The Judgment of the Court was delivered by
Indira Banerjee, J.:— In this writ application, the petitioners have challenged a notice dated May 13, 1992, issued by the Deputy Commissioner of Income-tax, Special Range 13, Calcutta, under section 148 of the Income-tax Act, 1961, seeking to reopen the assessment of taxable income of the petitioner company for the assessment year 1983–84.
2. According to the petitioners, on or about February 18, 1983, one Mimec (Sikkim) Investment Pvt. Ltd., incorporated under the Sikkim Registration Act, 1961, advanced an interest free loan of Rs. 25,49,300 to the petitioner-company.
3. On or about October 31, 1983, the petitioner company filed its return for the assessment year 1983–84, corresponding to the financial year 1982–83, showing a loss of Rs. 63,270. The said return was apparently filed along with the annual report of the petitioner company containing the audited profit and loss account and balance-sheet for the relevant year, which disclosed the alleged loan of Rs. 25,49,300 allegedly advanced by Mimec (Sikkim) Investment Pvt. Ltd. to the petitioner company. The petitioners have claimed that the said loan was also disclosed in the balance-sheet of Mimec (Sikkim) Investment Pvt. Ltd. for the year in question.
4. On March 20, 1986, the Assessing Officer completed the assessment for the assessment year 1983–84 under section 143(3) of the Income-tax Act, 1961, and computed the total income of the petitioner company at Rs. 71,040 for that assessment year, as against the loss return of Rs. 63,270 after disallowing certain deductions claimed. The loan referred to above was accepted the petitioners appealed against the disallowance of expenses and other deductions and pursuant to the appellate orders the income was later recomputed at Rs. 17,340. According to the petitioners, the assessment was done upon examination of all books of account and documents furnished by the petitioner company in response to notices under section 143(2) and 142(1) of the Income-tax Act, 1961.
5. The loan remained outstanding even in the financial year 1988–89. The loan was not questioned till the assessment was done for the assessment year 1989–90, even though several assessment orders had been passed in the meanwhile.
6. In the course of the assessment for the assessment year 1989–90, the Assessing Officer sought particulars with regard to the said loan. The petitioners claim to have furnished the particulars sought by the Assessing Officer, by a letter dated February 20, 1989. According to the petitioners, the petitioner company also enclosed the requisite documents of Mimec (Sikkim) Investment Pvt. Ltd.
7. On February 28, 1992, an order of assessment was passed for the assessment year 1989–90, treating the alleged loan as income of the petitioner company. Thereafter, on or about May 18, 1992, the petitioners were served with a notice under section 148 of the Income-tax Act dated May 13, 1992, for reopening of assessment for the assessment year 1983–84.
8. By a letter dated June 15, 1992, the petitioner objected to the said notice, pointing out that all material facts relevant to the assessment had duly been disclosed. It is alleged that notwithstanding repeated requests, the reasons for initiation of the reassessment for the assessment year in question were not disclosed to the petitioner.
9. The reasons recorded by the Deputy Commissioner of Income-tax on April 23, 1992, have been annexed to the affidavit-in-opposition affirmed on behalf of the Revenue.
10. On a perusal of the reasons, recorded by the Deputy Commissioner of Income-tax, it is clear that the alleged loan was disbursed through three cheques dated March 25, 1983, issued by and/or on behalf of Mimec (Sikkim) Investment Pvt. Ltd.
11. It is not in dispute that the alleged loan was duly disclosed by the petitioner company in its income-tax return for the assessment year 1983–84. The Assessing Officer, drew the inference that the loan was not genuine, from the fact that the loan was interest free and had not been repaid till the end of the previous year relevant to the assessment year 1989–90.
12. The Assessing Officer has in his reasons in writing, stated that investigations conducted in course of proceedings for the assessment year 1989–90, revealed that Mimec (Sikkim) Investment Pvt. Ltd., which was a wholly owned subsidiary company of the petitioner company, was no longer traceable. The assessee had stated that the said company was actually functioning from Calcutta, from the same address as the petitioner company.
13. The Assessing Officer also noted that the balance-sheet and the profit and loss account of Mimec (Sikkim) Investment Pvt. Ltd. reflected, advance of over Rs. 29 lakhs to the petitioner company within a few days of incorporation in Sikkim, but the source of the amount had not been properly explained.
