# I.T.O v. L. M. DAS (Khanna, I.) - **Citation:** [1976] 3 S.C.R. 956 - **Court:** Supreme Court of India - **Decided:** 1976-03-30 - **Case number:** Civil Appeal No. 2526 of 1972 - **Bench:** H. R. KHAN"fA, P. K. Goswami - **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/i-t-o-v-l-m-das-khanna-i-6854 - **Pages:** 10 ## Headnote /nconie Tax Act, 1961--,S. 148-Scope of-Words & Phrases-"Reason to believe" meaning of 'ratio11al nexus'-What postulates. Jn March 1967, a[ter obtaining the satisfaction of the Commissioner !he appel1ant issued a notice under s. 148 of the ln~o~e Tax Act. 1961 stating that he had reason to believe that the respondents income chargeable to t~ for the assessment year 1958-59 had escaped assessment. The respondent rephed that the I.T.0. had no competence or jurisdiction to reopen the assessment under s. 147 of the Act on a mere change of opinion. Since there \vas no reply from the appellant, the respondent moved the High Cou!t for . a . w~it. The High Court held that the conditions precedent for the exercISe of 1un~d1c· -1 tion by the Income Tax Officer were not fulfilled because the report subm1~ted by the Income Tax Officer to the Commissioner under s. 147(a) was defective. On appeal to this Court it was contended tha' the High c_;ourt was not right in holding that the Income Tax Officer"s report was defective. Dismissing the appeal, HELD : The High Court was right in holding that the material before the Income Tax Officer could not have led to the formation of the belief that the income of the assessee had escaped assessment because of his failure or omission to disclose fully and truly all material facts. [965Hl 1. (a) The two conditions required to be satisfied before the Income Tax Officer issued a notice under s. 148 of the Income Tax Act are that he must have reason to believe (i) that the income chargeable to tax bad escaped assessment and (ii) that such income had escaped assessment by reason of the omission or failure on the part of assessee, to disclose fully and truly material facts necessary for assessment for that year. Both these conditions must coexist in order to confer jurisdiction on the Income Tax Officer. Further the Income Tax Officer should record his reasons before initiating proceedings under s. 148(2); before issuing the notice after the expiry of four years from the end of the relevant assessment year, the Commissioner should be satisfied on the reasons recorded by the Income Tax Officer that it was a fit case for the issue of such notice. [962C-Dl (b) The duty cast upon the assessee does not extend beyond making a true and full disclosure of the primary facts. It is then for the Income Tax Officer to draw the correct inference from the primary facts. Where his inference s'ubsequently appears to be erroneous, mere change of opinion with regard to that inference would not justify initiation of action for reopening the assessment. [962F-G] · ( c) The grounds or reasons leading to the formation of the belief under s. 147(a) must have a material bearing on the question of escaPement of income. Once there exist reasonable grounds for the Income Tax Officer to form the above belief. that would be sufficient to clothe him with jurisdiction to issue notice. While· the sufficiency of grounds which induce the Income Tax Officer to act is not justiciable, it is open to the assessee to contend that the Income Tax Officer ·did not hold the belief that there was such non- ~isclos1;1re. _The expression .. reason to believe" does not mean a purely subjective satisfaction on the part of the Income-Tax Officer. It is open to the Court to examine whether the reasons for the formation of the belief have a rational connection with or relevant bearing on the formation of the belief arid are not extraneous or irrelevant for the purpose of the sectrion. [962H] _ I.T.O. v. L. M. DAS (Khanna, I.) 957 Chlrugamal Rajpal v. S. P. Chaliha 79 I.T.R. 603, Calcutta Discount Co. Lt~. A v. Income-Tax Officer, 41 I.T.R. 191 and S. Narayanappa & Ors. v. Commissioner of Income Tax 63 I.T.R. 219 followed. ~ ,,, In the instant case the grounds given by the Income Tax Officer for reopening the assessment were (i) that the three persons whose names were mentioned in the list of creditors, were known name lenders and (ii) that another person s ## Text 956 A INCOME TAX OFFICER, l WARD, DIST. VI, CALC.UTTA & ORS. B c D E F G H v. LAKHMANI MEW AL DAS March 30, 1976 [H. R. KHAN"fA AND P. K. GOSWAMI, JJ.] /nconie Tax Act, 1961--,S. 148-Scope of-Words & Phrases-"Reason to believe" meaning of 'ratio11al nexus'-What postulates. Jn March 1967, a[ter obtaining the