Allahabad High Court
K.M. Bansal (Deceased By Lrs.) vs Commissioner Of Income-Tax And Anr. on 27 March, 1991
Equivalent citations: [1992]195ITR247(ALL)
Author: B.P. Jeevan Reddy
Bench: B.P. Jeevan Reddy
JUDGMENT B.P. Jeevan Reddy, C.J.
1. A common question arises in this batch of six writ petitions. They can, therefore, be disposed of by a common order. The question is :
" Whether the assessee has a right to compel the Assessing Officer to communicate to him the reasons recorded by the Assessing Officer under Sub-section (2) of Section 148 of the Income-tax Act, 1961--whether before the filing of the return or thereafter ?" For the sake of convenience, we shall state the facts in Civil Misc. Writ No. 165 of 1991.
2. The assessee was a partner in three partnership firms during the "previous year" relevant to the assessment years 1983-84 to 1987-88. The petitioner states that he had no income other than the share income from the said partnerships. He filed returns and assessments were completed according to law. On August 10, 1988, a search was conducted at the business premises of the said three partnership firms under Section 132 of the Act. The residential premises of the partners, including the petitioner, were also searched and certain documents were seized. Summary assessments were made under Sub-section (5) of Section 132 holding that the partnerships concealed substantial income. Against the said orders, the petitioner says, representations were filed under Sub-section (11) of Section 132, which are pending now. While so, the second respondent, namely, the Assistant Commissioner of Income-tax, Investigation Circle 2(1), Agra, issued notices under Section 148 for the assessment year 1983-84 on March 23, 1989, and for the assessment years 1984-85 to 1987-88 on March 9, 1989. In response to these notices, the petitioner filed returns under protest with respect to all the assessment years. Along with the returns, he submitted a letter of request to the second respondent to supply him a copy of the "reasons" recorded for initiating the said reassessment proceedings. He relied upon the decision of the Delhi High Court in New Bank of India Ltd. v. ITO [1982] 136 ITR 679 in support of his right to be supplied with the reason. The second respondent, however, did not supply a copy of the reasons. It is then that the petitioner approached this court with the present writ petition, praying for issuance of an appropriate writ, order or direction quashing the notices issued under Section 148 and also for a further direction to the respondents to communicate the reasons recorded under Section 148(2) to the petitioner.
3. The petitioner's case is that the assessments have been reopened without forming the requisite satisfaction/belief and under a mere suspicion. It is alleged that the assessments have been reopened with a view to make a fishing and roving inquiry and that, in fact, there was no material in the possession of the Department which could have led them to believe that any income has escaped assessment within the meaning of Section 147 of the Act. The petitioner's further case is that, if at all, the only basis for reopening the assessments could be the material gathered during the search and the order made under Sub-section (5) of Section 132. But, says the petitioner, the said order is only a summary assessment and, in any event a representation against the same is pending under Section 132(11) and, until that is disposed of, the order made under Section 132(5) or the material contained therein cannot constitute relevant material for reopening the assessments.
4. At the hearing of the writ petition, learned counsel for the petitioner, Sri Ashok Khare, placed strong reliance upon the judgment of the aforementioned Delhi High Court case New Bank of India v. 7TO [1982] 136 ITR 679. He submitted that, in reassessment proceedings, the assessee is entitled to question the validity of the very initiation of proceedings under Section 147/148 and this he cannot do effectively until and unless the reasons recorded by the Assessing Officer under Sub-section (2) of Section 148 are communicated to him. He submitted that there is no provision in the Act which prohibits such communication. Counsel says that principles of natural justice do require such communication. We have heard learned counsel for the petitioner as well as learned additional standing counsel for the Revenue at length." They have brought to our notice several decisions of the Supreme Court and High Courts relevant to the question :
5. The impugned notices under Section 148 were issued in March, 1989, that is, prior to the amendment of Section 147 by the Direct Tax Laws (Amendment) Act, 1989, with effect from April 1, 1989. In other words, the notices were issued under Section 147 as it stood prior to April 1, 1989. According to the said provision, if the Assessing Officer has reason to believe that, by reason of the omission or failure on the part of the assessee, inter alia, to disclose fully and truly all material facts necessary-for his assessment for an assessment year, income chargeable to tax has escaped assessment for that year, he can reopen the assessment and make a reassessment subject to the provisions of Sections 148 to 153. This power is also available where there is no omission or failure on the part of the assessee, but the Assessing Officer has reason to believe, in consequence of information in his possession, that income chargeable to tax has escaped assessment for an assessment year. Here again, he has to act in accordance with Sections 148 to 153. Section 148, as it stood at the relevant time, provided that before making reassessment under Section 147, the Assessing Officer shall serve on the assessee a notice containing the requisite particulars. Sub-section (2) of Section 148, however, says that, before issuing such notice, the Assessing Officer shall record his reasons for doing so. For the present purpose, it is not necessary to notice the provisions contained in Sections 148 to 153. It would, however, be appropriate to set but Sub-section (2) of Section 148, which consists of only one sentence. It reads :
"(2) The Assessing Officer shall, before issuing any notice under this section, record his reasons for doing so."
