Patna High Court
Magni Ram Baijnath vs Central Board Of Direct Taxes And Ors. on 30 August, 1982
Equivalent citations: 1982(30)BLJR514, [1983]143ITR154(PATNA)
JUDGMENT
1. This application under Articles 226 and 227 of the Constitution of India has been filed by M/s. Magni Ram Baijnath, an HUF, through its karta Shri Kedarnath Goenka. The prayer made is to quash the notice dated 22nd February, 1982, issued by the ITO, Special Investigation Circle, Ward-B, Patna, respondent No. 2, under Section 148 of the I.T. Act, 1961, (hereinafter to be referred to as " the Act "), copy whereof has been marked as annex. 7. By the impugned notice, the petitioner has been directed to submit a return for making a reassessment under Section 147(a) of the Act. The petitioner asserts that the notice is wholly without jurisdiction and void.
2. The facts are not much in controversy. In proceedings for assessment of the petitioner for the assessment year 1965-66 (accounting year ending 4th November, 1964, Diwali year) it had produced its books of account and also a statement giving full names and addresses of the various creditors from whom it had borrowed during the accounting year in question. The return filed by the assessee showed a net loss of Rs. 1,27,903. But it was assessed under Section 143(3) of the Act by the ITO, Ward-A, Monghyr (Munger), determining the net loss at Rs. 76,494. A true copy of the assessment order has been annexed as annex. 1. Before the ITO, in the course of assessment proceedings, the petitioner duly submitted copies of the profit and loss account, balance-sheet, interest account, etc., and had also produced the books of account and other documents in support of the income returned. Further, in support of the loss including the impugned one and on which interest was also paid, the petitioner also filed confirmation letters from the various creditors. Most of the loans that remained unpaid during the year also appeared in the balance-sheet duly filed and examined by the ITO. Copies of the profit and loss account, balance-sheet and interest account have been enclosed as annexs. 2, 3, and 4, respectively. Assessment was completed after enquiry. The ITO accepted the transactions of the petitioner with B.I.C. shares as part of the business in share dealing, which is borne out by the opening sentence of the assessment order, which runs thus :
"The assessee derived income from property, share-dealing business and share income from the following firms: "
3. He also accepted the various loans as genuine loans taken for the purpose of investing them in the share-dealing business and allowed the interest claimed thereon as an allowable deduction. The loss was finally computed by the ITO from the petitioners' independent business at Rs. 2,65,673. Subsequently, after about 12 years, a letter bearing No. 203.7 dated 4th February, 1981, was addressed to the petitioner by respondent No. 2 asking him to show cause as to why the assessment for the year 1965-66 should not be reopened under Section 147(a) of the Act on the ground that the assessee had "claimed loss amounting to Rs. 13,788 on sales of B.I.C. shares as revenue loss during the assessment year 1965-66, whereas the scrutiny of the record showed that it is a capital loss. And investment in purchase of B.I.C. shares were made by borrowing from Calcutta market from the persons who are bogus name-lenders. The list of the fictitious creditors was given in the notice. They were 13 in number. A true copy of the notice dated 4th February, 1981, has been marked as annex. 5 to the petition. The petitioner, thereafter, filed a petition on April 16, 1981, objecting to the proposed initiation of the proceeding under Section 147(a) of the Act as unwarranted and without jurisdiction, inter alia, on the ground that the nature of the B.I.C. share transactions being a revenue loss was accepted after due examination and consideration of all the evidence in this regard and that a mere change of opinion of the ITO could not confer any jurisdiction on him to reopen the assessment under Section 147(a) of the Act. It was also stated in the show-cause petition that the casual observation about the borrowings being from persons who were allegedly bogus name-lenders was not only incorrect but was also an absolutely vague and arbitrary allegation and that the loans were, in fact, all genuine transactions which were so accepted by the then ITO after due consideration of all the relevant evidence produced before him. It was accordingly submitted in the show-cause petition that no act'ion under Section 147(a) of the Act was warranted. A true copy of the petition dated February 16, 1981, has been marked as annex. 6. Thereafter, the impugned notice under Section 148 dated 22nd February, 1982, was issued by respondent No. 2 to the petitioner.
