The Judgment of the Court was delivered by

V. Ramasubramanian, J.:— The petitioner has come up with this writ petition challenging a notice issued under section 148 of the Income-tax Act, 1961 and an order overruling the objections filed by the petitioner to the said notice.

2. I have heard Mr. S. Sridhar, learned counsel for the petitioner and Mr. K. Subramaniam, learned standing counsel for the Department. The petitioner is a company, whose main objects, as per the articles and memorandum of association, include the manufacturing and marketing of paper and the business of financing. The company was incorporated in 1974. For the assessment year 2004–05 relating to the previous year ending March 31, 2004, the petitioner filed a return of income on November 1, 2004, disclosing a total income of Rs. 3,02,626. This income was arrived at by the petitioner by showing an income of Rs. 12,80,258 as interest earned in the activity of money-lending, under the head “Business” and after claiming admissible expenses and set off as against brought forward losses.

3. However, the second respondent issued a notice dated July 7, 2008, under section 148 of the Income-tax Act, 1961 and called for various details. The petitioner filed objections and requested the respondent to furnish reasons for reopening the assessment. By a letter dated July 30, 2009, the second respondent furnished reasons. It was pointed out by the second respondent in that letter that in the return filed by the petitioner, the expenditure unconnected with the earning of interest was found to have been claimed and that brought forward business loss was wrongly set off against income from other sources, contrary to the provisions of section 72.

4. By a letter dated August 27, 2009, the petitioner filed objections to the reasoning given by the second respondent and requested the second respondent to drop further proceedings. But by a reply dated August 31, 2009, the second respondent rejected the request and held that the initiation of proceedings under section 147 was correct and proper. Therefore, the petitioner is before this court, challenging the notice under section 148 of the Act.

5. It is now well settled that the term “escaped assessment” includes both non-assessment and underassessment, (see Tax Officer-cum-Regional Transport Officer v. Durg Transport Company (Pvt.) Ltd., [1972] 85 ITR 156; (1975) 4 SCC 43 and Commissioner Of Income Tax v. Sun Engineering Works (P) Ltd., [1992] 198 ITR 297; (1992) 4 SCC 363). In a long line of decisions, the Supreme Court has held that this court, under article 226 of the Constitution, has power to set aside a notice under section 147 of the Income-tax Act, 1961, if the conditions precedent for the exercise of the jurisdiction do not exist.

6. One of the earliest decisions that arose on the question of reopening of assessment due to income escaping assessment, under section 34 of the Indian Income-tax Act, 1922 as amended in 1948, was the one in Calcutta Discount Co. Ltd. v. ITO, [1961] 41 ITR 191 : AIR 1961 SC 372. The provisions of section 34 were similar, though not in pari materia, to section 147 of the present Act. By a majority opinion, the Constitution Bench of the Supreme Court held in that case that two pre-conditions are to be satisfied, to confer jurisdiction under the above provision, namely (i) that the Income-tax Officer must have reason to believe that income, profits or gains chargeable to tax have been underassessed and (ii) that he must also have reason to believe that such underassessment had occurred by reason of either the omission or failure on the part of the assessee to file a return or omission or failure on the part of an assessee to disclose fully and truly, all material facts necessary for the assessment. In paragraph 8 of the said decision, the Supreme Court held that the section postulates a duty on every assessee to disclose fully and truly all material facts and that the question as to what are material facts, would differ from case to case. The court further pointed out in paragraph 9 that the Explanation to section 34 (of the old Act) was inserted “to meet a possible contention that when some account books or other evidence has been produced, there was no duty on the assessee to disclose further facts, which on due diligence, the Income-tax Officer might have discovered”. The court held that in view of the Explanation to section 34, no assessee would be heard to contend that by disclosing certain evidence, he should be deemed to have disclosed other evidence, which might have been discovered by the assessing authority by pursuing an investigation on the basis of what had been disclosed. However the apex court also made it clear that once all primary facts are disclosed, it is not necessary for the assessee to render any more assistance by telling the assessing authority what inferences, whether of facts or of law could be drawn.

7. In the next decision, CIT v. A. Raman and Co., [1968] 67 ITR 11 : AIR 1968 SC 49, the apex court held in paragraph 6(i) that the court, in exercise of its powers, can ascertain whether the Income-tax Officer had in his possession, any information and (ii) that the court may also determine whether from such information, the Income-tax Officer may have reason to believe that income chargeable to tax had escaped assessment. But the jurisdiction of the court extends no further. The Supreme Court made it clear that it is for the Income-tax Officer and not this court, to decide whether on the information in his possession, he should commence a proceeding for assessment or reassessment and that the Income-tax Officer alone is entrusted with the power to administer the Act.

