The Judgment of the Court was delivered by

Raghavan, J.:— The question referred in these references is the same:

“Whether, on the facts and in the circumstances of the case, the reassessment proceedings under section 147(a) were valid?”

2. The assessee is the same in both the cases; and the first reference relates to the assessment year 1958-59 and the second reference to the assessment year 1959-60. The Income-tax Officer reopened the assessment for the respective years under section 147(a) of the Income-tax Act of 1961 on the ground that he had 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 for the assessment in the respective years, income chargeable to tax had escaped assessment, since certain deductions were wrongly given towards payment of interest on borrowed moneys; and the question for us to consider is whether such reopening was valid in the light of the facts and circumstances.

3. The relevant portion of section 147(a) provides that, if the Income-tax Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment for any assessment year, income chargeable to tax has escaped assessment for that year, he may assess or reassess such income, etc. There are three aspects to be considered in cases like these; and they are all considered by the Supreme Court in Calcutta Discount Co. Ltd. v. Income-tax Officer, Companies District I, Calcutta [1961] 41 I.T.R 191, which was a case under the corresponding section 34(1)(a) of the Income-tax Act of 1922.

4. The first aspect relates to the powers or the jurisdiction of the Income-tax Officer to reopen. The majority judgment of three judges has stated that 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 have to be satisfied, namely, that the Income-tax Officer must have reason to believe that income, profits or gains chargeable to income-tax had been under-assessed, and that he must have also reason to believe that such under-assessment had occurred 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. The Supreme Court has also observed that these conditions are conditions precedent, so that if these conditions are not satisfied, the Income-tax Officer has no jurisdiction to reopen the assessment.

5. The next aspect relates to the expression “omission or failure to disclose fully and truly all material facts necessary for his assessment for that year”. In considering this expression, the majority judgment has said that section 34 of the Income-tax Act of 1922 (section 147 of the Act of 1961) postulated a duty on every assessee to disclose fully and truly all material facts necessary for his assessment. What facts were material and necessary for assessment differed from case to case. The assessee was bound to disclose all primary facts in his possession, including particular-entries in account books, particular portions of documents, etc. His duty to disclose however did not extend beyond the full and truthful disclosure of all primary facts. And once all the primary facts were before the assessing authority, it was for that authority to decide what inferences of facts could be reasonably drawn and what legal inferences had ultimately to be drawn too. Thus, the Supreme Court has pointed out, there are three facts: one, the disclosure of all primary facts; two, the inferences of facts to be drawn from such disclosed primary facts; and, three, the legal inferences to be drawn from the primary facts disclosed and the inferences of facts drawn therefrom. The first part of disclosing primary facts alone was the duty of the assessee; and the duty of drawing inferences of facts from the primary facts disclosed and the duty of drawing inferences of law were both on the Income-tax Officer. And if the officer drew a wrong inference of fact or of law and if, subsequently, he or another officer finds that the inference drawn was wrong, for that reason the Income-tax Officer does not get jurisdiction to reopen the assessment. Only the omission or the failure of the assessee to disclose primary facts gives jurisdiction to the Income-tax Officer to reopen. These are laid down by the majority judgment; and we may also refer to portions of the judgment of Hidayatullah J. Hidayatullah J. (as he then was) has observed that the mere production of evidence before the Income-tax Officer was not enough; and that there might be an omission or failure to make a full and true disclosure, if some material for the assessment lay embedded in that evidence which the assessee could uncover but did not. If there was such a fact, it was the duty of the assessee to disclose that too.

6. And the third aspect is the scope and meaning of the expression “reason to believe”. The majority judgment has said that if there were 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 under-assessment, that would be sufficient to give jurisdiction to reopen. Whether the grounds were adequate or not is not open for the court to investigate. On this aspect, Shah J. has observed that the belief must be held in good faith; it cannot be merely a pretence. The expression does not mean a purely subjective satisfaction of the Income-tax Officer; the forum of decision as to the existence of reasons and the belief is not in the mind of the Income-tax Officer. If it be asserted that the Income-tax Officer had reason to believe that income had been under-assessed by reason of failure to disclose fully and truly the facts material for assessment, the existence of the belief and the reasons for the belief, but not the sufficiency, of the reasons, will be justiciable. (The existence of the belief and the reasons for the belief are justiciable: but the sufficiency of the reasons alone is not justiciable. Whether the belief existed and whether it was reasonable in the circumstances is justiciable: whether the reasons were sufficient is not justiciable). The expression predicates that the Income-tax Officer holds the belief induced by the existence of reasons for holding such belief. It contemplates the existence of reasons on which the belief is founded, and not merely a belief in the existence of reasons inducing the belief. The learned judge has concluded that such a belief may not be based on mere suspicion: it must be founded upon information. And the court is not concerned with the question whether the materials may be regarded by a court, before which a dispute is raised, to be sufficient to sustain the belief entertained by the Income-tax Officer.