4. It has been asserted in the petition as also contended vehemently by learned counsel appearing for the petitioner at the time of argument that from the facts stated above it is apparent that respondent No. 2 had no reason to believe as contemplated under Section 147(a) that any income had escaped assessment, much less by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. It has further been asserted that it was only due to a mere change of opinion of the ITO with regard to the nature of the losses (as to whether they were capital or revenue) sustained by the petitioner in his dealing with the B.I.C. shares that had impelled the ITO to issue the notice under Section 148. This, it was contended, was not justiciable in law since the petitioner had placed all the primary facts before the ITO and he had drawn his inference, after having carefully examined the entries in the books of account, and after being satisfied that the petitioner was dealing in share business. In a nutshell, the validity of the impugned notice is challenged on two broad grounds: (i) that a mere change of opinion of the ITO, that the losses sustained by the petitioner during the assessment year in question were not partaking of the nature of revenue losses but were capital losses could not attract the provisions of Section 147(a), and (ii) that there was nothing in the notice dated 4th February, 1981 (annex. 3), issued by respondent No. 2 to show that the transactions entered into by the petitioner were not genuine, even prima facie, but all that was alleged was that the investment in the purchase of the B.I.C. shares was made by the petitioner by borrowing money from the Calcutta market from persons who were bogus name-lenders. This is followed by the list of the fictitious creditors. Nowhere has it been stated that there was any reason to believe on the part of the ITO that the transactions entered into by the petitioner were not genuine prima facie. Therefore, the ITO had no reason to believe that income had escaped assessment by reason of the failure on the part of the petitioner to disclose fully and truly all material facts necessary for the assessment.
5. A counter-affidavit has been filed on behalf of the respondents and the deponent is the ITO, respondent No. 2. The counter-affidavit being a little vague, we called upon the learned senior standing counsel for the Department to produce before us the original records in order to satisfy ourselves with regard to the assertions made by the petitioner. We shall refer to the counter-affidavit filed on behalf of the respondents, for whatever worth it may be, at a more appropriate place.
6. It is well settled that the existence of reasons to believe on the part of the ITO is a justiciable issue and it is for the court to be satisfied whether, in fact, the ITO has reason to believe that income had escaped assessment by reason of the failure on the part of the assessee to make a full and true disclosure. Learned senior standing counsel for the Department was good and fair enough to produce before us the original records of the Department having connection with the reopening of the assessment under Section 147(a). We have had the advantage of looking to the original form for recording the reasons for initiating the proceeding under Section 148 and for obtaining the approval of the CBDT against the petitioner. Against item 9(b) relating to the matter whether it was a case of underassessment or assessment at too low a rate, or an assessment which has been made the subject of excessive relief or the allowing of excessive loss or depreciation, it is stated " a case of under-assessment ". Item 11 of this form is " reasons for the belief that the income has escaped assessment ". Against this item is mentioned " attached herewith ", and then against item 12, which runs as :
"Whether the Commissioner/Board is satisfied on the reasons recorded by the Income-tax Officer that it is a fit case for the issue of notice under Section 148. "
7. The answer is in a stamped fnrm : " Yes. The Board is satisfied ". Thereafter is the signature of the Under Secretary on behalf of the CBDT.
8. As has already been stated before, the notice under Section 148 of the Act has been issued for the purpose of reassessment under Section 147(a). From the notice, it appears that the reopening of the assessment is sought to be made on two grounds: (i) that the loss of Rs. 13,788, which was allowed as a deductible loss for the purpose of earning revenue, was, in fact, not a revenue loss but a capital loss; and (ii) that investment in purchase of the B.I.C. shares was made by borrowing money from the Calcutta market from persons who are bogus name-lenders. The names of 13 such persons have been mentioned.
