BHAGWATI - (1.) THIS appeal by certificate is directed against an order passed by a Division Bench of the High Court of Calcutta allowing an appeal against a decision of a single Judge which quashed and set aside a notice dated 28/03/1968 issued by the Income-tax Officer under Section 148 of the Indian Income-tax Act, 1961 seeking to reopen the assessment of the assessee for the assessment year 1959-60. The facts giving rise to the appeal are a little important and they may be briefly stated as follows.
(2.) PRIOR to March, 1947, one Deo Datt Sharma carried on business in Delhi in the name of Sharma Trading Company. The business was quite a prosperous one and the record shows that Deo Datt Sharma was making an average profit of about Rs. 36,000.00 per year. In March, 1947, the assessee was incorporated as a private limited, company with Ganga Saran Sharma as its managing director and it took over the business of Sharma Trading Company as a going concern in consideration of allotment of 1703 shares in the share capital of the assessee to Deo Datt Sharma. The share capital of the assessee consisted of 8,500 shares out of which 1703 shares were allotted to Deo Datt Sharma, 5 shares were held by Ganga Saran Sharma and 3500 shares, by a company called Narendra Trading Company controlled by Ganga Saran Sharma and his wife. It may be pointed out at this stage that Deo Datt Sharma was the brother-in-law of Ganga Saran Sharma. When the business of Deo Datt Sharma was taken over by the assessee, Deo Datt Sharma was appointed director of the assessee along with two other persons. Deo Datt Sharma was placed in charge of management of the business of Delhi branch of the assessee and he was paid a salary of Rs. 1,000.00 per month, commission at the rate of 1 per cent on the sales of the Delhi Branch and bonus equivalent to three months' salary. Ganga Saran Sharma and the other two directors were also paid salary, commission and bonus but it is not necessary to set out the quantum of the emoluments paid to them, because in this appeal we are concerned only with the emoluments paid to Deo Datt Sharma and not with the emoluments paid to other directors. The Income-tax Officer while assessing the assessee to tax for the assessment year 1949-50 disallowed the claim of the assessee for deduction in respect of payments made to the managing director and other directors on account of commission and bonus. On appeal by the assessee the Appellate Assistant Commissioner disagreed with the view taken by the Income-tax Officer and allowed the entire amount paid to the managing director and other directors by way of commission and bonus. So far as Deo Datt Sharma is concerned, the Appellate Assistant Commissioner observed that having regard to the fact that this very business was carried on by Deo Datt Sharma prior to its taking over by the assessee and it was a prosperous business earning on an average about Rs. 36,000.00 per year and after taking over of the business by the assessee, Deo Datt Sharma continued to be in sole management of the business of the Delhi Branch, the aggregate amount paid to him could not at all be regarded as excessive and was allowable as a permissible deduction. Thus the entire amount paid by the assessee to the managing director and other directors was allowed by the Appellate Assistant Commissioner as a deduction in computing the taxable income of the assessee. The assessee had thereafter no difficulty in claiming deduction of the amount paid to the managing director and other directors on account of salary, commission and bonus, but again in the assessment year 1956-57, the Income Tax Officer disallowed a substantial portion of the remuneration paid to the managing director and the assessment made by the Income Tax Officer was confirmed in appeal by the Appellate Assistant Commissioner and in further appeal by the Income Tax Tribunal. This led to the making of a reference and the High Court answered the question referred to it in favour of the assessee and held that the disallowance of a portion of the remuneration paid to the managing director was not justified. While making the assessment for the assessment year 1957-58, the Income Tax Officer once again disallowed a part of the remuneration paid to the managing director as also the amounts of interest paid to the directors on the balances lying to the credit of their respective accounts with the assessee on account of undrawn remuneration. The Appellate Assistant Commissioner in appeal held that the interest paid to the directors on the balances lying to the credit of their respective accounts was an an allowable expenditure but he sustained the disallowance of a portion of the remuneration paid to the managing director. The assessee thereupon preferred a further appeal to the Tribunal and after considering all the facts and circumstances of the case, the Tribunal came to the conclusion that the remuneration paid to the managing director as also to the other directors was not at all excessive and no portion of it could justifiably be disallowed. The result was that not only was the remuneration paid to the managing director and the other directors allowed in full as a permissible deduction but also the amount of interest paid on the credit balances in their respective accounts was allowed to be deducted as a permissible expenditure. Obviously, and this could not be disputed on behalf of the Revenue, the accounts of the managing director and other directors including Deo Datt Sharma showing the amount of remuneration credited and the withdrawals debited in each year were produced before the Income-tax Officer and he was aware that only a vary small amount was withdrawn by Deo Datt Sharma out of the remuneration credited in his account. The record also shows that on a query made by the Income-tax officer the assessee furnished inter alia the assessment file number of Deo Datt Sharma who was being assessed in Delhi. The assessment for the assessment year 1958-59 also followed the same course up to the stage of appeal before the Income-tax Tribunal and ultimately the amount of interest paid to the directors on credit balances in their respective accounts was allowed as a permissible deduction to the assessee. The assessment of the assessee for the subsequent year 1959-60 was thereafter completed on the basis of the decision of the Income-tax Tribunal for the two earlier assessment years and the amounts paid to the managing