Income Tax Appellate Tribunal - Patna
Dy. Commissioner Of Income-Tax vs Murrah Live Stock Agency on 22 January, 2004
Equivalent citations: [2004]91ITD198(PAT)
ORDER
M.A. Bakshi, Vice-President
1. The appeals of the Revenue for the assessment year 1987-88 to 1989-90 had come up for decision before the Patna Division Bench. However, since there was a difference of opinion between the Members of the Bench, I was nominated by the Hon'ble President as Third Member for a decision in regard to the point of dispute in these appeals of the Revenue.
2. The Ld. Members of the Division Bench have identified the point of dispute separately as under:-
Point of dispute as per Ld. Judicial Member:
"Whether registration of a case with the CBI, on the allegation that the assessee received a sum of Rs. 7998500/- from AHD, Govt. of Bihar, without making any supplies and obtaining accommodation entries of purchases against commission and surrounding circumstances, would be sufficient for an AO to form an opinion that on account of non-disclosure of material facts fully and truly income has escaped assessment?"
Point of dispute as per Ld. Accountant Member:
"Whether on the basis of information available on account of registration of charge-sheet by the CBI in the case of assessee's relatives and their concerns would be sufficient for an AO to form an opinion that on account of non-disclosure of material facts regarding fake withdrawals from AHD, Govt. of Bihar, full and true income has escaped assessment in the case of the assessee?.
3. In my considered view, the point of difference between the Members of the Bench is as to whether on the facts and in the circumstances of the case the reopening of assessment in the case of the respondents was validly initiated by the A.O. Under Section 147 of the I.T. Act, 1961.
4. Parties have been heard and record perused. For the sake of convenience, relevant facts may be briefly stated even at the cost of repetition. The respondent was a firm constituted of two partners, viz., Sri Sandeep Malik and Smt. Kamal Malik. The firm is engaged in the business of supplies to the Govt. departments. The partners of the firm are members of Malik family and the various members of the family under different business names are engaged in the business of supply of fodder, livestocks, etc. to Govt. Departments. The respondents had filed the returns of income in regard to the supplies of livestock to the Animal Husbandry Department (in short AHD), Govt. of Bihar. In the year 1996, the cases relating to misappropriation of funds from the AHD popularly known as Animal Husbandry Scam came to the fore and many FIRs alleging fraudulent withdrawals against bogus and forged vouchers and receipt of money without supply were registered by the CBI in regard to the payments made from various treasuries and AHD offices of Govt. of Bihar. A public interest litigation was filed in the High Court of Patna and the Hon'ble High Court vide order 11.3.1996 in C.W.J.C. No. 602/96(R) directed the CBI to investigate the cases relating to misappropriation of Govt. funds by officers and suppliers of AHD, Govt. of Bihar. The Income-tax Department was also directed to take action against the suppliers for bogus supplies and withdrawal of money from AHD of Govt. of Bihar. The aforesaid order of the Hon'ble Patna High Court was confirmed by the Hon'ble Supreme Court in its judgment dated 19.3.1996 in SLP No. 58(A)/96. The directions contained in the said order of the Hon'ble High Court in the case of Sushil Kumar Modi v. State of Bihar 1996 (1)(1) P.L.J.R. 5691 at page 581 being relevant are reproduced hereunder:-
"I would, accordingly, direct the Central Bureau of Investigation (CBI) through the Director, toe enquire and scrutinize all cases of excess drawals and expenditure in the department of Animal Husbandry in the State of Bihar during the period 1977-78 to 1995-96 and lodge cases where the drawals are found to be fraudulent in character, and take the investigation in those cases to its logical end, as early as possible, preferably, within four months. The investigations by the State police in cases already instituted shall remain suspended in the meantime.
I would also direct the Income-tax Department through the Chief Commissioner of Income-tax, Bihar, to initiate such action as may be considered fit, necessary and expedient under the Income-tax Act, Wealth-tax Act, etc. against persons whom he reasonably thinks to be involved in the 'scam' and possess unaccountable wealth and property, and take the proceedings their logical conclusions.
The State Government shall provide all necessary facilities to both the CBI and the Income-tax Department in discharge of their duties pursuant to this order."
5. Doranda Police Station, Ranchi, Bihar had earlier registered a case vide FIR No. 080 dated 10.3.1996 which was taken over by the CBI. The FIR was registered by the C.B.I. for commission of offences punishable under Sections 409/420/467/468/471/472/474/120B IPC and Section 13(2) read with Section 13(1)(c) & (d) of P.C. Act, 1988. This FIR is numbered as RC.55(A)/96-Pat. dated 17.4.1996. The following persons are described as accused in the said FIR:-
(1) All Regional Directors, Animal Husbandry, Ranchi posted during the period 1980 to 1990.