satisfaction of the Commissioner !he appel1ant issued a notice under s. 148 of the ln~o~e Tax Act. 1961 stating that he had reason to believe that the respondents income chargeable to t~ for the assessment year 1958-59 had escaped assessment. The respondent rephed that the I.T.0. had no competence or jurisdiction to reopen the assessment under s. 147 of the Act on a mere change of opinion. Since there \vas no reply from the appellant, the respondent moved the High Cou!t for . a . w~it. The High Court held that the conditions precedent for the exercISe of 1un~d1c· -1 tion by the Income Tax Officer were not fulfilled because the report subm1~ted by the Income Tax Officer to the Commissioner under s. 147(a) was defective. On appeal to this Court it was contended tha' the High c_;ourt was not right in holding that the Income Tax Officer"s report was defective. Dismissing the appeal, HELD : The High Court was right in holding that the material before the Income Tax Officer could not have led to the formation of the belief that the income of the assessee had escaped assessment because of his failure or omission to disclose fully and truly all material facts. [965Hl 1. (a) The two conditions required to be satisfied before the Income Tax Officer issued a notice under s. 148 of the Income Tax Act are that he must have reason to believe (i) that the income chargeable to tax bad escaped assessment and (ii) that such income had escaped assessment by reason of the omission or failure on the part of assessee, to disclose fully and truly material facts necessary for assessment for that year. Both these conditions must coexist in order to confer jurisdiction on the Income Tax Officer. Further the Income Tax Officer should record his reasons before initiating proceedings under s. 148(2); before issuing the notice after the expiry of four years from the end of the relevant assessment year, the Commissioner should be satisfied on the reasons recorded by the Income Tax Officer that it was a fit case for the issue of such notice. [962C-Dl (b) The duty cast upon the assessee does not extend beyond making a true and full disclosure of the primary facts. It is then for the Income Tax Officer to draw the correct inference from the primary facts. Where his inference s'ubsequently appears to be erroneous, mere change of opinion with regard to that inference would not justify initiation of action for reopening the assessment. [962F-G] · ( c) The grounds or reasons leading to the formation of the belief under s. 147(a) must have a material bearing on the question of escaPement of income. Once there exist reasonable grounds for the Income Tax Officer to form the above belief. that would be sufficient to clothe him with jurisdiction to issue notice. While· the sufficiency of grounds which induce the Income Tax Officer to act is not justiciable, it is open to the assessee to contend that the Income Tax Officer ·did not hold the belief that there was such non- ~isclos1;1re. _The expression .. reason to believe" does not mean a purely subjective satisfaction on the part of the Income-Tax Officer. It is open to the Court to examine whether the reasons for the formation of the belief have a rational connection with or relevant bearing on the formation of the belief arid are not extraneous or irrelevant for the purpose of the sectrion. [962H] _ I.T.O. v. L. M. DAS (Khanna, I.) 957 Chlrugamal Rajpal v. S. P. Chaliha 79 I.T.R. 603, Calcutta Discount Co. Lt~. A v. Income-Tax Officer, 41 I.T.R. 191 and S. Narayanappa & Ors. v. Commissioner of Income Tax 63 I.T.R. 219 followed. ~ ,,, In the instant case the grounds given by the Income Tax Officer for reopening the assessment were (i) that the three persons whose names were mentioned in the list of creditors, were known name lenders and (ii) that another person shown as a creditor of the assessee had since confessed that he was doing only name lending. The first ground mentioned by the Income Tax Officer could • not have led to the formation of the belief that the income of the respondent B had escaped assessment for that year because of his failure or omission to disclose fully and truly all material facts. The High Court was justified in excluding that ground from consideration. [963D-E] As regards the second ground there is nothing to show that the confession of another person related to a Joan to the assessee and not to someone else. There is no indication a.;; to when the confession \Vas made and whether it related to the assessment year sought to be .re-opened. To infer from that C confession that it related to the period of assessment and that it pertained to the