6. Before we deal with the decisions cited by both counsel, it would be appropriate to examine the contention on principle. A notice under Section 148 has to be issued calling upon the assessee to file his return of income where the Assessing Officer has reason to believe that income has escaped assessment for one or the other reason mentioned in Section 147. Section 147, in so far as relevant, reads as follows :
"If--(a) the Assessing Officer has reason to believe that, by reason of the omission or failure on the part of an assessee 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."
7. It is evident that action under Section 148 has to be initiated where the Assessing Officer has "reason to believe" that income chargeable to tax has escaped assessment for one or the other reasons mentioned in the two clauses. The words "the Assessing Officer has reason to believe" indicates that this action has to be taken by the Assessing Officer on his subjective satisfaction. It has been held by the Supreme Court in Barium Chemicals Ltd. v. Company Law Board [1966] 36 Comp Cas 639 ; AIR 1967 SC 295, that use of the words "reason to believe" and "in the opinion of" indicates cases of subjective satisfaction. That was a case where Section 237(b) of the Companies Act empowered the Central Government to appoint inspectors to investigate the affairs of a company if "in the opinion of the Central Government, there are circumstances suggesting (1) that the business of the company is being conducted with intent to defraud its creditors, members or any other person . . ." This action could be taken for one or the other reasons mentioned in the section. Soon after the Central Government made the order, the company challenged the same by way of a writ petition in the High Court and, on failing there, approached the Supreme Court by way of special leave. Hidayatullah J., after setting out the ingredients of Section 237(b), made the following observations (at p. 661 of 36 Comp Cas) :
"These grounds limit the jurisdiction of the Central Government. No jurisdiction outside the section which empowers the initiation of investigation, can be exercised. An action not based on circumstances suggesting an inference of the enumerated kind will not be valid. In other words, the enumeration of the inference which may be drawn from the circumstances postulates the absence of a general discretion to go on a fishing expedition to find evidence. No doubt the formation of opinion is subjective but the existence of circumstances relevant to the inference as the sine qua non for action must be demonstrable. If the action is questioned on the ground that no circumstances leading to an inference of the kind contemplated by the section exist, the action might be exposed to interference unless the existence of the circumstances is made out. As my brother Shelat has put it trenchantly :
'It is not reasonable to say that the clause permitted the Government to say that it has formed the opinion on circumstances which, it thinks, exist . . .' Since the existence of 'circumstances' is a condition fundamental to the making of an opinion, the existence of the circumstances, if questioned, has to be proved at least prima facie. It is not sufficient to assert that the circumstances exist and give no clue to what they are because the circumstances must be such as to lead to conclusions of certain definiteness. The conclusions must relate to an intent to defraud, a fraudulent or unlawful purpose, fraud or misconduct or the withholding of information of a particular kind. We have to see whether the Chairman, in his affidavit, has shown the existence of the circumstances leading to such tentative conclusions."
8. To the same effect are the observations of Shelat J. In paragraph 61 of the report, the learned judge observed (at p. 686 of 36 Comp Cas) :
"The clause empowers the Central Government and, by reason of delegation of its powers, the Board to appoint inspectors to investigate the affairs of the company, if 'in the opinion of the Central Government' (now the Board), there are circumstances 'suggesting' what is stated in the three sub-clauses. The power is executive and the opinion requisite before an order can be made is of the Central Government or the Board, as the case may be, and not of a court. . . But the question is whether the entire action under the section is subjective ?"
