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citation codes
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  • Section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as the Act
  • Section 34(1) of the Old Act or Section 148(2) of the New Act
  • Section 34 of the Old Act or Section 148 of the New Act
  • Section 34(1)(a) of the Indian Income Tax Act, 1922
  • Section 271(1)(C) of the Income Tax Act, 1961
  • SECTION 147 INCOME TAX ACT 1961
  • Section 34(1)(a) of the Income-tax Act
  • sub-section (2) of Section 148
  • Section 148(2) of the I.T Act
  • sub-section (2) of Section 22.
  • Section 34(1)(a).Calcutta
  • Section 34(1)(a)17.
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
Acts
  • Section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as the Act
  • Section 34(1) of the Old Act or Section 148(2) of the New Act
  • Section 34 of the Old Act or Section 148 of the New Act
  • Section 34(1)(a) of the Indian Income Tax Act, 1922
  • Section 271(1)(C) of the Income Tax Act, 1961
  • SECTION 147 INCOME TAX ACT 1961
  • Section 34(1)(a) of the Income-tax Act
  • sub-section (2) of Section 148
  • Section 148(2) of the I.T Act
  • sub-section (2) of Section 22.
  • Section 34(1)(a).Calcutta
  • Section 34(1)(a)17.
Smart Summary

Judgment Summary — Agarwalla Brothers (Tax Case Nos. 39 & 40 of 1978)

Factual and Procedural Background

These two connected tax appeals were heard together because resolution of the question in Tax Case No. 40 (penalty) depended on the question in Tax Case No. 39 (reassessment). The Income Tax Appellate Tribunal referred two questions of law under Section 256(1) of the Income Tax Act, 1961: (I) whether cancellation of the entire reassessment under Section 147(a) for A.Y. 1962–1963 was justified (Tax Case No. 39 of 1978), and (II) whether cancellation of the penalty under Section 271(1)(c) by the Tribunal was legal (Tax Case No. 40 of 1978).

The assessee was Agarwalla Brothers. For the assessment year 1962–1963 (accounting year ending 31-12-1961), the original assessment completed on 25-5-1964 returned a loss of Rs. 7,361. The assessee disclosed having started construction of four buildings and showed an investment of Rs. 1,15,100; rental income from those buildings was assessed.

Subsequent complaints prompted enquiries. An Inspector (report dated 26-6-1969) estimated total construction investment across years at Rs. 9,18,519 and for the relevant previous year at Rs. 7,79,805. A departmental valuer's report (circa March 1971) estimated cost of construction at Rs. 7,19,000. On this basis the Income Tax Officer recorded reasons under Section 147(a) alleging undisclosed investment of Rs. 5,64,705 and issued a notice under Section 148(1) dated 16-3-1971 (served 17-3-1971) after obtaining sanction.

The assessee filed a return showing nil income, objected to reassessment on the ground that necessary particulars had been furnished in the original assessment. The ITO rejected the objection and assessed income at Rs. 2,61,815. The appeal to the Appellate Assistant Commissioner (A.A.C.) rejected the jurisdictional contention but granted nominal relief on quantum. Both parties appealed to the Income Tax Appellate Tribunal (ITAT), which gave a common order; the questions now arise from that order.

Legal Issues Presented

  1. Whether the Tribunal was justified in law in cancelling the entire reassessment under Section 147(a) of the Income Tax Act, 1961 for assessment year 1962–1963 (Tax Case No. 39 of 1978)?
  2. Whether the Tribunal's cancellation of the penalty imposed under Section 271(1)(c) of the Income Tax Act, 1961 was legal (Tax Case No. 40 of 1978)?

Arguments of the Parties

Assessee's Arguments

  • The assessee contended that all necessary particulars (including balance-sheets, copies of accounts, building plans, dates of sanction, and details of floor area) had been disclosed during the original assessment, and therefore there was no ground to initiate reassessment under Section 147(a).
  • The assessee objected to the reassessment on the basis that the recorded reasons did not establish omission or failure to disclose material facts and that the information relied upon by the department reflected a change of opinion or post-assessment inquiries rather than non-disclosure at the time of original assessment.

