The Judgment of the Court was delivered by

Deepak Verma, J.:— Heard Sri M.V Seshachala, learned counsel for the appellants and Sri A. Shankar, learned counsel for the respondent. This order shall also govern disposal of I.T.A Nos. 105 of 2002 and 106 of 2002. which are for the assessment years 1989-90, 1990-91 and 1993-94, respectively, arising out of common order passed by the Income-tax Appellate Tribunal. It has not been disputed before us that in all the aforesaid appeals, which are at the instance of the Revenue, common questions of law have been formulated, which are required to be adjudicated by this court.

2. These appeals under section 260A of the Income-tax Act, 1961 (hereinafter referred to in short as “the Act”), are at the instance of the Revenue against the order dated October 30, 2001 passed by the Income-tax Appellate Tribunal, Bangalore Bench “C” in I.T.A Nos. 545 to 552.Bang/2000 for the aforesaid assessment years. The appeals before the Tribunal were at the instance of the assessee against the consolidated order passed by the Commissioner of Income-tax (Appeals) on June 5, 2000, for the same assessment years. In fact out of the impugned order passed by the Tribunal, eight appeals are preferred by the Revenue. Out of those eight appeals, three appeals already stood disposed of by an earlier order passed by this court. I.T.A Nos. 99 of 2002 and 101 of 2002 for the assessment years 1991-92 and 1992-93 have been disposed of by us yesterday as the original records produced before us categorically revealed that there has not been any mandatory compliance with regard to section 148(2) of the Act inasmuch as no reasons have been recorded for invoking the said section. Thus, on a technical ground, those two appeals have been disposed of without going into the merits of the same.

3. Although several substantial questions of law have been formulated by the learned counsel for the Revenue in the appeals, but, vide order dated February 9, 2004, the questions of law have been reframed and the appeals have been admitted only on the reframed substantial questions of law, which are as under:

“1. Whether the Tribunal was correct in holding that the statements given by the assessee on oath during search could not be used as evidentiary of value in assessment, as the assessee had retracted these statements?

2. Whether the Tribunal was correct in holding that reopening of assessment is based on mere suspicion and without any material as the confession made by the assessee during search was withdrawn before the issue of notice under section 148 of the Act and consequently the assessment was liable to be cancelled?

3. Whether the Tribunal was correct in holding that the undisclosed income from money lending business and unexplained investments in the fixed deposits cannot be assessed in the hands of the assessee?

4. Whether the Tribunal was correct in deleting the additions made by the Assessing Officer in respect of unexplained credits and repayment of loans not accounted for?

4. Thus, we are required to address on the aforesaid substantial questions of law.

5. The facts of the case, lie in narrow compass, which are mentioned here-inbelow:

“A search was conducted at the residential premises of the assessee on August 23, 1994, purportedly exercising the power conferred on the Department under section 132 of the Act. The assessee is a medical practitioner and is assessed to tax in the status of individual delivering the income by way of insurance commission, income from house property, etc. During the course of search, the following valuables were seized by the Department:

Rs. (i) Cash 9,00,000.00 (ii) Pawned gold articles 9,47,584.00 (iii) Pledged NSCs 45,70,843.00 (iv) F.D.Rs 9,24,300.00

It has not been disputed before us that pursuant to the search conducted in the premises of the assessee, he had made declarations/statements under section 132(4) of the Act on August 23, 1994, and again on September 28, 1994. He later on retracted the said statements mentioning therein that the same were obtained under duress and coercion and he did not understand the implication of the same. In the letter of retraction addressed by the assessee to the Department, he further went on to state that on the dates of his recording statements, he was not keeping well. Retractions were made by the assessee on October 18, 1994 and December 17, 1994. By the later retraction he further elaborated the circumstances under which he was required to make the earlier statement under section 132(4) of the Act and reiterated his prayer for retraction thereof.

Rejecting his request that the declaration was not voluntary, an order under section 132(5) came to be passed retaining the assets seized on August 23, 1994, as the assets of the assessee and adding it to the income of the assessee. The assessee objected to the said order.

The Department had completed the assessments under section 143(1) for the assessment years 1986-87 to 1988-89 after accepting the returns. For the assessment years 1989-90 to 1993-94 the original returns filed by the assessee were processed under section 143(1)(a) of the Act accepting the same.

After discovery of the aforesaid documents during the course of search and seizure, the assessments were reopened by the Assistant Commissioner of Income-tax Circle 1(1), after recording reasons on October 5, 1995. The assessee was thereafter issued notice under section 148 of the Act. For the assessment years 1989-90 and 1990-91 the following reasons have been recorded under section 148(2) of the Act, which are reproduced hereinbelow:

Assessment year 1989-90 The assessee has offered in his statement under section 132(4) the interest income earned by him of Rs. 26,638.00 and also investments made by him in fixed deposit of Rs. 40,696 for the assessment year 1989-90.