9. With regard to the first ground it has been emphatically asserted that, after a thorough examination of the books of account of the petitioner including the balance-sheet, the profit and loss account, interest account, and all the relevant evidence produced before him in support of the income returned and the loans taken, the ITO completed the assessment under Section 143(3) of the Act accepting the transactions relating to the B.I.C. shares as part of the business in share dealing. In the counter-affidavit it has been stated by respondent No. 2 that-
"in view of the judgment pronounced the loss of Rs. 13,788 was in any view of the matter a capital loss and not a revenue loss.",
10. and further in para. 7 that-
"the assessee has not correctly stated the fact that he was a dealer in shares which he was not, and the loss in share transactions is a capital loss and cannot be a revenue loss."
11. In the reasons recorded by respondent No. 2 sent to the CBDT, respondent No. 1, it has been stated that-
"While examining the legal position, it has been held that shares acquired with a view to obtaining managing or selling agency or a directorship will be in the nature of capital investment and any profit or loss arising on sale of such shares will be capital gains."
12. Nowhere has it been stated either in the counter-affidavit or in the reasons recorded by the ITO that the petitioner had omitted or failed to disclose fully or truly all material facts necessary for its assessment for the year in question. There could thus be no reason for the ITO to believe that any income had escaped assessment in that year by reason of the omission or failure on the part of the petitioner to disclose fully and truly all material facts. Two distinct conditions precedent are required to be fulfilled before jurisdiction under Clause (a) of Section 147 can be exercised. They are : (i) that the ITO must have reason to believe that income has escaped assessment, and (ii) that he must have reason to believe that such escapement is by reason of an omission or failure on the part of the petitioner to disclose fully and truly all material facts necessary for the assessment year. It will thus be seen that, firstly, there must be either a failure on the part of the assessee to make a return or to disclose fully and truly all material facts. Then only can the question of the ITO having reason to believe, that there has been escapement of assessment of any income by reason of such failure on the part of the assessee, be , gone into. It may be that at times the reason to believe may be inter-linked with the failure on the part of the assessee to act according to his part of the statutory obligation. None the less, the question of reason to believe can crop up only when there has been a failure on the part of the assessee either factually or by virtue of the deeming clause embodied in the explanations. It is also well settled that the expression " material facts " used in Clause (a) refer only to primary facts. The duty of the assessee is only to disclose the primary facts. No obligation has been cast upon the assessee also to indicate what factual or legal inference should properly be drawn from those primary facts. In the case of Calcutta Discount Co. Ltd. v. ITO [1961) 41 ITR 191 (SC), decided by the Supreme Court, the assessee had disclosed all primary facts regarding sale of shares. The Supreme Court held that action under Clause (a) could not be initiated for the reason that the assessee had claimed it to be a mere change of investment and did not disclose "the true intention behind the sale ". The question whether the sale was a capital or trading transaction ,was for the ITO to decide. Reliance has been placed by the learned counsel for the petitioner on numerous cases, namely, CIT v. Bhanji Lavji [1971] 19 ITR 582 (SC), CIT v. Hemchandra Kar [1970] 77 ITR 1 (SC), C1T v. Burlop Dealers Ltd. [1971] 79 ITR 609 (SC) and ITO V. Madnani Engineering Works Ltd. [1979] 118 ITR 1 (SC). In the instant case, it would bear repetition to say that the petitioner had fully furnished and produced the profit and loss account, the balance-sheet, the interest returns and all material facts necessary for the purpose of the assessment during the year in question. The assessment order shows that net revenue loss under the head " Business " had been determined on the basis of the profit and loss account. It is not the case of the Department that anything was left in the profit and loss account or the balance-sheet. The assessment is sought to be reopened only on the ground that the intention was not disclosed by the assessee so as to make it possible to clear the legal inference. That is exactly what has been deprecated by the Supreme Court in various cases. As has already been pointed out in the Calcutta Discount Company's case [1961] 41 ITR 191 (SC), assessee's " true intention behind the sale, if not disclosed had not been taken as a valid ground for reopening