The Judgment of the Court was delivered by

Gopalan Nambiyar, J.:— The jurisdiction of the Income-tax Officer, A-Ward, Quilon, to issue notices under section 148 of the Income-tax Act, 1961, against the petitioner, for the assessment years 1961-62 to 1963-64 is challenged in these proceedings. The petitioner is a firm with its registered office in Quilon, doing business of processing cashewnuts in factories and importing raw nuts from Africa, and purchasing the same from Quilon and its suburbs, and from Trichur and Tellicherry. Copies of the notices sought to be quashed are exhibit P. 8 in O.P No. 581 of 1972 for the assessment year 1963-64, exhibit P-3 in O.P No. 583 of 1972 for the assessment year 1961-62, and exhibit P-2 in O.P No. 585 of 1972, for the assessment year 1962-63. The facts leading to the issue of these notices are he same; and these were stated and arguments advanced with respect to O.P No. 581 of 1972. The fate of the other two writ petitions was left to depend upon the result of O.P No. 581 of 1972. I, therefore, turn to the facts as disclosed in O.P No. 581 of 1972.

2. For the assessment year 1963-64, by exhibit P-1 communication dated Jane 29, 1964, of the 1st respondent, the petitioner was asked to give details in the pro forma indicated, of the loans taken by its Bombay branch on executing hundies. The pro forma required full details, showing the names and addresses of parties and brokers from and through whom the loans were taken, the dates of the transactions, their duration and dates of redemption; whether the money was paid and repaid by cheque or cash; dates of payment and repayment; whether the person who advanced the loan had discounted the hundies with any bank, and if so, the name of the bank or purjawalas with full address; whether the person advanced the loan with any bank or purjawalas, etc. The petitioner complied (vide exhibit P-2 dated 30th July, 1964). The 1st repondent by the original of exhibit P-3 letter dated 7th August, 1964, stated that it had come to his notice that there are certain indigenous moneylenders who issued bogus hundies to facilitate introduction of secret cash into the books and that he was in possession of the names of some of them; and that some of these names which accounted for a good portion of the loans in the list supplied by the petitioner figured in the said list. Exhibit P-13 concluded:

“I have therefore reason to doubt about the bona fides. I, therefore, request you to let me know on or before August 14, 1964, whether you still maintain that all these loans taken from these money-lenders were genuine and whether you want me to pursue the enquiry further.”

3. The petitioner replied (vide exhibit P-4, dated August 19, 1964) that the loans are raised through recognised finance brokers, in Bombay, who arrange for the necessary funds by means of the hundies; that its dealings were only with the brokers whose names had already, been furnished and all of whom are assessees in Bombay, and all of whom had certified their statements of the loans raised by them, as evidenced by the acknowledgments filed before the 1st respondent. Exhibit P-4 concluded:

“In these circumstances, we have no occasion to enquire into or suspect the bona fides of the money-lenders from whom the finance brokers had secured the loans to us in the course of their business.”

4. The assessment was then completed by an order, dated September 30, 1964 (copy exhibit P-5). Interest on the amounts covered by the hundi transactions was excluded and the tax was determined at Rs. 45,601. An appeal against the order was dismissed subject to a slight reduction in the assessable income. The further appeal to the Appellate Tribunal was allowed by its order dated December 28, 1966. A reference sought against the Tribunal's decision was also dismissed. It was, thereafter, by exhibit P-6 notice dated November 22, 1965, that the 1st respondent informed the petitioner that the income-tax authorities at Bombay had carried out a series of raids in the business premises as well as houses of hundi bankers and brokers and a good many of the hundi bankers whose names appeared in the list furnished along with exhibit P-2 by the petitioner, made clean admissions before the income-tax authorities that the loans given by them were bogus. The names of persons in the petitioner's list who made such clean admissions were specified in exhibit P-6. The total of the loans taken by the petitioner covered by such statements in the years 1960-61 and 1961-62 and assessable on that basis for the assessment years 1962-63 and 1963-64 was stated to amount to Rs. 9,65,000. The letter wound up:

“I may please be informed within three days from the date of receipt of this letter whether you still maintain that all the loans taken by you as shown above were genuine.”

