SEN, J. - (1.) THESE are six applications under s. 256(2) of the IT Act, 1961, by which the CIT, Rajasthan I, Jaipur, has applied for a direction to the Tribunal, Jaipur Bench, Jaipur, to state a case and make a reference of certain questions of law said to arise from its order in IT Appeals No. 631, 670, 671, 683, 769 and 770/JP all of 1972-73 dt. 7th March, 1974 to the High Court for its opinion.
(2.) THE facts giving rise to these applications for reference, briefly stated, are as follows : Tarachand Subhkaran, Sri Ganganagar (hereinafter referred to as `the assessee') is a registered firm which was assessed to tax on income derived from its business in sale of gold any silver ornaments. THE original assessments for the years 1962-63 and 1963-64 were completed on 13th Sept., 1963 and 23rd July, 1966 respectively. It appears that sometime in the month of March, 1970, the IT Department came in possession of a duplicate set of books of account maintained by the assessee during the relevant years viz., ledger and cash book for the asst. yr. 1962-63 and ledger for the asst. yr. 1963-64 wherein several transactions pertaining to the assessee which were not shown in its original books of account on the basis of which the assessments were made, were noticed. The ITO accordingly issued notices under s.. 148 of the IT Act to show cause why the assessee should not be assessed on the escaped income. On 11th Sept., 1970, the ITO after examining the books of account which had come in his possession, issued a detailed show cause notice to the assessee indicating to it the various additions which he proposed to make. Thereafter, on 14th Aug., 1970 the ITO issued a notice under s. 142(1) of the Act asking the assessee to produce before him the books of account on the basis of which the original returns were filed. The assessee failed to comply with the requirements of the notice under s. 142(1) for production of its books and consequently, the ITO cancelled the registration of the firm under s. 186(2). On the basis of the books of account which had come in his possession, the ITO by his order of assessment dt. 31st Nov., 1972 came to a best judgment assessment under s. 144 of the Act. In appeal, the AAC, Bikaner upheld the action of the ITO in making a reassessment of the firm under s. 148 of the Act, but deleted certain additions in the asst. yrs. 1962-63 and 1963-64 as made by him. The AAC, however, set aside the order of the ITO under s. 186(2) holding that the cancellation of the registration of the firm was in the circumstances, not justified. Both the Addl. CIT and the assessee preferred appeals against the orders passed by the AAC before the Tribunal, Jaipur Bench, Jaipur. The Tribunal, allowed the appeals of the assessee, while rejecting those preferred by the Department, holding :-- "In the present case, it was pointed out to us by the learned Departmental Representative that the ITO had compared the books handed over to the Asstt. Director with the statements filed by the firm at the time of original assessment and thus had come, to the conclusion that the books of account, which were handed over by the informant to the Asstt. Director of Inspection (Intt.) belonged to the assessee and that therefore, he was maintaining duplicate set of books of account." "There is no application of mind by the ITO on the basis of which it could be said that he had reasons to believe that the books produced belonged to the assessee. We, therefore, hold that the ITO could not, as a man of ordinary prudence, have entertained bonafidely the belief on the basis of the material before him that the books in question belonged to the assessee and that the same were maintained by the assessee in the normal course of its business. That being so, in our opinion, the very fundamental basis of starting proceeding under s. 147(1) namely that the ITO should have reasons to believe is lacking and, therefore, the assessment proceedings have been vitiated ab initio." Feeling aggrieved, the CIT unsuccessfully applied to the Tribunal to have certain questions referred to the Court, as arising out of the order of the Tribunal. The Tribunal, however, by its order dt. 10th Oct., 1974, declined to make a reference on the ground that no questions of law arise therefrom, stating :-- "The principle of law, which we have derived the inference regarding the action of the ITO as being void ab initio is a principle, which has been settled as good law by the various decisions of the Honourable Supreme Court, referred to above. A reference of this question of law would, therefore, be merely academic and hence, unwarranted." Shri S.K. Mal Lodha, learned counsel for the CIT, contends that the finding of the Tribunal that there was no material before the ITO on the basis of which e could have `reason to believe' within s. 147(a) of the Act that the income of the assessee had, in the relevant accounting years, escaped assessment or that in its observation the ITO had not applied is mind to the question whether the books of