the assessment". Then, also in the case of Bhanji Lawji [1971] 79 ITR 582 (SC), it was held by the Supreme Court that the ITO might have raised a wrong legal inference from the facts disclosed but on that account he was not competent to commence proceedings under Section 34(1)(a) of the 1922 Act which is identical to Section 147(a) of the Act. It was further held that since the factual position remained unaltered, there was no non-disclosure of the material facts. Clause (a) does not cast any duty upon the assessee to instruct the ITO on the question of law. When the primary facts necessary for assessment have been fully and truly disclosed to the ITO at the time of the original assessment proceeding he is not entitled, on any change of opinion, to commence proceedings for reassessment under Clause (a). In the case of Burlop Dealers Ltd. [1971] 79 ITR 609 (SC), the Tribunal had held that the assessee had produced all the relevant accounts and documents necessary for completing the assessment and it was under no obligation to inform the officer about the true nature of the transactions. The Tribunal and the High Court having rejected the Department's application, on a further appeal to the Supreme Court, it was held that the assessee had disclosed its books of account and evidence from which material facts could be discovered. It was under no obligation to inform the ITO about the possible inference that may have been raised against it. It was for the officer to raise such an inference and if he had not done so in the original assessment the income could not be brought to tax under Clause (a). In the instant case also, a perusal of both the counter-affidavit and the reasons recorded by the ITO shows merely a change of opinion with regard to the nature of the losses incurred. It has not been stated, in spite of the petitioner's assertion to that effect, that the petitioner had not submitted its relevant evidence and the books of account with regard to the transactions about B.I.C. shares. Indeed, respondent No. 2 could not be in a position to contradict this assertion of the petitioner because it would be within the knowledge of the ITO who had made the original assessment. It is on account of this that it has been held in spite of a number of cases that where the assessee avers that he had disclosed all material facts, in the absence of a contradiction by the ITO who made the original assessment, such an averment would normally be accepted, to wit: Grindlays Bank Ltd. v. ITO [1979] 116 ITR 710 (Cal), Narsinghdas Bagree v. ITO [1966] 61 ITR 172 (Cal), Shiva Lal v. ITO [1970] 77 ITR 999 (Cal), Dunlop Rubber Co. Ltd. (London) v. ITO [1971] 79 ITR 349 (Cal), Jeewanlal (1929) Ltd. v. ITO [1978] 115 ITR 465 (Cal) and Metal Distributors Lid. v. ITO [1978] 115 ITR 608 (Cal). The first ground for the ITO's reason to believe that income had escaped assessment on account of a failure on the part of the petitioner to disclose fully and, truly all material facts regarding the assessment for the year in question, in so far as the nature of the loss was concerned, is not legally justified.
13. Turning now to the second ground, namely, that the ITO had reason to believe that such income had escaped assessment on account of the fact, that the investment by the petitioner in purchase of BIC shares was made by borrowing money from the Calcutta market from 13 persons mentioned in the list, who were bogus name-lenders, it has been stated in para. 5 of the counter-affidavit that as a result of subsequent information received by the Department it was found that substantial borrowings by the assessee were in the names of creditors, who did not have any source of funds. For example, the statement on oath of Sri Ram Gopal Agrawalla, son of Trilok Chand Agrawalla, was taken in Calcutta on June 24, 1968. The statement proves beyond doubt that the said Trilok Chand Agrawalla was working on a salary of Rs. 360 per month in the year 1964. It has further been stated :
" His own total capital as per his books of account was Rs. 23,564 as on 31-3-65."
14. As a matter of first impression, the expression " his own total capital " in the aforesaid quotation refers to the total capital of Ram Gopal Agrawalla. Learned senior standing counsel for the Department, however, urged that it was a little ambiguous, no doubt. But then, read in the context of the subsequent words, namely, " but the said Trilok Chand Agrawalla was shown to be creditor of Rs. 35,000 by the assessee", we had to look to the reasons recorded by the ITO, respondent No. 2, as sent to the CBDT, respondent No. 1. It is worthwhile taking an extract from the report of respondent No. 2 himself:
" The DDI (Special Investigation) Special Cell in its report for the assessment year 1964-65 has furnished the above list of renowned bogus name-lenders. Since these creditors are renowned bogus name-lenders, the genuineness of the credit are, therefore, very much doubted and has to be examined afresh."