5. By exhibit P-7 letter dated 25th November, 1965, the petitioner replied that all the loans raised through hundi transactions were absolutely genuine; that the brokers through whom the hundies were executed and from whom the loans were received were income-tax assessees, and that it was understood that they had fully accounted for and paid tax on the discounts and brokerage amounts received by them in their income-tax assessment, besides having given the declarations filed before the 1st respondent. The 1st respondent was assured that the loans were actually received by the petitioner through brokers and the hundies were discharged by payment of value to the brokers, as could be seen from the discharged hundies produced before the 1st respondent and examined by him at the time of the assessment. The petitioner added that it was not in a position to admit, or to comment on, the alleged admissions of the hundi bankers before the income-tax authorities or to be bound by the same. It was thereafter that the impugned notice, exhibit P-8, dated December 17, 1970, was issued. Exhibit P-6 was by the very officer who had passed exhibit P-5 proceedings, and exhibit P-8, by his successor in office.

6. The attack against the notice was that the jurisdictional conditions necessary for the issue of the notice under section 148 did not exist; that the facts disclosed would, if at all, attract section 147(b) of the Act, and, therefore, only the smaller time, limit provided under section 149(1)(b) which had expired before exhibit P-8; and that the provisions of section 151 of the Act had not been complied with. Sections 147, 149 and 151 of the Act read:

“147. Income escaping assessment.—If—

(a) 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, or

(b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment 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 (hereafter in sections 148 to 153 referred to as the relevant assessment year).

Explanation 1.—For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely:—

(a) where income chargeable to tax has been under-assessed; or

(b) where such income has been assessed at too low a rate; or

(c) where such income has been made the subject of excessive relief under this Act or under the Indian Income-tax Act, 1922 (11 of 1922); or

(d) where excessive loss or depreciation allowance has been computed.

Explanation 2.—Production before the Income-tax Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Income-tax Officer will not necessarily amount to disclosure within the meaning of this section.

149. Time limit for notice.—(1) No notice under section 148 shall be issued,—

(a) in cases falling under clause (a) of section 147—

(i) for the relevant assessment year if eight years have elapsed from the end of that year, unless the case falls under sub-clause (ii);

(ii) for the relevant assessment year, where eight years, but not more than sixteen years, have elapsed from the end of that year, unless the income chargeable to tax which has escaped assessment amounts to or is likely to amount to rupees fifty thousand or more for that year;

(b) in cases falling under clause (b) of section 147, at any time after the expiry of four years from the end of the relevant assessment year.

(2) The provisions of sub-section (1) as to the issue of notice shall be subject to the provisions of section 151.

(3) If the person on whom a notice under section 148 is to be served is a person treated as the agent of a non-resident under section 163 and the assessment, reassessment or recomputation to be made in pursuance of the notice is to be made on him as the agent of such non-resident, the notice shall not be issued after the expiry of a period of two years from the end of the relevant assessment year.

151. Sanction for issue of notice.—(1) No notice shall be issued under section 148 after the expiry of eight years from the end of the relevant assessment year, unless the Board is satisfied on the reasons recorded by the Income-tax Officer that it is a fit case for the issue of such notice.

(2) No notice shall be issued under section 148 after the expiry of four years from the end of the relevant assessment year, unless the Commissioner is satisfied on the reasons recorded by the Income-tax Officer that it is a fit case for the issue of such notice.”

7. Section 148 is not quoted as it provides for issue of notice for action under section 147.

8. The scope of investigation when proceedings under section 148 (or its predecessor section 34 of the 1922 Act) are challenged under article 226, has been expounded by the Supreme Court in more than one decision. In S. Narayanappa v. Commissioner of Income-tax [1967] 63 I.T.R 219, 221 S.C., the Supreme Court, after noticing the jurisdictional conditions for taking action under section 34 of the 1922 Act, observed:

“Both these conditions are conditions precedent to be satisfied before the Income-tax Officer acquires jurisdiction to issue a notice under the section. But the legal position is that if there are in fact some reasonable grounds for the Income-tax Officer to believe that there had been any nondisclosure as regards any fact, which could have a material bearing on the question of under-assessment that would be sufficient to give jurisdiction to the Income-tax Officer to issue the notice under section 34. Whether these grounds are adequate or not is not a matter for the court to investigate. In other words, the sufficiency of the grounds which induced the Income-tax Officer to act is not a justiciable issue. It is of course open for the assessee to contend that the Income-tax Officer did not hold the belief that there had been such non-disclosure. In other words, the existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. Again, the expression ‘reason to believe’ in section 34 of the Income-tax Act does not mean a purely subjective satis faction on the part of the Income-tax Officer. The belief must be had in good faith it cannot be merely a pretence. To put it differently, it is open to the court to examine the question 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 Income-tax Officer in starting proceedings under section 34 of the Act is open to challenge in a court of law (see Calcutta Discount Co. Ltd. v. Income-tax Officer ).”