(2) All Asstt. Directors, Animal Husbandry, Ranchi posted during the period 1980 to 1990.
(3) Concerned Officers & employees posted in the office of Regional Director, Animal Husbandry, Ranchi during the period 1980 to 1990.
(4) All concerned firms who made supply to AHD during the period 1980 to 1990.
(5) And other unknown.
6. On investigation by the CBI, it transpired that the supplies made by some concerns of Malik family to the AHD were bogus. The A.O. received information that in regard to one of the concerns of Malik family, namely M/s. Malik Enterprises, the CBI has found bogus supplies made to AHD in assessment year 1995-96 and the parties from whom purchases were claimed to have been made admitted to have given accommodation entries of purchase against commission to the said Malik Enterprises. On the basis of the Public Interest Litigation, directions of the Hon'ble Patna High Court, registration of FIR No. 55(A)/96-Pat. against various persons including all the suppliers of AHD, Govt. of Bihar, information about bogus supplies by some of the members of Malik family and the accommodation entries of purchases having been given on payment of commission, to the sister concern of the assessee, viz., Malik Enterprises, the A.O. initiated proceedings Under Section 147 purportedly on the belief that income of the assessee assessable for assessment years 1987-88 to 1991-92 had escaped assessment. The reasons recorded by the A.O. for reopening of the assessment have been reproduced by the Ld. Judicial Member in his order and, therefore, it may not be necessary to reproduce the same. The A.O. issued notices Under Section 148 for the respective assessment years on 10.2.1998 which were served on the assessee on 2.3.1998. The assessee asked the A.O. to give reasons for reopening of the assessments for the respective assessment years. The assessee was asked to file the return of income after which the reasons for reopening of the assessee of the assessee would be communicated to them by the A.O. The assessee informed the A.O. that the return originally filed may be treated in response to the notice Under Section 148 and again demanded the reasons for reopening of the assessment. After some correspondence between the A.O. and the assessee, it is not disputed that the reasons for reopening the assessment as recorded by the A.O. were communicated to the assessee. The assessee was asked to produce the books of account and other documents for the purpose of assessing the escaped income. On the failure of the assessee to produce the books of account and other relevant material, the A.O. proceeded to make the assessments on estimate basis by applying a profit rate of 20% on supplies and by making disallowance of some of the expenditure.
7. The assessee appealed to the C.I.T.(A) against the decision of the A.O. The C.I.T.(A), Central-II, Patna vide consolidated order dated 1.2.2001 held that the basic premises on which the A.O. had reopened the assessments is the FIR field by C.B.I., viz., RC 55(A)/96-Pat in which the name of the assessee does not figure as co-accused. He has, accordingly, held proceedings Under Section 147 are without jurisdiction. The C.I.T.(A) has also pointed out in the impugned order that the A.O. has not recorded any finding about the bogus purchases/supplies and withdrawal of money from the AHD for such supplies by the assessee.
8. The Revenue appealed against the order of the C.I.T.(A) to the Tribunal. Whereas the Ld. Accountant Member has agreed with the view expressed by the C.I.T.(A) that the reopening of assessments for the respective assessment years is without jurisdiction, the Ld. Judicial Member has held that the reopening of assessments made by the A.O. is in accordance with law. There is no opinion expressed by the Ld. Members about the merits of the assessments as the C.I.T.(A) had also refrained from giving his opinion on merits in the light of his quashing orders of re-assessments on legal grounds.
9. The learned counsel for the assessee has filed an application before me pointing out that as per the order of the Tribunal in the case of Hindusthan Livestock Agency, Delhi (a sister concern of the assessee), the A.O. was on election duty to Kerda between 7.4.2001 to 15.5.2001. This appeal has been signed by the same A.O. on 20.4.2001. According to the learned representative of the assessee, when the A.O. was not available in Patna and was away on election duty, how he could have signed the Memo of Appeal in the case of the respondent on 20.4.2001 at Patna!
10. This objection has not taken by the assessee before the Division Bench and is not subject matter of difference of opinion before me. Since the Third Member has limited jurisdiction in regard to the point of difference, I refrain from giving any opinion about the claim made by the assessee's learned representative before me for the first time.