7. We do not think we need refer to other subsequent decisions of the Supreme Court on this question, because the later decisions have not laid down anything new or different from the principles set out above. For instance, see S. Narayanappa v. Commissioner of Income-tax, and Kantamani Venkata Narayana & Sons v. First Additional Income-tax Officer, Rajahmundry [1967] 63 I.T.R 638.

8. Now we shall consider the facts and circumstances of the cases before us, and we shall take up first I.T.R No. 4 of 1968.

9. That reference relates to assessment year 1959-60, and the Income-tax Officer who reopened the assessment considers three grounds for the reopening. He says that the Income-tax Officer who made the original assessment was not furnished with all the material facts, so that he gave deduction for payment of interest on moneys borrowed by the assessee. One such amount considered is a sum of Rs. 2,80,513 shown in the profit and loss account, which is treated by the Income-tax Officer who reopened the assessment, as a personal drawing by the assessee for non-business purposes from the borrowed moneys, for which no deduction by way of interest payment could be allowed. The second amount is a sum of Rs. 41,194 representing amounts advanced by the assessee for the construction of a tin printing factory. And the third is a debit balance in the folio of Sri S.N Padmanabhan, the assessee's father-in-law. In the opinion of the Income-tax Officer, the first sum, as indicated already, represented withdrawals by the assessee for non-business purposes, and the second sum was not an amount spent on the business of the assessee, since the tin printing factory was a partnership business of the assessee, his wife and his minor children. Regarding the third figure, we may straightaway observe that the Appellate Assistant Commissioner has stated in his order that, so far as the loan to Sri Padmanabhan is concerned, the assessing Income-tax Officer was aware of the nature of the loan. And the Appellate Assistant Commissioner has accepted this too. But, he has held that, for the other reasons given by the reopening Income-tax Officer, the reassessment proceedings were justified. Thus, we need consider only the two grounds relating to the figures, Rs. 2,80,513 and Rs. 41,194.

10. The nature of these amounts came directly for consideration before this court in N. Sundareswaran v. Commissioner of Income-tax, (N. Sundareswaran is the assessee before us too.) The first question referred to the High Court in that reference directly covered the figure Rs. 41,194: and the question was whether Vijayamohan Metal Printers (the tin printing factory in these references) owned by the assessee, his wife and minor children had nothing to do with the business of the assessee and that the interest incurred by the assessee for raising loan for the purpose of the said business was not an allowable item of expenditure in computing the income of the assessee. And this question was answered by this court in favour of the assessee. The result is that the metal printers was a business of the assessee. In the opinion of the Income-tax Officer who originally assessed, the metal printers was a business of the assessee; but in the opinion of the Income-tax Officer who reopened the assessment, it was not a business of the assessee. That, in short, is the position. All the material or primary facts necessary were disclosed at the time of the original assessment; and the Income-tax Officer who made the original assessment drew the correct inference from those facts. Evidently, the Income-tax Officer who reopened the assessment drew a wrong inference from the same set of facts. Therefore, this is not a reasonable ground for reopening the assessment under section 147(a) of the Act. We would hasten to add that what we are doing here is not considering the sufficiency of the ground: what we are pointing out is that the reopening of the assessment was the result of the drawing of a wrong inference by the Income-tax Officer, who reopened the assessment, from the same material facts disclosed at the time of the original assessment.

11. The next amount is the amount of Rs. 2,80,513. This was also claimed in the earlier case before this court to be not a diversion for non-business purposes: it was claimed that notional depreciation written off during the prior years would cover Rs. 2,80,513, which was only an entry carried over from year to year. And this court observed that, on the facts of the case, there was no material for holding that the aforesaid sum or any part of it represented withdrawal of amounts by the assessee from the business. Thus, regarding this figure also there was no reasonable ground for believing that there was non-disclosure of material facts by the assessee.