9. After considering certain decisions of the House of Lords and earlier decisions of the Supreme Court, the learned judge observed (p. 688 of 36 Comp Cas) :
"Therefore, the words 'reason to believe' or 'in the opinion of do not always lead to the construction that the process of entertaining 'reason to believe' or 'the opinion' is an altogether subjective process not lending itself even to a limited scrutiny by the court that such 'a reason to believe' or 'opinion' was not formed on relevant facts or within the limits or as Lord Radcliffe and Lord Reid called the restraints of the statute as an alternative safeguard to the rules of natural justice where the function is administrative."
10. Again in paragraph 64 (p. 689), the learned judge observed :
"There must therefore exist circumstances which, in the opinion of the authority, suggest what has been set out in Sub-clauses (i), (ii) and (iii). If it is shown that the circumstances do not exist or that they are such that it is impossible for any one to form an opinion therefrom suggestive of the aforesaid things, the opinion is challengeable on the ground of non-application of mind or perversity or on the ground that it was formed on collateral grounds and was beyond the scope of the statute."
11. We may point out that powers of this nature are conferred by any number of enactments. Not only taxing enactments, but several control orders made under Section 5 of the Essential Commodities Act empower several officials to inspect, search and seize documents, commodities and other material, on their being subjectively satisfied that a violation has occurred. While the courts have repeatedly affirmed that formation of belief/satisfaction/opinion must be a fair and honest one based upon relevant material, it has not been held that material on the basis of which such belief/satisfaction/opinion is formed should be communicated even at that stage to the person concerned. As stated by the Supreme Court, the words "reasonable grounds to believe" have been considered "to be a restraint on administrative power just as compliance with the rules of natural justice on a quasi-judicial power." It is true that Section 148(2) of the Income-tax Act expressly requires the assessing authority to record his reasons for reopening the assessment before issuing notice under subsection (1). But, the question is whether the Assessing Officer is bound to communicate the reasons to the assessee if he raises an objection before him that initiation of reassessment proceedings is invalid. The further question is whether an obligation to communicate can be inferred from the requirements of the principles of natural justice, namely, the obligation to afford a reasonable and adequate opportunity to the assessee to put forward his case. In this context, it must be remembered that, in reassessment proceedings, the assessee is not only entitled to contest the merits of the case (to show that no income has escaped assessment) but also to contend that the very initiation of proceedings is bad. The question naturally arises as to how he can effectively put forward his case unless he is supplied with the "reasons" recorded. The assessee is entitled to show that, on the date the proceedings were commenced, there was no material upon which the Assessing Officer could have formed the requisite belief. If reasons are communicated to him, he can rely upon those reasons to show that his contention is correct. Now, it is not disputed by learned additional standing counsel for the Revenue that if the validity of the notice is questioned in this court, this court can call upon the Assessing Officer to disclose the reasons to it (court) and that the Assessing Officer is bound to do so if called upon. What he contends is that the Assessing Officer is not bound to communicate the reasons to the assessee either before he files his return in response to the notice under Section 148(1) or after he files the returns. According to him, the nature of the proceedings at this stage is administrative in nature, and not quasi-judicial. He agrees that, in reassessment proceedings, whatever material is sought to be used against the petitioner, it will be put to him and he will be given an opportunity of rebutting the same. But he says, the assessee is not entitled to be supplied with the reasons, which the Assessing Officer recorded before commencement of reassessment proceedings. He submits that if the reasons need not be supplied before filing the return, they need not be communicated even after filing the return ; he says that, in principle, there is no difference between both the stages.
