The Judgment of the Court was delivered by

Salil Kumar Dutta, J.:— This is an appeal from the judgment and order of Sabyasachi Mukharji J. dated April 28, 1972, whereby the rule nisi obtained by the appellant on an application under art. 226 was discharged.

2. The appellant is a partnership-firm registered under the Indian Partnership Act, 1932, carrying on the business of manufacture and sale of buckets. For the assessment year 1958-59 (accounting period ending on December 31, 1957), the appellant was assessed by the respondent No. 1 on an income of Rs. 32,562 as computed according to the order of assessment dated January 30, 1959. According to the appellant, at the time of assessment, its representative produced copies of account of each creditor and disclosed fully and truly all transactions with each of the parties on production of all relevant vouchers, discharged hundis, statements of payments of interest with receipts, confirmation letters of creditors with respective income-tax file numbers, as asked for, also balance-sheets, profit and loss accounts and necessary documents. The ITO completed the assessment on his satisfaction with the said materials. On March 27, 1967, the appellant received a notice purported to be under s. 148 of the I.T Act, 1961, whereby the appellant was asked to submit a return of income for the said year. A copy of the notice is set out below:

“Notice Under Section 148 of the Income-Tax Act, 1961.

V(2)/305-H/A

Income-tax Officer V(2), ‘A’

Dated 27-3-67.

M/s. H.A Nanji & Co.,

46, Ezra Street,

Calcutta.

Whereas I have reason to believe that your income chargeable to tax for the assessment year 1958-59, has escaped assessment within the meaning of section 147 of the Income-tax Act, 1961.

1. therefore, propose to reassess the income for the said assessment year and I hereby require you to deliver to me within 30 days from the date of service of this notice a return in the prescribed form of your income assessable for the said assessment year.

2. This notice is being issued after obtaining the necessary satisfaction of the Commissioner of Income-tax, W.B.II, Calcutta.

(Sd.) Harnam Singh Sarna,

Income-tax Officer, ‘A’ Ward,

V(2), Calcutta

3. The appellant by letter written by its advocate on April 20, 1967, challenged the notice as illegal, barred by limitation and void ab initio and requested the ITO to drop the proceeding and without prejudice and on protest filed a return for assessment year 1958-59. No reply was given to the said letter. On the contrary, the ITO on July 30, 1970, gave notice fixing hearing of the proceeding on August 5, 1970. The appellant thereafter by letters of August 4 and 10, 1970, demanded justice and called upon the respondents to cancel the said notice and later on also called upon the respondents to furnish him with a copy of the facts and reason on which the sanction of the CIT, West Bengal, was obtained but there was no compliance with the aforesaid requisition. The appellant in this state of affairs, when according to him he had produced all materials necessary for the assessment, apprehending that the ITO might proceed on an apparent change of opinion moved this court on September 14, 1970, by an application under art. 226 of the Constitution, praying, inter alia, for issuance of a writ in the nature of mandamus commanding the ITO and others to cancel, withdraw and rescind the impugned notice and also of a writ in the nature of certiorari quashing the said notice and proceeding initiated thereon. It was contended, inter alia, in the petition, after narration of the facts stated above, that the conditions precedent for the assumption of jurisdiction under s. 147 read with s. 148 was absent and as such the notice as also the proceeding commenced thereunder were without jurisdiction.

4. On this application, a rule nisi in terms of the prayer was issued by this court on the same date and the respondents contested the rule by filing an affidavit-in-opposition on behalf of the respondents affirmed on December 31, 1971, by Harnam Singh Sarna at the time an AAC, Meerut, who as the concerned ITO, issued the impugned notice. In the said affidavit, the allegations and contentions made in the petition were denied and in particular it was stated, inter alia, as follows:

“4. With reference to paragraph 3 of the petition I crave leave to refer to the said order of assessment for the assessment year 1958-59, and the entire records and proceedings relating thereto for ascertaining the terms, scope and effect thereof and deny all allegations contrary thereto and/or inconsistent therewith. I say that the said assessment was completed on the basis of materials disclosed by the petitioner at that time. I further say that it appears from the records available that the petitioner had filed statement showing purported loans from various parties under the heading ‘Hundi accounts’ during the year 1957, and interest paid during the said year under the head ‘Interest accounts 1957 (paid to Sundry Parties)’. It does not, however, appear from the records that the petitioner had produced the discharged hundis, receipts for payment, alleged interest, bills of brokers for procuring the purported loans, purported confirmation letters from the parties quoting their income-tax file No. as alleged. It also appears from the records that the said hundi loan account had been accepted by the assessing Income-tax Officer as such without verification.