director and other directors including Deo Datt Sharma by way of salary, commission and bonus were allowed in full as permissible deductions and so was the interest paid on the credit balances in their respective accounts. On 28/03/1968 the Income-tax Officer issued a notice under S. 148 of the Income-tax Act, 1961 seeking to reopen the assessment of the assessee for the assessment year 1959-60 on the ground that the income of the assessee had escaped assessment at the time of the original assessment. Since a period of four years had already elapsed from the close of the assessment year 1959-60 and no notice could be issued under Section 147(b), it was obvious that the notice issued by the Income-tax officer was based on Section 147 (a), and it could be justified only if it could be shown that the Income-tax officer had reason to believe that, by reason of omission or failure on the part of assessee to disclose any material facts, the income of the assessee had escaped assessment. The Income-tax officer however did not indicate in the notice as to what were the reasons which had led him to believe that the income of the assessee had escaped assessment by reason of omission or failure to disclose material facts nor did he give any reasons though requested by the assessee to do so. The assessee thereupon preferred a writ petition in the High Court of Calcutta challenging the validity of the notice on the ground that there was no omission or failure on the part of the assessee to disclose any material facts at the time of the original assessment and that in any event, there was no reason to believe that any part of the income of the assessee had escaped assessment by reason of such omission or failure. The writ petition was admitted and rule was issued by a single Judge of the Calcutta High Court, the Income Tax Officer, possibly on service of the rule, addressed a letter dated 29/06/1968 to the assessee stating that the notice was issued by him because he had reason to believe that the payment of remuneration to Deo Datt Sharma was bogus and false. The Income-tax Officer also stated in the affidavit filed by him in reply to the writ petition that after the assessment of the assessee was completed for the assessment year up to 1963-64, the Income-tax Officer came to learn that Deo Datt Sharma was the brother-in-law of Ganga Saran Sharma, managing director and that Deo Datt Sharma had disposed of the income received by him by way of remuneration from the assessee, in the following manner : JUDGEMENT_143_3_1981Html1.htm and thereafter, out of the amount lying to his credit in the account with the assessee he had made the following gifts: JUDGEMENT_143_3_1981Html2.htm The Income-tax Officer stated that out of the total amount of remuneration of Rupees 3,51,000/- received by Deo Datt Sharma during the period up to 31/03/1962, he had paid tax in the sum of about Rs. 65,000.00 and spent a total sum of Rs. 2,37,550.00 on account of gifts and loan as aforesaid and the withdrawals made by him for his own purposes thus did not amount to more than Rs. 4,000.00 per year. These facts, according to the Income-tax Officer, showed that the remuneration paid to Deo Datt Sharma was not genuine and was sham and bogus and the amount of such remuneration alleged to have been paid to Deo Datt Sharma was wrongly allowed as a permissible deduction and hence the assessment of the assessee was liable to be reopened by issue of a notice under Section 147 (a).
(3.) THE learned single Judge of the Calcutta High Court who heard the writ petition took the view that there was no omission or failure on the part of the assessee to disclose any material facts relating to his assessment and that, in any event, there was no reason to believe that any part of the income of the assessee had escaped assessment at the time of the original assessment by reason of wrong allowance of the remuneration paid to Deo Datt Sharma as a permissible deduction. THE writ petition was accordingly allowed by him and the notice issued by the Income Tax Officer was quashed and set aside. THE Income Tax Officer thereupon preferred an appeal before a Division Bench of the Calcutta High Court and the learned Judges constituting the Division Bench allowed the appeal holding that the Income Tax officer had reason to believe that the amount of remuneration paid to Deo Dutt Sharma had been wrongly allowed as a permissible deduction by reason of omission or failure on the part of the assessee to disclose the material facts set out above and the notice issued by the Income Tax Officer was justified. THE assessee thereupon preferred the present appeal in this Court after obtaining certificate of fitness from the High Court of Calcutta. It is well settled as a result of several decisions of this Court that two distinct conditions must be satisfied before the Income Tax Officer can assume jurisdiction to issue notice under Section 147 (a). First, he must have reason to believe that the income of the assessee has escaped assessment and secondly, he must have reason to believe that such escapement in by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. If either of these conditions is not fulfilled, the notice issued by the Income-tax Officer would be without jurisdiction. The important words under Section 147 (a) are "has reason to believe" and these words are stronger than the words "is satisfied". The belief, entertained by the Income-tax Officer must not be arbitrary or irrational. It must be reasonable or in other words it must be based on reasons which are relevant and material. The Court, of course, cannot investigate into the adequacy or sufficiency of the reasons which have weighed with the Income-tax Officer in coming to the belief, but the Court can certainly examine whether the reasons are relevant and have a bearing on the matters in regard to which he is required to entertain the belief before he can issue notice under Section 147 (a). If there is no rational and intelligible nexus between the reasons and the belief, so that on such reasons, no one properly instructed on facts and law could reasonably entertain the belief, the conclusion would be inescapable that the Income-tax Officer could not have reason to believe that any part of the income of the assessee had escaped assessment and such escapement was by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts and the notice issued by him would be liable to be struck down as invalid.;