11. As is evident from the facts stated above, the whole issue revolves around the validity of reopening of assessments for the respective assessment years. There seems to be a doubt about the absence of the name of the respondent in the FIR No. RC.55(A)/96-Pat. expressed by the C.I.T.(A). The A.O. as well as the Ld. Judicial Member has specifically pointed out that the assessee is co-accused in FIR No. RC.55(A)/96-Pat. The C.I.T.(A) has recorded a finding to the contrary. I have reproduced the names of the accused mentioned in FIR No. Rc.55(A)/96-Pat. in para-5 above. It is evidence from the names of the accused that whereas no specific name of the suppliers has been mentioned in the said FIR, all the concerned firms who made supplies to AHD, Govt. of Bihar during the period 1980 to 1990 are referred to as the co-accused in FIR No. RC.55(A)/96-Pat. dated 17.4.1996. Since the respondent-firms has admittedly made supplies to AHD during the relevant period, it was wrong on the part of the C.I.T.(A) to hold that the assessee was not one of the co-accused in the FIR, referred to above. Apart from the above, there is no dispute on facts. During the course of hearing of this appeal, on my enquiry, the following information was disclosed in writing and I consider the same as relevant.
That there was a CBI search and seizure operation in the premises of the respondent on 6.7.1997 and again in July, 1998. What documents were seized during the course of such search and seizure operation by the CBI is not borne out from the records. The reopening of assessment was initiated on 10.2.1998. With these facts in mind, I proceed to consider as to whether the A.O. was justified to reopen the assessments for the respective assessment years on the basis of the information available to him on the date of recording the reasons for reopening such assessments.
12. Section 147 enables the A.O. to reopen an assessment after the expiry of four years if the A.O. has reason to believe that by reason of omission or failure on the part of the assessee, the income assessable to tax has escaped assessment. It is well settled principle of law that the A.O. should have material on the basis of which he could form a bonafide belief that the income assessable to tax has escaped assessment for the relevant assessment years. Before embarking upon the task of scrutiny of reasons for reassessment, it would be necessary to refer to some relevant decisions of the Supreme Court and the Calcutta High court in regard to the meaning of the words "reasons to believe" for the purpose of reopening of assessments.
13. In the case of Johri Lal (HUF) v. C.I.T. [(1973) 88 I.T.R. 439 (SC)], their Lordships of the Supreme Court held as under:-
"The formation of the required belief by the Income-tax Officer before proceedings can be validly initiated under Section 34(1)(a) is a condition precedent: the fulfillment of this condition is not a mere formality, it is mandatory, and failure to fulful that condition would vitiate the entire proceedings. Further, the formation of the required belief is not the only requirement: the officer is further required to record his reasons for taking action under Section 34(1)(a) and obtain the sanction of the Central Board or the Commissioner, as the case may be.
14. In the ITO v. Lakhmani Mewal Das [103 I.T.R. 437 (SC)], their Lordships of the Supreme Court held as under:-
"The reasons for the formation of the belief contemplated by Section 147(a) of the Income-tax Act, 1961, for the reopening of an assessment must have a rational connection or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Income-tax Officer and the formation of his belief that there has been escapement of the income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts. It is no doubt true that the court cannot go into the sufficiency or adequacy of the material and substitute its own opinion for that of the Income-tax Officer on the point as to whether action should be initiated for reopening the assessment. At the same line we have to bear in mind that it is not any and every material, howsoever vague and indefinite or distant, remote and far-fetched, which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment. The fact that the words "definite information" which were there in Section 34 of the Act of 1922 at one time before its amendment in 1948 are not there in Section 147 of the Act of 1961 would not lead to the conclusion that action can now be taken for reopening the assessment even if the information is wholly vague, indefinite, far-fetched and remote. The reason for the formation of the belief must be held in good faith and should not be a mere pretence."