In view of the above facts, I have reasons to believe that the interest income and investments made in fixed deposit to the tune of Rs. 67,334 has escaped assessment within the meaning of section 147.

Proposal to the Deputy Commissioner of Income-tax, put up under section 147 for the issue of notice under section 148.”

6. Except for some minor changes as mentioned hereinabove, similar reasons have been recorded by the authority for the assessment year 1990-91.

7. However, for the assessment year 1993-94, the following reasons have been recorded by the Assessing Officer on August 12, 1994, which read as thus:

“I have reasons to believe that the income chargeable to tax has escaped assessment for the assessment year 1993-94.

Notice under section 148, put up.”

8. The Assessing Officer thereafter completed the assessments after making various additions. Feeling aggrieved by the said additions made in the income of the assessee, he was constrained to file appeals before the Commissioner of Income-tax (Appeals). The appellate authority also did not accept the plea of the assessee and proceeded to reject the appeals on the merits.

9. Further feeling aggrieved by the said orders passed by the Commissioner of Income-tax (Appeals), he was constrained to prefer appeals before the Income-tax Appellate Tribunal. The said appeals having been allowed by the Tribunal and the findings having been recorded in favour of the assessee, now these appeals are before us at the instance of the Revenue, as mentioned hereinabove under section 260A of the Act.

10. We have accordingly heard learned counsel for parties at length and perused the records.

11. The basic and foremost question that crops up for consideration before this court is as to what will be the evidentiary value of the statements of the assessee, recorded under section 132(4) of the Act, which were admittedly retracted by him, even before issuance of notice to him under section 148 of the Act.

12. Learned counsel for the appellants-Revenue Sri M.V Seshachala submitted that once the statement was given by the assessee, there is no provision in the Act to retract the same. Hence, the Tribunal could not have proceeded on the basis that the assessee had retracted his statements given under section 132(4) of the Act. He further contended that after the amendment of section 147 with effect from April 1, 1989, sufficiency or otherwise of the reasons recorded could not be allowed to be enquired into. According to him, if there existed prima facie material to reopen the case, the same would be sufficient for the Revenue to commence reassessment proceedings. It was also contended that looking to the voluminous incriminating documents, found at the time of search and seizure, there was sufficient material before the Revenue for issuance of notice under section 148 of the Act. The findings recorded by the Tribunal are also being attacked and criticised on a variety of grounds.

13. Per contra, Sri A. Shankar, learned counsel appearing for the assessee contended that once the statements given by the assessee under section 132(4) of the Act were withdrawn or retracted, the same could not be basis for reopening the proceedings as contemplated under sections 147 and 148 of the Act. He further contended that de hors the statements of the assessee retracted subsequently, there was nothing before the Assessing Officer for reopening of the cases. It has also been contended that it was done before the issuance of notice under section 148 of the Act. It was also contended that in any case, the Assessing Officer was fully aware that the statements have been retracted by the assessee and thus if at all he wanted to proceed against the assessee, some other reason should have been recorded by him for reopening. He would, therefore, contend that the very issuance of notices under section 148 of the Act, to the assessee was invalid. If that be so, then all the subsequent proceedings initiated on the strength of the said notices would automatically fail and nothing can survive if the reasoning is held to be insufficient for reopening of the assessments.

14. Initially, at the time of hearing, there was some dispute whether the assessee had in fact retracted his statements or not but the same has been set at rest by the letter addressed by the assessee to the Assistant Commissioner of Income-tax dated March 23, 1998, in which he has categorically stated that the declaration obtained under section 132(4) of the Act was withdrawn and the same is not in force. The tenor of this letter shows that even before issuance of this letter he had already retracted his statement under section 132 of the Act. In fact, similar prayer was already made by the assessee as far back as on December 7, 1994. Since cognizance of this retraction had not been taken by the Assessing Officer, the assessee was constrained to approach the Deputy Commissioner of Income-tax for necessary direction under section 144A of the Act. On this, an order came to be passed by the Commissioner on March 16, 1998, and the Assessing Officer was issued the following directions:

“(a) to afford another opportunity of being heard to the assessee before finalising reassessment proceedings with reference to the disclosure made under section 132(4) and seized material, etc., and complete the said assessment for the said assessment year on the basis of his finding;

(b) in case, the assessee fails to furnish satisfactory evidence in support of his retraction of disclosure under section 132(4) notwithstanding another opportunity provided to him (vide (a) above), the Assessing Officer is directed to complete the reassessment for the assessment year as per his proposal, vide reference above. The assessee has undertaken to furnish all particulars on or before March 23, 1998.”