8. Elaborating on the reach of the term “reason to believe” appearing in section 34(1A) of the old Act, it was held in Sheo Nath Singh v. AAC of I.T, [1971] 82 ITR 147; (1972) 3 SCC 234, that the belief must be that of an honest and reasonable person based upon reasonable grounds and that the Income-tax Officer may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour.

9. In Gemini Leather Stores v. ITO, [1975] 100 ITR 1; (1975) 4 SCC 375, the 1 Supreme Court held that if the Income-tax Officer had all material facts before him when he made the original assessment and if it was plainly a case of oversight on the part of the Income-tax Officer and the income chargeable to tax had escaped assessment, not by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts, the Income-tax Officer cannot take recourse to section 147(a) to remedy the error resulting from his own oversight.

10. Again, in ITO v. Lakhmani Mewal Das, [1976] 103 ITR 437; (1976) 3 SCC 757 the Supreme Court pointed out that the duty cast upon the assessee is to make a true and full disclosure of the primary facts at the time of the original assessment. But the Supreme Court also made it clear in that decision that the mere production of the books of account or other evidence from which the Income-tax Officer could have, with due diligence, discovered material facts, would not necessarily amount to a disclosure contemplated by law. It was held therein that the duty of the assessee does not extend beyond making a true and full disclosure of primary facts and that it was for the Income-tax Officer to draw a correct inference from those primary facts. If an Income-tax Officer had drawn an inference which was found subsequently to be erroneous, the mere change of opinion with regard to that inference would not justify the initiation of action for reopening the assessment. After holding so, the apex court also added a note of caution that once there exist reasonable grounds for the Income-tax Officer to form the belief, it would be sufficient to clothe him with jurisdiction and that the sufficiency of grounds which induced the Income-tax Officer to act, is not a justiciable issue. While the existence of the belief can be challenged by the assessee, the sufficiency of reasons for the belief cannot be challenged.

11. In Ganga Saran and Sons (P) Ltd. v. ITO, [1981] 130 ITR 1; (1981) 3 SCC 143, it was again reiterated that before the Income-tax Officer can assume jurisdiction to issue notice under section 147(a), two distinct conditions are to be fulfilled namely (i) that he must have reason to believe that the income of the assessee had escaped assessment and (ii) that he must have reason to believe that such escapement was by reason of omission or failure on the part of the assessee to disclose truly and fully all material facts, necessary for the assessment. The apex court also pointed out that the belief entertained by the Income-tax Officer must not be arbitrary or irrational, but must be based on reasons which are relevant and material.

12. In Indian Oil Corporation v. ITO, [1986] 159 ITR 956; (1986) 3 SCC 409, the Supreme Court indicated that section 147(a) postulates a duty on every assessee, firstly to disclose facts; secondly, those which are material; thirdly, the disclosure must be full and fourthly, true. What facts are material and necessary for assessment, will differ from case to case.

13. Referring to the scope of operation of clauses (a) and (b) of section 147, the Supreme Court held in Niranjan and Co. Pvt. Ltd. v. CIT, [1986] 159 ITR 153; 1986 Supp SCC 272 that reopening under section 147 can only be made after completed assessment if the Income-tax Officer has reason to believe under clause (a) that by reason of omission or failure on the part of the assessee to make a return or to disclose fully or truly all relevant facts, income chargeable to tax has escaped assessment for that year. Reopening is also possible under clause (b) notwithstanding that there was no omission or failure on the part of the assessee, if the Income-tax Officer has in consequence of information in his possession, reason to believe that income chargeable to tax has escaped assessment.

14. Dwelling on the circumstances under which the reopening may not amount to a mere change of opinion, the Supreme Court held in Phool Chand Bajrang Lal v. ITO, [1993] 203 ITR 456; (1993) 4 SCC 77 that the Income-tax Officer may start reassessment proceedings either because some fresh facts come to light which were not previously disclosed or some information with regard to the facts previously disclosed comes into his possession which tends to expose the untruthfulness of those facts. In such situations, it is not a case of mere change of opinion or the drawing of a different inference from the same facts.