5. I say that on subsequent investigation it was found that the alleged loans purported to have been obtained on purported hundis were not genuine and most of the purported hundiwallas were blacklisted who have either confessed to have been mere name-lenders or who have been found to be name-lenders for the said purported loans which were entered in the books of accounts of various assessees including the petitioner on commis sion. It appears that the petitioner introduced these parties regarding the said purported loans to suppress its real income. I deny in particular that all necessary materials were produced by or on behalf of the petitioner as alleged or at all. I deny further that the said Income-tax Officer could or did consider all the materials as alleged. In the facts and circumstances of the case the alleged satisfaction of the Income-tax Officer does not arise……

13. With reference to paragraph 12 of the petition I say that on subsequent investigation it was found that the loans purported to have been obtained by the petitioner were not genuine and some of the persons from whom the petitioner alleged to have obtained loans either confessed to have been mere name-lenders or who have been found to be the name-lenders, for the said purported loans which were entered in the books of accounts of the various assessees including the petitioner on commission. I say that in the books of accounts of the petitioner for the previous year relevant to the assessment year 1958-59, the petitioner had shown that it had purported to have taken alleged loans to the tune of Rs. 3,25,000 from several hundi brokers and/or bankers such as Pahlajrai Keshavlal, Naraindas Nandlal, Mohansing Kanhaiyalal, Lakhmichand Bajaj, Nandlal Ramchand, Rupchand Pahlajrai, Govindram Arjandas, Bhagwandas Purushottamdas, Mathura-das Radhakishandas, Gokuldas Srichand, Pahlajrai Girdhardas which were accepted as genuine loans as claimed by the petitioner without any verification. Between March, 1965, and March, 1967, lists of bogus hundi brokers and/or bankers and their alleged debtors who were blacklisted were received by me from the Special Investigation Branch from the Commissioner of Income-tax, West Bengal. The said lists included most of the said purported hundi creditors of the petitioner such as Dondaram Vasudev, Pahlajrai Keshavlal, Naraindas D.K, Ramchand Monoharlal, Mohansing Kanhaiyalal, Lakhmichand Bajaj. I also received from the said Special Investigation Branch materials to the effect that in the course of the said assessment proceedings of the various hundi brokers and/or bankers and their alleged debtors before the Income-tax Officer the bogus nature of the said hundi trade and falsity of the said loans were proved in most of the said purported creditors of the petitioner. Some of the said alleged creditors, inter alia, Dondaram Vasudev, Mohansing Kanhaiyalal, specifically admitted and made confession that they had been mere name-lenders for the said pur ported loans, which were entered in the books of accounts of various assessees including the petitioner for the said year on commission.

6. It, therefore, prima facie, appeared to me that the petitioner introduced those hundi loans brokers and/or bankers and other parties regarding the said purported hundi loans to suppress its real income. The said purported hundi loans in fact represented the concealed income of the petitioner. In the premises on the aforesaid materials I had prima facie reasons to believe and I bona fide believe that due to the omission and/or failure on the part of the petitioner to disclose fully or truly all material facts necessary for his assessment for the said assessment year, income chargeable to tax had escaped assessment, and/or had been under-assessed and consequently I validly issued the said notice under section 148 dated 27th March, 1967, for the said assessment year after fulfilling all conditions. Save as aforesaid and save as would appear from the records of the income-tax department allegations contained in paragraph 12 of the petition are denied. In particular it is denied that there were no materials on the basis of which the respondents could have formed the belief that the income of the petitioner chargeable to tax had escaped assessment for the said year within the meaning of section 147 as alleged or at all.”

7. The appellants filed an affidavit-in-reply affirmed by Abdul Rasul Nanji on February 8, 1972, reiterating that all documents in respect of the loans were produced before the ITO who completed the assessment on being satisfied with the materials filed or produced. The allegations that the loans were not genuine were denied and it was stated that the alleged confessions or findings that the loans were bogus had no relevant bearing on the formation of the belief that the income had escaped assessment. Further, the conditions precedent for assumption of jurisdiction were not established.

8. It appears that in the course of proceeding as directed by the court the respondents disclosed the recorded reasons for proceeding under s. 147 of the I.T Act, 1961, relating to the relevant and other years. This is set out as follows:

“Order sheet entry.

Asstt. yr. 1958-59.

Dt. 15-3-67

Send Sec. 147(a) proposal to CIT, WB-II,

Calcutta, for obtaining his approval.

(Sd.) ITO

Brief reasons for starting proceedings u/s. 147.

In the course of assessment proceedings the following hundi loans were not examined.