account which had come in possession of the Department belonged to the assessee, was contrary to the evidence on record and otherwise unjustified. The learned counsel drew our attention to the fact that the ITO had before initiating the proceedings recorded his reasons as below,-- (A) For the asst. yr. 1962-63 : "The assessee was maintaining duplicate sets of accounts. As per the account books handed over by the informant to the A.D.I., income of Rs. 49,041 has escaped assessment." (B) For the asst. yr. 1963-64 : "The assessee was maintaining duplicate sets of account books. As per account books handed over by the informant to the A.D.I.., income of Rs. 4,503 has escaped assessment." He also adverted to the fact that the ITO after taking into account the submissions of the assessee and the evidence on record, came to the conclusion that the books which were in his possession were the real books of the assessee and that the assessee was deliberately withholding the books which it had produced at the time of the original assessments. The learned counsel further adverted to the fact that during the pendency of the proceedings the assessee had addressed a letter dt. 10th Sept., 1970 to the CIT, making an offer in terms of s. 271(4A) of the Act, in the following terms :-- "That for the purpose of co-operation with the Department in settling their Income-tax matters once for all and to be able to carry on their business peacefully and as good citizens of the Union of India your petitioners offer to pay tax on the income from even these books, though some are concocted or on the basis of the total wealth of each partner taking into account their respective agricultural holding and income therefrom and spreading such total income from 1936 to 1963 to avoid their ruin which is being planned by Om Prakash in connivance with other." This clearly showed that the assessee accepted that the books which came in possession, of the Department belonged to the assessee. We are satisfied that the Tribunal was wrong in stating that there was no material before the ITO on which he could have reason to believe that the income of the assessee had escaped assessment. It was also wrong in observing that the ITO had not applied his mind to the question whether the books of account brought to light, belonged to the assessee which fact was, indeed, never in dispute. Whether, in the circumstances. The re-assessment of the income of the assessee was justified, is not for us to say, at the present stage. But we would like to observe that the findings reached by the Tribunal that there was no material on which the ITO could have acted, was a mere surmise particularly when there was such material and when the assessee accepted the books of account to be its and offered to have an assessment of the income which had escaped assessment. Mahajan, C.J., delivering the judgment of the Supreme Court in Dhirajlal Gidharilal vs. CIT (1954) 26 ITR 736 (SC) observed :-- "If the Court of fact whose decision on a question of fact is final, arrives at the decision by considering material which is irrelevant to the inquiry, or by considering material which is partly relevant and partly irrelevant, or bases its decisions partly on conjectures, surmises and suspicious, and partly on evidence, then in such a situation clearly an issue of law arises." "It is well established that when a Court of fact acts on material partly relevant and partly irrelevant, it is impossible to say to that extent the mind of the Court was affected by the irrelevant material used by it in arriving at its finding. Such a finding is vitiated because of the use of inadmissible material and thereby an issue of law arises." The question whether there was any material before the Tribunal to find that the ITO could not have initiated re-assessment proceedings under s. 148 of the Act, is question of law : (See 31 ITR 28).
(3.) THE applications are, therefore, allowed. We directed the Tribunal to refer the following questions for the decision of the Court :-- In D.B. Income Tax Cases No. 117 and 120 of 1975 : Whether, on the facts and circumstances of the case, the Tribunal was justified to hold that the re- assessment proceedings were void ab initio and to reject the Departmental appeal on that ground ? In D.B. Income Tax Cases No. 118 and 122 of 1975 : Whether, on the facts and circumstances of the case, including the facts that the ledger in respect of the asst. yr. 1962-63 was admittedly written by Tarachand, the Tribunal was justified to hold that the action under s. 147 of the IT Act, 1961 was not validly initiated by the ITO and to quash the re-assessment proceedings on that ground ? In D.B. Income Tax Cases No. 119 and 121 of 1975 : Whether, on the facts and circumstances of the case, the Tribunal was justified to hold that the action under s. 147 of the IT Act, 1961 was not validly initiated by the ITO to delete the additions made to the assessee's total income in re-assessment proceedings on that ground ? There shall be no order as to costs.;