Andhra HC (Pre-Telangana)
Commissioner Of Income-Tax vs Rama Bai on 1 April, 1991
Equivalent citations: [1991]190ITR342(AP)
Author: P. Venkatarama Reddi
Bench: P. Venkatarama Reddi
JUDGMENT P. Venkatarama Reddi, J.
1. The following question of law has been referred by the Income-tax Appellate Tribunal under section 256(1) of the Income-tax Act, 1961, for the decision of this court :
"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the reassessment proceedings initiated by the Income-tax Officer in this case were not valid in law ?"
The facts giving rise to this reference are these : An extent of acre 42 of land situate at Nacharam village near Hyderabad which belonged to the respondent-assessee was acquired by the State Government in the year 1964. By an award dated November 20, 1965, the assessee was awarded compensation of Rs. 25,240 including interest. Later, on a reference to the interest. The decree of the civil court was confirmed by this court by judgment dated October 26, 1970. The assessee did not file any return of income under section 139 of the Act. However, he filed a return on February 17, 1972, i.e., after the period prescribed by section 139(4), disclosing an income of Rs. 3,599 on the compensation amount. On receipt of this return, the Income-tax Officer initiated proceedings under section 147(a) of the Act for the year ending on the March 31, 1965, treating the return filed by the assessee as an invalid return. The reasons for taking action under section 147(a) could be seen from the letter addressed by the Income-tax Officer seeking sanction of the Commissioner. The Income-tax Officer stated therein that the land in question is not agricultural land and has not been subjected to agricultural operations and hence the capital gains were chargeable to income-tax. He also referred to the fact that the return filed by the assessee was an invalid return. After referring to these facts, he stated that he had reason to believe that the income chargeable to tax had escaped assessment by reason of the omission or failure on the part of the assessee to make a valid return under section 139. Thereafter, notice under section 147(a) was issued on April 21, 1973. The assessment was finalised on March 4, 1978, subjecting the capital gains arising out of the compensation received by the assessee under the Land Acquisition Act to tax under the provisions of the Income-tax Act. The assessment was made on the taxable income of Rs. 2,10,240. On appeal by the assessee to the Commissioner of Income-tax (Appeals), the Commissioner of Income-tax (Appeals) held that, in view of the law laid down by the Full Bench of this court in Officer-in-charge (Court of Wards) v. CWT (1968) 72 ITR 552 which was holding the field as the time of initiating the proceedings under section 147(a), the Income-tax Officer could not have had reason to believe that the land in question was not agricultural land. The assessment under section 147(a) was, therefore, cancelled. The Department appealed against this order to the Income-tax Appellate Tribunal. The Tribunal confirmed the order to the Commissioner of Income-tax (Appeals). The Judicial Member held that the Income-tax Officer could not reasonably come to a belief that income had escaped assessment in the face of the Full Bench judgment of this court in Officer-in-charge (Court of Wards) v. CWT (1968) 72 ITR 552. The learned Accountant Member pointed out that the reasons in support of the Income-tax Officer's conclusion that the land was not agricultural land were not spelt out at all by him and that there was no material on record before the Income-tax Officer by which he could form the belief that the land in question was non-agricultural land on the application of the tests laid down by the full Bench in Officer-in-charge (Court of Wards) v. CWT and hence income had escaped assessment. The Tribunal also went into the second question, viz., whether the land was agricultural land by applying the tests laid down but the Supreme Court in CWT v. Officer-in-charge (Court of Wards) (which was a judgment rendered on appeal against the judgment in Officer-in-charge (Court of Wards) v. CWT (FB) and held that the land was agricultural in character. On this second aspect, it appears that this court called for a statement of case under section 256(2) and counsel are unable to tell us the number of the reference case. Hence, we are disposing of this reference separately.
2. Before we take up the question for consideration, it is appropriate to advert briefly to the Full Bench decision of this court in Officer-in-charge (Court of Wards) v. CWT (1969) 72 ITR 552 and the judgment of the Supreme Court in CWT v. Officer-in-charge (Court of Wards) . The Full Bench of this court in Officer-in-charge (Court of Wards) v. CWT (1969) 72 ITR 552, laid down certain principles for ascertaining whether a parcel of land is agricultural or non-agricultural in character. The Full Bench, inter alia, held that the actual user of the land for agriculture is one of the indicia for determining the character of the land as agricultural land. At the same time, the Full Bench held that neither actual cultivation of the land nor the nature of the products raised are decisive tests and that the capability of the land being put to agricultural use can also be taken into consideration. This judgment was the subject-matter of appeal before the Supreme Court in Civil Appeals Nos. 2552-2556 of 1969. The judgment is reported in CWT v. Officer-in-charge (Court of Wards) . The Supreme Court held that the land can be treated as agricultural land if such land can be said to be either actually used or ordinarily used or meant to be used for agricultural purposes. In other words "agricultural land" must have a connection with agricultural user or purpose. The Supreme Court pointed out that the court cannot dispense with credible evidence of at least appropriation or setting apart of the land for a purpose which can be regarded as agricultural and for which the land under consideration can be reasonably used without alteration of its character. The Supreme Court stressed that what is required to be shown is connection with an agricultural purpose and user and not the mere possibility of user of the land. The Supreme Court observed that the Full Bench of the High Court did not examine the question from a correct angle and the Full Bench fell into an error of law in stating that it was enough to show capability of the land being used for agricultural purpose. The Full Bench judgment of this court was, therefore, set aside and the matter remitted to the Tribunal. Thus, it may be noticed that the Supreme Court did not approve of all the tests laid down by this court for the purpose of determining the real nature of the land. The aforementioned judgment of the Supreme Court was rendered on August 6, 1976, i.e., during the interregnum between the issuance of section 147 notice and the date of final order.