15. In the case of C.I.T. v. T.S.PL.P. Chidambaram Chettiar [80 I.T.R. 467 (SC), their Lordships of the Supreme Court held as under:-
"The assessee's father, a money-lender, had advanced various sums of money to P on promissory notes. On July 6, 1932, the principle stood at Rs. 1,38,535 and interest thereon came to Rs. 1,34,965. Taking a further loan of Rs. 2,500, P executed a mortgage of some of his properties for a sum of rs. 2,67,000. Of this only a small amount was repaid. In December, 1940, a suit was instituted against P for recovery of a sum of Rs. 5,50,573 inclusive of interest. In September, 1943, the claim was compromised and on October 5, 1943, a compromise decree was passed for the sum of Rs. 3,50,000 in full satisfaction of the mortgagee's claim. The amount of the decree was payable by October 1, 1944, and the debt due under the decree was subsequently discharged. For the assessment year 1944-45, the assessee was assessed to tax as karta of his Hindu undivided family by the Income-tax Officer, Trichy. Pending the assessment proceedings, that officer received information from the Income-tax Officer, Erode, that P had paid secretly to the mortgagee during the relevant accounting period a sum of Rs. 1,50,000 which was not included in the compromise decree. The assessee, however, denied having received that amount. referring to the assessee's denial the assessing officer recorded in the order sheet on May 27, 1945: "The Income-tax officer, Erode, should be asked to give further details and to ask P to produce evidence of payment. In any event, this should come for consideration only in the assessment year 1945-46 as only the excess over Rs. 2,76,000 plus legal expenses can be treated as interest income in the hands of the assessee and so, the assessment for 1944-45 should not be held up pending further investigation." The assessing officer completed the assessment on February 12, 1946, without including that amount. Thereafter, the officer made further inquiry and on March 9, 1953, issued a notice under Section 34(1)(a) of the Income-tax Act, 1922 for reassessment and included the sum of Rs. 1,50,000 in the income of the assessee for the assessment year 1944-45. The Appellate Assistant Commissioner, on appeal, set aside the order and directed the officer to redo the assessment after giving the assessee an opportunity to cross-examine the parties examined by the officer. The Income-tax Officer, without issuing a fresh notice of reassessment, enquired further into the matter: P's books of accounts were produced to prove the payment to the assessee, some witnesses were examined in the presence of the assessee, and a fresh order of assessment was made. This order was affirmed by the Tribunal. On a reference, the High Court held that the reassessment was valid, and that the officer had acted rightly in giving effect to the order of the Appellate Assistant Commissioner, but that the sum of Rs. 1,50,000 was not taxable income of the relevant year of account, because the amount secretly received must be deemed to have been kept in suspense and as the debtor had not given any direction about the appropriation of that amount it was open to the creditor to appropriate it towards the principal. On appeal to the Supreme Court by both the parties:
Held, (i) that the reassessment proceedings were valid as the requirements of Section 34(1)(a) were fully satisfied. The fact that there was some vague information before the officer at the time of the original assessment that the assessee's father had secretly received a sum of Rs. 1,50,000 from the mortgagor was by itself not sufficient to bring to tax that amount particularly in view of the fact that the assessee had denied the fact. The fact that the officer could have made further inquiry into the matter but did not do so did not take the case out of Section 34(1)(a) as the assessee had failed to place truly and fully all the material facts before him. The remarks made by the officer in the order sheet did not amount to a decision taken by him on the basis of facts found but had to be treated as casual observations."
16. In the case of H.A. Hanji & Co. v. I.T.O. [120 I.T.R. 593], their Lordships of the Calcutta High Court held as under:-
"At the time of issue of the notice of reassessment it is not incumbent on the ITO to come to a finding that income has escaped assessment by reason of the omission or failure of the assessee to disclose fully and truly all material facts necessary for assessment. The belief which the ITO entertains at that stage is a tentative belief on the materials before him which have to be examined and scrutinized on such evidence as may be available in the proceedings for reassessment. There must be some grounds for the reasonable belief that there has been a non-disclosure or omission to file a true or correct return by the assessee resulting in escapement of assessment or in under-assessment. Such belief must be held in good faith, and should not be a mere pretence or change of opinion on inferential facts or facts extraneous or irrelevant to the issue and the material on which the belief is based must have a rational connection or live link or relevant bearing on the formation of the belief."
17. In the case of Sheo Nath Singh v. A.A.C. [82 I.T.R. 147 (SC)], their Lordships of the Supreme Court held as under:-
"The words 'reason to believe' suggest that the belief must be that of an honest and reasonable person based upon reasonable grounds and that the Income-tax Officer may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour. The Income-tax Officer would be acting without jurisdiction if the reason for his belief that the conditions are satisfied does not exist or is not material or relevant to the belief required by the section. The court can always examine this aspect though the declaration or sufficiency of the reasons for the belief cannot be investigated by the court."