14. The Assessing Officer concluded that creation of a subsidiary company in Sikkim in the financial year 1982–83, when the Income-tax Act, 1961, did not apply to Sikkim, and the procurement of loan of Rs. 29 lakhs from the said subsidiary company founded by unknown sources, within a few days of its incorporation, was nothing but an arrangement to bring in funds to the company from undisclosed sources, taking advantage of the fact that the Income-tax Act did not apply to Sikkim.
15. The Assessing Officer concluded that the petitioner company had, by recourse to the aforesaid arrangement, concealed the income from undisclosed sources, amounting to more than Rs. 29 lakhs, which escaped assessment during the assessment year 1983–84, due to failure on the part of the assessee to disclose fully and truly all material facts necessary for determination of the correct taxable income and completion of assessment.
16. On or about December 6, 1993, notice under section 143(2) of the Income-tax Act was issued requiring the petitioner company to appear before the Assessing Officer on December 22, 1993, along with documents on which the petitioner company wished to rely. Another notice under section 143(2) was issued on or about October 20, 1994, calling upon the petitioner to produce documents.
17. Under cover of a letter dated January 31, 1995, which was received by the petitioners on February 13, 1995, respondent No. 1 furnished to the petitioners, the reasons recorded by the Deputy Commissioner of Income-tax for reopening the assessment for the assessment year 1983–84, treating the loan from Mimec (Sikkim) Investment Pvt. Ltd. as income of the petitioner-company from undisclosed sources. On March 15, 1995 the Assessing Officer passed an order of assessment, treating the loan as undisclosed income of the petitioner.
18. Counsel appearing on behalf of the Revenue emphasized the fact that the loan was interest-free and remained outstanding even after eight years, and suggested that the loan was not genuine.
19. It was emphatically argued on behalf of the Revenue that the Assessing Officer had reason to believe that income had escaped assessment in the assessment year 1983–84, as the loan taken in the assessment year 1983–84 was not genuine and was liable to be taxed under section 68 of the Income-tax Act, 1961.
20. The Revenue submitted that no company by the name of M/s. Mimec (Sikkim) Investment Pvt. Ltd. existed at the address furnished by the petitioners. It is, however, not disputed that the company Mimec (Sikkim) Investment Pvt. Ltd. was incorporated in 1983. The Assessing Officer has also, in effect, accepted that the cheques towards the alleged loan were issued by Mimec (Sikkim) Investment Pvt. Ltd.
21. The Revenue argued that even though Mimec (Sikkim) Investment Pvt. Ltd. had no source of income, except income from dividend, the petitioner company did not explain the source from which the loan was funded. The petitioner company was under no obligation to disclose the source from which Mimec (Sikkim) Investment Pvt. Ltd. obtained funds for the loan to the petitioner company.
22. In any case, the materials on record, including the reasons recorded for reopening the assessment do not show that the petitioner company was called upon to explain the source from which the loan given by Mimec (Sikkim) Investment Pvt. Ltd. to the petitioner company was funded. It is not the case of the Revenue that the petitioner company did not explain the source from which the loan was funded, even though it was called upon to do so. It is also not the case of the Revenue that any information furnished by the petitioner with regard to the source of funds for the loan was false.
23. The Revenue further submitted that the notice under section 148 of the Act was issued for the assessment year 1983–84 on May 11, 1992, after obtaining the approval of the Commissioner of Income-tax and after proper recording of reasons. The notice or the order of reassessment made pursuant thereto do not warrant interference of this court under article 226 of the Constitution of India.
24. The short question involved in this writ petition is, whether the notice under section 148 of the Income-tax Act, purporting to open assessment of taxable income of the petitioner company under section 147 of the said Act, could have been issued after expiry of over six years from the end of the relevant assessment year and whether the loan taken by the petitioner company from Mimec (Sikkim) Investment Pvt. Ltd., could have been treated as income from undisclosed sources, after successive assessment orders had been passed including the assessment order for the assessment year in question, accepting that the amount in question had been received by the petitioner company by way of loan.
25. Sections 147 and 148 of the Income-tax Act, 1961, as they stood at the material time when the impugned notice under section 148 was issued, are set out hereinbelow for convenience:
“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.
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 purposes 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.
148. Issue of notice where income has escaped assessment.— (1) Before making the assessment, reassessment or recomputation under section 147, the Assessing Officer shall serve on the assessee a notice requiring him to furnish within such period, as may be specified in the notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed; and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139.
