JUDGMENT
D.K. Jain, J.
1. Pursuant to the directions issued by this court under section 256(2) of the Income-tax Act, 1961 (for short, “the Act”), the Income-tax Appellate Tribunal has referred the following common questions of law in respect of the assessment years 1964-65 and 1965-66 :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the proceedings under section 147(a) of the Income-tax Act, were validly initiated by the Income-tax Officer ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal had no material to hold that the sum of Rs. 25,518 in the assessment year 1964-65 and Rs. 44,619 in the assessment year 1965-66 represented the assessed’s income from undisclosed sources ?”
2. The relevant facts as found by the Tribunal are that original assessments on the assessed, a private limited company, for the said assessment years were completed on a total income of Rs. 50,843 for the assessment year 1964-65 and on a loss of Rs. 82,997 for the assessment year 1965-66. On August 17, 1967, the Income-tax Officer reopened both the assessments by making the following nothings in the order sheets :
“17-8-1967 : Assessment year 1964-65 :
During the year ended December 31, 1963, the assessed-company introduced fictitious loans in the books in the name of Messrs. Topan Dass Gopal Dass of Rs. 10,000 and debit of interest to this party was also fictitious. Facts about this loan were not truly disclosed. Action under section 147(a)/148 is taken to assess this escaped income.
(Sd.) Income-tax Officer.
17-8-1967 : Assessment year 1965-66 :
During the year ended December 31, 1964, the assessed-company introduced fictitious loans in the names of Topan Dass Gopal Dass – Rs. 95,000, Faquir chand Lachman Dass – Rs. 90,000, Satish and Co. – Rs. 1,08,000 and Om Prakash and Co. – Rs. 2,10,000. The debit raised in books in respect of interest to these parties is also factitious. Escaped income is estimated at Rs. 5,50,000 approximate interest. Action under section 147(a)/148 is taken since facts about these loans were not properly disclosed.
(Sd.) Income-tax Officer.”
3. During the course of reassessment proceedings for the assessment year 1964-65, the Income-tax Officer found that the hundi loans of Rs. 10,000 in the name of Messrs. Topandas Gopaldas and Rs. 25,000 in the name of Messrs. Gopaldas Udhavdas were bogus cash credits and he thus made an addition of Rs. 35,000 as income from undisclosed sources to the originally assessed income of the assessed. He also disallowed the interest allegedly paid by the assessed on these loans. Similarly, while framing the assessment for the year 1965-66, the Income-tax Officer treated the hundi loans, appearing in the books of account of the assessed in the names of Messrs. Faquir chand Lachmandas (Rs. 65,000) and Messrs. Topandas Gopaldas (Rs. 95,000), as in genuine and accordingly treated the same as the income of the assessed from undisclosed sources. Interest claimed to have been paid on the said loans was also disallowed. This resulted in the assessed getting assessed on a total positive income of Rs. 66,623 as against a net loss of Rs. 1,02,266 computed in the original assessment, as modified in the first appeal.
4. Being aggrieved, the assessed preferred appeals to the Appellate Assistant Commissioner challenging the jurisdiction of the Income-tax Officer to reopen the two assessments and it was contended that the books of account containing the squared up loans in question having been produced at the time of original assessment, the Income-tax Officer had no valid reason to believe that income chargeable to tax had escaped assessment by reason of omission or failure on the part of the assessed to disclose fully truly all material facts necessary for the assessment of the assessed-company. The additions/disallowances made were challenged on the merits also. The Appellate Assistant Commissioner upheld the validity of the reassessment proceedings but on the merits he held that in the case of Messrs. Topandas Gopaldas, the assessed had been able to establish is identity and the transaction having been effected almost wholly through the bank, the Income-tax Officer was not justified in treating the credits appearing in the name of the said firm as the assessed’s income from undisclosed sources. He, accordingly deleted the additions of Rs. 10,000 and Rs. 95,000 (together with interest) made in the assessment years 1964-65 and 1965-66, respectively. He however, upheld the additions made on account of unexplained cash credits appearing in the books of account of the assessed in the names of Messrs. Gopaldas Udhavdas, in the assessment year 1964-65, and in the name of Messrs. Faquir chand Lachmandas in the assessment year 1965-66. Disallowance of interest on the said loans was also upheld.
5. The Revenue accepted the first appellate order but the assessed appealed to the Income-tax Appellate Tribunal Before but Tribunal, the assessed primarily challenged the propriety and legality of the assessment proceedings and it was urged that the orders of the Income-tax Officer did not show what information he had for initiating action under section 148/147(a) of the Act and it was not established if any rational connection or direct nexus existed between the material coming the his notice and the formation of his belief that there had been escapement of income for the relevant assessment years. It was pleaded that the existence of these cash credits and the payment of interest thereon was fully reflected in the books of account of the assessed and the same were open to scrutiny by the Income-tax Officer at the time of original assessment.