loan shown to have been advanced to the assessee would be far-fetched. [964G} 2(a). Rational connection postulates that there rr1ust be a direct nexus or 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 income of the assessee from assessment in the particular year. It is not anv and every material, -howsoever vague and indefinite or distant, remote and far-fetched whic.b \VOuld warrant the formation of the belief relating to escapement of the D income of the assessee from assessment. The fact that the words "definite information" in s. 34 of 1922 Act before its amendment in 1948 do not find a place in s. 147 would not lead to the conclusion that action could now be taken for reopening assessment even if the information was wholly vague, indef!ni1:e, far-fetched and remote. [965B-DJ (b) The powers of the Income Tax Officer to reopen assessn1ent. though wide, are not plenary. The words are "reason to believe". and not "reason to suspect". The provisions of the Act depart from the .normal rule that there E should be finality about orders made in judicial and quasi-judicial proceedings. It is, therefore, essential that before such action is taken the requirement of the law should be satisfied. [965E-F] In the instant case the live link or close nexus bet.ween the material before the Income Tax Officer and the belief which he was to form regarding the esca_pe1nent of the income was missing or at any rate the link was too tenuous to provide a legally sound basis for reopening the assessment. [GJ CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2526 of 1972. Appeal from the Judgment and Order dated the 13th January, 1972 of the Calcutta High Court in Matter No. 326 of 1967. G. C. Sharma and S. P. Nayar, for the Appellant. F D. Pal, B. Sen, (Mrs.) Leila Seth, P. K. Pal, S. R. Agarwala and G Parveen Kumar for the Respondent . The Judgment of the Court was delivered by • KHANNA, J. This appeal ou certificate is against the Full Bench Judgment of the Calcutta High Court whereby on petition under article 226 of the Constitution of India filed by the respondent that court by majority quashed notice under section 148 of the Income-tax Act 1961 (hereinafter referred to as the Act) issued by appeallant No. 2 (fucometax Officer E Ward, Hundi Circle, Calcutta) (hereinafter referred to 11-725 SC!/76 H A 958 SUPREME COURT REPORTS [1976] 3 S.C.R. as the appellant) for the purpose of reopening assessment of the income of the respondent for the assessment year 1958-59. .. The respondent was assessed for the assessment year 1958-59 ·"' • under section 23(3) of the Indian Income-tax Act, 1922 on June 14, B c D E 1960. His total income was assessed to be Rs. 37,872. While making the assessment the Income-tax Officer allowed deduction of a sum of Rs. 15,991 by way of expenses claimed by the respondent. The expenses included Rs. 10,494/4 As/3 Pies by way of interest. According to the respondent, he produced through his authorised representative all books of accounts, bank statements and other necessary documents in connection with the return. On March 14, 1967 the respondent received notice dated March 8, 1967 issued by the . appellant under section 148 of the Act stating that the appellant had reason to believe that the respondent's income which was chargeable to tax for the assessment year 1958-59 had escaped assessment within the meaning of section 14 7_ of the Act and that the notice was being issued after obtaining the necessary satisfaction of the Commissioner of Income- -., tax. The respondent was called upon to submit within 30 days from the date of the service of the notice a return in the prescribed form of his income for the assessment year 1958-59. On May 2,. 1967 the respondent through his lawyer stated that there was no material on which the appellant had reason to believe that the respondent's income had escaped assessment and, therefore, the condition precedent for the assumption of jurisdiction by the appellant had not been satisfied. The appellant was said to have no competence or jurisdiction to re-open the assessment under section 147 of the Act on a mere change of opinion. The appellant was also called upon to furnish all the materials on which he had reason to believe that income had escaped assessment. As, according to the respondent, there was no satisfactory response from the appellant. he filed petition under article 226 of the :.._ Constitution for quashing the impugned notice. It was denied in the affidavit on behalf of the appellant that all materials relevant and necessary for the assessment of the respondent's income for the assessment year 1958-59 had been produced