Rs. 1. Pahlajrai Keshavlal 50,000 2. Naraindas Nandlal 35,000 3. Naraindas B.K 20,000 4. Dondaram Vasudev 30,000 5. Ramchand Monoharlal 10,000 6. Mohansing Kanhaiyalal 10,000 7. Lakhmichand Bajaj 15,000 8. Nandlal Ramchand 5,000 9. Rupchand Pahlajrai 35,000 10. Govindram Arjundas 15,000 11. Bhagwandas Purushottamdas 15,000 12. Mathuradas Radhakishandas 20,000 13. Gokuldas Srichand 55,000 14. Pahlajrai Girdhardas 10,000 Total 3,25,000

No disclosure petition u/s. 271(4A) appears to have been filed in this case. Please also refer to your Circular No. Dis/29/64-65.WB-III/CIB/10535-934A dt. 7-3-67. Reference also to be made in IAC/R-IX's D.O

I have reason to believe that hundi loans shown by the assessee are fictitious and hence that has escaped assessment for the year.

(Sd.) (H.S Serna)

Income-tax Officer, A-Ward,

Dist. V(2)/Cal.

The recorded reasons refer to two circulars which are as follows:—

Office of the Commissioner of Income-tax, West Bengal,

P-7, Chowringhee Square, Calcutta.

Dated the 7th March, 1967.

No. Dis. 29/64-65.WB-III/SIB/10535-935A.

All IACs and ITOs (by name)

Sub: Normal voluntary disclosure u/s. 271(4A) of I.T Act, 1961—petition involving 1962-63 asstt. year—instructions regarding.

A large number of disclosure petitions u/s. 271(4A) have been received in which assessment for the year 1962-63 is involved. Such petitions are being filed even now. It may not be possible to dispose of all such petitions before the end of the current financial year. In the meantime, assessment for 1962-63 has to be completed in all these cases to prevent it from becoming time-barred. The ITOs are, therefore, directed to complete the assessment for the year 1962-63 in all such cases on the merits of each case.

2. Similarly there are petitions which involve reopening of the assessment for the year 1958-59, u/s. 147(a) which action will be barred by limitation after 31-3-67. ITOs are directed to review all cases where disclosure petition u/s. 271(4A) have been filed by assessees under their jurisdiction and where any action is indicated in respect of the assessment year 1958-59, they should send their proposals u/s. 147(a) for approval immediately and see that notices u/s. 148 are issued to the assessees well before 31-3-67.

Kewal Ram, Inspg. Asstt. Commissioner, of Income-tax, Range IX.

Aayakar Bhawan, P-7, Chowringhee Square, Calcutta-1

Dated, the 21st July, 1966.

D.O No. 40-C/R-IX.

M-IV(Con) 62-63.

My dear Serna,

I am giving below some information concerning some cases which are either assessed by you or by ITOs of your district. Please take necessary action in respect of cases assessed by you and pass on the information in respect of other cases to other colleagues of your district.

(i) ………………

(ii) ………………

(iii) ………………

(iv) H.R Nanji.

In the assessment year 1957-58, the following hundi loans were not examined by the ITO.

Rs. (a) Narayan Singh 10,000 (b) Mathura Das 20,000 (c) Narayandas 10,000 (d) Rupchand 20,000 (e) Pahlajrai Keshavlal 15,000 (f) Bhagwandas 5,000 (g) Pahlajrai Girdhardass 5,000 (h) Gokuldas 30,000

As the total credits exceed Rs. 50,000 proceedings u/s. 147 should be taken after completing investigations. The ITO should also consult the list of bogus hundi financiers and also the list of those persons who have confessed either here or at Bombay to the effect that they are merely name-lenders. Action should be taken quickly so that action u/s. 147 is initiated well within time.

Asstt. yrs. 1958-59 & 1959-60:

The following hundi loans were not investigated by the ITO:

Rs. (a) Lakhmichand 15,000 (b) Narayandas 15,000 (c) Ramchand 10,000 (d) Narsumal 16,000 (e) Bhagwandas P. 10,000 (f) Mohan Singh 15,000 (g) Bhagwandas S. 10,000 (h) Dondaram 5,000 (i) Narayan Singh 20,000

The records should be examined carefully and investigations also completed quickly for taking action u/s. 147.

Asstt. yrs. 1960-61 and 1961-62: In these years also hundi loans were not verified and they were accepted on mere confirmation letters. The present ITO should examine these hundi loans in the light of instructions and circulars issued by the Commissioner and take action u/s. 147 quickly.

Yours faithfully,

(Sd.) (Kewal Ram)”

Sri H.S Serna,

Income-tax Officer, ‘A’ Ward.,

Dist. V(2)/Calcutta.