3. We will now proceed to consider the question referred to us.
4. Learned standing counsel for the Income-tax Department, Mr. Ashok, contended that the mere fact that a return of income was not field by the assessee even till the expiry of the period prescribed by section 139(4) is itself sufficient to invoke the jurisdiction under section 147(a) and that the conclusion of the Tribunal that the Income-tax Officer had no reason to form the belief that the income had escaped assessment is unsustainable in law. It is also contended by him that the question whether the Income-tax Officer could have had reason to believe can be decided in the light of the law laid down by the subsequent decision of the Supreme Court, because the Supreme Court had merely clarified the existing legal position. On the other hand, it is contended by Sri Ramam, learned counsel for the respondent-assessee that, in the face of the Full Bench decision of this court in Officer-in-charge (Courts of Wards) v. CWT (1969) 72 ITR 552, which held the field on the date of initiation of the proceedings in 1973, there was no scope to form the belief that the land in question was non-agricultural land, that the factum of pendency of appeal against the said judgment is no ground to ignore the said decision and that the legal position as laid down by the Full Bench of this court as on the date of initiation of the proceedings has to be taken into account irrespective of the reversal or modification of the judgment subsequently by the Supreme Court.
5. The expression "reason to believe" occurring to section 34 of the old Income-tax Act (1922) corresponding to section 147 of the 1961 Act was interpreted by the Supreme Court in Sheo Nath Singh v. AAC of I.T. . The Supreme Court observed (p. 153) :
"There can be no manner of doubt that the words 'reason to believe' suggest that the belief must be that of an honest and reasonable person based upon the reasonable grounds and that the Income-tax Office 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."
The interpretation of section 147(a) and in particular the expression "reason to believe" was the subject-matter of the Supreme Court's decision in ITO v. Lakhmani Mewal Das . The Supreme Court held (p. 445) :
"It would appear from the perusal of the provisions reproduced above that two conditions have to be satisfied before an Income-tax Officer acquires jurisdiction to issue notice under section 148 in respect of an assessment beyond the period of four years but within a period of eight years from the end of the relevant year, viz., (1) the Income-tax Officer must have reason to believe that income chargeable to tax has escaped assessment, and (2) he must have reason to believe that such income has escaped assessment by the reason of the omission or failure on the part of the assessee (a) to make a return under section 139 for the assessment year to the Income-tax Officer, or (b) to disclose fully and truly material facts necessary for his assessment for that year. Both these conditions must co-exist in order to confer jurisdiction on the Income-tax Officer. It is also imperative for the Income-tax Officer to record his reasons before initiating proceedings as required by section 148(2). Another requirement is that before notice is issued after the expiry of four years from the end of the relevant assessment years, the Commissioners should be satisfied on the reasons recorded by the Income-tax Officer that it is a fit case for the issue of such notice."
It was further held (pp. 445, 446) :
The grounds or reasons which lead to the formation of the belief contemplated by section 147(a) of the Act must have a material bearing on the question of escapement of income of the assessee from assessment because of his failure or omission to disclose fully and truly all material facts. One there exist reasonable grounds for the Income-tax Officer to form the above belief, that would be sufficient to clothe him with jurisdiction to issue notice. Whether the grounds are adequate or not is not a matter for the court to investigate. The sufficiency of the grounds which induce the Income-tax Officer to act is, therefore, not a justiciable issue. It is, of course, open to the assessee to contend that the Income-tax Officer did not hold the belief that there had been such non-disclosure. The existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. The expression 'reason to believe' does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The reason must be held in good faith. It cannot be merely a pretence. It is open to the court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose of the section. To this limited extent, the action of the Income-tax Officer in starting proceedings in respect of income escaping assessment is open to challenge in a court of law."
The Supreme Court explained that (p. 448) "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". The Supreme Court, while emphasising that the court cannot go into the sufficiency or adequacy of the material, however, cautioned 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 Supreme Court highlighted the significance of the words "reason to believe" in contradistinction to the words "reason to suspect".