18. The Hon'ble Supreme Court in the case of Sri Krishna Pvt. Ltd. v. I.T.O. [221 I.T.R. 538 (SC) held as under:-
"The Income-tax Officer can issue notice under Section 148 of the Income-tax Act, 1961, proposing to reopen an assessment only where he has reason to believe that an account of either the omission or failure on the part of the assessee to file the return or on account of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that year, income has escaped assessment. The existence of the reason(s) to believe is intended to be a check, a limitation, upon his power to reopen the assessment. Section 148(2) imposes a further check upon the said power, viz., the requirement of recording of reasons for such reopening by the Income-tax Officer. Section 151 imposes yet another check upon the said power, viz., the Commissioner or the Board, as the case may be, has to be satisfied, on the basis of the reasons recorded by the Income-tax Officer, that it is a fit case for issuance of such a notice. The power conferred upon the Income-tax Officer by Sections 147 and 148 is thus not an unbridled one. It is hedged in with several safeguards conceived in the interest of eliminating room for abuse of this power by the Assessing Officers. The idea was to save the assessee from harassment resulting from the mechanical reopening of assessments but this protection avails only to those assessees who disclose all material facts truly and fully. Every disclosure is not and cannot be treated to be a true and full disclosure. A disclosure may be a false one or a true one. It may be a full disclosure or it may not be. A partial disclosure may very often be a misleading one. What is required is a full and true disclosure of all material facts necessary for making assessment for that year. All the requirements stipulated by Section 147 must be given due and equal weight.
The enquiry at the stage of finding out whether the reassessment notice is valid is only to see whether there are reasonable grounds for the Income-tax Officer to believe and not whether the omission/failure and the escapement of income is established. It is necessary to keep this distinction in mind."
19. In the case of Raymond Woollen Mills Ltd. v. I.T.O. [236 I.T.R. 34 (SC), their Lordships of the Supreme Court held as under:-
"In determining whether commencement of reassessment proceedings was valid it has only to be seen whether there was prima facie some material on the basis of which the Department could reopen the case. The sufficiency or correctness of the material is not a thing to be considered at this stage.
Held, that the case of the Revenue was that the assessee was charging to its profits and loss account, fiscal duties paid during the year as well as labour charges, power, fuels, wages, chemicals, etc. However, while valuing its closing stock, the elements of fiscal duty and the other direct manufacturing costs were not included. This resulted in undervaluation of inventories and understatement of profits. This information was obtained by the Revenue in a subsequent year's assessment proceedings. The commencement of reassessment proceedings was valid."
20. In the case of S. Narayanappa v. C.I.T. [63 I.T.R. 219 at page 222 (SC)] it was held as under:-
".....the sufficiency of the grounds which induced the Income-tax Officer to act is not a justiciable issue. It is of course open for the assessee to contend that the Income-tax Officer did not hold the belief that there had been such non-disclosure. In other words, the existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. Again the expression "reason to believe" in Section 34 of the Income-tax Act does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The belief must be held in good faith: it cannot be merely a pretence. To put it differently, it is open to the court to examine the question whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section."
21. In the case of Ganga Saran & Sons P. Ltd. v. I.T.O. [130 I.T.R. 1 at page 11 (SC), their Lordships of the Supreme Court held as under:
"It is well settled as a result of several decisions of this court that two distinct conditions must be satisfied before the ITO can assume jurisdiction to issue notice under Section 147(a). First, he must have reason to believe that the income of the assessee has escaped assessment and, secondly, he must have reason to believe that such escapement is by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. If either of these conditions is not fulfilled, the notice issued by the ITO would be without jurisdiction. The important words under Section 147(a) are "has reason to believe" and these words are stronger than the words "is satisfied". The belief entertained by the ITO must not be arbitrary or irrational. it must be reasonable or in other words it must be based on treasons which are relevant and material. The court, of course, cannot investigate into the adequacy of sufficiency of the reasons which have weighed with the ITO in coming to the belief, but the court can certainly examine whether the reasons are relevant and have a bearing on the matters in regard to which he is required to entertain the belief before he can issue notice under Section 147(a). If there is no rational and intelligible nexus between the reasons and the belief, so that, on such reasons, no one properly instructed on facts and law could reasonably entertain the belief, the conclusion would be inescapable that the ITO could not have reason to believe that any part of the income of the assessee had escaped assessment and such escapement was by reason of the omission or failure on the part of the assessee to disclose the assessee to disclose fully and truly all material facts and the notice issued by him would be liable to be struck down as invalid."
22. In the case of Phool Chand Bajrang Lal v. ITO [203 I.T.R. 456 at 477 (SC)], their Lordships of the Supreme Court held as under:-
"From a combined review of the judgments of this court, it follow that an Income-tax Officer acquires jurisdiction to reopen an assessment under Section 147(a) read 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 assessee to make a true and full disclosure of all material facts necessary for his assessment during the concluded assessment proceedings, any of his income, profits or gains chargeable to income-tax has escaped assessment."