9. The court was there considering the validity of proceedings which had resulted in reassessment under section 34, and which had been carried up in appeal, in further appeal, and in reference to the High Court. In Kantamani Venkata Narayana and Sons v. First Additional Income-tax Officer [1967] 63 I.T.R 638, 643 S.C., the assessee, a Hindu joint family, was assessed on income derived principally from money-lenders. In the course of proceedings for assessment of a private limited company the officer discovered that there was a large accretion to the wealth of the assessee, which had not been disclosed in proceedings for its assessment. He, therefore, issued notice to reopen the assessment. The assessee filed a writ of prohibition to restrain the officer from proceeding in pursuance of the notice. The writ was dismissed by the High Court and the dismissal was sustained on appeal by the Supreme Court. It was ruled that the notice under section 34 need not specify under which of the two clauses of the section, the action was proposed to be taken. It was argued for the assessee that the assessment had been completed on the materials furnished by the assessee, including the account books and the statements of accounts which were produced before the officer, and that, therefore, there was no power to reassess, merely because, on the same materials, the officer or his successor entertained a different opinion. This contention was rejected. It was held that the increase in wealth discovered was wholly disproportionate to the known sources of income of the assessee, and prima facie there was evidence on which the officer had reason to believe that the assessee had omitted to disclose fully and truly all the material facts as a result of which the income had escaped assessment. The court observed:

“From the mere production of the books of account it cannot be inferred that there had been full disclosure of the material facts necessary for the purpose of assessment. The terms of the explanation are too plain to permit an argument being reasonably advanced, that the duty of the assessee to disclose fully and truly all material facts is discharged when he produces the books of account or other evidence which has a material bearing on the assessment. It is clearly implicit in the terms of sections 23 and 34 of the Income-tax Act that the assessee is under a duty to disclose fully and truly all material facts necessary for the assessment of the year, and that the duty is not discharged merely by the production of the books of account or other evidence. It is the duty of the assessee to bring to the notice of the Income-tax Officer, particular items in the books of account or portions of documents which are relevant. Even if it be assumed that from the books produced, the Income-tax Officer, if he had been circumspect, could have found out the truth the Income-tax Officer may not on that account be precluded from exercising the power to assess income which had escaped assessment.”

10. In Malegaon Electricity Co. (P.) Ltd. v. Commissioner of Income-tax the assessee-company informed the officer of its resolution to sell the concern to the Belgaum company, of the minutes of the meeting of the board of directors of the Belgaum company agreeing to purchase the assets of the assessee-company, and of the agreement between the two companies regarding the sale and purchase. But, the assessee-company did not disclose the profit on sale, under section 10(2)(vii) of the Indian Income-tax Act, 1922, in the relevant column of the return of income, nor did it indicate the written down value of the assets sold. Proceedings under section 34 were started and the reassessment order was carried up in appeal and further appeal to the Tribunal, and by way of reference to the High Court. Thereafter, the matter went up to the Supreme Court. It was observed:

“It is true that if the Income-tax Officer had made some investigation, particularly if he had looked into the previous assessment records, he would have been able to find out what the written down value of the assets sold was, and, consequently, he would have been able to find out the price in excess of their written down value raised by the assessee. It can be said that the Income-tax Officer if he had been diligent could have got all the necessary information from his records. But that is not the same thing as saying that the assessee had placed before the Income-tax Officer truly and fully all material facts necessary for the purpose of assessment. The law casts a duty on the assessee to disclose fully and truly all material facts necessary for his assessment for that year.”