6. It is in the light of these principles that we have to decide the question whether the power under section 147(a) has been lawfully invoked by the Income-tax Officer. The reason noted by the Income-tax Officer for resorting to section 147(a) was that the land in question was non-agricultural land and the assessee had not filed a valid return of income disclosing the capital gains. These reasons are certainly relevant reasons having a direct nexus with the formation of belief that the income had escaped assessment to tax. The next question is whether the opinion of the Income-tax Officer that the land is non-agricultural in nature is based upon reasonable grounds or, to put it differently, whether the prima facie view of the Income-tax Officer regarding the non-agricultural character of the land is based upon definite and relevant material or information. If the Income-tax Officer had acted on mere suspicion and if reasonable person could not have drawn even a prima facie conclusion that the land in question is non-agricultural on the basis of the material available to him, there could be no valid formation of belief in the eye of law. In order to examine this aspect, let us assume for the time being that the law declared by the Full Bench in Officer-in-charge (Courts of Wards) v. CWT (1968) 72 ITR 552 (AP), is the correct law. The Income-tax Officer refers to the fact that no agricultural operations were being carried out on the land. Whether the land was being put to agricultural use is certainly a relevant consideration even according to the Full Bench judgment, though the absence of it is not conclusive. In the award of the Land Acquisition Officer which finds a reference in the Income-tax Officer's note, there is a finding that the land under acquisition is unsuitable for agriculture (vide para 6 of the order of the Accountant Member). In the civil court's judgment, there is no comment on this part of the finding, though the civil court observed that there was no basis for fixing the value of the land at a low rate of Rs. 500 per acre. The revenue records (Pahani Patriks) indicate that, for some years preceding the date of acquisition, there was no cultivation at all and in some years, grass was said to have been grown ..... (vide para 6 of the Judicial Member's order). We cannot assume that these revenue records were not looked into by the Income-tax Officer before taking the decision to initiate proceedings under section 147(a). Nor is it expected of him to specifically spell out in the course of preliminary examination or investigation. Having regard to these facts, we are unable to say that the Income-tax Officer had formed the belief without definite or relevant material before him or that the reasons given by the Income-tax Officer for the formation of belief had no material bearing on the question of escapement of income. The Income-tax Officer cannot be said to have acted on mere suspicion in observing that the land in question is non-agricultural and hence income had escaped assessment. The prima facie finding of the Income-tax Officer is not his mere ipse dixit. The material or information on which he acted furnishes a "live link" between the reason and belief. It is well to remember that neither the Tribunal nor this court can go into the adequacy or sufficiency of the reasons which induced the Income-tax Officer to form the requisite belief. If the belief formed by the Income-tax Officer is backed up by relevant reasons which in turn is based upon some material having a nexus with that reason, that is enough to sustain the notice under section 147(a). The fact that certain other relevant consideration were not taken into account by the Income-tax Officer or that he did not apply each and every test laid down by this court in Officer-in-charge (Court of Wards) v. CWT (1969) 72 ITR 552 (FB) before coming to the prima facie conclusion is no ground to invalidate the notice. Some of the tests were not conclusive and certain other tests involved investigation into factual details. In that state of things, if the Income-tax Officer formed the belief that the lands were non-agricultural, we cannot way that he acted without basis or on irrelevant consideration. It may be that the view taken by the Income-tax Officer at the initial stage may turn out to be wrong ultimately on the basis of a further enquiry that the Income-tax Officer is called upon to make pursuant to the notice under section 147(a). But that has no bearing on the question whether the Income-tax Officer had reason to believe that income had escaped assessment to tax, whether the Income-tax Officer had reason to believe cannot be judged from the ultimate result of the proceedings before the Income-tax Officer and the higher forums. What is required is "reason to believe", but not the established factum of escapement of tax. At the stage anterior to issuing notice under section 147(a), we should not expect the Income-tax Officer to embark upon an elaborate enquiry to determine the character of the land in question. As we have already noted, the Full Bench of this court did not lay down in unqualified terms that a particular parcel of land should or should not be treated as agricultural land. It is essentially a question of fact or at best, a mixed question of law and fact. In the very nature of things, the answer to this question depends upon further probe. A definite finding could be arrived at only after a full-fledged enquiry in which the assessee will have his say. In that enquiry, the assessee may be able to prove that the land was being actually cultivated or that the land had potentiality of being put to agricultural use in which case the basis of the Income-tax Officer's observation will fall to the ground. But, that stage will come later. It is not in dispute that we have to see the state of facts obtaining on the date of formation of "belief" by the Income-tax Officer as a prelude to setting in motion the proceedings under section 147. If so, we are of the view that the Income-tax Officer had some basis and some material which are neither irrelevant nor extraneous for forming the belief which he did before issuing the notice under section 147. In effect, if the Tribunal's view is to be accepted, we will be traversing the arena of sufficiency of the material and reasons and according to the well-settled interpretation of section 147(a), this cannot be permitted to be done. Though the Tribunal took note of the correct principles governing the interpretation of section 147, the Tribunal misdirected itself in the actual application of the principles. We, therefore, disagree with the view expressed by the Tribunal. We are of the opinion that he notice issued by the Income-tax Officer under section 147(a) cannot be said to be invalid or without jurisdiction.
7. In view of what we have said above, it is not necessary for us to deal with the second limb of the argument of learned standing counsel that the law laid down in ITO v. Lakhmani Mewal Das has to be projected into the consideration of the issue whether the Income-tax Officer had "reason to believe".
8. Hence, we answer the question in the negative, that is to say, in favour of the Revenue and against the assessee. No costs.