15. This is the only foundation for the reason to believe as recorded by the ITO. In our considered view this can be no reason to believe on the part of the ITO that the transactions were not genuine in nature. All that is said is that the creditors were renowned bogus name-lenders and that the genuineness of the credits was doubtful and, therefore, it had to be examined afresh. It would be worthwhile to say that the report referred to by the ITO is in relation to the assessment year 1964-65, absolutely unconnected with the assessment of the petitioner, whereas, the present case is in connection with the assessment year 1965-66. Apart from that in the case of Chhugamal Rajpal v. S. P. Chaliha [1971] 79 ITR 603 (SC), cited on behalf of the assessee, the ITO in his report had referred to such communications received by him from the Commissioner from which it had appeared that the creditors were name-lenders and the loan transactions were bogus and that, therefore, proper investigation regarding the loan taken by the assessee had been felt necessary. It was held by the Supreme Court that this should not be a reason to believe on the part of the ITO. It would be worthwhile to state the broad facts of that case. In the report of the ITO it was said (p. 607) :-
"...During the year the assessee has shown to have taken loans from various parties of Calcutta. From D.I.'s Inv. No. A/P Misc. (5) D.I. 63-64/ 5623, dated August 13, 1965, forwarded to this office under C.I.T. Bihar and Orissa, Patna's letter No. Inv. (Inv) 15/65-66/1953-2017 dated Patna, September 24,1965, it appears that these persons are name-lenders and the transactions are bogus. Hence, proper investigation regarding these loans is necessary. The names of some of the persons from whom money, is alleged to have been taken on loan on hundis are :
1. Seth Bhagwan Singh Sricharan.
2. Lakha Singh Lal Singh.
3. Radhakissen Shyam Sunder.
The amount of escapement involved amounts to Rs. 1,00,000.
Sd. S. P. Chaliha, 30-4-66, Income-tax Officer, A-Ward, Muzaffarpur."
16. Commenting on such a report of the ITO, the Supreme Court said (p. 607):
" In his report the Income-tax Officer does not set out any reason for coming to the conclusion that this is a fit case to issue notice under Section 148. The material that he had before him for issuing notice under Section 148 is not mentioned in the report. In his report he vaguely refers to certain communications received by him from the Commissioner of Income-tax, Bihar and Orissa. He does not mention the facts contained in those communications. All that he says is that from those communications ' it appears that these persons (alleged creditors) are name-lenders and the transactions are bogus'. He has not even come to a prima facie conclusion that the transactions to which he referred are not genuine transactions. He appears to have had only a vague feeling that they may be bogus transactions. Such a conclusion does riot fulfil the requirements of Section 151(2). What that provision requires is that he must give reasons for issuing a notice under Section 148. In other words he must have some prima facie grounds before him for taking action under Section 148."