9. The learned judge in the trial court in disposing of the rule, in disagreement with the decision in Jamna Lal Kabra v. ITO, [1968] 69 ITR 461 (All), held that provisions of sub-s. (2) of s. 148 does not require that the ITO should record all reasons which lead to the formation of the requisite belief relying on the decision in the Calcutta Discount Co. Ltd. v. ITO, [1961] 41 ITR 191/203 (SC). It was further held that the ITO is entitled to refer to additional reasons in his affidavit not inconsistent with reasons recorded which operated in his mind not recorded before the notice was issued. It was further held that during March, 1965, to March, 1967, list of bogus hundi brokers and bankers were received by the ITO from the Special Investigation Branch of the CIT, West Bengal. Of the hundi loans for the relevant year claimed to have been taken by the assessee amounting to Rs. 3.25 lakhs, most of the alleged hundi creditors were included in the list. The ITO formed the opinion that these loans, which were accepted by the ITO as genuine at the time of assessment without verification, were fictitious and accordingly there was escapement of income. The requisite conditions precedent for issue of notice, it was held, were thus satisfied as, (i) the ITO had formed the belief, (ii) he had materials to form the belief, and (iii) such materials had a rational nexus with the formation of the belief. The rule accordingly was discharged. This appeal is against this decision.

10. Mr. Bajoria, learned counsel for the appellant, contended that there were no materials for initiation of the proceedings under s. 147, cl. (a), of the Act. The recorded reasons constituted no reason or materials to clothe the ITO with jurisdiction to issue the impugned notice. In the recorded reasons two circulars were referred to. While the circular dated March 7, 1967, has no relevance as no application was filed by the appellant under s. 271(4A), the other circular of July 21, 1966, required the ITO to initiate proceeding under s. 147 after completing the investigation and after consulting the list of the bogus creditors. In the recorded reasons there is nothing to indicate that there was any investigation at all and materials gathered as a result thereof and the result of the investigation were before the Commissioner when on the reasons recorded by the ITO he granted the sanction that the case was a fit one for issue of notice under s. 148. It is thus imperative in law to record all the reasons since on such recorded reasons, which means materials for the belief, the necessary sanction can only be granted by the Commissioner under sub-s. (2) of s. 151.

11. The recorded reasons only refer to the circular of July 21, 1966, which by itself does not indicate any investigation or even anything adverse against the assessee. The revenue, it was contended, was not entitled to rely on any statement of fact not contained in the recorded reasons. In the affidavit-in-opposition it was said that on subsequent investigation it was found that most of the hundi loans were not genuine and most of the hundiwallas were blacklisted, a material fact not stated in the recorded reasons. Absence of such investigation and of any reference to it in the recorded reasons had vitiated the notice and the proceedings based thereon, as the fact of investigation alleged to have been made and its result were not obviously before the Commissioner. While it was incumbent on the ITO to record all material facts, by way of affidavit he is not entitled to introduce a fact which had no place in the recorded reasons. The learned judge, it was submitted, committed an error in misapplying the observations of the Calcutta Discount Co.'s case, [1961] 41 ITR 191 (SC), made in a different context and in thinking it was not necessary even to mention all relevant facts including the most material fact in the recorded reasons which could be supplemented by a subsequent affidavit.

12. We shall now consider some decisions cited at the bar on this point apart from the decision in Calcutta Discount Co.'s case.

13. In S. Narayanappa v. CIT, [1967] 63 ITR 219, the Supreme Court observed (pp. 221, 222):

“……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 the expression ‘reason to believe’ in section 34 of the Income-tax Act does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The belief must be held 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 that 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.”

14. In Chhugamal Rajpal v. S.P Chaliha, [1971] 79 ITR 603, the Supreme Court again observed (p. 607):

“In his report he (the Income-tax Officer) vaguely refers to certain communications received by him from the Commissioner of Income-tax, Bihar and Orissa. He does not mention the facts contained in those communications. All that he says is that from those communications ‘it appears that these persons (alleged creditors) are name-lenders and the transactions are bogus.’ He has not even come to a prima facie conclusion that the transactions to which he referred are not genuine transactions. He 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). What that provision requires is that he must give reasons for issuing a notice under section 148. In other words he must have some prima facie grounds before him for taking action under section 148. Further his report mentions: ‘Hence proper investigation regarding these loans is necessary.’ In other words his conclusion is that there is a case for investigating as to the truth of the alleged transactions. That is not the same thing as saying that there are reasons to issue notice under section 148.”

15. In Union of India v. Rai Singh Deb Singh Bist, [1973] 88 ITR 200 (SC), the court reiterated thus (p. 202)

“The recording of the reasons in support of the belief formed by the Income-tax Officer and the satisfaction of the Central Board of Revenue on the basis of the reasons recorded by the Income-tax Officer that it is a fit case for issue of notice under section 34(1)(a) are extremely important circumstances to find out whether the Income-tax Officer had jurisdiction to proceed under section 34(1)(a).”