12. On a consideration of the rival contentions, we are of the following opinion :
13. Proceedings of the nature provided by Section 147 of the Income-tax Act have to be initiated on the concerned authority being satisfied subjectively that a certain violation of la-w has taken place ; in the case of Section 147, it is escapement of income chargeable to tax for one or the other reasons mentioned in the section. As required by Sub-section (2) of Section 148, the Income-tax Officer has to record his reasons before issuing a notice under Section 147/148(1). This is a statutory requirement. If reasons are not recorded as required by law, the very action is rendered bad. See Collector of Monghyr v. Keshav Prasad Goenka, AIR 1962 SC 1694. But it is not necessary at this stage--unless required by law to do so--to communicate the reasons so recorded or to communicate the material on the basis of which the authority has formed the requisite satisfaction/belief. Section 148(2) requires the Assessing Officer to record his reasons before issuing a notice under Section 148(1) as a measure of curbing arbitrary action. Once the officer is required to record reasons, he will be bound to give reasons which are at least prima facie relevant. These reasons can also be looked into by the superior authority to satisfy himself that the action has not been initiated arbitrarily. But, from this, it does not follow that along with the notice under Section 148(1), the reasons recorded under Sub-section (2) must be also be communicated. The reasons recorded would, necessarily, contain material or other information which discloses that income has escaped assessment. The existence of such information/material is, of course, necessary for initiating action, but it does not follow therefrom that either along with the notice under Section 148(1) or as soon as the assessee demands, the Assessing Officer is bound to disclose that material/information or the reasons recorded by him under Sub-section (2). It may also happen that disclosure of the material or information or the reasons recorded may, in some cases, expose the source of information or certain persons who supply such information or material to risk. It would be in the interest of the Revenue to protect such sources. At the same time, it goes without saying that, in response to a notice under Section 148(1), the assessee is entitled to contend not only that no income has escaped assessment but that the initiation of reassessment proceedings is bad. It is also open to him to contend that no reasons were recorded as contemplated by Sub-section (2) of Section 148 or that, even if recorded, they are not relevant or germane. In such a case, he must be given a reasonable and adequate opportunity to establish the said plea effectively and that' can be done only if the reasons are disclosed to him. But the question is at what stage should this be done. We agree with the Delhi High Court that this should be done after the assessee files his return. If the reasons are disclosed even before the assessee files his return, that would amount to disclosing the information material prematurely and the assessee would be able to fashion his revised return accordingly. The proper thing, therefore, would be that the assessee should file his return or revised return, as the case may be a in the first instance in response to the notice under Section 148(1) and if he raises an objection that the very initiation of reassessment proceedings is bad because reasons were not recorded as required by Section 148(2) or that the reasons recorded are not relevant, he would become entitled to communication of the reasons so recorded. So far as the material/information on the basis of which reassessment proceedings are initiated is concerned, that would be put to the assessee if and when it is sought to be used against him. It is not necessary that all the material or information which is gathered or received by the Assessing Officer ought to be disclosed to the assessee. The obligation is only to disclose that material or information, as the case may be, which is sought to be used against the assessee. In this connection, we may also mention that courts generally discourage decision of a suit or proceeding in instalments. The normal policy of the courts is to insist that all the issues arising in a suit or proceeding should be decided at once, and not piecemeal. This means that all contentions of the assessee raised in response to a notice under Section 148(1) should be decided at once, whether they are questions of law or of fact. We may now refer to the decided cases cited before us.
14. In K. S. Rashid and Sons v. ITO [1964] 52 ITR 355, the Supreme Court considered a similar provision occurring in the Indian Income-tax Act, 1922. Section 34 of the 1922 Act provided for reopening of assessments where income had escaped assessment. Sub-section (1A) of Section 34 provided that, where the escaped income amounted to or was likely to amount to one lakh of rupees or more, the Income-tax Officer was empowered to reopen the assessment even after the expiry of eight years. The first proviso to this sub-section, however, provided as follows :
"Provided that the Income-tax Officer shall not issue a notice under this sub-section unless he has recorded his reasons for doing so and the Central Board of Revenue is satisfied on such reasons recorded that it is a fit case for the issue of such notice".
