Reassessment reopening needs reason to believe and timely action; machinery provisions cannot create tax liability without a charging provision.

Reassessment under the escaped-income provisions was unsustainable because the reopening lacked relevant material to form the required belief of nondisclosure, and the alternative basis was time-barred; the notice under section 148 was therefore invalid. The commentary also notes that a saving or machinery provision cannot create a fresh tax liability unless the amount is otherwise chargeable under the charging provisions, so the sum could not be taxed under section 28(ii)(c) or section 41(1). It further explains that the amount did not fall within the 1922 Act provisions on agency termination compensation or remission of trading liability, so no taxability arose on that basis either.

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Issues: (i) Whether the reassessment notice under section 148 of the Income-tax Act, 1961, was validly issued on the basis of section 147(a) and, alternatively, whether the action was barred by limitation under section 147(b) read with section 149(1)(b); (ii) Whether the amount of Rs. 3,92,200 could be brought to tax under section 28(ii)(c) or section 41(1) of the Income-tax Act, 1961; (iii) Whether the amount was taxable under section 10(5A)(d) or section 10(2A) of the Indian Income-tax Act, 1922.

Issue (i): Whether the reassessment notice under section 148 of the Income-tax Act, 1961, was validly issued on the basis of section 147(a) and, alternatively, whether the action was barred by limitation under section 147(b) read with section 149(1)(b).

Analysis: Reopening under section 147(a) requires material on which the Income-tax Officer can form a reason to believe that the assessee omitted or failed to disclose fully and truly all material facts necessary for assessment. On the record, no material was shown to justify such belief, and the respondents did not establish the statutory precondition for reopening. The alternative basis under section 147(b) also could not sustain the notice because, if so treated, the proceeding was beyond the prescribed period of limitation.

Conclusion: The reassessment notice and the proceedings initiated under section 148 were without jurisdiction and invalid.

Issue (ii): Whether the amount of Rs. 3,92,200 could be brought to tax under section 28(ii)(c) or section 41(1) of the Income-tax Act, 1961.

Analysis: Section 297(2)(d)(ii) operates only as a machinery provision for reassessment of escaped income and does not create a fresh tax liability where none already existed. The opening words of the saving provision presuppose that the income is already chargeable to tax. On that footing, neither section 28(ii)(c) nor section 41(1) could be used to impose liability in the present case.

Conclusion: The amount was not taxable under section 28(ii)(c) or section 41(1) of the Income-tax Act, 1961.

Issue (iii): Whether the amount was taxable under section 10(5A)(d) or section 10(2A) of the Indian Income-tax Act, 1922.

Analysis: Section 10(5A)(d) applies only to compensation or other payment due to or received by a person at or in connection with the termination of an agency. The sum of Rs. 3,92,200 was neither due to nor received by the assessee; it represented a portion of the amount payable by the assessee to the corporation, which was later written off as a bad debt. Section 10(2A) likewise did not apply because there was no material showing that the amount related to any loss, expenditure, or trading liability for which an allowance had earlier been made, nor that any benefit arose by remission or cessation of such liability in the required statutory sense.

Conclusion: The amount was not taxable under section 10(5A)(d) or section 10(2A) of the Indian Income-tax Act, 1922.

Final Conclusion: The reassessment was held unsustainable both on jurisdictional grounds and on merits, and the assessee was granted relief against the impugned proceedings.

Ratio Decidendi: Reassessment under the escaped-income provisions requires the statutory precondition of reason to believe based on relevant material, and a saving or machinery provision cannot be used to create a tax liability unless the amount is otherwise chargeable under the applicable charging provision.

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