(2) The Assessing Officer shall, before issuing any notice under this section, record his reasons for doing so.”
26. In view of the proviso to section 147, where an assessment under subsection (3) of section 143 had been made for the assessment year in question, no action could have been taken for reassessment under section 147 after expiry of four years from the end of the relevant assessment year, unless it could be shown that any income chargeable to tax, had escaped assessment for such assessment year, by reason of failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148, or to disclose fully and truly all material facts necessary for assessment for that assessment year.
27. Admittedly, an order of assessment under section 143(3) for the assessment year 1983–84 had been issued on March 20, 1986. The petitioners appealed against the disallowance of expenses and other deductions made in the aforesaid order of assessment. Pursuant to the appellate orders, income was reassessed and recomputed at Rs. 17,340.
28. Assessment for the relevant assessment year having been made, the Assessing Officer was debarred from reopening assessment under section 147, unless he could show that income chargeable to tax had escaped assessment for such assessment year either by reason of failure to make a return or to disclose fully and truly all material facts necessary for assessment for that year.
29. In a case like this, where assessment for the assessment year 1983–84 has been completed under section 143(3), the condition precedent for exercise of jurisdiction to reopen assessment under section 147, is existence of the factors specified in the proviso to section 147.
30. It is a matter of record that the petitioners duly filed their return of income for the assessment year in question pursuant to which assessment was completed. The question is, whether there was any failure to disclose fully and truly, material facts necessary for assessment for that assessment year.
31. As observed above, there is no dispute that the loan of about Rs. 29 lakhs odd from Mimec (Sikkim) Investment Pvt. Ltd. had been disclosed in the income-tax return. It is not the case of the Revenue, that the Revenue was not aware of the said loan when income for the relevant assessment year was assessed.
32. The loan from Mimec (Sikkim) Investment Pvt. Ltd. having been disclosed in the return, it was for the Assessing Officer to make necessary investigations with regard to the source of funds of Mimec (Sikkim) Investment Pvt. Ltd., if it deemed it necessary to do so. Having accepted the loan and passed orders of assessment, it is not permissible for the same Assessing Officer and/or his successor in office to reopen the assessment, after expiry of four years from the relevant assessment year. The extended period of limitation cannot be invoked on the ground of any omission or mistake on the part of the assessing authority, which is not attributable to failure of the assessee, to disclose material facts necessary for assessment truly and fully.
33. In Calcutta Discount Co. Ltd. v. ITO reported in [1961] 41 ITR 191 (SC) : AIR 1961 SC 372 a Constitution Bench of the Supreme Court held (page 201):
“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. Indeed, when it is remembered that people often differ as regards what inferences should be drawn from the given facts, it will be meaningless to demand that the assessee must disclose what inferences—whether of facts or law—he would draw from the primary facts.
If from primary facts more inferences than one could be drawn, it would not be possible to say that the assessee should have drawn any particular inference and communicated it to the assessing authority. How could an assessee be charged with failure to communicate an inference, which he might or might not have drawn ?
It may be pointed out that the Explanation to the sub-section has nothing to do with ‘inferences’ and deals only with the question whether primary material facts not disclosed could still be said to be constructively disclosed on the ground that with due diligence the Income-tax Officer could have discovered them from the facts actually disclosed. The Explanation has not the effect of enlarging the section, by casting a duty on the assessee to disclose ‘inferences to draw the proper inferences being the duly imposed on the Income-tax Officer.
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.”
34. Where the assessee discloses all primary facts, but still income escapes assessment because of the failure on the part of the Assessing Officer to draw the correct inference in law, initiation of reassessment proceedings after expiry of four years from the end of the relevant assessment year cannot be justified, in view of the clear language appearing in the proviso to section 147. This view also finds support from the judgment of the Supreme Court in Gemini Leather Stores v. ITO reported in [1975] 100 ITR 1 (SC).
35. In Parashuram Pottery Works Co. Ltd. v. ITO reported in [1977] 106 ITR 1 (SC), the Supreme Court held that failure on the part of the Assessing Officer to allow correct depreciation to the assessee was not a valid ground for initiation of reassessment proceedings. The Supreme Court held that when, on the basis of the facts on record the Income-tax Officer determines the amount of depreciation allowable to the assessee erroneously, the responsibility for that mistake cannot be ascribed to be an omission or failure on the part of the assessee. The Supreme Court quashed the initiation of reassessment after expiry of four years from the end of the relevant assessment year.