It was further held at page 478 of 203 I.T.R. by the Hon'ble Supreme Court-
"We are not persuaded to accept the argument of Mr. Sharma that the question regarding truthfulness of falsehood of the transactions reflected in the return can only be examined during the original assessment proceedings and not at any stage subsequent thereto. The argument is too broad and general in nature and does violence to the plain phraseology of Sections 147(a) and 148 of the Act and is against the settled law laid down by this court. We have to look to the purpose and intent of the provisions. One of the purposes of Section 147 appears to us to be to ensure that a party cannot get away by willfully making a false or untrue statement att eh time of original assessment and when that falsity comes to notice, to turn around and say 'you accepted my lie, now your hands are tied and you can do nothing'. It would be a travesty of justice to allow the assessee that latitude."
23. The legal principles that emerge from the aforementioned decisions may be summarized as under:-
(i) That for valid reopening of assessment after four years, the A.O. should have reason to believe that the income of the assessee had escaped assessment by reason of omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. It is a condition precedent for assumption of jurisdiction Under Section 147(a).
(ii) The condition that the A.O. had reason to believe that the income of the assessee had escaped assessment is question of jurisdiction, a vital thing which can always be investigated by Court. The words 'has reason to believe' in Section 147 are stronger than the words 'is satisfied'. The belief entertained by the A.O. must not be arbitrary or irrational. It must be reasonable or, in other words, it must be based on reasons which are relevant and material.
(iii) The 'reason to believe' does not mean 'reason to suspect'. The expression 'reason to believe' in Section 147 does not mean purely subjective satisfaction on the part of the A.O. The belief must be held in good faith; it cannot be merely a pretence. There must be a rational connection between the reasons for the belief and the relevant material.
(iv) The belief of the Officer should not be a product of imagination or speculation. There must be reason to induce the belief. The belief must be of an honest and reasonable person based upon reasonable grounds.
(v) The officer may act on direct or circumstantial evidence; but his belief must not be based on mere suspicion, gossip or rumour.
(vi) The belief that is required for reopening of assessment is that of the A.O. The sufficiency of the reasons for the belief cannot be investigated by the Court.
(vii) At the time of issuing of reassessment notice, it is not necessary for the A.O. to come to a conclusive finding that the income has escaped assessment. Such belief obviously at that stage is a tentative belief on the materials before him to be examined and scrutinized on such evidence as may be available in the proceedings for reassessment. But there must be some ground for reasonable belief that there had been a non-disclosure etc. of material facts resulting in escapement of income.
(ix) For determining whether initiation of reassessment proceeding was valid, it is only to be seen whether there was prima facie some material on the basis of which the department could reopen the case.
(x) The sufficiency or the correctness of the material is not a thing to be considered at this stage. Since the belief is that of the A.O., the sufficiency of the reasons for forming the belief is not for the Court to judge, but it is open to an assessee to establish that there, in fact, existed no belief or that the belief was not at all a bonafide one or was based on vague, irrelevant and non-specific information.
24. on the analysis of the above legal principles, it emerges that whereas the 'reason to belief' cannot be equated with the 'reason to suspect', it is equally not necessary that there should be ample evidence on record to establish the actual escapement of income so as to form a reasonable belief that the income of the assessee has escaped assessment. One has to keep in mind the distinction between suspicion & belief and between belief & conclusive finding based on evidence. The 'belief' falls in between the suspicion and conclusive finding based on evidence. In order to determine as to whether the A.O. had a bonafide belief about the escapement of income of the assessee, it has to be considered as to whether the facts and circumstances justify the formation of the belief in contrast to suspicion. There has to be some material on record on the basis of which the A.O. formed a bonafide belief that the income of the assessee has escaped assessment. In other words, the material on the basis of which belief is formed must be in the nature of prima facie evidence, direct or circumstantial, giving rise to belief in the mind of the A.O. about the escapement of income. Testing the facts and circumstances of this case in the light of the aforementioned principles of law, one will necessarily have to consider the reasons recorded by the A.O. for reopening of the assessments. The reasons recorded for assessment year 1988-89 have been quoted by the Ld. Judicial Member in his order. At this state there may be reproduced hereunder for the sake of ready reference:-
"Subsequent to transfer of jurisdiction the case records of the assessee have been received from the ACIT, Inv. Circle-10(1), New Delhi. The partners of the assessee as per records are Sandeep Malik and Kamal Malik who are family members of Shri Vijay Malik. As his concern M/s. Malik Enterprises are prominent accused persons in the case filed by the CBI relating to misappropriation of funds from the AHD, Govt. of Bihar, for instance in the case RC No. 32(A)/96-Pat, it has been found on inquiry that the purchases claimed by M/s. Malik Enterprises for the financial year 95-96 were bogus and the parties from whom purchases were claimed to have been made admitted to have given an accommodation entry of purchases against commission of M/s. Malik Enterprises. A similar case has also been registered against the assessee in which it has been alleged that fraudulent withdrawals were made from AHD, Govt. of Bihar, without actual supply. One of such cases in R C No. 55(A)/96-Pat.