15. After tracing the law on the point right from the earliest decision of the Constitution Bench in Calcutta Discount Co. Ltd., [1961] 41 ITR 191 : AIR 1961 SC 372 and while agreeing with the decision in Phool Chand Bajrang Lal v. ITO, [1993] 203 ITR 456; (1993) 4 SCC 77, the Supreme Court held in Sri Krishna Private Ltd. v. ITO, [1996] 221 ITR 538; (1996) 9 SCC 534 that the existence of the reasons to believe is supposed to be the check, a limitation, upon the power to reopen assessment and that sections 148(2) and 151 impose further checks by respectively prescribing (i) the requirement to record reasons and (ii) the requirement for the Commissioner to satisfy himself that it was a fit case for the issue of a notice. Therefore the power conferred upon the Income-tax Officer was held by the apex court to have been hedged with several safeguards conceived in the interest of eliminating room for abuse of this power by the Assessing Officers.

16. In Raymond Woollen Mills Ltd. v. ITO, [1999] 236 ITR 34 (SC), assessment was reopened on the ground that the assessee was charging to its profit and loss account, fiscal duties paid during the year as well as labour charges, power, fuel, wages, chemicals etc., and that however, while valuing its closing stock, the elements of fiscal duty and the other direct manufacturing costs were not included. The reason for reopening was that such non-inclusion resulted in undervaluation of inventories and understatement of profits. When a challenge was made, the Supreme Court rejected it on the ground that the court could only see whether there was prima facie some material on the basis of which the assessment could be reopened and that the sufficiency or correctness of the material cannot be considered. The court made it clear that it would be open to the assessee to prove the assumption of the Assessing Officer to be erroneous and that there were no new facts, while participating in the proceedings.

17. Indicating the procedure to be followed in cases where a notice under section 148 is issued, the Supreme Court held in GKN Driveshafts (India) Ltd. v. ITO, [2003] 259 ITR 19 that when a notice under section 148 is issued, the proper course of action for the noticee is to file a return and if he so desires, to seek reasons for issuing notice. The Assessing Officer is then obliged to furnish reasons, after receipt of which, the noticee can file objections. Thereafter, the Assessing Officer is bound to pass a speaking order disposing of the objections.

18. Having thus seen the broad canvas on which the courts have painted the nature and scope of the power under section 148, right from the Constitution Bench decision in Calcutta Discount Co. Ltd., [1961] 41 ITR 191 : AIR 1961 SC 372, up to GKN Driveshafts (India) Ltd., [2003] 259 ITR 19 let us now take a look at section 147 of the Act. It reads as follows:

“147. Income escaping assessment.—If the Assessing Officer has reason to believe that any 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 and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year):

Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under subsection (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year:

Provided further that the Assessing Officer may assess or reassess such income other than the income involving matters which are the subject-matter of any appeal, reference or revision, which is chargeable to tax and has escaped assessment.

Explanation 1.—Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso.

Explanation 2.—For the purpose of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely:—

(a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax;

(b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return;

(c) where an assessment has been made, but—

(i) income chargeable to tax has been underassessed; or

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

(iii) such income has been made the subject of excessive relief under this Act; or

(iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed.”

19. Section 147 underwent a substantial change, first by the Direct Tax Laws (Amendment) Act, 1987 (Act 4 of 1988) and later by other amendments. Prior to the amendment in 1988, section 147 contained clauses (a) and (b) and Explanations 1 and 2. After amendment, clauses (a) and (b) have been deleted and Explanation 2 has taken a new shape. Explanation 2, as it stands today, creates a deeming fiction in three types of situations namely:— (i) when no return is filed even though the total income exceeds the maximum amount; (ii) when a return of income is filed but no assessment has been made and the Assessing Officer notices either an understatement of the income or a claim for excessive loss, deduction, allowance or relief in the return; and (iii) where an assessment had been made but there is either understatement of income or assessment at a lower rate or grant of excessive relief or the computation of excessive loss or depreciation or other allowance.

20. Even before the amendment under Act 4 of 1988, there was a deeming fiction in section 147 under Explanation 1. But the import of the same was not so much as it is under Explanation 2 inserted after the amendment. Prior to the Direct Tax Laws (Amendment) Act, 1988, section 147 read as follows:

“147. Income escaping assessment.—If.—

(a) the Assessing 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 Assessing 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 Assessing 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 underassessed; 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 Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of this section.”

21. After the aforesaid amendment under Act 4 of 1988, yet another amendment was made by the Direct Tax Laws (Amendment) Act, 1989 and the words “for reasons to be recorded by him in writing, is of the opinion”, appearing in the first line of section 147, was substituted by the words “has reason to believe”. Thus a substantial change has been made to section 147 by the amendments of the years 1988 and 1989.