36. In CTT v. Cholatnandalam Investment and Finance Co. Ltd. reported in [2009] 309 ITR 110 (Mad), the Madras High Court held that after expiry of four years from the relevant assessment year, where the assessee had disclosed fully and truly all primary facts in relation to his claim for depreciation, the initiation of reassessment proceedings on the ground that the claim for depreciation had not been explained would be without jurisdiction, illegal, invalid and void ab initio.
37. It is a well-established proposition settled by judicial decisions that change of opinion is no ground for reopening of assessment. There could be no justification in law in initiation of reassessment proceedings on the basis of the facts and materials already disclosed in the course of the original proceedings.
38. On behalf of the Revenue, it was also contended that the petitioner company had objected to the impugned notice under section 148 of the Income-tax Act, 1961, and thereby submitted to the jurisdiction of the Assessing Officer to reopen the assessment. In any case, an order of assessment was passed on March 15, 1995, treating the loan as undisclosed income of the petitioner company. The order of assessment being appeal-able, the writ petition ought not to be entertained.
39. The writ petition was filed in 1995. The writ petition was entertained. Directions for affidavits were issued. Affidavit-in-opposition was filed way back in August, 1997. Since the writ petition has been pending in this court for about 14 years, this court is not inclined to reject the writ application on the ground of existence of the remedy of an appeal. In any case, existence of an alternative remedy is no bar, when an action is without jurisdiction.
40. In B.K Gooyee v. CTT reported in [1966] 62 ITR 109 (Cal), a Division Bench of this court held that a notice under section 34 of the Indian Income-tax Act, 1922, which is invalid vitiates the entire proceedings, and the illegality of the notice cannot be waived by filing a return in pursuance thereof. section 34 of the Indian Income-tax Act, 1922, corresponds to section 148 of the Income-tax Act, 1961.
41. In CIT v. Thayaballi Mulla Jeevaji Kapasi reported in [1967] 66 ITR 147 (SC), the Supreme Court held that service of notice under section 34(1)(a) of the Indian Income-tax Act, 1922, within the period of limitation being a condition precedent for exercise of jurisdiction, if the Income-tax Officer was unable to prove service of the notice within the prescribed period, the filing of any return in pursuance of the notice would not invest the Income-tax Officer with power to reassess income of the assessee pursuant to such return.
42. In the State of Madhya Pradesh v. D.K Yadav reported in AIR 1968 SC 1186, the Supreme Court, inter alia, held that it was well established that where the jurisdiction of an authority depended upon a preliminary finding of fact, this court in exercise of its writ jurisdiction would be entitled to examine whether the findings on jurisdictional facts were correct or not.
43. In Raza Textiles Ltd. v. Income Tax Officer, Rampur reported in [1973] 87 ITR 539 (SC) : (1973) 1 SCC 633 : AIR 1973 SC 1362, the Supreme Court held that no authority, much less a quasi-judicial authority, could confer jurisdiction on itself by deciding any jurisdictional fact wrongly. The question of whether the jurisdictional fact had rightly been decided or not was a question open to examination by the High Court in an application under article 226 of the Constitution of India.
44. In Raza Textiles Ltd. [1973] 87 ITR 539 (SC), the Supreme Court held that, if in an application under article 226 of the Constitution of India, the Income-tax Officer had assumed jurisdiction by deciding a jurisdictional fact erroneously, the assessee would be entitled to a writ of certiorari as prayed for, since it was incomprehensible to think that a quasi-judicial authority could erroneously decide a jurisdictional fact and impose a levy.
45. In Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC) the Constitution Bench of the Supreme Court held (page 207):
“The scheme of the law clearly is that where the Income-tax Officer has reason to believe that an under assessment has resulted from non-disclosure he shall have jurisdiction to start proceedings for reassessment within a period of eight years;… The argument that the court ought not to investigate the existence of one of these conditions, viz., that the Income-tax Officer has reason to believe that underassessment has resulted from non-disclosure of material facts cannot, therefore, be accepted…
It is well settled, however, that though the writ of prohibition or certiorari will not issue against an executive authority, the High Courts have power to issue in a fit case an order prohibiting an executive authority from acting without jurisdiction. Where such action of an executive authority acting without jurisdiction subjects or is likely to subject a person to lengthy proceedings and unnecessary harassment, the High Courts, it is well settled, will issue appropriate orders or directions to prevent such consequences….