The filing of these cases against the assessee and related concerns/individuals gave rise to a reasonable belief that it has received payments from AHD, Govt. of Bihar, against little or no supply. It also gave fries to a reasonable belief that the expenses incidental to supply such as purchases and expenses on transportation were wrongly claimed by the assessee to avoid a higher returned income and higher incidence of tax. As per return for assessment year 89-90 filed and available on record the assessee has shown to have received on total payment of Rs. 7998500/- against sales whereas the purchases and freight expenses have been claimed at Rs. 5958454 and Rs. 580594/- respectively. The assessment for assessment year 87-88 was not made under Section 1453(3) or 147 of the Act.
On account of above, I have reason to belief that the assessee has under stated its profit for this financial year by inflated purchases and other expenses as a result of which a large portion of its income escaped assessment within the meaning of Section 147 of the Income-tax Act."
25. The reasons for other assessment years are more or less same. Question before me is as to whether on the basis of facts of this case the A.O. had reason to believe that the income of the assessee had escaped assessment. It is not disputed that in the year 1996, the cases relating to misappropriation of funds from Animal Husbandry Department, Govt. of Bihar came to the fore and many FIRs alleging fraudulent withdrawals against bogus and forged vouchers and receipt of money without supply were registered by the CBI in regard to the payments made from various treasuries and AHD of Govt. of Bihar. A public interest litigation had been filed in the High Court of Patna and the Hon'ble High Court had issued directions to the CBI and the Income-tax Department to initiate action as may be considered fit. The direction of the Patna High Court was confirmed by the Hon'ble Supreme Court in the judgment dated 19.3.1996 in SLP No. 58(A)/96. The directions of the Hon'ble High Court have been reproduced by me in para-4 of this order. In pursuance of the directions of the Hon'ble High Court, CBI had registered a case against various officers of the AHD and all concerned firms which had made supplies to AHD during the period 1980 to 1990. The assessee being one of the suppliers it is futile to dispute that the assessee firm was one of the accused in FIR No. 55(A)/96. The payments received by the assessee from AHD in assessment years 1987-88 to 1991-92 are as under:-
Assessment year Payment received _______________ __________________ 1987-88 Rs. 35,77,035 1988-89 Rs. 82,53,500 1989-90 Rs. 79,98,500 1990-91 Rs. 42,29,700 1991-92 Rs. 42,29,700
The appellant-firm is one of the concerns of Malik family. In respect of Malik Enterprises and Hindusthan Livestock Agency, Delhi, not only material was collected by the CBI about the fraudulent withdrawals from AHD, Govt. of Bihar but partners of the firm had also accepted that they were involved in the fraudulent withdrawals. Some parties had also certified that Malik Enterprises, one of the concerns of the Malik family, had paid commission for getting bogus bills for the purchase of goods purportedly supplied to AHD, Govt. of Bihar. The question for consideration is as to whether in this background any person could have a reasonable belief that assessee, a concern of Malik family, was also involved in withdrawal of money from AHD against little supplies or no supplies. I have referred to various decisions of the Supreme Court wherein it has been specifically laid down that the power to reopen an assessment by the A.O. is subject to the condition that he has reasons to believe that the income as escaped assessment. It is also established from judicial principles laid down by the Hon'ble Supreme Court referred to elsewhere in this order that the formation of belief need not necessarily result into reassessment. The material sufficient for formation of the belief need not be sufficient for making the assessment/reassessment. The A.O. should not act arbitrarily, nor should he pretend of having a reasonable belief for reopening of an assessment. Reopening is also not valid if there is no live link or nexus between the material relied upon and the perception of the belief.