before the Income-tax Officer at the time of the original assessment. It was further stated : "Subsequent to the assessment for the assessment year 1958-59, it was discovered, inter alia, that some of the loans shown to have been taken and interests alleged to have been paid thereon by the petitioner during the relevant assessment G year were not genuine .. The Income-tax Officer had reason to believe and bona fide believed that the said alleged loans and the interest alleged to have been paid thereon are .,! not genuine. If necessary, I crave leave to produce before the hon'ble Judge hearing the application, the relevant records on the basis of which the said Income-tax Officer had reason to believe that the income of the petitioner escaped assessment H as aforesaid at the hearing of the application." During the pendency of the proceedings the High Conrt directer. that a copy of the report made by the appellant to the Commissioner of I.T.O. v. L. M. DAS (Khanna, J.) 959 Income-tax for obtaining latter's sanction under section 147 be proA duced. The report was accordingly produced, and the same reads as under: "There are hundi loau credits in the name of Narayansingh Nandalal, D. K. Naraindas, Bhagwandas Srichand, etc., who are known name-lenders, and also hundi loan credit in the name, Mohansingh Kanayalal, who has since confessed he was doing only name-lending. In the original assessment these credits were not investigated in detail. As the information regarding the bogus nature of these credits is since known, action under section 147 (a) is called for to reopen the assessment and assess these credits as th~ undisclosed income of the assessee. The assessee is still claiming that the credits are genuine in the assessment proceedings for 196263. Commissioner's sanction is solicited to reopen the assessment for 1958-59, under section 147(a)." B c All the three Judges who constituted the Full Bench found that the assessee was not being charged with omission to disclose all facts : D he was charged for having made an un'.rue disclosure because the assessee had stated that he had received certain sums of money from certain persons as loans when, in fact, he had not received any sum at all from these persons. It was also stated by the assessee at the time of the original assessment that he had paid interest to certain persons when, in fact, he had not, if the information received later was true. The duty of the assessee, it was held, was not only to make a E full disclosure of all material facts, his duty was also to make a true disclosure of facts and not to mislead the assessing officer by disclosing certain things wmch did not represent facts. The High Court accordingly held that once an assessee infringes this rule, any subsequent discovery of fact by the assessing officer which would raise a resonable belief in his mind that the assessee had not made a true and correct disclosure of the facts and had thereby been responsible for F escapement of his income from assessment would attract section 147 of the Act. Two of the learned Judges, A. K. Mukherjea and S. K. Mukherjea JJ., however, took the view that the conditions precedent for the exercise of jurisdiction by the Income-tax Officer under section 147 of the Income-tax Act were not fulfilled in the case as the report submitted by the Income-tax Officer to the Commissioner for sanction under section 147(a) was defective. The defects in the report, in the G opinion of the High Court, were the same as had been pointed out by this Court in the case of Chhugamal Rajpal v. S. P. Cltaliha.(') The Commissioner. while according permission for taking action under section 147, it was observed, acted mechanically because the Commissioner had not expressly stated that he was satisfied that this was a fit case for the issue of notice under section 148. As against the majority, Sabyasachi Mukherji J. held that notice under section 148 H of the Act was valid and did not suffer from any infirmity. It was (1) 79 l.T.R. 603. B c D F G 96@ SUPREME COURT REPORTS [1976] 3 S.C.K. also observed that the Co=issioner of Income-tax had not acted improperly in giving sanction. In the result, by majority the High Court quashed the notice issued by the appellant to the respondent. In appeal before us Mr. Sharma on behalf of the appellants ha> assailed the judgment of the majority of the learned Judges in so far as they have held that the report submitted by the Income-tax Officer to the Commissfoner of Income-tax for sanction was defective. As against that, Dr. Pal on behalf of the assessee-respondent has canvassed for the correctness-of the view