22. In the Statement of Objects and Reasons accompanying the Direct Tax Laws (Amendment) Bill, 1987 (which became Act No. 4 of 1988), it was indicated in paragraph 2(i) that in view of the proposed amendment, no assessment order would generally be required to be passed, once the acknowledgment of return of income was issued and that however if a return of income is scrutinised, the process of investigation will be initiated.

23. In the Notes on Clauses, explaining in detail, the provisions of the Bill, it was stated, in relation to the proposed amendments to sections 147 and 148, as follows [1987] 168 ITR (St.) 301, 328):

“Clause 54 seeks to substitute new sections for the existing sections 147 and 148 relating to income escaping assessment and issue of notice on such escapement of income.

Clause (a) of the existing section empowers the Income-tax Officer to assess or reassess the income escaping assessment, if he has reason to believe that income has escaped assessment and such escapement has occurred on account of either assessee's omission or failure to file a return of income or failure to disclose fully and truly all material facts necessary for his assessment for that year. Clause (b) empowers the Income-tax Officer to reopen an assessment, notwithstanding the fact that there is no omission or failure, as mentioned in clause (a) on the part of the assessee, if he has, in consequence of information in his possession, reason to believe that income chargeable to tax has escaped assessment.

Under the proposed amendment, separate provisions contained in the existing clauses (a) and (b) of the section are to be simplified and merged into a single provision enabling the Assessing Officer to assess or reassess income which has escaped assessment for any assessment year, after recording reasons for doing so. The existing requirements of having ‘reason to believe’ or ‘information in possession’, are dispensed with. It is further provided in the new section that once an assessment is reopened, any other income which has escaped assessment and which comes to the notice of the Assessing Officer subsequently in the course of the proceeding under this section, can also be included in the assessment.

A proviso to the new sub-section provides that if an assessment has been made for the relevant assessment year under sub-section (3) of section 143 or this section, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless the income has escaped assessment due to the failure on the part of the assessee to file a return under section 139 or 142(1) or 148 or to disclose fully and truly all material facts necessary for his assessment.

Explanation 1 to the new section, which clarifies the meaning of the term ‘disclosure’, is the same as Explanation 2 in the existing section.

Explanation 2 to the new section clarifies that the following shall also be deemed to be cases of income escaping assessment:—

(i) Where no return of income has been furnished by an assessee, although his total income is above the taxable limit;

(ii) Where a return of income has been furnished but no assessment has been made, and the assessee is found to have understated his income or claimed excessive loss, deduction, etc., in the return; and

(iii) Where an assessment has been made, but income chargeable to tax has been underassessed or assessed at too low a rate or any excessive loss or relief or depreciation allowance or any other allowance under the Act has been allowed.

The existing provisions of sub-section (1) of section 148 provide that a notice issued under this section shall tantamount to a notice issued under sub-section (2) of section 139. The existing sub-section (2) provides that before issuing a notice under this section, the Income-tax Officer will record his reasons for doing so.

In the new section 148, reference to sub-section (2) of section 139 is to be removed as that sub-section is being deleted. Sub-section (2) of the section is to be deleted, as the requirement of recording reasons is incorporated in section 147 itself. The new section 148, therefore, provides that before making the assessment, reassessment or recomputation under section 147, the Assessing Officer shall serve on the assessee, a notice requiring him to furnish the return of income within such period, not being less than 30 days, as may be specified in the notice.”

24. Thus it is clear that the scope of the deeming fiction which was found in Explanation 1 under section 147, before its amendment, was enlarged in the form of Explanation 2, by the amendment under Act No. 4 of 1988. The effect of this deeming fiction did not fall for consideration in any of the decisions that arose even up to Sri Krishna Private Ltd.. Therefore, even while keeping in mind the elementary principles laid down in the aforesaid decisions, we may have to apply them to the extent that they are now permissible in view of Explanation 2.

By virtue of Explanation 2—

(i) non-furnishing of return by an assessee, whose total income is above the ceiling limit, will be deemed to be a case of income escaping assessment;

(ii) understatement of income or a claim of excessive loss, deduction, allowance or relief in the return furnished by the assessee, will also be deemed to be a case of income escaping assessment, in cases where a return is filed but no assessment is made;

(iii) underassessment of income chargeable to tax, assessment of income at too low a rate, grant of excessive relief under the Act to an income and the computation of excessive loss or depreciation allowance or any other allowance, would also be deemed to be a case of income escaping assessment, in cases where an assessment has been made.