16. The court in this case drew an adverse inference as the revenue failed to produce the relevant records to enable the court to come to the conclusion that the facts necessary to confer jurisdiction under section 34(1)(a) had been established. The same proposition was laid down in Johri Lal (Huf), Agra v. Commissioner Of Income Tax., [1973] 88 ITR 439, 441 (SC), in the following terms:

“The formation of the required opinion by the Income-tax Officer is a condition precedent. Without formation of such an opinion he will not have jurisdiction to initiate proceedings under section 34(1)(a). 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 this court in Sheo Nath Singh v. Appellate Assistant Commissioner of Income-tax, [1971] 82 ITR 147 (SC), the Income-tax Officer would be acting without jurisdiction if the reason for his belief that the conditions are satisfied, does not exist or is not material or relevant to the belief required by this section. It is true that the courts will not go into the sufficiency of the reasons which persuaded the Income-tax Officer to initiate proceedings under section 34(1)(a) of the Act but the courts will examine the relevancy of the reasons which persuaded the Income-tax Officer to take proceedings under section 34(1)(a). The formation of the required belief is not the only requirement. The Income-tax Officer is further required by section 34 to record his reasons for taking action under section 34(1)(a) and obtain the sanction of the Central Board of Revenue or the Commissioner, as the case may be.”

17. The Supreme Court in Calcutta Discount Co.'s case, [1961] 41 ITR 191, in respect of the recorded reasons of the ITO for initiating proceedings under s. 147, which also constitute his report to the Commissioner, observed (p. 203):

“It is clear, therefore, that if one looked at this report only it would not be possible to say that the Income-tax Officer had any non-disclosure of material facts by the assessee in mind when he assumed jurisdiction. It has to be remembered, however, that in sending a report to the Commi-sioner, the Income-tax Officer might not fully set out what he thought amounted to a non-disclosure, because it is conceivable that the report may not be drawn up carefully and may not contain a reference to all the nondisclosures that operated on his mind. We have, however, on the record an affidavit sworn by the same Income-tax Officer who started the section 34 proceedings. It is reasonable to expect that in this affidavit which was his opportunity to tell the court what non-disclosure he took into consideration he would state as clearly as possible the material facts in respect of which there had not been in his view a full and true disclosure.”

18. In the Allahabad decision in Jamna Lal Kabra's case, [1968] 69 ITR 461 (All), the court observed (p. 464)

“Sub-section (2) of section 148 requires the Income-tax Officer to record his reasons for issuing a notice under that section and it is necessarily envisaged that he will record all the reasons he has in mind. This consideration acquires importance when the question is raised as to what were the reasons on the basis of which the Income-tax Officer invoked the jurisdiction conferred under clause (a) of section 147. To justify action by reference to clause (a) of section 147 it is not open to the Income-tax Officer to refer to reasons other than those recorded by him pursuant to sub-section (2) of section 148. If those reasons are such that on their basis it can possibly be said that income chargeable to tax has escaped assessment for a certain assessment year because of the omission or failure on the part of the assessee to make a return for that year or to disclose fully and truly all material facts necessary for such assessment, there is a valid case for invoking the jurisdiction conferred by clause (a) of section 147. If, on the contrary, the reasons recorded by the Income-tax Officer cannot possibly lead to such conclusion, the proceedings initiated by the Income-tax Officer by reference to that clause must be struck down as invalid.”

Sabyasachi Mukharji, J. on the decision in Kraba's case, [1968] 69 ITR 461 (All), is of the view that it is not necessary to record all the reasons, as the section does not say so and the Calcutta Discount Co.'s case, [1961] 41 ITR 191 (SC), a case not cited before the court, expressly laid down that the report may not contain a reference to all the non-disclosures the ITO had in mind and in the affidavit the ITO has the opportunity to state clearly the material facts he had in mind. All the same such facts should not be inconsistent with the reasons recorded.

19. It appears that since the satisfaction of the Commissioner on the recorded reasons that the case is a fit one for issue of notice is mandatory, it is obvious that the affidavit cannot disclose facts which travel beyond the ambit and scope of the recorded reasons. Though it is not necessary to state all the facts in the disclosed reasons, the genesis of the facts stated in the affidavit must have some place in the reasons, however brief or short it may be. In a given case where the recorded reasons refer to only fictitious loans in short, it may not be necessary to state all such loans which the ITO had in his mind. But the ITO cannot be heard to say in his affidavit that he had in mind also at the time of recording reasons the suppre-siori of sales committed by the assessee in his return since such facts were not before the Commissioner to ensure that the case is a fit one for issue of notice under s. 147. The courts have laid down that by the affidavit the ITO may always clarify the position fully about the material facts he had in his mind at the time of recording reasons but facts in the affidavit, as it appears to us, which even by implication had no place in the recorded reasons for issuing notice cannot be accepted as forming part thereof. There is, however, no dispute over the proposition that once the assessment is validly reopened, the entire assessment again becomes open for scrutiny in respect of all categories of matters relevant for assessment.