15. The main question before the Supreme Court, however, pertained to the validity of Sub-section (1A) of Section 34. Having repelled the said contention, the Supreme Court proceeded to deal with what it called "a minor additional point", which may be said to be somewhat relevant for the present purpose. The contention was that a notice under Section 34(1A) could not be issued unless the Income-tax Officer has recorded his reasons for doing so and the Central Board of Revenue was satisfied on such reasons recorded that it was a fit case for the issue of such notice. Recording of reasons, it was argued, constituted a condition precedent for the exercise of power conferred by the said sub-section. Since the respondents had not shown that the said requirement was satisfied in that case, the notice under Section 34(1A) was to be held to be invalid. This argument was dealt with by the Supreme Court in the following words (pages 363 and 364) :
"We are not impressed by this argument. What was urged before the High Court by the appellant was not that no reasons had been recorded by the Income-tax Officer as required by the proviso ; the argument was that the appellant had not been given a copy of the said reasons and it appears to have been urged that the appellant was entitled to have such a copy. This latter part of the case has not been pressed before us by Mr. Setalvad, and rightly. Now, when we look to the pleadings of the parties, it is clear that it was assumed by the appellant that reasons had been recorded and, in fact, it was positively affirmed by the respondent that they had been so recorded ; the controversy being, if the reasons are recorded, is the assessee entitled to have a copy of those reasons ? Therefore, we do not see how Mr. Setalvad can suggest that no reasons had in fact been recorded, and so, the condition precedent prescribed by the proviso had not been complied with."
16. This question was again raised in S. Narayanappa v. CIT [19671 63 ITR 219 (SC). The appeal to the Supreme Court was against the judgment of the High Court in a reference under Section 66 of the 1922 Act. The question referred to the High Court related to the jurisdiction of the Income-tax Officer to initiate proceedings under Section 34(1)(a) of the Act. The Supreme Court held, agreeing with the High Court, that the Income-tax Officer had jurisdiction to reopen the assessment in that case. Then, the Supreme Court proceeded to consider the argument relating to communication of the reasons recorded (pp. 222, 223) :
"It was also contended for the appellant that the Income-tax Officer should have communicated to him the reasons which led him to initiate the proceedings under Section 34 of the Act. It was stated that a request to this effect was made by the appellant to the Income-tax Officer, but the Income-tax Officer declined to disclose the reasons. In our opinion, the argument of the appellant on this point is misconceived. The proceedings for assessment or reassessment under Section 34(1)(a) of the Income-tax Act start with the issue of a notice and it is only after the service of the notice that the assessee, whose income is sought to be assessed or reassessed, becomes a party to those proceedings. The earlier stage of the proceeding for recording the reasons of the Income-tax Officer and for obtaining the sanction of the Commissioner are administrative in character and are not quasi-judicial. The scheme of Section 34 of the Act is that, if the conditions of the main section are satisfied, a notice has to be issued to the assessee containing all or any of the requirements which may be included in a notice under Sub-section (2) of Section 22. But before issuing the notice, the proviso requires that the officer should record his reasons for initiating action under Section 34 and obtain the sanction of the Commissioner who must be satisfied that the action under Section 34 was justified. There is no requirement in any of the provisions of the Act or of any section laying down as a condition for initiation of the proceedings that the reasons which induced the Commissioner to accord sanction to proceed under Section 34 must also be communicated" to the assessee. In Presidency Talkies Ltd. v. First Additional Income-tax Officer, [1954] 25 ITR 447, the Madras High Court has expressed a similar view and we consider that that view is correct. We accordingly reject the argument of the appellant on this aspect of the case."
17. It would be relevant to notice that, according to this decision of the Supreme Court, the proceedings under Section 34 reacquire quasi-judicial character only after the service of notice upon the assessee, and earlier thereto, they are administrative in character. Since the requirement of recording reasons is a stage anterior to issuance of notice, it was held that there was no obligation on the part of the Income-tax Officer to communicate the same. It was also observed that recording of reasons is required by law as a condition for initiation of proceedings and also for obtaining sanction of the Commissioner who must be satisfied that the action proposed was warranted.
