- (1.) This appeal, on a certificate of fitness granted by the High Court under Art. 133 of the Constitution of India is directed against the judgment in Civil Misc. Writ Petition No. 1541 of 1974 decided by the Allahabad High Court on 24-11-1976 : (reported in 1977 Cur Tax Rep 73) and arises in the following circumstances : The appellant is a firm which was assessed to income-tax at Azamgarh (U.P.). In the Income-tax Returns for the assessment year 1963-64, the assessee claimed that it had borrowed a sum of Rs. 50,000/- from M/s. Jain Finance Distributor (India) Private Limited, Calcutta (hereinafter called the Calcutta company) on 19-5-1962. An entry dated 25-5-1962 in that behalf was made by the assessee in its books of account as well as in the balance sheet as liability. The loan was stated to have been raised in cash and it was also claimed to have been returned in cash in 1968, though the interest on loan was stated to be paid by cheque/bank drafts till repayment in 1968. During the assessment proceedings, the Income-tax Officer directed the assessee to file a copy of the account of the Calcutta company to support the loan transaction. The assessee produced a confirmatory letter dated 15-11-1963 from the Calcutta company, confirming the payment of loan of Rs. 50,000/- to the assessee. The case of the assessee before the ITO was that one of its partners, namely Bajrang Lal, (since deceased) had gone to Calcutta on 13th May, 1962 with a draft of Rs. 31,000/- and Rs. 151/- in cash in order to make payment of outstanding at Calcutta. For making certain purchases of cloth and for payment of other outstandings against the assessee, the said partner, while in Calcutta, raised a cash loan of Rs. 50,000/- from the Calcutta company and on his return to Azamgarh on 25th May, 1962 necessary entries were made in the books of account of the assessee showing a credit of Rupees 50,000/- from the Calcutta company by way of cash loan to the assessee. The ITO finalised the return and for each of the assessment years 1963/64 to 1968/69, the ITO allowed deduction of interest claimed to have been paid to the Calcutta company by the assessee. From a perusal of the record it appears that the Income-tax Officer entertained some doubts about the genuineness of the loan transaction and accordingly he addressed a letter to the Income-tax Officer, District Companies (III)-196/ J/1, Central Revenue Building, Calcutta on 19th May, 1970 enquiring if the Calcutta company fell within its jurisdiction. It was stated by the ITO in that letter that he wanted to gather certain information from the case records of the Calcutta company. In reply the ITO Calcutta on 7-7-70 sent the following communication to the ITO Azamgarh: "Confidential Regd. Post A/D. OFFICE OF THE INCOME-TAX OFFICER, "K" WARD, COMPANIES DISTT. III P/7, CHOWRINGHREE SQUARE, CALCUTTA No. C-III/ J-46/K./606 Date 7-7-70 Income-tax Officer, A Ward, Azamgarh, (by name) Subject : M/s. Jain Finance Distributors (India) Private Ltd., 34/IB, Sudhir Chatterjee St., Calcutta. Reference : Your letter No. P306/ A, D/ 19-5-10 addressed to ITO "I" Ward, Companies Dist. III, Calcutta. Please refer to your above letter asking for some information about Jain Finance Distributors India Private Ltd. This company is now assessed to tax in my ward. I have however to inform you that according to the confession of Shri Tara Chand Surana Mg. Director of the company it appears that the so-called company is really a dummy concern of Shri Surana. The company never actually advanced any loans to any person and according to the confession of Shri Surana the business of the company consisted entirely of name-lending. The company lent its name to enable different parties to bring into their books 'black money' under the guise of loan from Jain Finance Distributors (India) Pvt. Ltd. No finance was ever distributed, only the name of the concern was lent. This position has been accepted in the assessments of the company for 1962-63, 1963-64 and 1964-65. In the circumstances you are requested not to treat any transaction with this concern as genuine. I can furnish further information to you if you sent me full particulars of transactions which you may be enquiring about. Sd/- (A. R. Das Gupta) Income-tax Officer 'K' Ward (Companies Distt. III, Cal.")