20. At the time of issue of notice it is not incumbent on the ITO to come to a conclusive finding that income has escaped assessment by reason of the omission or failure of the assessee to disclose fully and truly all material facts necessary for the relevant assessments. Such belief obviously at that stage is a tentative belief on the materials before him to be examined and scrutinised on such evidence as may be available in the proceedings for reassessment. But as we have seen there must be some grounds for the reasonable belief that there has been a non-disclosure or omission to file a true or correct return by the assessee resulting in escapement of assessment or in under-assessment. Such belief again must be in good faith, not a mere pretence or change of opinion on inferential facts or facts extraneous or irrelevant to the issue but must have a rational connection or live link or relevant bearing on the formation of the belief.

21. Mr. Bajoria's contention is that the ITO according to the relevant circular was to conduct an investigation before forming his belief that the loans are fictitious. There is no mention in the recorded reasons or any investigation carried on by the ITO before formation of the belief and on the terms of the recorded reasons there is no indication or whisper of any investigation which was a vital, essential and unavoidable step for formation of belief. The ITO cannot now be heard to say that he conducted the requisite investigation before his formation of belief a case made in the affidavit only. Accordingly, there were no materials before the ITO for the formation of the belief, a condition precedent for issue of notice.

22. The circular dated July 21, 1966, clearly indicated that a list of bogus hundi financiers had been in possession of the ITO concerned. For the relevant year, the circular mentioned some hundi loans with names of the respective creditors which were not investigated by the ITO concerned during the assessment. The circular directed the ITO to examine the records and to complete investigation quickly for taking action under s. 147. In his recorded reasons, the ITO referred to this circular, setting out earlier the names of hundi creditors and respective amounts in seriatim which were not examined in the course of assessment. Thereafter, he referred to the list of bogus creditors and then stated that he had reasons to believe that hundi loans shown by the assessee were fictitious and those had escaped assessment. On a reading of the recorded reasons as a whole, it becomes obvious that a comparison of the names of bogus creditors in the list and those shown by the assessee was made by the ITO which was the investigation contemplated under the circular. When such names disclosed by the assessee were found in the list, the ITO straightaway recorded his prima facie but positive belief that the income had escaped assessment. This is in effect, as also contended by Mr. Sen appearing for the revenue, what was stated in the affidavit in elaborating the steps he had taken before recording his reasons. Such action taken is well within the scope and ambit of the recorded reasons and is in no way inconsistent therewith. We are accordingly unable to hold that there were no materials or reasons to clothe the ITO with jurisdiction under s. 147 and hold that the proceedings thereunder were legally and validly initiated by the ITO.

23. The other question requiring consideration is whether there has been any omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that year resulting in escapement of income chargeable to tax for that year. Under s. 139, sub-s. (1), every person is required to furnish a return of his income in the prescribed form and verified in the prescribed manner. Under r. 12, the returns in statutory form are required to be verified by the assessee as being correct and complete and the total income and total world income and other particulars shown as truly stated. It is thus clear that the assessee has the statutory obligation to disclose correctly and truly the income for the relevant year and all material particulars or facts in connection therewith. On considering what is the precise scope of disclosure which s. 147 demands, the Supreme Court in Calcutta Discount Co.'s case, [1961] 41 ITR 191 (SC) observed (p 200, 201):

“It postulates a duty on every assessee to disclose fully and truly all material facts necessary for his assessment. What facts are material and necessary for assessment will differ from case to case. In every assessment proceeding, the assessing authority will, for the purpose of computing or determining the proper tax due from an assessee, require to know all the facts which help him in coming to the correct conclusion. From the primary facts in his possession, whether on disclosure by the assessee, or discovered by him on the basis of the facts disclosed, or otherwise the assessing authority has to draw inferences as regards certain other facts J and, ultimately, from the primary facts and the further facts inferred from them, the authority has to draw the proper legal inferences, and ascertain, on a correct interpretation of the taxing enactment, the proper tax leviable Does the duty, however, extend beyond the full and truthful disclosure of all primary facts? In our opinion, the answer to this question must be in the negative. Once all the primary facts are before the assessing authority, he requires no further assistance by way of disclosure. It is for him to decide what inferences of facts can be reasonably drawn and what legal inferences have ultimately to be drawn. It is not for somebody else —far less the assessee—to tell the assessing authority what inferences, whether of facts or law, should be drawn

24. We have, therefore, come to the conclusion that while the duty of the assessee is to disclose fully and truly all primary relevant facts, it does not extend beyond this.

25. The position, therefore, is that if there were in fact some reasonable grounds for thinking that there had been any non-disclosure as regards any primary fact, which could have a material bearing on the question of ‘underassessment’ that would be sufficient to give jurisdiction to the Income-tax Officer to issue the notices under section 34.”