25. In the light of the above deeming fiction, if we now look at the order dated August 31, 2009, passed by the second respondent, overruling the objections of the petitioner to the initiation of proceedings, it is seen that the petitioner admittedly earned income solely from interest on fixed deposits and intercorporate deposits and debited significant amount of expenditure. The Assessing Officer has taken a stand, prima facie, that the expenditure debited to the profit and loss account under various heads is not incidental to the earning of interest income. Therefore the stand taken by the second respondent that he has reason to believe that certain income chargeable to tax escaped assessment, cannot be said to be vague, irrational or devoid of any basis.

26. The learned counsel for the petitioner relied upon two decisions, one, of the Division Bench of the Delhi High Court and another, of the Division Bench of this court. In Klm Royal Dutch Airlines v. Assistant Director Of Income-Tax, [2007] 292 ITR 49 (Delhi), relied upon by the learned counsel, a notice under section 148 was issued on the ground that the income earned by rendering technical services cannot be claimed by the Airlines, as covered by article 8 of the Double Taxation Avoidance Agreement. The Division Bench of the Delhi High Court found that the assessee had filed a return under section 139 on October 31, 2002, and that since no order of assessment had been finalised by the Assessing Officer, there was no scope for initiating proceedings for “reassessment”. The focus of the Delhi High Court was on the word “reassessment”, in the light of the fact that in that case, an inquiry had been initiated after scrutiny by the Assessing Officer. Though the Division Bench of the Delhi High Court, relying upon a Full Bench decision of the very same court in Commissioner Of Income-Tax, Delhi-Ii. v. Kelvinator Of India Ltd., [2002] 256 ITR 1 (Delhi) also held that the amendment to section 147 with effect from April 1, 1989, had not altered the position in so far as the law relating to change of opinion was concerned, the purport of the deeming fiction did not arise for consideration in that case. Therefore, the decision of the Delhi High Court does not assist the petitioner.

27. In Sterlite Industries (India) Ltd. v. Asst. Commr. Of Income Tax, [2008] 305 ITR 339 (Mad), relied upon by the learned counsel for the petitioner, the Division Bench of this court was concerned with a notice issued under section 148, after the expiry of 5 years from the assessment year. The Division Bench found that in that case, the assessment was originally completed under section 143(3) on March 28, 2003, by the Assistant Commissioner, Circle-2(3), Mumbai, in respect of the assessment year 2000–01. Subsequently the case was transferred to the Company Circle, Chennai. The Company Circle, Chennai, allegedly received information from the Enforcement Directorate that the assessee had given some orders of import, but failed to produce the original bills of entry. On the basis of the said information, the Deputy Commissioner suspected that there was every chance of inflated expenditure being booked on account of import. When the suspicion was brought to the notice of the Commissioner, the Commissioner granted approval for the issue of notice under section 148. Upon a perusal of the reasons recorded and the communications between the Deputy Commissioner and Commissioner, the Division Bench came to the conclusion that what was raised by the Revenue was only a “doubt” and not a “specific finding” and that the Assessing Officer failed to record (i) that he had reasons to believe that there was underassessment, and (ii) that such underassessment had occurred by reason of the omission or failure on the part of the assessee. But in the case on hand, the reason recorded by the second respondent cannot be said to be vague or a mere doubt. From the return of income filed by the petitioner, the Assessing Officer had found that the petitioner had earned interest on deposits to the tune of Rs. 12,80,258 and that they sought deduction of a sum of Rs. 9,26,830.84 towards admissible expenses that included the general administrative expenses, vehicle maintenance, salaries etc. The losses brought forward from the previous assessment years were also set off and the petitioner claimed a total income of only Rs. 3,02,626.16. It is this that prompted the second respondent to issue a notice under section 148 and hence on the facts, the case of the petitioner is patently distinguishable from the one in Sterlite Industries' case, [2008] 305 ITR 339 (Mad). Moreover, Explanation 2 was not in issue in Sterlite Industries' case, [2008] 305 ITR 339 (Mad). Therefore, that case is of no assistance to the petitioner.

28. In any event, the petitioner is only at the threshold. Once it is found that the Assessing Officer had reason to believe that there was income escaping assessment, it is not open to this court to make a roving enquiry, since the reasons are not justiciable. All that can happen, by allowing the proceedings to continue, is that the Assessing Officer may pass an order of assessment or reassessment. The petitioner would then have a spate of statutory remedies. Therefore, the case on hand, in my opinion, is not one that warrants interference at this stage.

29. In view of the above, the writ petition is dismissed. No costs. Consequently connected miscellaneous petition is also dismissed.