(2.) After receipt of the above communication, the assessing authority on 26-8-1971 issued a notice to the assessee stating therein that he was prima facie satisfied that the loan transaction of Rs. 50,000/- was not genuine and that since the assessee had failed to disclose fully and truly all the material facts necessary for assessment for the year 1963/64, income chargeable to tax had escaped assessment and he therefore proposed to reopen the case for the assessment year 1965-66 under S. 147 (a) of the Indian Income-tax Act, 1961 (hereinafter called as the Act). Objections were invited from the assessee. In his reply dated 25-11-1972, the assessee contended that there had been no non-disclosure on its part in respect of the loan transaction of Rs. 50,000/- and that since all the primary facts had been disclosed by the assessee at the stage of the original assessment, the provisions of Section 147(a) were inapplicable. After considering the reply, the ITO issued a notice under S. 148 of the Act to the assessee proposing to reassess his income, after recording that he had reason to believe that the assessee's income in respect of which he was assessable to tax had escaped assessment within the meaning of S. 147 of the Act. The assessee was called upon to file its return for the assessment years 1963-64 to 1968-69 within 30 days from the date of service of the notice. The proposal of the ITO to reopen the assessment had been submitted earlier to the Commissioner of Income-tax on 1-1-72 with the relevant record and sanction of the Commissioner for reassessment was obtained on 7-2-72. On 26-6-72, the assessee filed its return for the assessment year 1963-64 and later appeared before the ITO in person on 26-9-1973. The assessee filed before the ITO, Azamgarh an affidavit from the creditor, Calcutta company, in support of its contention that the cash loan had in fact been raised from the creditor. The ITO directed the assessee to produce the Calcutta creditor for cross-examination in respect of his affidavit. The creditor, Shri Surana, Managing Director of the Calcutta Company appeared and was cross examined by the ITO. During the course of his cross examination, he admitted before the ITO that he had made a confession to the ITO at Calcutta on the lines which had been indicated in the letter of the jurisdictional ITO from Calcutta dated 7-7-70. The creditor, was thereafter reexamined by the counsel for the assessee but nothing was elicited from the creditor regarding the correctness or otherwise of the 'confession' alleged to have been made by him before the ITO at Calcutta, during the assessment proceedings relating to his company at Calcutta. After considering the entire material on the record, a show cause notice was issued by the ITO, Azamgarh to the assessee detailing all the facts gathered by him from the contents of the letter of the ITO at Calcutta, the confession allegedly made by the creditor before the ITO at Calcutta in respect of assessment years 1962-63 to 1964-65 and the statement of the creditor before him. The assessee was called upon to reply but he did not give any reply to the show cause notice. While the matters rested here, the assessee filed Writ Petition No. 1541/74 in the High Court of Judicature at Allahabad on 18-3-74 seeking the quashing of the notices issued under S. 148 of the Act and to restrain the ITO from continuing with the reassessment proceedings.
(3.) A Division Bench of the High Court after a detailed consideration of facts and law, came to the conclusion that the information furnished by the ITO, Calcutta could form the basis for entertaining a resonable belief on the part of the ITO, Azamgarh, that as a result of false representation made by the assessee regarding the raising of cash loan from the Calcutta company, his income had escaped assessment during the relevant assessment year and it dismissed the writ petition with costs on 24-11-1976. The assessee applied for a certificate of fitness to file an appeal in the Supreme Court under Art. 133 of the Constitution. The Division Bench of the High Court while granting the certificate opined: "On one of the questions which arise out of our order in the writ petition, there is considerable divergence of views amongst different High Courts. Some High Courts have taken the view that in...........the cases of loans borrowed by an assessee, if he has disclosed the details thereof to the Income-tax Officer at the time of the original assessment, he (the assessee) is under no further obligation to inform the Income-tax Officer that such loans were bogus ones. Whether such loans are genuine or bogus according to this view, a matter of inference which the Income-tax Officer has to draw on the facts disclosed after proper verification and that if he has treated such loans as genuine, he cannot later re-open the assessment merely because he has subsequently reason to believe that such loans were not genuine. A few other High Courts have taken a contrary view on the above question. The aforesaid question is, in our opinion, a substantial question of law of general importance which needs to be decided by the Supreme Court." That is, how, the matter is before us.;