JUDGMENT
N.K. Sodhi, J.
1. Petitioner is working as a Development Officer with the LIC at Fatehabad. He is a regular income-tax assesses. In the return filed for the asst. yr. 1995-96 the assessee had shown income by way of incentive bonus received from the LIC at Rs. 2,19,366 against which he claimed a deduction of Rs. 87,746 @ 40 per cent This return was processed on 22nd Sept., 1995, by the AO under Section 143(1)(a) of the IT Act, 1961 (for short the Act). Thereafter, a notice dt. 14th March, 2002, was received by the petitioner under Section 148 of the Act for the asst. yr. 1995-96 wherein the AO required him to file his return of income for the said year as, according to him, income for that year had escaped assessment within the meaning of Section 147 of the Act. In response to this notice, the petitioner filed his return of income on 17th April, 2002. Petitioner also requested for the supply of reasons as recorded by the AO under Section 148(2) of the Act and those were supplied to him as per letter dt. 1st May, 2002, Since the controversy revolves around the reasons recorded by the AO, those are being reproduced hereunder for facility of reference :
“Reasons for reopening of assessment under Section 147
The assessee is a Development Officer of LIC of India. Return declaring an income of Rs. 1,60,690 was filed on 30th June, 1995, which was processed under Section 143(1)(a) on 22nd Sept., 1995, by making addition of Rs. 5,000 on account of disallowance of deduction under Section 80G. The assessee claimed deduction out of incentive at Rs. 87,746 @ 40 per cent of incentive bonus received at Rs. 3,19,366. This deduction is, however, not admissible in view of the decision of Punjab & Haryana High Court in the case of B.M. Parmar v. CIT where it has been held that income from incentive bonus received by the Development Officers of the LIC of India is liable to be taxed under the head “salary” and deduction therefrom can be allowed only under Section 16(1) of IT Act, 1961.
2. I have, therefore, reasons to believe that the escaped income chargeable to tax in this case amounts to more than Rs. 1 lac including Rs. 87,746 referred to above on all the issues. It is, therefore, a fit case for issue of notice under Section 148 of IT Act, 1961, in view of Expln. 2(b) below Section 149 of IT Act, 1961.
In view of the above facts, necessary permission to issue notice under Section 148 of the IT Act, 1961, may kindly be accorded.”
The grievance of the petitioner is that the impugned notice under Section 148 of the Act has been issued with an ulterior motive and that the AO had been demanding a sum of Rs. 40,000 from the assessee failing which he was threatening that proceedings under Section 148 of the Act would be initiated and the assessment reopened. It is further alleged that it was because of the failure of the assessee to meet the demand of the AO that the impugned notice has been issued. It is also urged that a perusal of the reasons as recorded by the AO would clearly show that the satisfaction of the AO in regard to the quantum of escaped income had no nexus with the material before him. The argument is that even, if the facts stated by the AO were to be accepted as correct, he could not record satisfaction on the escapement of income beyond the amount of Rs. 87,746. According to the petitioner, no notice under Section 148 of the Act could be issued for escapement of income of Rs. 87,746 as the period prescribed for issue of such notice under Section 149 of the Act had lapsed. It is contended that it was only with a view to overcome the period of limitation as prescribed under Section 149 of the Act that the AO had recorded his satisfaction regarding escaped income to the tune of Rs. 1 lac or above.
2. In response to the notice issued by this Court, the respondents have filed their reply and the averments made in the writ petition have been controverted.
3. We have heard counsel for the parties. In order to appreciate the contention raised by the learned counsel for the petitioner, it is necessary to refer to the provisions of Section 149 of the Act, which read as under :
“149.–(1) No notice under Section 148 shall be issued for the relevant assessment year,–
(a) if four years have elapsed from the end of the relevant assessment year, unless the case falls under Clause (b);
(b) if four years, but not more than six years, have elapsed from the end of the relevant assessment year unless the income chargeable to tax which has escaped assessment amounts to or is likely to amount to one lakh rupees or more for that year.
Explanation.–In determining income chargeable to tax which has escaped assessment for the purposes of this sub-section, the provisions of Expln. 2 of Section 147 shall apply as they apply for the purposes of that section.
(2) The provisions of Sub-section (1) as to the issue of notice shall be subject to the provisions of Section 161.
(3) If the person on whom a notice under Section 148 is to be served is a person treated as the agent of a non-resident under Section 163 and the assessment, reassessment or recomputation to be made in pursuance of the notice is to be made on him as the agent of such non-resident, the notice shall not be issued after the expiry of a period of two years from the end of the relevant assessment year.”