The expression ‘reason to believe’ postulates belief and the existence of reasons for that belief. The belief must be held in good faith: it cannot be merely a pretence… If it be asserted that the Income-tax Officer had reason to believe that income had been underassessed by reason of failure to disclose fully and truly the facts material for assessment, the existence of the belief and the reasons for the belief, but not the sufficiency of the reasons, will be justiciable. The expression, therefore, predicates that the Income-tax Officer holds the belief induced by the existence of reasons for holding such belief. It contemplates existence of reasons on which the belief is founded, and not merely a belief in the existence of reasons inducing the belief; in other words, the Income-tax Officer must on information at his disposal believe that income has been underassessed by reason of failure fully and truly to disclose all material facts necessary for assessment. Such a belief, be it said, may not be based on mere suspicion: it must be founded upon information.”
46. In ITO v. Lakhmani Mewal Das reported in [1976] 103 ITR 437 (SC), the Supreme Court reiterated the view taken in Calcutta Discount Co. [1961] 41 ITR 191 (SC) and held that reasons for the formation of belief contemplated by section 147(a) should have a rational connection or relevant bearing on the formation of belief. Rational connection postulates that there must be a live link between the material coming to the notice of the Income-tax Officer and the formation of his belief that, there had been escapement of the income of the assessee from assessment, in the particular year, because of his failure to disclose fully and truly all material facts.
47. In Union Carbide (India) Ltd. v. ITO reported in [1973] 87 ITR 529 (Cal), this court reiterated the conditions and limitations for issuance of notice under section 148 of the Income-tax Act, 1961. This court held that in order to be entitled to issue a notice under section 147(a) of the Income-tax Act, 1961. The Income-tax Officer issuing the notice must hold the belief that due to omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for the assessment or to make the return, the income had escaped assessment. There would have to be materials or reasons for formation of the aforesaid belief and existence of the belief and existence of the materials for forming the belief could both be challenged in proper proceedings and in case of a challenge it was for the Income-tax authorities to satisfy the court that the Income-tax Officer had held the belief and that there were reasons to hold such belief.
48. The loan of Rs. 25,49,300 was disclosed in the return for the assessment year 1983–84. The Assessing Officer upon consideration of all relevant records accepted the loan, not only in that year but in subsequent years and as late as in 1989–90.
49. In Commissioner Of Income Tax v. Lovely Exports Private Limited. reported in [2009] 319 ITR (St.) 5 (SC) : [2008] 216 CTR 195 (SC), cited by Dr. Pal, the Supreme Court held that if share application money had been received by the assessee-company from alleged bogus shareholders, the Department was free to proceed with the individual assessments of those bogus applicants for share in accordance with law, but it could not be regarded as undisclosed income of the asses-see-company.
50. The judgment in Commissioner Of Income Tax v. Lovely Exports Private Limited. reported in [2009] 319 ITR (St.) 5 (SC) : [2008] 216 CTR 195 (SC) was rendered in the particular facts and circumstances of that case. The judgment may not lay down any proposition of law that operates as a binding precedent on this court. At the same time, there is no reason why the same principle should apply in this case.
51. Dr. Pal also cited CIT v. Steller Investment Ltd. reported in [2001] 251 ITR 263 (SC) where the Supreme Court held that even if it was argued that the subscribers to the increased capital were not genuine, under no circumstances could the amount of share capital be regarded as undisclosed income.
52. In Chhugamal Rajpal v. S.P Chaliha reported in [1971] 79 ITR 603 (SC) the Supreme Court held that unless the requirements of clause (a) or clause (b) of section 147 was satisfied, the Income-tax Officer had no jurisdiction to issue a notice under section 148.
53. For the reasons discussed above, this court is constrained to hold that even if any income in the assessment year 1983–84 has escaped assessment, it is not on account of failure of the petitioner company to disclose facts, material for assessment, truly and fully. The assessing authority thus lacked jurisdiction to reopen assessment that had been concluded, over four years having elapsed from the end of the relevant assessment year.
54. The writ application is thus allowed.
55. The impugned notice and the impugned order of assessment are set aside and quashed. Ms. Das De, learned advocate appearing on behalf of the Department, prays for stay of operation of this order.
56. The prayer for stay is considered and refused.
section 148 of the Income-tax Act, 1961.