Lalchand—Rs. 10,000, (2) Seth Naraindas Jethanand—Rs. 10,000, (3) Seth Khubchand Vashumal—Rs. 10,000, (4) Seth Hariram Tiloomal—Rs. 10,000 and (5) Seth Ramchand and Sons—Rs. 10,000. There is information to show that these bankers have been found to have indulged in hawala business. These loan transactions which the assessee claims to have had with the above mentioned five bankers are not genuine and to that extent there has been concealment of income. I have reason to believe that there has been an escapement of income to the extent of Rs. 50,000 for the assessment year 1958-59. Permission is requested for reopening the assessment under section 147(a) for the assessment year 1958-59.”

9. From these two reports it is clear that the Income-tax Officer had prima facie come to the conclusion with reference to these assessment years that the income had escaped assessment to the extent mentioned in the said reports. Therefore, the facts here are different from those which came to be considered by the Supreme Court in the two decisions mentioned above. The finding on the facts here that there was no disclosure of the material facts at the stage of the original assessment cannot be said to be erroneous. Learned counsel for the revenue brought to our notice a decision of this court in the case of the very same assessee in Varadarajulu v. Income-tax Officer, [1974] 97 ITR 476 (Mad). That was a case for the assessment years 1960-61 and 1961-62. With reference to those years similar proceedings under section 147(a) were initiated by the Income-tax Officer for bringing to tax the income that had escaped assessment. The assessee, as soon as he received the notice took proceedings under article 226 of the Constitution and the said writ proceedings came to be disposed of in the judgment mentioned above. This court held that on the basis of certain investigations conducted by the income-tax department in respect of hundi transactions, it came to light that the creditors who had advanced monies on hundis to various businessmen were merely name-lenders who had no means for making the advances and the amounts shown were the assessee's own monies brought into the account in the banker's names. In pursuance of this information the petitioner's assessments for 1960-61 and 1961-62 were sought to be reopened under section 147 and notices, therefore, were issued under section 148. In view of this it was held that the notices were proper and valid. The circumstances for the two assessment years in question cannot be said to be materially different. For the reasons mentioned above we answer the question that is referred to us in the affirmative and against the assessee. The revenue will be entitled to its costs. Counsel's fee Rs. 500.