15. The Assessing Officer thereafter passed the order on March 27, 1998. Since these directions were given to the Assessing Officer, it can safely be presumed that he was fully aware of the said order passed by the Deputy Commissioner of Income-tax, Hubli. However, the order passed by the Assessing Officer shows that there is no whisper with regard to the retraction of the statement made by the assessee and compliance with the directions as contained in the order passed by the Deputy Commissioner of Income-tax. The order passed by the Assessing Officer on March 27, 1998, has been filed as per annexure C. In the light of the aforesaid fact situation, we have to examine as to what would be the legal position after retraction of the statements by the assessee, and whether still after retraction, there existed sufficient material or reasons to reopen the case or not.

16. Learned counsel for the Revenue has placed reliance on the following judgments of the Supreme Court and High Courts:

(i) Surjeeth Singh Chhabra v. Union of India, (1997) 1 SCC 508 : AIR 1997 SC 2560;

(ii) Greenview Restaurant v. Assistant Commissioner Of Income-Tax [2003] 263 ITR 169 (Gauhati); and

(iii) Ramjas Nawal v. CIT [2003] 183 CTR 144 (Raj).

17. Critical examination of the aforesaid judgments, would show that they deal with the aspect of retraction of statements, recorded earlier.

18. We have already discussed, in the preceding paras, wherein it is crystal clear that the statements made by the assessee under section 132(4) of the Act were retracted not once, but twice. Since cognizance of the retraction was not being taken by the Assessing Officer, he was constrained to move the Deputy Commissioner for redressal of his grievance under section 144A of the Act, wherein certain directions were given to the Assessing Officer. In view of the aforesaid factual aspect, it leaves no amount of doubt in our mind that the assessee had already retracted the statements, which were also accepted by the Department. Thus, the aforesaid judgments which deal with question of retraction are not required to be discussed any more as on the facts, it is established, in the case in hand that the assessee had retracted his statements.

19. With regard to the reopening of assessment under section 148 of the Act, learned counsel for the appellant has placed reliance on the following judgments of the Supreme Court:

(i) S. Narayanappa v. CIT [1967] 63 ITR 219 (SC);

(ii) Asst. CIT v. Rajesh Jhaveri Stock Brokers P. Ltd. [2007] 291 ITR 500 (SC); and

(ii) GKN Driveshafts (India) Ltd. v. ITO [2003] 259 ITR 19 (SC).

20. In the case of S. Narayanappa v. CIT [1967] 63 ITR 219, the Supreme Court dealing with section 34(1)(a) of the Indian Income-tax Act, 1922, has held as under (headnote):

“The expression ‘reason to believe’ in section 34 does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The belief must be held in good faith: it cannot be merely a pretence. It is open to the court to examine whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section.”

21. It has been further held in the said judgment that those reasons must be sufficient for a prudent man to come to the conclusion that the income had escaped assessment. In this regard, it has been held that two of the following conditions must be fulfilled before a case is sought to be reopened, namely, (1) the first condition is that the Income-tax Officer must have reason to believe that the income, profits or gains chargeable to income-tax had been under assessed. (2) The second condition is that he must have reason to believe that such “underassessment” had occurred by reason of either, (i) omission or failure on the part of an assessee to make a return of his income under section 22, or (ii) omission or failure on the part of the assessee to disclose fully and truly all the material facts necessary for his assessment for that year.

22. The Supreme Court then further went, on to hold that fulfilment of the same is a condition precedent to be satisfied by the Assessing Officer, before he acquires jurisdiction to issue a notice under this Act.

23. In the matter of Rajesh Jhaveri Stock Brokers P. Ltd. [2007] 291 ITR 500, the Supreme Court while dealing with the provisions of sections 147 and 148 of the Act, has held as under (page 511):

“Section 147 authorises and permits the Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word ‘reason’ in the phrase ‘reason to believe’ would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. The function of the Assessing Officer is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers.”

24. The last judgment of the Supreme Court in the case of GKN Driveshafts (India) Ltd. v. ITO [2003] 259 ITR 19, does not deal, with the reasons to be assigned by the Assessing Officer for reopening of the case, but proceeds to hold that once the case has been reopened and notice to the assessee has been issued under section 148 of the Act, then he shall have a right to ask for reason for reopening and then challenge the same in accordance with law.