11. The principles applicable are sufficiently expounded in the above decisions. For the petitioner it was contended that there had been a full and true disclosure of all the material facts by the assessee, and that these had been probed into by the officer, as will be seen from exhibits P-1 to P-4 which preceded the assessment order, exhibit P-5. It was claimed that what happened was only a change of opinion on the part of the officer, or a failure to draw the necessary inferences from the facts disclosed, neither of which could sustain action under sections 147 and 148. Strong reliance was placed on the decision of the Supreme Court in Commissioner of Income-tax v. Bhanji Lavji. The matter went to the Supreme Court against reassessment proceedings which had been completed and been appealed against, up to the level of the Tribunal and carried up in reference thereafter to the High Court. It was laid down that it was not for the assessee to establish that there was no concealment but for the officer to show a failure to disclose the primary facts as required by the section; and that where there had been a full and true disclosure of primary facts, the officer was not entitled to take action on the ground of a change of opinion from the view taken at the time of the original assessment, or of failure to draw the necessary inference from the facts disclosed at the stage of the assessment. The same principle was restated in Commissioner of Income-tax v. Burlop Dealers Ltd. and in Commissioner of Income-tax v. Dinesh Chandra H. Shah [1971] 82 I.T.R 367 S.C. In Madhya Pradesh Industries Ltd. v. Income Tax Officer, Nagpur. [1970] 77 I.T.R 268 S.C., the Supreme Court surveyed the decisions commencing from the Calcutta Discount Company's case 5, referred to Narayanappa's case [1967] 63 I.T.R 219 S.C. and Kantamani Venkata Narayana's case 7, and observed that the officer who issued the notices had not filed any affidavit traversing the allegations of the assessee, and that the proceedings recorded by the officer before issuing the notices and the officer's report to the Commissioner or even the Commissioner's sanction had not been produced. It was in these circumstances that the Supreme Court held that action taken under section 34(1)(a) was without jurisdiction.

12. In view of the above decisions of the Supreme Court, I am not referring to the decisions of the High Courts, a large number of which were cited by counsel on either side. The principles applicable appear to be clear enough. The difficulty is only to decide on which side of the line the case falls, whether there was an omission to disclose on the part of the assessee, or a failure to draw inferences or a change of opinion on the part of the officer. Proceedings for assessment are not a game of hide and seek, where one party tries to over-reach the other. Under section 147(a) read with section 143 of the Income-tax Act, an obligation is implicit on the assessee to disclose fully and truly all the material facts. The conditions which the disclosure must satisfy are cumulative, viz., it should be both full and true. This aspect of the matter is stressed by Explanation II to section 147, as pointed out by the Supreme Court in the passage cited in Kantamani Venkata Narayana's case and in Malegaon Electricity Co. (P.) Ltd.'s case 8, where the relevant passage referring to the Explanation has not been cited.

13. Exhibits P-1 and P-2 disclose that the officer called for certain particulars in a pro forma statement and that the petitioner complied with the same. Thereafter, it came to the notice of the officer that certain indigenous money-lenders in Bombay had issued bogus hundies and that the names of some of them were seen in the list filed by the petitioner. The officer, therefore, stated that he had reason to doubt the bona fides of the transaction and enquired in exhibit P-3 whether the petitioner maintained that the loans were genuine, and whether it wanted him to pursue the enquiry further. The petitioner replied by exhibit P-4, and the officer thereafter completed the assessment by exhibit P-5. The questions that arise at this stage are: Had the 1st respondent reason to believe that the petitioner had not made a clean breast of the material facts? or, was it a case of failure on the part of the officer to draw the necessary inferences from the facts supplied, or of change of opinion? Further, in the light of the disclosures made by exhibits P-2 and P-4, was the officer precluded from proceeding to take action under sections 147 and 148 of the Act? Giving the matter my careful attention, I think there was enough for the 1st respondent to have reason to believe that the petitioner had not dis charged its duty of full and true disclosure and that the 1st respondent was not precluded from taking action under section 147(a) read with section 148. I think too that the action under these provisions was proper and justified and there is no substance in the contention that the matter would, if at all, fall only under section 147(b). The officer had only stated in exhibit P-2 that he had reason to doubt the bona fides of the transactions and enquired if the petitioner would like him to pursue the matter further. On the assurance given by the petitioner in exhibit P-4, the officer was apparently content to act, and proceeded to assessment by the order, exhibit P-5. It was only subsequently on receipt of information from the income-tax authorities in Bombay that the officer had “reason to believe” that the petitioner had not made a full and true disclosure of the material facts; and hence the notices, exhibits P-6 and P-8. This has been stated also in the counter-affidavit. Going by the test propounded by the Supreme Court in Narayanappa's case and in Venkata Narayana's case , it cannot be said at this stage that the 1st respondent did not even have prima facie reason to believe that the facts material to the assessment had not been fully and truly disclosed and that, as a result thereof, the income had escaped assessment. In that view the impugned notices were justified. This is not to say that a further and fuller investigation as to whether the grounds of action under sections 147 and 148 actually existed or not, would stand foreclosed. That should follow hereafter. It would be open to the petitioner to urge all objections to the proposed action including those of a jurisdictional nature before the 1st respondent before he proceeds to reassess the petitioner in pursuance of the impugned notices.