6. The Tribunal, after detailed consideration of the facts of the case in the light of the principles laid down in various judgments, cited before it by both the sides, as also the letter dated April 26, 1967, received by the Income-tax Officer from the Assistant Director of Inspection regarding bogus hundi loan transactions conducted by the assessed, came to the conclusion that the reassessment proceedings in respect of both the assessment years were validly initiated by the Income-tax Officer and the assessed had failed to establish the genuineness of the deposits in question. The assessed’s appeals were accordingly dismissed.
7. Thereafter, the assessed moved an application before the Tribunal under section 254(2) of the Act for rectification of the mistake in its order. In the application it was stated that in the file produced by the representative of the Revenue before the Tribunal, except for a letter from the Assistant Director of Inspection, which only mentioned the names of three alleged fictitious lenders, there was no other material with the Income-tax Officer on the basis whereof he could form the belief that by reason of the assessed’s omission to disclose truly and fully all material facts necessary for its assessment for the relevant assessment years, income chargeable to tax had escaped assessment and, therefore, while returning the finding that the proceedings under section 147(a) of the Act had been validly initiated, the Tribunal had referred to some different records of the proceedings than the one produced before it in the course of hearing. It was pleaded that this being a mistake apparent from the record should be rectified. The assessed’s application was rejected and it was held that the Tribunal had not looked into any other material which was not produced before it at the time of hearing. This, the Tribunal held, was clear from the following observations in paragraph 7 of its order :
“In view of these contentions raised, we required the Departmental Representative to get produced the file in which the Income-tax Officer recorded the reasons and obtained the sanction of the Commissioner for commencing reassessment proceedings. The same was produced. It was lying in a confidential folder. We found there from that the Income-tax Officer had received a letter dated April 26, 1967, from the Assistant Director of Inspection regarding bogus hundi loan transactions conducted by the assessed. The names of the three creditors, as referred to above, were specifically mentioned. We apprised the assessed that this information had existed with the Income-tax Officer. The Revenue, however, did not allow further inspection of the file to the assessed on the ground that it contained confidential information and matters. It is thus clear that in the present case, the Income-tax Officer had definite information from the Assistant Director of Inspection of the Revenue Department about non-genuineness of the disputed cash credits.”
8. The assessed having failed to persuade the Tribunal to make a reference under section 256(1) of the Act, filed an application under section 256(2) of the Act and this court, vide its order dated April 30, 1981, directed the Tribunal to refer the aforesaid questions.
9. Mr. S. K. Aggarwal, learned counsel for the assessed, submitted that the condition precedent for the Income-tax Officer to assume jurisdiction to issue a notice under section 148 of the Act was not satisfied on the instant case inasmuch as no reasons have been recorded by him before issuing the notices for reopening the assessments and, secondly, even if the nothings made by the Income-tax Officer in the order sheets dated August 17, 1967, are taken to be his “reasons” for initiating proceedings under section 147(a) of the Act, there was no material on the record which could form the basis for the Income-tax Officer having “reasons to believe” that the income of the assessed had escapade assessment during the relevant years on account of omission on the part of the assessed to disclose true and full facts during the assessment proceedings. He maintained that though the assessed was not made aware of the contents of the Assistant Director of Inspection’s letter dated April 26, 1967, from the observations of the Tribunal on the said letter it was evident that the “information” contained therein was as vague and indefinite as in the case of ITO v. Lakhmani Mewal Das and, therefore, as held by the Supreme Court in the said case, this “information” could not afford any basis to the Income-tax Officer for entertaining a reasonable belief to initiate proceedings under section 147(a) of the Act.
10. To appreciate the submissions made by Mr. Aggarwal, it would be appropriate to notice the relevant provisions of the Act. Section 147 and 148 of the Act, as they stood at the relevant time and material for the purpose of this reference, 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 assessed 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……….
he may, subject to the provisions of sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year…..”
“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 assessed 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-section.
(2) The Income-tax Officer shall, before issuing any notice under this section, record his reasons for doing so.”
11. From the plain language of the above sections, it is clear that two conditions have to be satisfied before an Income-tax Officer acquires jurisdiction to issue a notice under section 148 of the Act in respect of an assessment. These are :
(1) The Income-tax Officer must have reason to believe that income chargeable to tax has escaped assessment; and
(2) He must have reason to believe that such escapement was occasioned by reason of omission or failure on the part of the assessed to disclose fully and truly all material facts necessary for the assessment.
12. The two 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 is reasons before initiating reassessment proceedings as required by section 148(2) of the Act.