taken by the majority regarding the defective nature of the report. Dr. Pal has in his own turn assailed the finding of all the three learned Judges of the High Court in so far as they have held that the assessee was being charged with omission to disclose true facts. Contention has also been advanced by Dr. Pal that the material on the basis of which the Income-tax Officer initiated these proceedings for reopening the assessment did not have a rational connection with the formation of the belief that the assessee had not made a tru.e disclosure of the facts at the time of the original assessment. Before dealing with the points of controversy, it would be useful to reproduce the relevant provisions of the Act. Sections 14 7 and 148 which deal with income escaping assessment and issue of notice where income has escaped assessment read as under :· "147. Income escaping assessment.-If- (a) 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 that year, income chargeable to tax has escaped assessment for that year,. or (b) notwithstanding that there has been no omisswn or failure as mentioned in clause (a) 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, he may, subject to the provisions of section 148 to 153, assess or ressess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereinafter in sections 148 to 153 referred to as the relevant assessment year). Explanation 1.-For...!_tbe purposes of this section, the following shall also be deemed to be cases where income H chargeable to tax has escaped assessment, namely :- (a) where income chargeable to tax has been under" assessed; or .. I.T.O. v. L. M. DAS (Khanna, J.) 961 (b) where such income has been assessed at too low a A 'fate; or ( c) where such income has been made the subject of excessive relief under this Act or under the Indian Incometax Act, 1922 (XI of 1922); or ( d) where excessive loss or depreciation allowance has been computed. Explanation 2.-Production before the Income-tax Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Income-tax Officer will not necessarily amount to dis- 'Closure within the meruring of this section. 148. Issue of notice where income has escaped assessment.- (1) Before making the assessment, reassessment or recomputation under section 147, the Income-tax Officer shall serve on the assessee a notice containing all or any of the requirements which may be included in a notice under sub-section (2) of section 139; and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-sectidn. ( 2) The Income-tax Officer shall, before issuing any notice under this section, record his reason for doing so." B c D Sub-section ( 1) of section 149 prescribes the time limit for notice and E reads as under : "(l) No notice under section 148 shall be issued,, (a) in cases falling under clause (a) of section 14 7- (i) for the relevant assessment year, if eight years have elapsed from the end of that year, unless the case falls under sub-clause (ii) ; F (ii) for the relevant assessment year, where eight years, but not more than sixteen years, have elapsed from the end ·of that year, unless the income chargeable to tax which has escaped assessment amounts to or is likely to amount to ;rupees fi~ty thous;ind or more for that year; (b.) in cases falling under clause (b) of section 147, at any time after the expiry of four years from the end of the relevant assessment year." 'Section 151 pertains to the sanction for issue of notice and reads as under: "151. Sanction for issue of notice.-(1) No notice shall be issuea under section 148 after the expiry of eight years from the end of the relevant assessment year, unless the Board is satisfied op. the reaSOl)S recorded by the Income-tax {)fficer that it is a fit case for the issue of such notice. G H A B c D E F G H 962 SUPREME COURT REPORTS [1976] 3 S.C.R. (2) No notice shall be issued under section 148 after the expiry of four years from the end of the relevant assessment year, unless th.e Commissioner is satisfied on the reasons recorded by the Income-tax Officer that it is a fit case for the issue of such notice." The provisions of sections 147 to 153 of the Act correspond to those of section 34 of the Indian Income-tax Act, 1922. There have been some points of departure from the old law, but it is not necessary for the purpose of the present case to refer to them. It would appear from the perusal of the. provisions reproduced above that two conditions have to b6 satisfied before an Income-tax Officer acquires jurisdiction to issue notice nnder section 148 in respect of an assessment beyond the period of four years but within a period of eight years from the end of