Revenue's (Income Tax Department's) Position

  • The Income Tax Department relied on the Inspector's inquiry and the valuer's report that indicated a much larger cost of construction than shown in the assessee's books, and recorded reasons to believe that undisclosed investments of Rs. 5,64,705 had come from undisclosed income.
  • The department proceeded to obtain sanction and issue notice under Section 148(1) and thereafter assessed income by invoking Section 147(a), and imposed a penalty under Section 271(1)(c) consequent to the reassessment addition.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
S. Norayanappa v. CIT, 1967 ITR 219 Recording reasons and obtaining sanction are administrative steps prior to issuing notice; the notice makes the assessee a party to proceedings. Used to support that recording reasons and sanctioning are administrative prerequisites and that the scheme requires those steps before the assessee becomes a party; this undercuts attempts to justify reopening by relying on post-recorded factual material.
Union of India v. Rai Singh Deb Singh Bisth, (1973) 88 ITR 200 Recording of reasons and satisfaction of the Board/Commissioner on those recorded reasons are crucial to determine whether the ITO had jurisdiction to proceed. Cited to emphasize that recorded reasons are "extremely important circumstances" to test jurisdiction under the reopening provisions.
Jamna Lal Kabra v. ITO, (1968) 69 ITR 461 (All) ITO cannot rely on reasons other than those recorded under Section 148(2); if recorded reasons cannot lead to belief of escapement, proceedings must be struck down. Relied on to hold that only recorded reasons can justify reopening and that an absence of relevant recorded reasons invalidates proceedings under Section 147(a).
H.A. Nanji & Co. v. I.T.O., 1973 Tax Law Report 567 Section 148(2) requires recording of reasons before issuing notice; debate whether it requires recording of all reasons. Quoted as a contrasting view; the judgment of the Calcutta High Court held that recording of reasons is required but not necessarily every reason must be recorded; the present court accepts the limited aspect but insists recorded reasons must be valid and relevant.
H.A. Nanji & Co. v. ITO (appeal), (1979) 120 ITR 593 (Calcutta) Affirmed the view that reasons recorded must have genesis in the disclosed reasons; additional affidavit facts cannot travel beyond recorded reasons. Used to support the proposition that additional reasons or facts disclosed later (for court's satisfaction) cannot validate proceedings if not within recorded reasons on which sanction was given.
C.M. Rajagharia v. I.T.O., (1975) 98 ITR 486 Where belief itself is challenged, the department must disclose reasons from original record; ITO may be confined to recorded reasons to support assumption of jurisdiction. Adopted to show that when formation of belief is challenged, the recorded reasons must justify existence of such reasonable belief and that extraneous material cannot be relied upon.
East Coast Commercial Co. Ltd. v. ITO, (1981) 128 ITR 327 Section 148(2) does not explicitly require recording of all reasons in mind, but recording of reasons is mandatory and cannot be an empty formality; additional reasons not disclosed to Board/Commissioner cannot validate reopening. Applied to reiterate that the recorded reasons must be sufficient for the Board/Commissioner to grant sanction and that after-the-fact affidavit material cannot cure insufficiency of recorded reasons.
Equitable Investment Co. (P) Ltd. v. ITO, (1988) 174 ITR 715 Consistent application of the principle that recorded reasons must form the basis for sanction and reopening. Referred to as another authority supporting the same legal approach adopted by the court.
Chunnilal Surajmal v. Commissioner of Income-Tax, (1986) 160 ITR 141 Reassessment proceedings held illegal where challenge was not based on parameters of recorded reasons but on subsequent materials collected; revenue cannot use reassessment as a fishing enquiry. Not treated as directly relevant to the present question (per the court) because the ground of challenge there was different; cited and distinguished.
Johri Lal (HUF) v. C.I.T., (1973) 88 ITR 439 Formation of required opinion by ITO is a condition precedent; courts will examine relevancy (not sufficiency) of recorded reasons; failure vitiates proceedings. Relied upon to support that the court can inquire whether the "reasons to believe" are material and relevant and not a mere pretence.
Sheonath Singh v. Appellate Assistant Commissioner of Income Tax, (1971) 82 ITR 147 (SC) Failure to form the required belief or reliance upon reasons that are not material or relevant results in the ITO acting without jurisdiction. Used to underscore that formation of belief and recording of reasons are mandatory and subject to judicial scrutiny for relevancy.
Commissioner of Income Tax, Bombay v. Lakhi Ram & Ramdas, (1962) 44 ITR 726 (SC) The pre-requisite for action under the reopening provision (old Section 34(1)(a)) is that the ITO has reason to believe that the assessee omitted or failed to disclose material facts causing escapement of income. Applied as authority for the proposition that such pre-requisites must be satisfied before reopening and that this is a condition precedent.
Calcutta Discount Co. Ltd. v. ITO, (1961) 41 ITR 191 (SC) If there was no non-disclosure of material fact, issuance of notice is without jurisdiction and assessment orders passed pursuant thereto are quashed. Referred to as a precedent where the Supreme Court quashed reassessment because the assessee had not failed to disclose material facts; followed by the court in the present case.