13. There is a plethora of case-law on the subject of reassessment under section 147(a) of the Act, but we do not propose to burden the judgment by making a reference to them all because we find that the law on the issue has been succinctly restated thus by the Supreme Court in its recent judgment reported as Phool Chand Bajrang Lal v. ITO [1993] 203 ITR 456 as under (at page 477) :
“From a combined review of the judgments of this court, it follows that an Income-tax Officer acquires jurisdiction to reopen an assessment under section 147(a) with section 148 of the Income-tax Act, 1961, only if on the basis of specific, reliable and relevant information coming to his possession subsequently, he has reasons, which he must record, to believe that, by reason of omission or failure on the part of the assessed to make a true and full disclosure of all material facts necessary for his assessment during the concluded assessment proceedings, any part of his income, profits or gains chargeable to income-tax has escaped assessment. He may start reassessment proceedings either because some fresh facts had come to light were not previously disclosed or some information with regard to the fact previously disclosed comes into his possession which tends to expose the untruthfulness of those facts. In such situations, it is not a case of mere change of opinion or the drawing of a different inference from the same facts as were earlier available but acting on fresh information. Since the belief is that of the Income-tax Officer, the sufficiency of reasons for forming the belief is not for the court to judge but it is open to an assessed to establish that there in fact existed no belief or that the belief was not at all a bona fide one or was based on vague, irrelevant and non-specific information. To that limited extent, the court may look into the conclusion arrived at by the Income-tax Officer and examine whether there was any material available on the record from which the requisite belief could be formed by the Income-tax Officer and further whether that material had any rational connection or a live link for the formation of the requisite belief. It would be immaterial whether the Income-tax Officer, at the time of making the original assessment, could or could not have found by further enquiry or investigation, whether the transaction was genuine or not if, on the basis of subsequent information, the Income-tax arrives at a conclusion, after satisfying the twin conditions prescribed in section 147(a) of the Act, that the assessed had not made a full and true disclosure of the material facts at the time of original assessment and, therefore, income chargeable to tax had escaped assessment.”
14. In the present case, it is not in dispute that before issuing the notice under section 148 of the Act, the Income-tax Officer did make nothing on the order sheets on August 17, 1967 (reproduced above), in respect of both the assessment years and we find no difficulty in holding that these nothings meet the requirements of section 148(2) of the Act. But the real question which falls for determination is whether there was any material available on the record of the assessed from which the Income-tax Officer could form the requisite belief and whether that material had any rational connection with or relevant bearing on the formation of the requisite belief because the contention of Mr. Aggarwal is that the information, if at all there is any, contained in the letter of the Assistant Director of Inspection’s letter dated April 26, 1967, and referred to by the Tribunal is vague and cannot justify the formation of any belief that the assessed’s income for the assessment years 1964-65 and 1965-66 has escaped assessment.
15. We are of the opinion that having regard to the facts found by the Tribunal, Mr. Aggarwal’s contention is not well-founded. In paragraph 7 of its order (extracted above), the Tribunal has clearly found as a fact that the Income-tax Officer had received a letter dated April 26, 1967, from the Assistant Director of Inspection regarding bogus hundi loans transactions conducted by the assessed. The names of the three creditors, as referred to above, were specifically mentioned. We have little hesitation in upholding the finding recorded by the Tribunal that the information contained in the said letter was definite and there was a nexus and a rational connection between that information and the belief entertained by the Income-tax Officer before initiating reassessment proceedings. We are of the opinion that on the basis of the said letter of the Assistant Director of Inspection, the Income-tax Officer could legitimately form a reasonable belief that the said creditors had not advanced any money to the assessed in the assessment years. We are unable to agree with learned counsel for the assessed that the facts of the present case are similar to the facts in Lakhmani Mewal Das’ case . In Lakhmani Mewal Das’ case , the assessed, in his return, claimed deductions of certain sums paid by way of interest on the borrowings, including the one from Mohan Singh Kanhaya Lal, who was shown as one of the creditors of the assessed. A confession had allegedly been made by Mohan Singh Kanhaya Lal to the effect that he had only lent his name. However, there was nothing to show that the confession related to any loan advanced to the assessed or even the period during which name and not loan was lent. There was no other material at all to show that the confession made was in relation to the period April 1, 1957, to March 31, 1958, the subject-matter of the assessment which was sought to be reopened. It was in that situation that the Supreme Court found that the information based on the confession of the creditor, Mohan Singh Kanhaya Lal, was vague, indefinite, remote and far-fetched and could not justify the formation of any belief that the income of the assessed for the period April 1, 1957, to March 31, 1958, had escaped assessment. However, in the instant case, as noted above, the Tribunal has recorded a categorical finding of fact that the information furnished by the Assistant Director of Inspection was definite. We, therefore, reject the contention that there was no material before the Income-tax Officer for initiating a reasonable belief that the income of the assessed for the relevant assessment years had escaped assessment.
16. At this stage, we may also deal with another point raised on behalf of the assessed. It is submitted by Mr. Aggarwal that during the course of hearing of the assessed’s petition under section 256(2) of the Act the Revenue’s counsel had made a statement that there were no reasons recorded by the Income-tax Officer and got approved by the commissioner as stated in the order of the Tribunal, which would show that no reasons had in fact been recorded by the Income-tax Officer before initiating proceedings under section 147(a) of the Act. In our view, the contention is stated to be rejected. The said statement of the Revenue’s counsel is not relevant for the purpose of answering the present reference because we have already recorded a finding that the Income-tax Officer did record his reasons on August 16, 1967, before initiating the assessment proceedings. Even otherwise it is not the case of the assessed that approval of the Commissioner of Income-tax was required in respect of both the assessment years in question.
17. We accordingly endorse the view taken by the Tribunal and answer question No. 1 in the affirmative and question No. 2 in the negative, that is, in favor of the Revenue and against the assessed.
18. There will be no order as to costs.