Reopening U/S 147 Not Valid If Certain Safeguards Not Followed By Revenue As Provided In section 147,148 And 151 of Income Tax Act, 1961
The important safeguards provided in sections 147,148 and 151 has not to be treated lightly by the concerned Assessing Officer and CIT as held in Chuggamal Rajpal Vs. S.P.Challia & others decided by the Hon’ble Supreme Court Dt. 21.01.1971 Certain safeguards that has to be followed by ITO as well as CIT summarized as under .
1. There must be prima facie grounds for taking action u/s 147 and 148 of the Act .
2. The Income Tax Officer is not allowed to have a vague feeling that the income has escaped assessment .
3. The report which has to be submitted to the commissioner u/s 151 must mention the reasons for coming to the conclusion that it is a fit case for issue of notice u/s 148 of the Act .
4. The commissioner is not authorized to accord his permission mechanically u/s 151 of the Act .
5. The ITO has to record reasons before issue of notice u/s 148 and he has to have reasons to believe upto his satisfaction .
6. Report to the commissioner u/s 151 must disclose existence of grounds for issue of notice u/s 148 of the Act .
7. Commissioner must apply mind before granting permission u/s 151 of the Act and must record his satisfaction .
8. The Income tax officer should have any material before him which could satisfy the requirement of section 147 of the Act .
9. Both ITO as well as CIT has not to appear to have taken the duty imposed on them under the provisions of little importance .
Full text of the judgement for the readers
Supreme Court of India
Chhugamal Rajpal vs S. P. Chaliha & Ors on 21 January, 1971 Equivalent citations: 1971 AIR 730, 1971 SCR (3) 342
Author: K Hegde
Bench: Hegde, K.S.
Income-tax Act, 1961, s. 147, 148 and 151-Issue of notice under s. 148-Assessment of escaped income-Requirement of s.147(a) and (b) must be satisfied and reasons recorded before the issue of notice under s. 148-Report to Commissioner under s. 151(i) must disclose existence of grounds for issue of notice-Commissioner must apply mind before granting sanction.
Brief Facts of the case
The appellant, a partnership firm, filed its return of income for the assessment year 1960-61 and subsequently produced before the Income tax Officer its relevant books of accounts and papers.It also produced before him the
statement showing various creditors from whom it had borrowed on Hundis during the accounting year in question, giving full names and addresses of the alleged creditors.
After enquiry the Income tax Officer made an assessment. On June 3, 1966 the Income-tax Officer issued to the appellant a notice under s. 148 of the Income-tax Act, 1961. The notice was issued after four years but before 8 years of the end of the original assessment year.
The appellant challenged the validity of the notice as well as the proceedings taken on the strength of that notice in a writ petition under Arts. 226 and 227 of the Constitution. The High Court dismissed the petition.
By special leave appeal was filed in this Court. On direction given by the Court the report submitted by the Income-tax Officer to the
Commissioner and the Commissioner’s order thereon were produced.In the report it was said that it appeared that the alleged creditors of the appellant were name lenders and transactions were bogus; hence proper investigation regarding those loans was necessary. Question No. 8 on the report was whether the Commissioner was satisfied that the case was fit for the issue of notice under s. 148. Against this the commissioner had noted ‘yes’. On these facts this Court,
HELD : Under s. 148 and s. 151(2) the Income-tax Officer Must record his reasons for issuing the notice under s. 148.
There must be prima facie grounds for taking action under s. 148.
Further before issuing such a notice the provisions of cis. (a) and (b) of s. 147 must be satisfied.
In this case the Income-tax Officer appears to have had a vague feeling that the transactions were bogus and that the alleged creditors were only name lenders. According to him proper investigation regarding the loans was necessary.
That is not the same thing as saying that there are reasons to issue notice under s. 148.
In these circumstances it could not be held that the Income-tax Officer had any material before him which could satisfy the requirements of either cl. (a) or cl. (b) of s. 147. Therefore he could not have issued a notice under s.148.
Further the report submitted by him under s. 151(2) did not mention any reason for coming to the conclusion that it was a fit case for the issue of the notice under s. 148. The Commissioner also mechanically accorded permission. Thus the important safeguards provided in ss. 147 and 151 were lightly treated by the income-tax Officer as well as by the Commissioner.
The appeal must accordingly be allowed.
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1311 of 1967. Appeal by special leave from the judgment and order dated January 17, 1967 of the Patna High Court in C.W.J.C. No. 952 of 1966.