A perusal of the aforesaid provision would make it clear that the contention regarding time-limit for the issue of notice under Section 148 of the Act, as raised by the assessee, is correct and that notice under Section 148 of the Act could be issued only if the escaped income was likely to be more than Rs. 1 lac. A reading of the reasons as recorded by the AO would show that, according to him, the assessee had claimed a deduction of Rs. 87,746 on incentive bonus which was not allowable in view of the judgment of this Court in B.M. Parmar v. CIT. It is, thus, clear that if the assessee had claimed this deduction which was otherwise not allowable, the AO could be satisfied that income to that extent had escaped assessment but he could not jump to the conclusion that the escaped income was likely to be Rs. 1 lac or more unless, there were some other items of escaped income referred to in the reasons. It is by now well settled that there has to be a reasonable nexus between the satisfaction arrived at by the AO with the material in his possession regarding escaped income. In the present case, there is no such nexus. Court cannot go beyond the reasons recorded nor can it take into account any supplementary reasons which did not enter the mind of the AO at the time of issuing the notice under Section 148 of the Act. As the AO did not refer to any other item of escaped income in the reasons recorded by him and since the validity of the notice issued under Section 148 of the Act has to be examined only on the basis of the reasons as recorded, we are satisfied that the AO stated in the notice that the escaped income was likely to be more than Rs. 1 lac only with a view to overcome the hurdle of limitation when there was no material with him in support of this satisfaction. In this view of the matter, the impugned notice cannot be sustained.
4. Since the allegations made by the petitioner against the AO were rather serious, we directed the Chief CIT to look into those allegations and hold a discreet inquiry and submit a report to this Court. We have examined the report submitted by Ms. Baljit Bains, Chief, CIT Panchkula, wherein she concluded as under :
“In the end, it is observed that what transpired between the two officials and Shri M.S. Malik is exclusively in their personal knowledge. However, Shri M.S. Malik could not adduce any further evidence in support of his allegations made in the affidavit. Therefore, there is no other option but to refer to the circumstantial evidence available in the form of assessment records, assessment orders, conduct of proceedings, record of proceedings and sequence of events for drawing final conclusions. The perusal of records do not indicate any harassment, violation of any law or procedures or denial of any opportunity to the petitioner. Therefore, allegations made by the petitioner remain unsubstantiated and not proved.”
It is true that the only material that was placed before the Chief CIT was the affidavit of the petitioner and also affidavits of some of his colleagues from whom also money is alleged to have been demanded by the AO, no other material could be adduced by the petitioner in support of his allegations, The same material has been placed before us as well. Having given our thoughtful consideration to this aspect of the matter, we are of the view that no positive finding can be recorded against the AO though looking at the reasons recorded by him and the circumstances in which the notice was issued, one raises one’s eyebrows. However, we give the benefit of doubt to the AO and leave the matter at that. We also sent for the AO and asked him to explain as to. how he could record his satisfaction that the escaped income was likely to be more than Rs. 1 lac when he referred only to a sum of Rs. 87,746 as the escaped income in the reasons recorded by him. No satisfactory explanation could be furnished by him except that he stated that there were some other items of escaped income as well. He also pointed out that he had obtained the sanction from the superior authority as prescribed under Section 151 of the Act. It is true that the sanction has been obtained but it is amazing that the higher officers, too, did not apply their mind and granted the same mechanically. The very purpose for which the provision of sanction has been made stands frustrated when such sanctions are accorded without application of mind. As already observed by us, the reasons recorded by the AO could not lead to the conclusion that the escaped income was likely to be more than Rs. 1 lac. If the sanctioning authority had only cared to have a bare look at the reasons, he would have noticed the fallacy in the action proposed by the AO.
5. Before concluding, it may be mentioned that we are conscious of the latest decision of the apex Court in G.K.N. Driveshafts (India) Ltd v. ITO and Ors. (2003) 259 ITR 19 (SC) wherein their Lordships have held that the proper course for challenging the notice under Section 148 of the Act is to raise all objections before the AO who would first decide those objections by a speaking order before proceeding to assess the income.
However, in the peculiar circumstances of the present case, no useful purpose would be served in sending the assessee back to the AO to raise the objections before him because the AO himself has not been able to justify the issuance of the notice before us. Even the learned senior counsel appearing for the Department conceded during the course of arguments that if the Court thought that the notice was illegal, the same could be quashed but it was not a case where action should be taken against the AO. We do not, therefore, want to prolong the agony of the petitioner any more.
6. In the result, the writ petition is allowed and the impugned notice, dt. 14th March, 2002, is quashed with costs which are assessed at Rs. 10,000, The costs shall be paid personally in equal shares by the AO and the officer who granted sanction under Section 151 of the Act. This amount shall not be debited to the State exchequer.