18. This question was again considered by the Supreme Court, no doubt, in an incidental way in Ajantha Industries v. Central Board of Direct Taxes [1976] 102 ITR 281. The appeal before the Supreme Court was against a decision of the High Court in a writ petition preferred against an order of transfer of assessment proceedings under Section 127 of the Income-tax Act, 1961. Section 127 provides for transfer of assessment proceedings from one Income-tax Officer to another Income-tax Officer. The relevant portion of Section 127(1) reads as follows :
"(1) The Commissioner may, after giving the assessee a reasonable opportunity of being heard in the matter, wherever it is possible to do so, and after recording his reasons for doing so, transfer any case from any Income-tax Officer or Income-tax Officers subordinate to him to any other Income-tax Officer or Income-tax Officers also subordinate to him and the Board may similarly transfer any case from any Income-tax Officer or Income-tax Officers to any other Income-tax Officer or Income-tax Officers :
Provided that nothing in this sub-section shall be deemed to require any such opportunity to be given where the transfer is from any Income-tax Officer or Income-tax Officers to any other Income-tax Officer or Income-tax Officers and the offices of all such Income-tax Officers are situated in the same city, locality or place :"
19. Where the transfer is to an Income-tax Officer situate in the same city, locality or place, no such opportunity need be given, but where the transfer is to a different city, locality or place, an opportunity has to be given to the assessee to show cause against the proposed transfer. The Supreme Court observed that the reasons for recording of the reasons in the order and making them known to the assessee is to afford an opportunity to the assessee to approach the High Court under article 226 or the Supreme Court under article 136 of the Constitution. The court observed that the requirement of recording reasons is mandatory and non-communication of the reasons vitiates the order of transfer. In the words of the Supreme Court, (at page 286) : "when law requires reasons to be recorded in a particular order affecting prejudicially the interests of any person, who can challenge the same in a court, it ceases to be a mere administrative order and the vice of the violation of the principles of natural justice on account of omission to communicate the reasons is not expiated." At this stage, it appears that reliance was placed upon the decision in S. Narayanappa [1967] 63 ITR 219 (SC) which was dealt with in the following words (at pages 286 and 287) :
"Mr, Sharma also drew our attention to a decision of this court in S. Narayanappa v. CIT [19671 63 ITR 219, where this court was dealing with Section 34 of the old Act. It is clear that there is no requirement in any of the provisions of the Act or any section laying down as a condition for the initiation of the proceedings that the reasons which induced the Commissioner to accord sanction to proceed under Section 34 must also be communicated to the assessee. The Income-tax Officer need not communicate to the assessee the reasons which led him to initiate the proceedings under Section 34. The case under Section 34 is clearly distinguishable from that of a transfer order under Section 127(1) of the Act. Where an order under Section 34 is made the aggrieved assessee can agitate the matter in appeal against the assessment order, but an assessee against whom an order of transfer is made has no such remedy under the Act to question the order of transfer. Besides, the aggrieved assessee on receipt of the notice under Section 34 may even satisfy the Income-tax Officer that there were no reasons for reopening the assessment. Such an opportunity is not available to an assessee under Section 127(1) of the Act. The above decision is, therefore, clearly distinguishable."
20. The relevant portion of Section 127(1) reads :
"The Commissioner may, after giving the assessee a reasonable opportunity of being heard in the matter, wherever it is possible to do so, and after recording his reasons for doing so, transfer any case . . .".
21. In Thanthi Trust v. ITO [1973] 91 ITR 261, a Bench of the Madras High Court considered a similar argument. It opined that since the nature of the proceedings at the stage of recording of reasons is administrative in character, the requirement of communication does not apply, and that the assessee cannot compel the Income-tax Officer to disclose all the material which formed the basis of notice under Section 148 before he filed his return in pursuance of the notice. Proceedings before the commencement of reassessment are only administrative in character. As a matter of fact, courts have taken the uniform view that disclosure of the material at the stage of notice will be detrimental to the Revenue. The court, however, observed that, while the reasons recorded need not be communicated or disclosed to the assessee before reassessment proceedings under Section 147 actually commence, (at page 273 of 91 ITR): "They have to be disclosed to the court when his jurisdiction to issue the notice is challenged on the ground that there is no reason to believe that certain income has escaped assessment by omission or failure of the assessee to disclose fully and truly all material facts necessary for his assessment, and the Income-tax Officer has to justify his assumption of jurisdiction only on those recorded reasons."