Court's Reasoning and Analysis

The court undertook a structured legal analysis grounded in the statutory scheme and established precedents. The analysis proceeded in these principal steps:

  1. Statutory framework: The court explained that Section 147(a) permits reassessment only where the Income-Tax Officer (ITO) has reason to believe that income has escaped assessment due to omission or failure to disclose material facts, and that the ITO must comply with the procedural safeguards in Sections 148 to 153. Section 148(2) requires recording of reasons before issuing a notice and Section 151 requires sanction by the Commissioner/Board when notices are issued beyond statutory time limits.
  2. Primacy of recorded reasons: The court held that the validity of the assumption of jurisdiction under Section 147(a) must be tested by reference to the reasons recorded under Section 148(2). The ITO is not authorised to rely on other omitted or subsequent reasons not recorded when seeking sanction; recorded reasons alone are the foundation for sanction and the initiation of proceedings.
  3. Precedent synthesis: The court surveyed authorities (including S. Norayanappa, Johri Lal, Jamna Lal Kabra, H.A. Nanji, East Coast, Calcutta Discount, and others) to demonstrate a settled line of law: recorded reasons must be relevant and material to form the "reason to believe" and the Board/Commissioner grants sanction on those recorded reasons. Additional facts disclosed later (for instance, in affidavits) that were not part of the recorded reasons cannot validate reopening if the recorded reasons were insufficient.
  4. Application to facts: The Tribunal had found, on record, that at the time of the original assessment the assessee had filed balance-sheets, copies of accounts showing investments, building plans (sanctioned 9-2-1961), and had furnished floor area details (letter dated 22-5-1964). The ITO had examined these and found the investments shown to be reasonable. The Tribunal therefore concluded the primary facts were disclosed at original assessment.
  5. Limited omission noted by Inspector: Although the Inspector's later report noted one construction not shown in the accounts, that particular circumstance was not recorded among the reasons under Section 148(2) and hence could not be relied upon to justify reopening. The court accepted the Tribunal's factual conclusion that the reassessment was effectively a change of opinion based on subsequent inquiries rather than a case of initial non-disclosure.
  6. Conclusion on jurisdiction and consequence: Because the recorded reasons did not validly establish the requisite "reason to believe" and because an unrecorded omission could not be used to sustain jurisdiction, the initiation of proceedings under Section 147(a) was held to be legally unjustified. The assessment and consequent penalty were therefore invalid to the extent they depended on that improper reopening.

The court expressly noted it did not need to re-evaluate primary facts on its own because the Tribunal had examined the records and made the necessary factual findings about disclosure at the original assessment.

Holding and Implications

Holding: Both referred questions are answered in the affirmative and in favour of the assessee.

Direct consequences and practical implications as declared by the court:

  • The Tribunal was correct in law in cancelling the entire reassessment under Section 147(a) of the Income Tax Act, 1961 for assessment year 1962–1963 because the recorded reasons did not justify the assumption of jurisdiction.
  • As a consequence of the invalidity of the reassessment, the Tribunal's cancellation of the penalty imposed under Section 271(1)(c) was also held to be legal. The penalty of Rs. 2,53,239 (as earlier imposed by the Inspecting Assistant Commissioner) was not sustainable because it was founded on the invalid reassessment addition.
  • No order as to costs was made under the facts and circumstances of the case.
  • The court directed that a copy of the judgment under the seal of the court be forwarded to the Income Tax Appellate Tribunal, Patna Bench.

The opinion follows and applies existing authorities on the necessity and scope of recorded reasons and does not purport to lay down a novel precedent beyond applying the settled principles to the facts of these cases.

Disposition and Administrative Directions

The questions referred were answered in the assessee's favour; the assessment under Section 147(a) for A.Y. 1962–1963 was cancelled and the penalty under Section 271(1)(c) was held to be invalid. The Court ordered that a copy of this judgment be forwarded to the ITAT, Patna Bench, and recorded that there would be no costs.

