Chhugamal Rajpal Vs. S. P. Chaliha
& Ors  INSC 23 (21 January 1971)
SHAH, J.C. (CJ) GROVER, A.N.
CITATION: 1971 AIR 730 1971 SCR (3) 342 1971
SCC (1) 453
F 1971 SC2451 (9) R 1974 SC 478 (5) RF 1976
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.
The appellant, a partnership firm, filed its
return of income for the assessment year i960-61 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. [447 B, E] 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. [447 A-C] 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. [447 F-448 B] 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
M. C. Chagla, N. D. Karkhanis, S. P.
Chowdhury, Bhuvanesh Kumari, for the appellant.
S. 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 lull
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
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 19 19 has escaped assessment within
the 444 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- 61
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,
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 445
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
income tax 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 Income tax
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. Herein below 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 A Ward,
Muzaffarpur G. I.R. No. 303-C.
1.1. Name and address of the assessee M/S.
Chugamal Rajpal, Muzaffarpur.
3. Assessment year for which notice under s.
1 48 is proposed to be issued 1960-61.
4. Whether it is a new case or one in which
re-assessment (or re computation) has to be made Re-assessment
5. If a case of reassessment (or re computation)
the income (or loss or depreciation allowance) originally assessed/determined.
6. Whether the case falls under cl. (a) or
(b) of s. 147 147(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
a secretary, Board of Revenue.fit case for the issue of notice under s.
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
1. Seth Bhagwan Singh Sricharan.
2. Lakha Singh Lal Singh.
3. Radhakissen Shyam Sunder.
The amount of escapement involved amounts to
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 447 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 fulfill 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 under s. 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 under s. 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
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 there under.
We are of the opinion .that if only he had read the report carefully, he could
never have 448 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.