14. In Sowdagar Ahmed Khan v. Income-tax Officer, the assessee was an individual carrying on business in the distribution and exhibition of cinema films. He owned a cinema theatre at Nellore. The original assessments for 1943-44 to 1949-50 were completed. In the course of the assessment proceedings for 1957-58, the officer found that the assessee had a current account in the Imperial Bank of India in the name of his father-in-law till the latter's death. This fact came to the notice of the Income-tax Officer when the assessee was asked to explain the cash credit of Rs. 49,000 for the assessment year 1950-51. It was found that a sum of Rs. 70,000 advanced by the assessee to Jagamani Pictures on 9th January, 1946, had not been disclosed for the relevant assessment year. On all these, the officer started proceedings under section 34(1)(a) of the Indian Income-tax Act, 1922, by a notice dated 5th September, 1959. The assessee challenged the notice on the ground that the proceedings were barred by limitation and that there was only a change of opinion on the part of the officer and not any failure to disclose the material facts on the part of the assessee. The argument was that all the accounts were produced before the officer in the original assessment proceedings and the accounts containing cash credits had been accepted in the original assessment. The contention was rejected by the Supreme Court. The officer had asserted that the assessee had failed to disclose the existence of the bank account in the name of the assessee and to disclose fully and truly the basic facts in respect of the source of the alleged credits. It was, therefore, held that there was material on which the officer could form the prima facie belief that the assessee had omitted to disclose fully and truly all the material facts and that the notice issued under section 34(1)(a) was not without jurisdiction. After referring to Kantamani Venkata Narayana's case it was observed that the fact that the original assessment had duly considered and accepted the cash credits in question would not preclude action under section 34(1)(a). The Supreme Court observed:

“He has to bring to the notice of the Income-tax Officer particular items in the books of account or portions of documents which are relevant. Even if it may be assumed that, from the books produced, the Income-tax Officer, if he had been circumspect, could have found out the truth, he is not on that account precluded from exercising the power to assess income which had escaped assessment.”

15. In the light of the above, I am unable to hold at this stage that there was no jurisdiction to issue notice under section 148. Nor has the 1st respondent precluded himself by reason of the enquiries pursued and the disclosure made prior to exhibit P-5. It is, therefore, unnecessary to consider the petitioner's argument that action would, if at all, properly lie only under section 147(b) and that the larger time-limit provided under section 149 would not be available, and that, therefore, the proceedings are barred.

16. It remains to notice the contention that section 151 of the Act has not been properly complied with. The section has been quoted earlier. The petitioner's argument was based on the decisions of the Supreme Court in Chhugamal Rajpal v. S.P Chaliha and Madhya Pradesh Industries Ltd. v. Income Tax Officer, Nagpur.. Besides the averment in the counter-affidavit that the officer had duly satisfied himself and performed his obligations as required by section 151 of the Act, the files were made available to me at the hearing and they show that the officer had recorded the reasons for taking action, and that on the said report, the Board and the Commissioner were satisfied that the case was a fit one for issue of the notice. An additional counter-affidavit has also been filed by the officer who issued exhibit P-8. There is no merit in the contention that section 151 of the Act had not been complied with.

17. O.P Nos. 583 and 585 of 1972 should follow the result of O.P No. 581 of 1972. I dismiss all the three writ petitions but, in the circumstances, without costs.