    The Commissioner Of Income-Tax, Bihar Ii, Patna v. M/S. Agarwalla Brothers, Dhanbad

    G.C Bharuka, J.:— The present two tax cases are being disposed of by a common judgment because the answer to the question referred in Tax Case No. 40 of 1978 is intimately dependent on the answer to the question involved and referred in Tax Case No. 39 of 1978. The Income Tax Appellate Tribunal has referred the following questions of law under Section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’ only):

    I. Whether on the facts and in the circumstances of the case the Tribunal is justified in law in cancelling the entire assessment under Section 147(a) of the Income Tax Act, 1961 for the assement year 1962-1963? (referred in Tax Case No. 39 of 1978).

    II. Whether on the facts and in the circumstances of the case the cancellation of the penalty under Section 271(1)(C) of the Income Tax Act, 1961 by the Tribunal was legal? (referred in Tax Case No. 40 of the 1978).

    2. For the assessment year 1962-1963 pertaining to the accounting year ending on 31-12-1961, the assessment of the assessee, namely, Agarwalla Brothers had been completed on 25-5-1964 by determining a loss of Rs. 7,361/-. During the assessment proceedings as disclosed by the assessee, the Income Tax Officer noted that the assessee had started construction of four buildiags during this year and an investments of Rs. 1,15,100/- was shown during the year under assessment. While computing the income, he also assessed the rental income arising out of the said buildings.

    3. Subsequently, it appears that on the basis of some complaints enquiries were made in respect of the investments made in the constructions undertaken by the assessee and investments made therein in the year at hand, as well as, in subsequent, years. According to the Inspector who enquired into the matter by visiting the buildings to ascertain the nature of the construction and went through the Municipal records, the total investment made in the construction in all the years was Rs. 9,18,519/- out of which as per his estimate the investment during the previous year relevant to assessment year 1962-1963 was to the extent of Rs. 7,79,805/-. This report of the Inspector was dated 26-6-1969. Since there was a wide difference between the cost of construction estimated by the Inspector and the cost as shown by the assessee, the Income Tax Officer referred the matter to the valuation Cell in order to get the cost of construction valued by an export. The valuer after making local inspection alongwith Income Tax Officer submitted his report some time in March, 1971. According to the report of the valuer, the cost of construction was Rs. 7,19,000/.

    4. In view of the aforesaid facts, the Income Tax Officer initiated a re-assessment proceeding under Section 147(a) of the Act by recording the following reasons:—

    “The assessee constructed a number of houses in Ashok Nagar, Dhanbad and shown in his books a sum of Rs. 1,13,100/- only as investment towards construction during the relevant accounting period. Taking into consideration all the relevant facts, the cost of construction as per the estimate of the department comes to Rs. 6,79,805/- during the period. Thus, a sum of Rs. 5,64,705 is taken as investment in house construction, not accounted for, in the absence of satisfactory explanation from the assessee regarding the source of this sum, this is treated to have come out of assessee's undisclosed income during the year.

    I 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 its assesssment for that year income chargeable to tax amounting to Rs. 5,64,705/- has escaped assessment. I, therefore, propose to assess this income under Section 147 of the Income Tax Act, 1961.”

    5. After recording, the aforesaid reason as required under Section 148(2), sanction of the Commissioner was obtained on the basis of the reason so recorded under Section 151(2) of the Act. Thereafter, notice dated 16-3-1971 was issued under Section 148(1) of the Act which was served on the assessee on 17-3-1971.

    6. In response to the said notice, the assessee filed its return showing income as ‘nil’. During the assessment proceedings the assessee, inter alia, challenged the initiation of re-assessment proceedings under Section 147(a) on the ground that all the necessary particulars had been furnished during the course of original assessment proceedings. The Income Tax Officer rejected the objection and assessed the income of the assessee at Rs. 2,61,815/-. The assessee preferred an appeal before the Appellate Assistant Commissioner and assailed the order of assessment both on the ground of jurisdiction, as well as, the quantum of the Income assessed. The A.A.C also negatived the contention raised in relation to jurisdiction, but granted nominal relief in quantum. Thereafter, both the assessee as well as the department preferred appeals before the Income Tax Appellate Tribunal which was disposed of by a common order. Question No. 1 arises out of this order of the tribunal.