the relevant year, viZ., (1) the Incometax Officer must have reason to believe that income chargeable to tax has escaped assessment, and (2) he must have reason to believe that ·'i such income has escaped assessment by reason of the omission or failure on the part of the assessee (a) to make a return under section 139 for the assessment y'ar to the Income-tax Officer, or (bl to disclose fully and truly material facts necessary for his assessment for that year. Both these conditions must co-exist in order to confer jurisdiction on the Income-tax Officer. It is also imperative for the Income-tax Officer to record his reasons before initiating proceedings as required by section 148(2). Another requirement is that before notice is issued after the expiry of four years from the end of the relevant assessinent years, the Commissioner should be satisfied on the reasons recorded by the Income-tax Officer that it is a fit case for the issue of such notice. We may add that the duty which is cast upon the assessee is to make a true and full disclosure of the primary facts at the time of the original assessment. Production before the Incometax Officer of the account books or other evidence from which material evidence could with due diligence have been discovered by the Incometax Officer will not necessarily amount to disclosure contemplated by law. . The duty of the assessee in any case does not extend beyond making a true and full disclosure of primary facts. Once he has done that his duty ends. It is for the Income-tax Officer to draw the correct inference from the primary facts. It is no responsibility of the assessee to advise the Income-tax Officer with regard .to the inference which he should draw from the primary· facts. If an Income-tax Officer draws an inference which appears subsequently to be erroneous, mere change of opinion with regard to that inference would not justify initiation of action for reopening assessment. The grounds or reasons which lead to the formation of the belief contemplated by section 147(a) of the Act must have a material bearing on the question of escapement of income of the assessee from assessment because of his failure or omissio11..to disclose fully and trnly all material facts. Once there exist reasonable grmfnds · for the Income-tax Officer to form the above belief, that would be sufficient to clothe him with jurisdiction to issue notice. Whether the grounds are adequate or not is not a matter for the court to investigate. The . ,.. , I. T.O. v. L. M. DAS (Khanna, l.) 963 sufficiency of grounds which induce the Income-tax Officer to act is, therefore, not a justiciable issue. It is, of course, open to the assessee to contend that the Income-tax Officer did not hold the belief that there had been such non-disclosure. The existence of the belief can be challenged by the assessee but not the sufficiency of reasons for the belief. The expression "reason to believe" does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The reason must be held in good fai_th. It cannot be merely a pretence. It is open to the court to examine whether the reasons for the formation of the belief have a rationaLconnection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose of the section. To this limited extent, the action of the Income-tax Officer in &!arting proceedings in respect of income escaping assessment is· open to challenge in a court of law [see observations of this Court in the cases of Calcutta Discount Co. Ltd. v. Income-tax Officer(') and S. Narayanappa & Ors. v. Commissioner of Incometax(2) while dealing with corresponding provisions of the Indian Income-tax Act, 1922]. Keeping the above principles in view, we may now turn our attention to the facts of the present case. Two grounds were mentioned in A B c the report made by the Income-tax Officer for reopening the assessD men t of the assessee respondent with a view to show that his income had been under-assessed because of his failure to disclose fully and truly material facts necessary for the assessment. One was that Mohansingh Kanayalal, who was shown to be one of the creditors of the asscssee, had since confessed that he was doing only name-lending. The other ground was that Narayansingh Nandalal, D. K. Naraindas, Bhagwandas Srichand, etc., whose names too were mentioned in the E list of the creditors of ,\he assessee, were known name-lenders. So far as the second ground is concerned, neither the majority of the Judges of the High Court nor the learned Judge who was in the minority relied upon that ground. Regarding that ground, the learned Judge who was in the minority observed that no basis ha