17. The Supreme Court has also emphasised the words : " Hence proper investigation regarding these loans is necessary ". It was held that all that was said in the report was that there was a case for investigation as to the truth of the alleged transactions, which was not the safne thing as saying that there were reasons to issue notice under Section 148. The facts and ratio of the Supreme Court judgment in Chhugamal Rajpal's case [1971] 79 ITR 603 (SC), are on all fours with the present case. Here also all that the ITO says is that the matter needs to be examined afresh. The grounds given for such fresh investigation have been given out to be that the credits were said to have been obtained from the famous name-lenders of the Calcutta market. It has not even been said that the transactions in question were bogus--even prima facie. The ITO, respondent No. 2, thus, had no reason to believe that income had escaped assessment on Account of the petitioner's failure either to make a return or to have concealed any material fact. A similar question arose before the Supreme Court in the case of Madnani Engineering Works Ltd, [1979] 318 ITR 1 (SC), wherein the principles laid down by the Supreme Court in the case of Burlop Dealers Ltd. [1971] 79 ITR 609 (SC), having been applied, the case was decided against the Department. It was held that there was no obligation on the assessee to disclose--(i) that the transactions entered into by him were bogus, and (ii) the entries made in the books of account were false. The assessee discharged the legal obligation by disclosing its books of account and evidence from which material facts could be discovered and it was for the ITO to decide whether the documents produced by the assessee were genuine or false. The assessee cannot be said to have failed to make a full and true disclosure of any fact before the ITO that the entries in the books of account produced before him in the original assessment were false. Having regard to the three Supreme Court decisions primarily, namely, in the cases of Chhugamal Rajpal [1971] 79 ITR 603 (SC), Burlop Dealers Ltd. [1971] 79 ITR 609 (SC) and Madnani Engineering Works Ltd. [1979] 118 ITR 1 (SC), the petitioner must succeed in this application. We are constrained to hold that, on the materials on record, the ITO, respondent No. 2, could have had no reason to believe that any part of the petitioner's income for the relevant year had escaped assessment on account of the failure on the part of the petitioner, either to have made any return, or to have fully and truly disclosed all material facts.
18. Mr. B. P. Rajgarhia, learned senior standing counsel for the Department, invited our attention to a number of decisions, namely, in Kirpa Ram Ramji Dass v. ITO [1982] 135 ITR 68 (P & H), ITO v. Mahadeo Lal Tulsyan [1978] 111 ITR 25 (Cal), ITO v. Mahadeo Lal Tulsian [1977] 110 ITR 786 (Cal), Malegaon Electricity Co..P. Ltd. v. CIT [1970] 78 ITR 466 (SC), Smt. Urmila Ratilal v. CIT [1982] 136 ITR 797 (Guj) and Bhadarmal Hazariwal v. ITO [1975] 100 ITR 159 (Gauhati). He also laid greatstress on the decision of the Supreme Court in the case of ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 (SC). We are afraid none of these decisions is of any avail to the Department on the facts of the instant case. As a matter of fact, the case reported in [1976] 103 ITR 437 (ITO v. Lakhmani Mewal Das) is against the contention of Mr. Rajgarhia. In that case also, the Supreme Court has reiterated that the reasons for the formation of the belief contemplated by Section 147(a) of the Act must have a rational connection with, or relevant bearing to, the formation of the belief. And rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the ITO and formation of his belief that there has been an escapement of income. It has been stressed by the Supreme Court that we have to bear in mind that it is not any and every material, however vague and indefinite or distant, remote and farfetched, which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment; even on the facts of that case, the Supreme Court dismissed the Department's appeal and decided the case in favour of the assessee. The other cases relied upon by the learned counsel for the Department must be confined to the special facts and features of those cases. In view of the principle well settled by the Supreme Court and in view of some of the decisions to which we have referred earlier, there is no escape from the assumption on the facts of the present case that the ITO, respondent No. 2, would have had no reason to believe within the meaning of Section 147(a) of the Act.
20. Mr. K.N. Jain, learned counsel for the petitioner, urged another point in support of this application, namely, that the sanction accorded by the CBDT, respondent No. 1, ought to be held to be merely mechanical without an application of its mind. Mr. Rajgarhia, however, contends that the stamped answer to the question as to whether the Board had accorded sanction or not, namely, "Yes" was merely signed by the Deputy Secretary on behalf of the CBDT. The original sanction order of the Board must, presumably, be lying in the office of the CBDT itself. We are inclined to take the view that Mr. Rajgarhia is contending for. It is, therefore, not possible for us on the materials before us to hold that the sanction accorded by respondent No. 1 was merely mechanical.
21. In the result, this application is allowed, the impugned notice dated February 22, 1982, as contained in annex. 7 is quashed; and the respondents are restrained from taking any action in pursuance thereof. There shall be no order as to costs.