25. As against these judgments, learned counsel for the assessee has placed reliance on the following judgments of various High Court and the Supreme Court:

(i) ITO v. Madnani Engineering Works Ltd. [1979] 118 ITR 1 (SC);

(ii) Birla Vxl Ltd. v. Assistant Commissioner Of Income-Tax [1996] 217 ITR 1 (Guj);

(iii) H. Noronha v. ITO [1982] 133 ITR 199 (Karn);

(iv) Chhugamal Rajpal v. S.P Chaliha [1971] 79 ITR 603 (SC);

(v) Equitable Investment Co. (P.) Ltd. v. ITO [1988] 174 ITR 714 (Cal);

(vi) Hindustan Lever Ltd. v. R.B Wadkar [2004] 268 ITR 332 (Bom);

(vii) Indian Oil Corporation v. ITO [1986] 159 ITR 956 (SC);

(viii) Ganga Saran and Sons P. Ltd. v. ITO [1981] 130 ITR 1 (SC);

(ix) Unreported judgment of this court passed by learned single judge in (W.P No. 11573/1989, decided on January 11, 1991)—A. Nagappa v. Asst. CIT, Mangalore.

(x) Appellate judgment passed by the Division Bench in W.A No. 928/1991 (decided on March 19, 1991)—Asst. CIT v. A. Nagappa, Mangalore.

26. In the matter of Madnani Engineering Works Ltd. [1979] 118 ITR 1, it has been held as under by the apex court (page 5):

“We may also point out that though it was contended in the writ petition that the Income-tax Officer could have no reason to believe that any part of the income of the respondent had escaped assessment by reason of its failure to make a full and true disclosure of material facts, the Income-tax Officer did not disclose in his affidavit any material on the basis of which it could be said that he had come to the requisite belief. All that the Income-tax Officer stated in his affidavit was that he discovered that the transactions of loan against security of hundis were not genuine and that the credits against the names of certain persons who were alleged to have advanced loans were bogus.”

27. It was further held as under (page 6):

“We are, therefore, not at all satisfied on the affidavit that the Income-tax Officer had reason to believe that a part of the income of the respondent had escaped assessment by reason of its failure to make a true and full disclosure of the material facts.”

28. The Gujarat High Court in the matter of Birla Vxl Ltd. v. Assistant Commissioner Of Income-Tax [1996] 217 ITR 1, has dealt with the issue as under (page 3):

“Why for holding such belief must be reflected from the record of reasons made by the Assessing Officer. In a case where the Assessing Officer holds the opinion that because of excessive loss or depreciation allowance income has escaped assessment, the reasons recorded by the Assessing Officer must disclose by what process of reasoning he holds such a belief that excessive loss or depreciation allowance has been computed in the original assessment. Merely saying that excessive loss or depreciation allowance has been computed without disclosing the reasons which led the assessing authority to hold such a belief, in our opinion, does not confer jurisdiction on the Assessing Officer to take action under sections 147 and 148 of the Act.”

29. This court in the matter of H. Noronha [1982] 133 ITR 199, has held that mere suspicion would not be sufficient for reopening of the case unless there existed some other prima facie evidence to warrant reopening.

30. In the matter of Chhugamal Rajpal [1971] 79 ITR 603, the apex court while considering the reasons assigned by the Assessing Officer, in its inimitable way has held as under (page 607):

“Hence, proper investigation regarding these loans is necessary. In other words his conclusion is that there is a case for investigating as to the truth of the alleged transactions. That is not the same thing as saying that there are reasons to issue notice under section 148. Before issuing a notice under section 148, the Income-tax Officer must have either reasons to believe that by reason of the omission or failure on the part of the assessee to make a return under section 139 for any assessment year to the Income-tax Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment or alternatively notwithstanding that there has been no omission or failure as mentioned above on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year.”

31. The Calcutta High Court in the matter of Equitable Investment Co. (P.) Ltd. v. TTO [1988] 174 ITR 714, has examined all the previous judgments of the Supreme Court and the High Court on the issue, to come to the following conclusion (page 727):

“Accordingly, in our opinion, it is not open to the Commissioner to support the notice under section 148 on the basis of material which does not find place in the report.”