22. We may now consider the decision of the Delhi High Court in New Bank of India [1982] 136 ITR 679, which constitutes the sheet anchor of the petitioner's case. This was a case where the assessee questioned the validity of initiation of proceedings under Section 147/148 on the ground that no material existed on which the Income-tax Officer could have reason to believe that his income had escaped assessment. The Division Bench of the Delhi High Court examined the nature of proceedings under Section 148, compared the same with proceedings under Section 139 and observed that a person to whom a notice under Section 139(2) is issued cannot straightaway come to the High Court under article 226 and ask the court to restrain the Income-tax Officer from calling upon him to file his return. The assessee must say whatever he has to say before the Income-tax Officer, and not before the High Court. The same view, the Bench observed, applies to a large extent to a notice under Section 148. The assessee must file his return in response to such a notice. The Bench then made the following observations which are strongly relied upon by learned counsel for the petitioner (at page 687) :
"All that the petitioner can insist is that the reasons for the issue of the notice under Section 148(1) must be disclosed by the Income-tax Officer to the assessee after the latter files the return and before the former makes the assessment. It is then only that the petitioner can contend that the said material could not form the basis of 'reason to believe' within the meaning of Section 147. These reasons or materials can then be placed by the assessee before the court in a writ petition under article 226 to invite the decision of the court whether such material can form the basis of exercise of the jurisdiction of having 'reason to believe' by the Income-tax Officer under Section 147. It would not be proper for the assessee without filing the return to ask this court to call for the reasons recorded by the Income-tax Officer. If the Supreme Court has held that reasons need not be furnished with the notice, the decision of the Supreme Court would be stultified if this court were nevertheless to call for the reasons recorded by the Income-tax Officer for the benefit of the assessee without the latter submitting the return. This would be virtually compelling the Income-tax Officer to disclose his reasons along with the notice issued under Section 148(1), though according to the Supreme Court, this was not obligatory for the Income-tax Officer to do."
23. We are inclined to agree with this reasoning.
24. Learned counsel for the petitioner also placed reliance on the decision of the Supreme Court in Liberty Oil Mills v. Union of India AIR 1984 SC 1271. Clause 8B of the Imports (Control) Order, 1955, empowered the Central Government to keep in abeyance an application for licence or allotment of imported goods. The clause read as follows (at page 1282 of AIR 1984 SC) :
"8B. Power to keep in abeyance applications for licences or allotments of imported goods.--Where any investigation into any of the allegations mentioned in clause 8 is pending against a licensee or importer or any other person, and the Central Government or the Chief Controller of Imports and Exports is satisfied that without ascertaining further details in regard to such allegation, the grant of licence or allotment of imported goods will not be in the public interest, then notwithstanding anything contained in this order, the Central Government or the Chief Controller of Imports and Exports may keep in abeyance any application for grant of licence from such person, or direct the State Trading Corporation of India, the Minerals and Metals Trading Corporation of India, or any other similar agency to keep in abeyance allotments of imported goods to such person, without assigning any reason and without prejudice to any other action that may be taken in this behalf :
Provided that the period for which the grant of such licence or allotment is kept in abeyance under this clause shall not ordinarily exceed six months."
25. The question before the Supreme Court was whether the decision to keep in abeyance should be communicated to the person concerned. It was held that communication of the decision is obligatory. The court then considered the relevance of the words "without assigning any reasons occurring in the said clause and observed (at page 1287), "there is nothing in Clause 8B to suggest that the decision is not to be communicated. On the other hand, the expression 'without assigning any reason' implies that the decision has to be communicated, but reasons for the decision have not to be stated. Reasons, of course, must exist for the decision since the decision may only be taken if the authority is satisfied that the grant of licence or allotment of imported goods will not be in public interest. We must make it clear that, 'without assigning any reasons' only means that there is no obligation to formulate the reasons and nothing more. Formal reasons may lead to complications when the matter is still under investigation. So, the authority may not give formal reasons, but the skeletal allegations must be mentioned in order to provide an opportunity to the person affected to make his representation. Chapter and verse need not be quoted. Details may not be mentioned and an outline of the allegations should be sufficient." (vide paragraph 22).
26. Reliance was also placed upon the decision of the Supreme Court in R.E. Shreeram Durga Prasad v. Settlement Commission (IT and WT) [1989] 176 ITR 169. A special appeal was preferred against the judgment and order of the Settlement Commissioner constituted under the Income-tax Act. The petitioner therein filed an application for settlement under Section 245C. Objections were filed by the Commissioner to this application after perusing which the application for settlement was dismissed.
The objections filed by the Commissioner were, however, not communicated to the petitioner and this was one of the objections raised before the Supreme Court as a violation of the principles of natural justice. The following observations in the judgment are relevant (at page 175) :
"Reading the order, it appears to us, that though the appellant had made submissions on the Commissioner's objections there was no clear opportunity given to the appellant to make submissions on the Commissioner's objections in the sense to demonstrate that the Commissioner was not justified in making the objections and, secondly, the Commission should not accept or accede to the objections in the facts and circumstances of the present case. We are of the opinion that in view of the facts and circumstances of the case and in the context in which the objections had been made, it is necessary as a concomitant of the fulfilment of natural justice that the appellant should be heard on the objections made by the Commissioner."