    7. The Tribunal while considering the validity of the proceedings and the consequential order of assessment, examined the necessary facts and has held that at the time of the original assessment the assessee had filed balance-sheet for the period ending 31-12-1960 as well as for the period ending 31-12-1961. The Tribunal after perusing the records recorded a finding that the copy of the accounts of Agarwalla Brothers showing the amounts of investments was also filed. The plan of the building and the remark that it was sanctioned on 9-2-1961 was also found on the records. The assessee in letter dated 22nd May, 1964 had given the details of the floor area of the flats and this was considered by the Income Tax Officer. In the assessment year itself the fact of construction has been found noted and the nature of buildings have been also indicated. The period of construction of office buildings had been given as between 1st April, 1961 and 31st December, 1961. The Tribunal also found that the Income Tax Officer had examined the investments made by the assessee is the building stated to have been constructed by him and he found the cost as shown in the balance-sheet and the books to be reasonable both in respect of the office building, as well as, the residential buildings. While analysing the facts further in order to examine the jurisdictional issue, the Tribunal opined that it was only as a result of further enquiry, it transpired that the cost of construction of the buildings in question would be much more if the nature of construction is taken into consideration and in these circumstances it needs to be legally determined whether there was any escapement as a result of omission or failure on the part of the assessee to disclose to full and true facts. The Tribunal has further held that at the time of original assessment, the fact of construction, the plan of construction, the area of construction and the cost of construction was given by the assessee and the Income Tax Officer found the investments shown to be reasonable and on consideration of all these factors, it cannot be said that primary facts were not disclosed by the assessee.

    8. Another important fact noticed by the Tribunal in its order is that as per the report of the Inspector one particular construction had not been shown by the assessee in the accounts though this construction also had been undertaken in this very year. It has proceeded to hold that this omission on the part of the assessee has not formed the basis for taking action under Section 147(a) of the Act, inasmuch as, this reason has not been recorded as envisaged under Section 148(2) of the Act, and therefore, this cannot be taken to be a basis for sustaining the validity of the impugned action and accordingly, it held the proceedings to be invalid and cancelled the order of assessment.

    9. On the above premise, it has to be seen, as to whether for determining the validity of the assumption of jurisdiction by the Income Tax Officer under Section 147(a) of the Act, the Tribunal was to confine itself only to the recorded reasons and in case the recorded, reasons fail to stand the test of ‘reasons to believe’ within the meaning of Section 147(a) of the Act as judicially laid down then whether the very initiation of the proceeding can be said to be ab initio void rendering all consequential actions including the order of assessment as ineffective and non est.

    10. Section 147 of the Act authorises the Income-Tax Officer to initiate proceedings in order to assess or reassess the income of any assessee provided the conditions contemplated under either of the two clauses of the said section can be shown to be in existence. In the present case we are concerned with Section 147(a) of the Act which reads as under:—

    “147(a). 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 assessment for that year, income chargeable to tax has escaped assessment for that year,

    (b) ……………

    he may, subject to the provisions of Sections 148 to 153, assess of reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereafter in Sections 147 to 153 referred to as the relevant assessment year).”

    11. From the bare reading of the aforesaid provision it is apparent that the jurisdiction of the Income Tax Officer to assess or reassess under Section 147(a) is, inter alia, founded on the existence of reason to believe that the assessee has failed to disclose fully or truly all material facts necessary for his assessment for the relevant assessment year and secondly on the compliance of the manadates contained in Sections 148 to 153. Section 148 casts an obligation on the Income Tax Officer to issue a notice before making any assessment or assessment, and sub-section (2) thereof provides that before issuance of any notice under sub-section (1) the Income Tax Officer is required to record hit reasons for doing so.

    12. Section 151 of the Act provides a further important safeguard to the assessee against any arbitrarily of illegal assessment or reassessment under Section 147 of the Act by providing that if notice under Section 148 is sought to be issued after the expiry of eight years from the end of the relevant assessment year it can be issued only if the Central Board of Direct Taxes after examining the reasons recorded by the Income Tax Officer is satisfied that it is a fit case for issue of such notice. In case the notice is sought to be issued after the expiry of four years from the end of the relevant assessment year a similar satisfaction is required to be arrived at by the Commissioner of Income Tax on the basis of the reasons recorded by the Income Tax Officer.