32. Confronted with an identical fact situation, the Bombay High Court in the matter of Hindustan Lever Ltd. [2004] 268 ITR 332 has held as under (page 338):

“It is needless to mention that the reasons are required to be read as they were recorded by the Assessing Officer. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn based on reasons not recorded. It is for the Assessing Officer to disclose and open his mind through reasons recorded by him. He has to speak through his reasons. It is for the Assessing Officer to reach the conclusion as to whether there was failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the concerned assessment year. It is for the Assessing Officer to form his opinion. It is for him to put his opinion on record in black and white. The reasons recorded should be clear and unambiguous and should not suffer from any vagueness. The reasons recorded must disclose his mind. The reasons are the manifestation of the mind of the Assessing Officer. The reasons recorded should be self-explanatory and should not keep the assessee guessing for the reasons. Reasons provide the link between conclusion and evidence. The reasons recorded must be based on evidence. The Assessing Officer, in the event of challenge to the reasons, must be able to justify the same based on material available on record. He must disclose in the reasons as to which fact or material was not disclosed by the assessee fully and truly necessary for assessment of that assessment year, so as to establish the vital link between the reasons and evidence. That vital link is the safeguard against arbitrary reopening of the concluded assessment.”

33. The Supreme Court in the matter of Indian Oil Corporation [1986] 159 ITR 956: “but reason to believe is not the same thing as reason to suspect.”

34. Now, coming to the single Bench judgment of this court in the matter of A. Nagappa, wherein the reasons of the Assessing Officer, were elaborate, were reproduced. Yet it proceeded to quash the notice issued to the assessee under section 148 of the Act. This order was the subject-matter of challenge at the instance of the Revenue in W.A No. 928 of 1991 before the Division Bench of this court, which held as under:

“More than the ADI's report which the learned judge characterised as evasive and speculative, it is the statement of reasons for the reopening which is evasive and speculative. We find no basis therein which could have led the appellant to entertain reasons to believe that income chargeable to tax had escaped assessment for the relevant assessment year. It is imperative that the reasons should have a rational and relevant nexus to the formation of such belief. We do not find such nexus.”

35. The Supreme Court had the occasion to consider this aspect of the matter in Ganga Saran and Sons P. Ltd. [1981] 130 ITR 1, wherein it has dealt with the situation beautifully by holding as under (page 11):

“It is well settled as a result of several decisions of this court that two distinct conditions must be satisfied before the Income-tax Officer can assume jurisdiction to issue notice under section 147(a). First, he must have reason to believe that the income of the assessee has escaped assessment and, secondly, he must have reason to believe that such escapement is by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. If either of these conditions is not fulfilled, the notice issued by the Income-tax Officer would be without jurisdiction. The important words under section 147(a) are ‘has reason to believe’ and these words are stronger than the words ‘is satisfied’. The belief entertained by the Income-tax Officer must not be arbitrary or irrational. It must be reasonable or in other words it must be based on reasons which are relevant and material.”

36. In the light of the aforesaid judgments of various High Courts and the Supreme Court, we have examined whether there existed sufficient reasons for reopening of the case against the assessee, exercising the power conferred on the Assessing Officer under section 148 of the Act. The reasons to believe have been reproduced by us as recorded by the Assessing Officer. The same would show that he was not even able to find out prima facie case with regard to the escaped assessment within the meaning of section 147 of the Act.

37. For the assessment year 1993-94, in fact no cogent and valid reasons have been assigned by the Assessing Officer for reopening of the case. In the light of the aforesaid discussions, we have no hesitation to hold that there existed no material for reopening of the case against the assessee.

38. It is further pertinent to mention here that once the statements said to have been recorded under section 132(4) of the Act were withdrawn then there existed no material on record to warrant reopening of the case against the assessee under section 148 of the Act. If the very basis on which reopening was ordered did not exist, there was no question for reopening of the case. This material aspect of the matter has not been considered by the Assessing Officer, who proceeded to direct reopening of the case, without there being any legally admissible evidence available on record. Thus, the very issuance of notice under section 148 of the Act is found to be illegal and absolutely without jurisdiction.

39. Learned counsel for the respondent also contended that even on the merits, the Revenue would not have been justified to issue such a notice especially in the light of the affidavits submitted by the brothers of the assessee mentioning categorically therein that several F.D Rs., and other funds which have been added to the income of the assessee, in fact belonged exclusively to them. This is what they had submitted in the affidavits submitted before the authorities of the Department. Since even after taking those amounts in their individual names, the income did not cross the taxable limits, they did not file any returns. But the Revenue also did not issue any notices to them.

40. However, since we are not going into the merits of the matter and only on this preliminary issue we decide the questions in appeals in favour of the assessee and against the Revenue. We accordingly hold that there existed no good, or sufficient grounds or reasons for reopening of the case under section 148 of the Act against the assessee. In view of this, we find that there is no merit or substance in this appeal and the connected appeals. Accordingly, we dispose of this and the connected appeals.

41. Copy of the order shall be retained in each appeal.