C. Chagla, N. D. Karkhanis, S. P. Chowdhury, Bhuvanesh Kumari, for the appellant.
C. Manchanda, R. N. Sachthey and B. D. Sharma, for the respondent.
The Judgment of the Court was delivered by Hegde, J. This is an assessee’s, appeal by special leave against the judgment of the High Court of Patna dismissing in limini its writ petition under Arts 226 and 227 of the Constitution of India.
The assessee is having construction contracts under the Railways as well as the Government. It is a partnership firm. For the assessment year 1960-61, relevant to the accounting year 1959-60, after the assessee submitted its income-tax return, it was asked by the Income-tax Officer during the income-tax assessment proceedings to produce before him its books of account and the other relevant papers. The assessee also produced before him a statement showing various creditors from whom it had borrowed on Hundis during the accounting year in question. In that statement it gave the full names and address of the alleged creditors. After enquiry, the assessee’s total income was assessed at Rs. 69,886/-. On June 3, 1966, the 1st respondent (Income-tax Officer Ward ‘A’,, Muzaffarpur) issued to the assessee a notice under s. 148 of the Indian Income-tax Act, 1961. The material portion of that notice reads as follows “Notice under s. 148 of the Income-tax Act, 1961. Income-Tax Officer, Muzaffarpur Dated, the 3-6-1966.
TO M/s. Chugamal Rajpal, Muzaffarpur.
Whereas (1) have reason to believe that your income chargeable the income of 1960-1961 in respect of which you are assessable to tax for the assessment year 1961-62 has escaped assessment within the meaning of section 147 of the Income Tax Act, 1961. I therefore propose to re-assess the income for the said assessment year and I hereby require you to deliver to me within 30 days from the date of service of this notice a return in the prescribed form of your income The income assessable relevant to the assessment year 1960- of in respect of which you are assessable for the said assessment year.
2. The notice is being issued after obtaining the necessary satisfaction of the Commissioner of IncomeTax, Bihar and Orissa, Patna.
Sd/- S. P. Chaliha Income-Tax Officer, Ward A, Muzaffarpur.”
The assessee challenged the validity of that notice as well as proceedings taken on the strength of that notice on various grounds. As we are accepting the contention of the assessee that the impugned notice is invalid inasmuch as it did not comply with the requirements of s. 151(2) of the Act, we have not thought it necessary to examine the other contentions advanced on behalf of the assessee. In this case the notice was issued after four years but before eight years of the date of the original assessment. Section 151 (2) of the Act reads “No notice shall be issued under Section 148 after the expiry of four years from the end of the relevant assessment year, unless the Commissioner is satisfied on the reasons recorded by the Income-tax Officer that it is a fit case for the issue of such notice.”
Section 148 prescribes :
“(1) Before making the assessment, re-assessment or re- computation under Section 147, the Income-tax Officer shall serve on the assesee a notice containing all or any of the requirements which may be included in a notice under sub- section (2) of Section 139 and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section.
(2) The Income-tax Officer shall, before issuing any notice under this section, record his reasons for doing so. ” Section 147 deals with income escaping assessment. At this stage we need not refer to that section : We shall refer to that provision at a later stage. Section 139(2) says : “In the case of any person who, in the incometax Officer’s opinion, assessable under this Act, whether on his own total income or, on the total income of any other person during the previous year, the Income-tax Officer may, before the end of the relevant assessment year, serve a notice upon him requiring him to furnish, within thirty days from the date of service of the notice, a return of his income or the income of such other person during the previous year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed.” (proviso is not necessary for our present purpose) When this appeal came up for hearing on the last occasion, as we found the affidavit filed by the Income-tax Officer to ‘be vague and indefinite, we directed the learned Counsel for the Department to produce before us the records of the Incometax Officer to show that the, Income-tax Officer had complied with the requirements of s. 148 and s. 151(2) of the Act. When the appeal was taken up for hearing on the 18th January 1971, only the report submitted by the Income- tax Officer to the Commissioner and the order of the Commissioner was produced. The order sheet recording the reasons of the Income-tax Officer as required by s. 148(2) was not produced. Hereinbelow we have sent out the report of the Income-tax Officer as well as the order of the Commissioner:
Report in Connection with the starting of proceeding” under Section 147 of the Income-tax Act, 1951.
Name of District
Ward of Circle AWard, Muzaffarpur
I.R. No. 303-C.