26. In Commissioner Of Income Tax, Calcutta v. Burlop Dealers Ltd.† , [1971] 79 ITR 609 (SC), the ITO in the course of assessment allowed for the assessment year 1949-50 a deduction of 50% of the profits earned by a joint venture of the assessee with another person on the basis of an agreement sharing the profits equally. For the assessment year 1950-51 on the similar return filed by the assessee, the ITO, in consequence of information on examination of the transactions, brought the entire amount of profit to tax holding that the agreement of sharing profits was a got up device to reduce profits. On a challenge being thrown to initiation of proceeding for the assessment year 1949-50 under s. 34(1)(a) of the Indian I.T Act, 1922, and reassessment made thereunder, the Supreme Court observed that the initiation of proceeding could be validly made in consequence of information subsequently received under s. 34(1)(b) but the time for issue of notice had already expired. It was observed (p. 612):

“We are of the view that under section 34(1)(a) if the assessee has disclosed primary facts relevant to the assessment, he is under no obligation to instruct the Income-tax Officer about the inference which the Income-tax Officer may raise from those facts. The terms of the Explanation to section 34(1) also do not impose a more onerous obligation. Mere production of the books of account or other evidence from which material facts could with due diligence have been discovered does not necessarily amount to disclosure within the meaning of section 34(1), but where on the evidence and the materials produced the Income-tax Officer could have reached a conclusion other than the one which he has reached, a proceeding under section 34(1)(a) will not lie merely on the ground that the Income-tax Officer has raised an inference which he may later regard as erroneous.

27. The assessee had disclosed his books of account and evidence from which material facts could be discovered it was under no obligation to inform the Income-tax Officer about the possible inferences which may be raised against him. It was for the Income-tax Officer to raise such an inference and if he did not do so the income which has escaped assessment cannot be brought to tax under section 34(1)(a).”

28. The Supreme Court affirmed the order of the Tribunal directing that the amount of 50% profit be excluded from the total income of the assessee for 1949-50.

29. The Calcutta Discount Co.'s case, [1961] 41 ITR 191 (SC) thus lays down as provided in the statutory provisions that the assessee has no further duty beyond a full and truthful disclosure of all primary facts. In this case, the assessee disclosed all transactions of sale in shares and securities which fetched a profit of Rs. 5.48 lakhs. The ITO at the time of assessment accepted the assessee's version that the transactions were casual and in the nature of change in investments. Later on, the assessment was sought to be reopened on the ground that the company failed to disclose the true intention behind the sale of shares. It was held that the motive of the assessee for sale of shares was as inferential fact based on consideration of attending circumstances like frequency of sales, nature of sales, price received and the like. Though the assessee had the duty to disclose all primary facts bearing on the question, the law does not require the assessee to state the conclusion that could reasonably be drawn from the primary facts already disclosed.

30. In Burlop Dealers' case, [1971] 79 ITR 609 (SC) again the court held that the inference which the ITO had drawn resulting in reassessment was based on the same primary facts disclosed by the assessee at the time of assessment. It was thus another possible inference which could be drawn even at the time of assessment by the ITO who regarded the earlier inference as erroneous. The assessee, it was held, had no obligation to inform the ITO that there could be another inference on the same primary facts. The decision which reiterated the law as laid down in the Calcutta Discount Co.'s case, [1961] 41 ITR 191 (SC) is thus no authority for the proposition, as contended, that the assessee is under no obligation to make a full and true disclosure of all primary facts relating to assessment. All that the decision lays down is that where on the evidence and materials the ITO could have reached a conclusion other than the one reached, a proceeding under s. 34(1)(a) will not lie on the ground that the ITO later regarded the inference raised at the time of assessment as erroneous.

31. The same principle was followed in the case of ITO v. Madnani Engineering Works Ltd., delivered on January 4, 1979, Civil Appeal No. 829 (NT) of 1975—still unreported (since reported in [1979] 118 ITR 1 (SC)). In this case, the assessment was sought to be reopened on the ground that the ITO claimed that the transactions of loan shown by the assessee and accepted as such in the original assessment were bogus and no interest was paid to the creditors. In the supporting affidavit, the ITO did not disclose any material on the basis whereof he could come to the requisite belief. It is obvious that the belief of the ITO was based on inference on the same primary facts which he could arrive at even at the time of the assessment and the assessee had no obligation to point out to the ITO that such conclusion to the effect that loans were bogus and no interest was paid thereon was also possible on the same primary facts. In the circumstances, the court confirmed the order of our High Court on appeal which] quashed the notice under s. 147(a). It may also be noted that the Supreme Court, in agreement with the High Court, held further, that on the grounds recorded and affidavit in support by the ITO, there was no material for any belief on the part of the ITO to initiate proceedings under s. 147(a).