27. Reliance was lastly placed upon the decision of the Calcutta High Court in British Electrical and Pumps P. Ltd. v. ITO [1978] 113 ITR 143. The court generally considered the requirement of Section 147. It considered the contention that the Income-tax Officer is bound to make necessary disclosure of materials upon which he formed the "reason to believe" that income had escaped assessment. This argument was rejected, relying upon the decision of the Supreme Court in Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 and of the Madras High Court in Thanthi Trust [1973] 91 ITR 261. It was held that the proper stage for full disclosure of all relevant material had not yet reached and that the contention that the Income-tax Officer must disclose all material is premature. It may be noted that it was a case where the assessee filed a writ petition against the notice under Section 148(1) soon after receiving it, without participating in the reassessment proceedings.
28. A review of the decided cases shows that the function of the Assessing Officer at the stage of issuance of notice under Section 148(1) is administrative in nature. It becomes quasi-judicial once the notice is served upon the assessee. Since reasons are recorded at a stage anterior to issuance and serving of the notice, it is held that reasons need not be communicated. But once the proceedings become quasi-judicial and more important, and once it is admitted that, in such proceedings, the assessee has a right to question the validity of initiation of reassessment proceedings, refusal to communicate the reasons becomes unsupportable. No decision of the Supreme Court says so. We may also observe that it is not enough that the reasons are disclosed to the court. No doubt, the court will look into them, but that is no substitute for the affected party looking into them and submitting his objections thereto. The system of jurisprudence we follow--adversarial--cannot recognise such half-measures.
29. The above discussion yields the following propositions :
(i) While the recording of reasons as contemplated by Sub-section (2) of Section 148 is obligatory, the reasons so recorded need not be communicated to the assessee along with the notice under Sub-section (1) of Section 148. It is also not open to the assessee to straightaway call upon the Assessing Officer to disclose or communicate reasons to him, as soon as he receives the notice under Section 148(1). He must first file his return or a revised return, as the case may be, and if he raises a contention either that no reasons were recorded or that the reasons recorded are not relevant and germane, then the Assessing Officer has to communicate the reasons to him.
(ii) While communicating the reasons, it is open to the Assessing Officer to withhold the names of informants and/or identities of sources, if he thinks it necessary to protect his sources and informants. If and when, however, the matter comes before the court, the Assessing Officer is bound to disclose the entire reasons to the court and it is for the court to decide whether to recognise the Assessing Officer's claim to withhold the names/identities of informants/sources or not.
(iii) So far as the material/information on the basis of which the assessment is reopened is concerned, there is no obligation upon the Assessing Officer to disclose all the material and information that may have been gathered by him. His obligation is to disclose such material/ information as he wishes to use against the assessee. This is a principle of natural justice--and there is no other principle governing the issue.
(iv) All the issues arising in the reassessment proceedings including the issue relating to the validity of reopening of assessment proceedings have to be gone into at the same time. Normally speaking, there ought not to be any piecemeal decision of issues. If, however, it turns out in a case that no reasons whatsoever were recorded under Section 148(2), it may be a case where proceedings can be terminated on that question itself without going into the merits of the case. We must also clarify that this court, in a writ petition, does not sit in judgment over the adequacy or sufficiency of reasons recorded. This is a matter to be gone into in reassessment proceedings. This court will interfere only in cases where no reasons are recorded or when the reasons recorded are ex facie irrelevant.
30. Applying the above principles to the case in hand, it must be held that, in cases where the assessees have filed their returns or revised returns, as the case may be, in response to the notice under Section 148(1) and have also raised a contention that the very initiation of the reassessment proceedings is not in accordance with law, the Assessing Officer shall communicate the reasons recorded by him under Section 148(2) to the assessee, subject, of course, to the necessity of protecting his sources/ informants if he thinks such protection is necessary in any given case. Suffice it to say that he shall proceed in accordance with the principles enunciated above.
31. The writ petitions are disposed of in the above terms.