12. And this concludes I.T.R No. 4 of 1968.

13. Then about the other case (I.T.R No. 3 of 1968) relating to assessment year 1958-59. This case and another case relating to assessment year 1956-57 were disposed of by the Iucome-tax Officer giving common reasons and one additional reason in the present case. The common reasons were found against by the Appellate Assistant Commissioner in the appeal relating to assessment year 1956-57; and those grounds are not before us either. We have, therefore, not to consider the reasonableness or the bona fides of the belief of the Income-tax Officer basing on those grounds. The only ground available in the present case is an advance of Rs. 10,000 to Sri S.N Padmanabhan, the father-in-law of the assessee. The Income-tax Officer says that the loan of Rs. 10,000 was given to the assessee's father-in-law, Sri S.N Padmanabhan, and at the time of the original assessment, no information was furnished to the then officer regarding the nature of the advance (vide annexure “A”). Thus, it cannot be said that the relationship of Sri Padmanabhan to the assessee was not disclosed to the Income tax Officer then. What the Appellate Assistant Commissioner says is that subsequent enquiries indicated that Sri Padmanabhan was the assessee's father-in-law and that the advance had nothing to do with the business of the appellant. And the Appellate Assistant Commissioner and the Tribunal, at any rate, proceed on the basis that the nature of this advance was not disclosed,. It is not disputed that Sri Padmanabhan was also a businessman doing business in cashew and an income-tax assessee too: there were also several transactions between the assessee and Sri Padmanabhan. In these circumstances, the maximum that can be said in favour of the revenue is that the Income-tax Officer who reopened the assessment felt suspicious regarding this advance: in other words, it is difficult to agree that this was a reasonable ground which could have made the Income-tax Officer who reopened the assessment to believe bona fide that there was non-disclosure of material facts. As we have already pointed out, the Supreme Court has observed that a mere suspicion is not sufficient to reopen an assessment, and the ground must be a reasonable ground—a ground on which the belief is founded and not merely a belief in the existence of a ground inducing the belief, in which case, evidently, the belief cannot be bona fide.

14. This concludes I.T.R No. 3 of 1968 too.

15. A few decisions have been cited before us by Sri P.K Krishnan Kutty Menon, counsel for the revenue. We do not think we need refer to all of them: but we feel that we might consider one of them, the decision in Commissioner of Income-tax v. Kalyanji Mavji & Co., by the Calcutta High Court. Firstly, that case arose under section 34(1)(b), corresponding to section 147(b), and not under section 34(1)(a), corresponding to section 147(a). Secondly, what we have found in that judgment is that, the Tribunal, relying on two decisions, Bhimraj Panna Lal v. Commissioner of Income-tax, of the Patna High Court and D.R Dhanwatay v. Commissioner of Income-tax [1956] 29 I.T.R 257 Pat.., of the Nagpur High Court, held that it was not open to the Income-tax Officer to act under section 34 on a mere change of opinion on the same set of facts and law. And this reasoning of the Tribunal, which is correct, is referred to by the Division Bench at page 110 of the reports, but, a little surprisingly, these decisions are not referred to in the subsequent portion of the judgment. As pointed out by us already, the duty of the assessee is only to disclose the material or primary facts necessary, and if, on the same set of facts, different inferences are drawn by different Income-tax Officers, that is no reason for reopening the assessment. That is the correct legal position; and that is what is pointed out by the two decisions followed by the Appellate Tribunal in the Calcutta case. Therefore, if the conclusion of the Calcutta Division Bench is contrary to the principle pointed out by the Patna and the Nagpur High Courts (which, we hope, not), we, with due respect to the learned judges of the Calcutta High Court, disagree with them. If, on the other hand, what they have done is to follow the same principle pointed out by the Patna and the Nagpur High Courts (which, we think, is what they have done) but, in the application of the principle they have disagreed with the conclusion of the Tribunal, then there is nothing in this decision which will help the revenue in the cases before us.

16. Our answer to the common question referred to us is in the negative— in favour of the assessee. This answer will be sent to the Appellate Tribunal by the Registrar of this court. The assessee will get his costs in both the cases; but we fix a consolidated counsel's fee of Rs. 250 in both the cases together.