    13. Therefore, the legislative scheme is that Income Tax Officer can clothe himself with the jurisdiction to assess or reassess under Section 147(a) of the Act only if he records the reasons which can stand the test of relevance in accordance with the judicial pronouncements and after obtaining necessary sanction as stated above notices are issued by him but if in any case it is found that the reasons recorded by him are not germane for the exercise of jurisdiction under Section 147(a) of the Act then the very assumption of jurisdiction will be ab-initio void rendering the entire process of assessment as a nullity. There can be hardly any doubt in holding that the recording of the reasons is a prerequisite to the assumption of jurisdiction by the Income Tax Officer for initiating the proceeding under Section 147(a). The reasons so recorded acquire much significance when the action is taken under clause (a) of Section 147 because it is the recorded reasons which can only indicate as to why the Income Tax Officer was made to believe that the income has escaped assessment for the relavant assessment year. Further the language employed in Section 151 clearly leads to the conclusion that the Board or the C.I.T while according sanction for issuance of notice under Section 148 and for coming to an objective conclusion authorising the Income Tax Officer to take action under Section 147(a) are required to confine themselves only to the reasons recorded by the Income Tax Officer.

    14. Therefore, looking at the entire scheme and purpose of the Act. I am of the considered view that the validity of the assumption of jurisdiction under Section 147(a) can be tested only by reference to the reasons recorded under Section 14(2) of the Act and the Income Tax Officer is not authorised to refer to any other reason even if it can be otherwise inferred and/or gathered from the records. If the reasons so recorded are cuch 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 can be 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 lead to such conclusion the proceedings initiated by the Income Tax Officer by under that clause must be declared as ab-initio void.

    15. In S. Norayanappa v. CIT, 1967 ITR 219, the Supreme Court while dealing with the case of reopening of an assessment under Section 34(1)(a) of the Indian Income Tax Act, 1922 has observed (p. 222):

    “The proceedings for assessment or reassessment under Section 34(1)(a) of the Income-tax Act start with the issue of notice and it is only after the service of the notice that the assessee, whose income is sought to be assessed or reassessed becomes a party to those proceedings. The earlier stage of the proceedings for recording the reasons of the Income-tax Officer and for obtaining the sanction of the Commissioner are administrative in character and are not quasi-judicial. The scheme of Section 34 of the Act is that, if the conditions of the main section are satisfied, a notice has to be issued to the assessee containing all or any of the requirements which may be included in a notice under sub-section (2) of Section 22. But, before issuing the notice, the proviso requires that the officer should record his reasons for initiating action under Section 34 and obtain the sanction of the Commissioner who must be satisfied that the action under Section 34 was justified.”

    16. In Union of India v. Rai Singh Deb Singh Bisth (1973) 88 ITR 200, the Supreme Court has held that (page 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 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)”

    17. In Jamna Lal Kabra v. ITO, (1968) 69 ITR, page 461 (All), it has been held at page-464 that:

    “To justify action by reference to clause (a) of Section 147 it is not open to the Income Tax-Officer, in my opinion, to refer to reasons other than those recorded by him pursuant to sub-section (2) of Section 148 and if the reasons recorded by the Income Tax Officer cannot lead to the conclusion that the income chargeable to tax has escaped assessment for the relevant assessment year because of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for such assessment, the proceedings initiated by the Income Tax Officer by refernce to that clause must be struck down as invalid.”

    18. I may point out here that in this judgment at page-464, it has also been send that 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. The Calcutta High Court in the case of H.A Nanji and Co. v. I.T.O 1973 Tax Law Report 567 has dissented on this limited aspect by holding that Section 148(2) merely requires that before issuing any notice the Income Tax Officer should record his reasons for doing so and it does not state that it is necessary to record all the reasons. In appeal, this decision was affirmed by the Division Bench, which reported in (1979) 120 ITR page 595. I respectfully agree with the view expressed by the Calcutta High Court in this regard. But then the reason so recorded must be a valid and relevant reason providing foundation for assumption of jurisdiction by the Income Tax Officer under Section 147(a) of the Act.

