1979 (4) TMI 42 - AT - Income Tax

Invalid reassessment under Section 147: Lack of rational connection between material & belief.

The Tribunal held that the reassessment proceedings initiated under Section 147(a) read with Section 148 were invalid due to the lack of a rational ... - Issues Involved:1. Validity of reopening the assessment under Section 147(a) of the IT Act, 1961.2. Whether the Income Tax Officer (ITO) had 'reason to believe' that income had escaped assessment due to the assessee's failure to disclose fully and truly all material facts.3. Whether the Commissioner of Income Tax (CIT) had validly accorded permission under Section 151(2) for reopening the assessment.Detailed Analysis:1. Validity of Reopening the Assessment under Section 147(a):The primary contention in this appeal is whether the conditions precedent for assumption of jurisdiction under Section 147(a) were satisfied, making the reopening of the assessment under Section 148 read with Section 147(a) of the IT Act, 1961, valid or invalid.The original assessment was completed on 5th June 1962, under Section 23(3) of the IT Act, 1922. The ITO had examined the Balance Sheet and Profit & Loss Account, including several hundi loans, and allowed the interest expenditure claimed by the assessee. No further action was taken until 21st March 1969, when the ITO reported to the CIT for reopening the assessment under Section 147(a), citing that the hundi and other loan credits were accepted without investigation and that many alleged hundi loan creditors were name lenders with no actual monetary transactions.2. Reason to Believe:The ITO must have 'reason to believe' that income chargeable to tax had escaped assessment due to the assessee's failure to disclose fully and truly all material facts necessary for the assessment year. The Tribunal found that the ITO did not provide specific information connecting the alleged name lenders and the assessee's transactions. The reasons recorded by the ITO were vague and lacked a direct nexus or live link between the material and the formation of his belief. The Tribunal emphasized that the reasons for the formation of the belief must have a rational connection with or relevant bearing on the formation of the belief, as established in the Supreme Court case of Lakhmani Mewal Das.The ITO's reasons for reopening the assessment included general statements about confessions from hundi bankers and disclosures from borrowers, but did not specify which bankers or borrowers were involved, the terms of their confessions, or whether these confessions implicated the assessee firm or related to the transactions in question. The Tribunal concluded that the ITO's reasons were held in bad faith and were merely a pretence, failing to meet the requirement of a 'reason to believe.'3. CIT's Permission under Section 151(2):The Tribunal also found that the CIT had mechanically accorded permission under Section 151(2) without carefully considering the ITO's report. If the CIT had carefully reviewed the report dated 21st March 1969, he could not have concluded that this was a fit case for issuing a notice under Section 148 read with Section 147(a). The notice issued under Section 148 was deemed invalid on this ground as well, following the Supreme Court decision in Chhugamal Rajpal.Conclusion:The Tribunal held that the reassessment proceedings initiated under Section 147(a) read with Section 148 were invalid due to the lack of a rational connection between the material and the formation of the belief by the ITO. The reassessment made by the ITO was vacated, and the appeal was allowed. The Tribunal also noted that similar cases cited by the Revenue were distinguishable on facts, as those cases involved specific confessions and direct nexus between the material and the formation of the belief, which were absent in the present case.