32. The cases are distinguishable on facts from the case before us. Here the ITO was proceeding not merely on the basis of the primary facts which he had at the time of original assessment. The assessee claimed deductions from income for the relevant year on account of interest paid on a number of hundi loans which were accepted as genuine in the original assessment. Subsequently, the ITO received a list of bogus hundi creditors from the Governmental authorities which included the alleged creditors of the assessee. The ground for the belief for initiation of proceedings under s. 147, cl. (a), was thus not the same set of primary facts as at the time of original assessment as in the cases cited above, but altogether additional materials which were not before the ITO when the assessment now sought to be reopened was made.

33. The decisions cited above lay down that the assessee is under a statutory obligation to disclose fully and truly all primary facts relating to assessment and to produce all relevant documents but he is under no obligation to disclose inferential facts which could be arrived at by a process of reasoning from such primary facts. The question for consideration is whether in such a case the initiation of proceedings under s. 147 is based on new primary facts or it is based on inferential facts on the primary facts already disclosed, the latter being impermissible in law. In this case, the disclosure of the hundi loans as genuine by the assessee were of primary facts which were accepted as such by the ITO during the assessment. The ITO, after the assessment, came to be in possession of a list of bogus creditors and therefrom he came to the tentative belief that in respect of the relevant year the hundi creditors of the assessee disclosed by him whose names appear in the list were bogus creditors. This fact could be ascertained only by a bare comparison of the list of bogus creditors with the creditors disclosed by the assessee in the course of assessment and did not involve any act of drawing conclusion by a process of reasoning, nor was it based on materials disclosed by the assessee during assessment as in the cases cited above but on fresh materials which came into the possession of the ITO after assessment. It cannot accordingly be said that the discovery of the creditors of the assessee as bogus creditors according to the list was an inferential fact based on the same materials which the assessee had disclosed as primary facts in respect of the assessment in the usual course nor was the belief a result of mere pretence or change of opinion only on the same primary facts or one a prudent man acting bona fide could not have arrived at.

34. There can be little doubt that the discovery of the alleged creditors of the assessee as bogus creditors according to the list could result in the reasonable belief in the mind of the ITO that the income had escaped assessment. The assessee was given deduction from the income of interest he claimed to have paid to such creditors for loans by them, accepted as genuine during the assessment. There is thus a rational nexus or live link between the facts discovered and the reasonable belief arrived at by the ITO regarding the escapement of income chargeable to tax due to the failure or omission of the assessee to disclose fully and truly all material particulars relating to the assessment though such belief being tentative was yet to be established in reassessment proceedings.

35. It has been repeatedly contended on the authority of the observations of the Supreme Court that the assessee is under no obligation to confess contrary to his return that the hundi creditors and their bans to him as disclosed in the original assessment were bogus and fictitious. Such contention is wholly erroneous and no such proposition was ever laid down by the Supreme Court to the effect that the assessee is entitled to make an untrue return of income with bogus creditors and loans and escape with impunity once he has been able to cross the barrier in the shape of the ITO. Observations of the Supreme Court as of judicial pronouncements are to be considered with reference to the context and the circumstances in the particular case in which such observations are made and never bereft of the context and the attending circumstances of the case. The assessee, as we have seen, is required by statute to make a full and true disclosure of all primary facts material to the assessment. In a given case, the assessee with improper motive may set up bogus creditors and loans for obtaining relief from income-tax. He may persist in the position he has taken in respect of such creditors and loans all through but he will do so at his peril since such action will amount to failure or omission to disclose fully and truly all material facts necessary for assessment in violation of the statutory obligation to disclose fully and truly all primary facts if found untrue. If in the reassessment proceedings it is established that the creditors shown by the assessee were bogus creditors and the loans disclosed were fictitious, such assessee apart from reassessment will be subject to penal consequences under the Act for submitting the return which in such a case will not be a full and true return of income he is under the statutory obligation to file, on account of his failure to make a full and true disclosure of all material facts necessary for assessment. It is also to be remembered that the initiation of proceedings under s. 147, cl. (a), is based on the reasonable belief tentatively formed and during reassessment the question whether the hundi creditors or hundi loans are bogus and fictitious will be adjudicated according to law. Mere initiation of proceeding under s. 147(a).does not amount to a finding that the loans are fictitious, though, undoubtedly, the bona fide assessee by the reassessment is put to inconvenience which unfortunately cannot be avoided in the context of large scale evasion of income tax in the country and the methods adopted for the purpose. In view of the above discussion it seems to us that there were grounds for the reasonable belief on the part of the ITO to hold that the assessee failed and omitted to disclose fully and truly all material facts necessary for the assessment for the relevant year leading to escapement of income chargeable to tax.

36. For the above reasons, as all the contentions of the appellant fail, this appeal is dismissed but without any order as to costs in the circumstances. All interim orders, if any, are vacated.

Sankar Prasad Mitra, C.J:— I agree.