    19. In the case of C.M Rajagharia v. I.T.O, reported in (1975) 98 ITR 486 (at paga-496) a Bench of this Court has held that “the existence of the belief itself being challenged either for the purpose of Section 147(a) or Section 147(b), nothing has teen said in the counter affidavit filed on behalf of the respondents to justify any reason to believe. Nor was anything shown to us from the original record of the department which could justify the existence of any such reasonable belief. It is true that the communication of any such reasons to hold a belief to the assessee is not necessary, but they have to be disclosed to this court and ‘the Income-tax officer may be confined to those recorded reasons to support the assumption of jurisdiction’ (underlining his mine).

    20. In the case of H.A Nanji and Co. v. ITO (Calcutta) reported in (1979) 120 ITR 593 which has been referred to above an another point, it has been held at page 606 that, “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 manadatory, 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 I.T.O bad in his mind. But the I.T.O cannot be heard to say in his affidavit that he had in mind also at the time of recording reasons the suppression 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 Section 147.”

    21. A Bench of the Calcutta High Court by placing reliance on its earlier judgment again in the case of East Coast Commercial Company Ltd. v. ITO, reported in (1981) 128 ITR 327 held (p. 355) that, “it is true that Section 148(2) of the I.T Act does not say that the I.T.O shall record all the reasons which he had in his mind for reopening the assessment or for formation of his belief that income of the assessee had escaped assessment or has been under-assessed on account of the assessee not having made full and true disclosure of his income but the section does not also say that the I.T.O would record only some of the reasons and keep the others up his sleeves to be disclosed before the court if his action is over challenged in a court of law. The recording of reasons in our opinion is not an idle formality but is a manadatory requirement of the statute casting a duty and obligation on the I.T.O to record his reasons for issuing a notice for reopening an assessment and the C.B.D.T or the Commissioner, as the case may be, being satisfied that it is a fit case for issue of such notice solely on the basis of the said reasons recorded accords it sanction to the issue of such notice.”

    22. At page-356 of the said report the court has further held that “The I.T Act does not provide that for the issue of a notice under Section 34 of the Old Act or Section 148 of the New Act satisfaction of the court was necessary but such satisfaction under the statute had to be that of the Board of the Commissioner, as the case might be. Thus, if any additional reasons were disclosed by the I.T.O, in his affidavit before the court in support of his action in reopening the assessment on which the court might be satisfied as to the validity of the proceedings, that would not, in our opinion, validate the proceedings, if the reasons recorded under clause (iii) of the first proviso to Section 34(1) of the Old Act or Section 148(2) of the New Act were not sufficient for the initiation of the proceedings or for the grant of a sanction by the Board or the Commissioner, as the case might be.”

    23. The same view has been taken by the Calcutta High Court in a subsequent case of Equitable Investment Co. (P) Ltd. v. I.T.O, reported in (1988) 174 ITR 715.

    24. At the bar reference was also made to the case of Chunnilal Surajmal v. Commissioner Of Income-Tax reported in (1986) 160 ITR page 141 decided by a Bench of this Court but in my view this case is not relevant for deciding the question involved in this case because though in that case the reassessment proceedings were found to be illegal but the ground of challenge was not founded on the parameters of recorded reasons. Rather the proceedings were sought to be challenged by reference to certain materials collected subsequent to the initiation of the proceedings and it was held by this court that the revenue cannot be allowed to initiate reassessment proceedings under Section 147 of the Act, which is not inconfirmity with law and then start fishing enquiry.

    25. In view of the above discussions, I am clearly of the view that the Tribunal was right in holding that though as per the report of the Inspector, one particular construction was not shown by the assessee in the accounts, but since this circumstance has not been recorded as one of the reasons for initiating the proceedings under Section 147(a), it cannot be taken in aid for sustaining the assumption of jurisdiction by the Income Tax Officer.

    26. Now the next question that immediately falls for consideration is whether the reasons recorded by the Income Tax Officer as quoted above can be said to be legally relevant for conferring the jurisdiction on the Income Tax Officer. In the case of Johri Lal (HUF) and C.I.T, (1973) 88 I.T.R 439, 441, it has been held by the Supreme Court that.”

    “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 manadatory. The failure to fulfill that condition would vitiate the entire proceedings as held by this Court in Sheonath Singh v. The Appellate Assistant Commissioner of Income Tax (1971) 82 I.T.R 147 SC, the Income Tax Officer would be acting without jurisdiction if the reason for his belief that the conditions are satisfied, but 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 the proceedings under Section 34(1)(a) of the Act, but the Court 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 obtained the sanction of the Central Board of Revenue or the Commissioner as the case may be.”

