Sabyasachi Mukharji, J. - (1.) The assessment for the assessment year 1963-64 for income-tax was completed on August 31, 1965. In the said assessment, the assessee claimed deductions on account of payment of certain interest to various parties including, inter alia, the Murshidabad Jute Co. It appears that the account in the name of Murshidabad Jute Co. originated for the first time, according to the assessee, in the relevant financial year for the assessment year 1963-64 when credits aggregating to Rs. 90,000 figured on nine different dates. The said interest was allowed. Thereafter, there was assessment of the assessee for the assessment year 1964-65, which was completed on December 30, 1967. In the said assessment, the ITO examined the accounts and came to the conclusion that the transaction with Murshidabad Jute Co. was fictitious and for this purpose he relied on certain confessions alleged to have been made by one Sewlal Jain, who is the proprietor of the said Murshidabad Jute Co. The ITO, accordingly, disallowed the said interest. He recorded that what Sewlal Jain had done was to lend the name of Murshidabad Jute Co. to the assessee in order to accommodate the assessee to introduce its concealed income in the form of loans in the accounting year corresponding to the assessment year 1963-64. Therefore, according to the said ITO, the credings aggregating to Rs. 90,000 figuring in the books of the assessee-company in the name of Murshidabad Jute Co., in fact, represented concealed income of the assessee. He, accordingly, directed reopening of the assessment under Clause (a) of Section 147 of the I.T. Act, 1961. Thereafter, there was an appeal to the AAC for the assessment year 1964-65 and the AAC passed an order on August 22, 1968. Before that, on March 22, 1968, notice under Section 148 of the I.T. Act, 1961, was issued to the assessee reopening the assessment for the assessment year 1963-64. In the appellate-order of the AAC for the year 1964-65, the AAC observed that the transaction with Murshidabad Jute Co. started from October, 1961, and ended in June, 1962. The AAC further observed that the company had already been on the record of the ITO, Berhampore, and a certified copy of the account had been filed which brought forward a balance of about Rs. 91,802 during the year 1962-63. The AAC was, therefore, of the view that M/s. Murshidabad Jute Co, was a genuine concern and doing genuinely business in jute up to the middle of 1962 and the transaction related to this period. He was, therefore, of the opinion that on the confession of the bogus money-lending after the middle of 1962 no adverse inference could be drawn against the assessee. He, accordingly, allowed the interest which was disallowed by the ITO for the assessment year 1964-65. In this connection, it would be relevant at this stage to set out from the confessions recorded in the assessment year 1964-65 by the ITO by Sewlal Jain. The said confession was made on November 24, 1965, before the ITO. The extracts from the question and answers are hereunder: " Q. What arc your source of income ? A. I am also the proprietor of M/s. Murshidabad Jute Co., which is having its head office at Jiaganj and branch at 46, Strand Road, Calcutta. This firm was started some time in 2000 Ratlia Jatra as a partnership concern and in about 2010 or 2012 R.J. I became the proprietor of the concern which had main jute purchasing centre at Lalgola in most of the years and had commission agency business in jute in Calcutta till R.J. year ended in the middle of the calendar year 1962. So far as I remember since then there is no business nor Mursliidabad jute except bogus name-lending from its Calcutta branch. Q. Since when you started this business of Jamakharcha ? A. I am carrying on the business of Jamakharcha for about last six or seven years prior to which I carried on really business as stated above."
(2.) The assessee challenged the notice issued on March 22, 1968, under Section 148 of the I.T. Act, 1961, in the application under Article 226 of the Constitution and obtained a rule nisi. The assessee contended that the conditions precedent for the issuance of the notice had not been fulfilled in this case and, therefore, the notice issued by the ITO was without jurisdiction. The rule nisi ultimately came up for hearing before B. C. Mitra J. and by an order passed and judgment delivered on June 2, 1972, the learned judge has made the rule nisi absolute and quashed the said notice. This appeal arises out of the aforesaid judgment and order passed by B. C. Mitra J. on June 2, 1972.
(3.) The question involved in this case is whether the conditions precedent for the issuance of the notice under Section 148 have been fulfiled in this case, This notice was issued as mentioned hereinbefore under Clause (a) of Section 147 of the I.T. Act, 1961. In order, therefore, to sustain this notice it is necessary to find out whether the ITO had formed the requisite belief that income of the assessee had escaped assessment or had been underassessed as a result of any omission or failure on the part of the assessee to disclose fully and truly all material facts relevant for the assessment. It is further accessary to enquire whether there were materials for the ITO to form that belief and if so whether these materials have a rational nexus to the formation of the belief, if any, formed in this case. As mentioned hereinbefore, the ITO who issued the impugned notice was the ITO who has made the assessment for the subsequent year, namely, for the assessment year 1964-65. The said ITO proceeded on the basis of the finding that he had arrived at in making the assessment for the assessment year 1964-65. In the said assessment year, relying on the confession of Sewlal Jain, who was admittedly one of the alleged money-lenders to whom interest was alleged to have been paid by the assessee, had made a confession. The question is whether the confession was of such a nature on which reliance could have been placed in this case by the ITO for reopening the assessment and if such reliance had been placed whether such reliance could be described as material on which a reasonable man could have acted in issuing the impugned notice.;