1.1. Name and address of the assessee
M/S. Chugamal Rajpal,
3. Assessment year for which notice under s. 148is proposed to be issued 1960-61.
4. Whether it is a new case or one in which re-assessment (or recomputation) has to be made Re-assessment
5. If a case of reassessment (or recomputation) the income (or loss or depreciation allowance) originally assessed/determined. Rs. 73,604/-
6. Whether the case falls under cl. (a) or (b) ofs. 147147(a)
7. Brief reasons for starting proceedings under Kindly see s. 147(indicate the items which are Sd/- S. P. Chaliha.
I.T.O. 30-4-66 believed to have escaped assessment) A-Ward, Muzaffarpur.
8.Whether the Commissioner is satisfied that Yes it is a fit case for the issue of notice under Sd/- K.
Narain section 148. 13-5-66 Commissioner of Income-tax, Bihar and Orissa, Patna
9. Whether the Board is satisfied that it is aSecretary, Board of Revenue.fit case for the issue of notice under s.
148. During the year the assessee has shown to have taken loans from various parties of Calcutta. From D.I.s Inv. No. A/P/ Misc.(5)D.I./63-64/5623 dated 13-8-65, forwarded to this office under C.I.T. Bihar and Orissa, Patna’s letter No. Inv. (Inv.)15/ 65-66/1953-2017 dated Patna 24-9-65, it appears that these persons are name lenders and the transactions are bogus. Hence proper investigation regarding these loans is necessary. The name of some of the persons from whom money is alleged to have taken on loan on Hundis are:
1. Seth Bhagwan Singh Sr icharan.
2. Lakha Singh Lal Singh.
3. Radhakissen Shyam Sunder.
The amount of escapement involved amounts to Rs. 100,000/-. Sd/- S. P. Chaliha, 30-4-66.
Income-tax Officer, A-Ward, Muzaffarpur.”
In his report the Income-tax Officer does not set out any reason for coming to the conclusion that this is a fit case to issue notice under s. 148. The material that he had before him for issuing notice under s. 148 is not mentioned in the report. In his report he vaguely refers to certain communications received by him from the C.I.T., Bihar and Orissa. He does not mention the facts contained in those communications. All that he says is that from those communications “it appears that these persons (alleged creditors) are name lenders and the transactions are bogus”. He has not even come to a prima facie conclusion that the transactions to which he referred are not genuine transactions. He appears to have had only a vague feeling that they may be bogus transactions. Such a conclusion ‘does not fulfil the requirements of s. 151(2). What that provision requires is that he must give reasons for issuing a notice under s. 148. In other words he must have some prima facie grounds before him for taking action under s.
148. Further his report mentions : “Hence proper investigation regarding these loans is necessary In other words his conclusion is that there is a case for investigating as to the truth of the alleged transactions. That is not the same thing as saying that there are reasons to issue, notice unders. 148. Before issuing a notice under s. 148, the Income-tax Officer must have either reasons to believe that by reason of the omission or failure on the part of these assessee to, make a return unders. 139 for any assessment year to the Income-tax Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year or alternatively not- withstanding that there has been no omission or failure as mentioned above on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year. Unless the requirements of clause (a) or (b) of s. 147 are satisfied, the Income-tax Officer has no jurisdiction to issue a notice under s. 148. From the report submitted by the Income-tax Officer to the Commissioner, it is clear that he could not have had reasons to believe that by reason of the assessee’s omission to disclose fully and truly all material’ facts necessary for his assessment for the accounting year in question, income chargeable to tax has escaped assessment for that year; nor could it be said that he as a consequence of information in his possession, had reasons to believe that the income chargeable to tax has escaped assessment for that year. We are not satisfied that the Income-tax Officer had any material before him which could satisfy the requirements of either cl. (a) or cl. (b) of s. 147. Therefore he could not have issued a notice under s. 148. Further the report submitted by him under s. 151(2) does not mention any reason for coming to the conclusion that it is a fit case for the issue of a notice under s. 148. We are also of the opinion that the Commissioner has mechanically accorded permission. He did not himself record that he was satisfied that this was a fit case for the issue of a notice under s. 148. To Question No. 8 in the report which reads “Whether the, Commissioner is satisfied that it is a case for the I issue of notice under section 148”, he just noted the word “yes” and affixed his signatures thereunder. We are of the opinion .that if only he had read the report carefully, he could never have come to the conclusion on the material before him that this is a fit case to issue notice under s. 148. The important safeguards provided in sections 147 and 151 were lightly treated by the Income-tax Officer as well as by the Commissioner.. Both of them, appear to have taken the duty imposed on them under those provisions as of little importance. They have substituted the form for the substance.
In the result this appeal is allowed, the order of the High Court is set aside and the impugned notice quashed. The Respondent No. 2 shall pay the costs of the appellant both in this Court and in the High Court.
G.C. Appeal allowed.