    27. In view of the law laid down by the Supreme Court as quoted above which holds the field till this date, the Court can always enquire and ascertain as to whether “the reasons to believe” entertained by the Income Tax Officer can validly afford foundation for assumption of jurisdiction by him or it is a mere pretence and an effort to undergo a change of opinion.

    28. In the present case it is not necessary for this Court to come to an independent finding to ascertain as to whether by reason of any omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the assessment year in question any income chargeable to tax has escaped or not because it is essentially a question of fact and in the present case the Tribunal after examining the entire records have recorded that at the time of the original assessment the fact of construction, the plan of construction, the area of construction and the cost of construction was given by the assessee and the Income Tax Officer found the investments shown to be reasonable. It also held that on consideration of all these factors it cannot be stated that the primary facts were not disclosed by the assessee, and accordingly, it further held that even if this is not written in the assessment order, but is indicated otherwise by the Income Tax Officer is immaterial. Accordingly, the Tribunal took the view that the action under Section 147(a) was not legally justified on the basis of the reasons recorded by the Income Tax Officer. It was a case of change of opinion on the basis of further informations gathered by the Income Tax Officer, and in such circumstances, the escapement cannot be held to be due to any omission or failure on the part of the assessee to disclose fully and truly all material facts. Consequent upon these findings of fact, the Tribunal held the impugned action under Section 147(a) to be invalid and cancelled the assessment.

    29. In case of Commissioner of Income Tax, Bombay v. Lakhi Ram and Ramdas (1962) 44 I.T.R 726 S.C it has been held tha:—

    “The pre-requisite condition for the initiation of the proceeding under Section 34(1)(a) is that, the Income Tax Officer has reason to believe that by reason of the omission of failure on the part of the assessee…………..to disclose fully and truly all material facts necessary for his assessment for that year,” Income, profits or gains chargeable to Income Tax have escaped assessment etc. That condition must be fulfilled before the Income Tax Officer can take action under Section 34(1)(a).”

    Calcutta Discount Col. Ltd. v. I.T.O, (1961) 41 I.T.R 191 (S.C). Therefore, what the tribunal had to consider was whether the assessee had fully and truly disclosed all material facts necessary for the assessment.. .. .. .. .. .. .. …In our opinion in the circumstances of this case, the question whether the assessee had or had not failed to disclose fully and truly all material facts necessary for his assessment was a question of fact and we are enable to accept the argument of the learned Advocate for the appellant to the contrary.”

    30. At this stage I may also refer to Calcutta Discounts case (supra) for the purpose that in this case, the assessee had challenged the issuance of reassessment notices under writ jurisdiction before the Calcutta High Court and having failed, went in appeal to the Supreme Court. During the pendency of the writ application, the Income Tax Officer passed the assessment orders with permission of the Court. The Supreme Court while allowing the appeals, inter alia, held that the issuance of notice was without jurisdiction since there was no non-disclosure of material fact by the assessee by reason of which any underassessment had taken place. The Supreme Court, accordingly, quashed the assessment orders, as well.

    31. Respectfully following the dictum of the Supreme Court, I am of the view that the Tribunal was justified in law in cancelling the entire assessment under Section 147(a) of the Act for the assessment year 1962-1963.

    32. So far as Tax Case No. 40 of 1978 is concerned its result is just consequential without requiring any elaboration either on facts or law. On the basis of the addition made to the cost of the construction and passing of the assessment order determining income from other sources the Inspecting Assistant Commissioner passed an order of penalty under Section 271(1)(c) of the Act and imposed a penalty of Rs. 2,53,239. The assessee preferred an appeal to the Tribunal. The Tribunal cancelled the order of penalty in view of its earlier order (which is the subject-matter of the connected Tax Case No. 39 of 1978) that the very initiation of reassessment proceedings were invalid.

    33. In view of the findings recorded in the connected case, it has to be held that the order of the Tribunal cancelling the penalty levied under Section 271(1)(c) of the Act was also legal.

    34. I, accordingly, answers both the questions in affirmative and in favour of the assessee. Under the facts and circumstances of the case, there will be no order as to cost.

    35. Let a copy of this judgment under the seal of this court and the signature of the Registrar be forwarded to the Income Tax Appellate Tribunal, Patna Bench.

    36. G.G Sohani, C.J:— I agree.

    Questions answered in affirmative.

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