26. In this case, the fodder scam had become well known not only in the State of Bihar but because of its publicity all over India. The Hon'ble High Court had also admitted the public interest litigation and directed the CBI and the Income-tax Department to investigate and initiate such action as may be considered fit. There was evidence on record to establish the involvement of members of the Malik family in the scam. The assessee had withdrawn substantial amount from AHD, Govt. of Bihar. When all the concerned officers of the AHD have been booked for fraud in regard to the payments made for bogus supplies or little supplies, when the Hon'ble High Court had directed the CBI and the Income-tax Department to take action against the officers and the suppliers, when the members of the Malik family had admitted to be involved for the fraudulent withdrawals, when some of the parties had confirmed that they had accommodated one of the concerns of Malik family of giving bogus bills on payment of commission, was it reasonable for the A.O. to believe that the assessee, one of the concerns of the Malik family, would not have indulged in any such fraudulent withdrawals for no supply or little supplies to the AHD, Govt. of Bihar. In my considered view, it would not have been reasonable for the assessing officer to believe that the assessee was an exception to the fraudulent withdrawals from A.H.D., Govt. of Bihar. In the light of large scale fraud detected in the Deptt of A.H., Govt. of Bihar, the belief of the A.O. that the assessee had inflated purchase and expenses was a reasonable belief of a prudent person on the facts and in the circumstances of this case.
27. As has been laid down by the Hon'ble Supreme Court in several cases referred to elsewhere in this order, the material on the basis of which a reasonable belief is formed that income has escaped assessment need not necessarily result into assessment/reassessment. The material available at the time of formation of belief may not be sufficient for making the reassessment. But one has to consider as to whether the said material was sufficient for formation of the belief, the belief of an honest person. As pointed out earlier, the provisions of Section 147 require that the A.O. should have reason to believe that any income chargeable to tax has escaped assessment. The word 'reason' in the phrase 'reason to believe' would mean cause or justification. If the A.O. has a cause to think or suppose that income had escaped assessment he can be said to have reason to believe that such income had escaped assessment. The reason to believe cannot mean that the A.O. should have finally ascertained the facts by legal evidence. The justification for his belief is not to be adjudged from the standard of proof required for coming to a final decision. A belief though justified for the purpose of initiation of the proceedings Under Section 147, may ultimately stand altered after the hearing and while reaching the final conclusion on the basis of intervening scrutiny. At that stage where he finds cause or justification to believe that such income has escaped assessment, the A.O. is not required to base his belief on any final adjudication of the matter. In my considered view on the facts of this case, any reasonable person would believe that the assessee-firm, a unit of Malik group, would not be an exception to the fraudulent withdrawals from the AHD, Govt. of Bihar. As pointed out earlier, validity of initiation of proceedings is dependent on the formation of the belief. It gives the A.O. the right to reopen a completed assessment. The provisions of the I.T. Act clearly provides the procedure for making the reassessment after the initiation has validly been made. Provisions of Section 143(2) and (3) are applicable in respect of making a reassessment after having been validly initiated. Even where proceedings are reopened validly, the assessee is given an opportunity to establish that there has been no escapement, as perceived by the A.O. In this case also after the proceedings were initiated by the A.O., it was open to the assessee to establish by necessary evidence that the perception of the I.T.O. about the escapement of income on the basis of the information available with him was incorrect and/or that in any case the assessee had not inflated the purchases or expenses or made withdrawals from AHD, Govt. of Bihar without supplies. That could be done by production of evidence of purchases, expenses and supplies to the department. So, it is not that when the proceedings are validly initiated, the assessee loses the right of defence. It is in the light of this position of law, one has to consider the validity of the initiation of proceedings for reopening of an assessment. One may not be confused to test the basis for reopening with the final outcome of reassessment on the basis of the material on which the A.O. formed the belief that income had escaped assessment.
28. Taking the totality of the facts and circumstances of this case into consideration, in the light of the legal principles laid down by the Hon'ble Supreme Court referred to elsewhere in this order, I am of the considered view that the A.O. was justified in forming the belief that the income of the assessee had escaped assessment for the respective assessment years. The C.I.T.(A) has quashed the assessments on the legal ground and has not deliberated upon the merits of assessments. The Ld. Members of the Division Bench have also decided the legal issue only. My jurisdiction being limited to the point of difference between the Members, I have expressed the opinion about the validity of the initiation of the proceedings only and not about the merits of the addition. My conclusion is that on the basis of circumstantial evidence available with the A.O. at the time of initiation of proceedings, any reasonable person would believe that the income of the assessee in regard to supplies to A.H.D., Govt. of Bihar had escaped assessment for the respective assessment years especially when there was no material on record to suggest that the assessee firm would be an exception to the general trend of withdrawals from the said department. I, therefore, agree with the conclusion of the learned Judicial Member that the reopening of assessment for the respective assessment years has validly been initiated.
29. The records may be placed before the Division Bench for announcing the majority judgment.