D.N. Baruah, J.
1. The petitioner in this application under Article 226 of the Constitution has challenged annexure-5 notice, dated March 30/ 31, 1989, issued by the Deputy Commissioner of Income-tax (Assessment), Special Range-II, Guwahati, in the exercise of the power under Section 148 of the Income-tax Act, 1961, for the assessment year 1985-86 proposing to reassess the income for the said assessment year and requiring the petitioner to submit a return of the income in the prescribed form.
2. For the purpose of disposal of this writ petition, the facts may be narrated as under :
The petitioner is a private limited company incorporated under the Companies Act, 1956. The company carries on the business of manufacture
and sale of commercial plywood, sawn timber, railway sleepers and other allied products. The factory of the petitioner-company is situated at Naginimara in the District of Mon, Nagaland.
3. The petitioner-company is an assessee under the Income-tax Act. Notice dated March 30/31, 1989 (annexure-5 to the writ petition), was issued by the first respondent under Section 148 of the Act for the assessment year 1985-86.
4. The Forest Utilisation Officer, Government of Nagaland, Dimapur, for short ('the FUO'), placed orders on the petitioner-company for the supply of broad gauge and meter gauge railway sleepers of specified quality and size to be supplied from time to time as per despatch orders/instructions to be issued by the Forest Utilisation Officer. The sleepers were for use by the Indian Railways. As per the arrangement, the petitioner used to receive advance payment from time to time in respect of supply of sleepers. Such advance payments were made against such advance bills and the same were adjusted against such supply.
5. In the assessment year 1985-86, the petitioner-company filed a return under the Act on September 4, 1985, showing a net loss of Rs. 9,29,500. Along with the said return, the company also filed its audited profit and loss account and the balance-sheet and all other relevant details. In the balance-sheet submitted along with the return, the petitioner-company showed an amount of Rs. 31,58,700 received from the Forest Utilisation Officer under the head 'Current liability' as advance received from the Forest Utilisation Officer. The company also filed along with the return account of the Forest Utilisation Officer. The said return was filed under the provisions of the Income-tax Act and in the course of the assessment proceedings before the first respondent, the company disclosed all materials and primary facts necessary for assessment of the income of the petitioner-company by the first respondent for the assessment year in question. In the course of assessment proceedings, the first respondent issued notices to the petitioner-company in the exercise of the power under Sections 142(1) and 143(2)(b) of the Act. In response to that, the chief executive of the petitioner-company appeared before the assessing authority from time to time and produced before the authority the books of account and also submitted all other necessary details to complete the assessment. In the assessment proceedings, the first respondent examined the details of the stock manufactured, purchased and sold by the petitioner-company in the relevant accounting year and also the account of the Forest Utilisation Officer. The first respondent also received independent information from
the Forest Utilisation Officer of the total advance payment made to the petitioner-company.
6. The first respondent thereafter finalised the assessment for the year 1985-86 and by an order of assessment dated January 27, 1988, made assessment for the year 1985-86 and showed nil income.
7. The contention of the petitioner is that the first respondent illegally made addition and disallowed various claims. Being aggrieved, the petitioner-company preferred an appeal before the Commissioner of Income-tax (Appeals), Guwahati. The Commissioner of Income-tax (Appeals) by order dated October 28, 1988, upheld the order of assessment except on the point of qualification of admissible 'investment allowance'.
8. The second respondent by a letter dated February 8, 1989, informed that there had been no disclosure of certain material facts in respect of advance received from the Forest Utilisation Officer and, therefore, respondent No. 2 had reason to believe that the petitioner-company had suppressed stock of railway sleepers for the accounting year ending June 30, 1984, and sale of railway sleepers during the accounting year ending June 30, 1985. By the said notice, the petitioner was also asked to show cause as to why the assessment for the profit from the sale of sleepers should not be added to the return of income submitted for the assessment year 1985-86.
9. The contention of the petitioner-company is that the aforesaid letter dated February 8, 1989, was wholly misconceived, untenable and uncalled for inasmuch as all the relevant facts were made available on record and along with the return of income filed for the accounting year ending June 30, 1984, all the relevant and primary facts had been disclosed by the petitioner-company before the assessing authority. Therefore, there was no reason or basis for issuance of the aforesaid annexure-3 letter dated February 8, 1989, and issuance of the said letter would show that the respondents were embarking on a fishing and roving enquiry and to re-examine the facts already on record which was absolutely uncalled for and contrary to the provisions of law. Effort was made only to change opinion on the facts which were already available. The petitioner further states that the second respondent was not an assessing authority of the petitioner-company at the relevant time. The first respondent alone being at the material time a competent authority in the matter of assessment of the income of the petitioner-company, annexure-3 letter dated February 8, 1989, issued by the second respondent was on the face of it, without jurisdiction and authority of law. On receipt of annexure-3 letter dated
February 8, 1989, the petitioner replied by annexure-4 letter dated March 27, 1989, and denied the allegation. The company further stated that the stock of the sawn timber as on June 30, 1985, was shown in the books of account of the petitioner-company. The said books of account were produced before the competent authority at the time of assessment proceeding and there was no scope to doubt the correctness of the same. All the material particulars having been placed before the authority at the time of assessment, no proceeding under Section 148 of the Act could be initiated against the petitioner-company and there could be no reason and/or material to reopen the assessment for the assessment year 1985-86.
10. The petitioner-company, thereafter, received impugned annexure-5 notice dated March 30/31, 1989, from the first respondent. The said notice was issued in purported exercise of the power under Section 148 of the Act in respect of the assessment year 1985-86. By the said notice, the first respondent proposed to reassess the same. The petitioner-company disputed, the legality and validity of the said notice issued. Thereafter, by yet another letter dated July 7, 1989 (annexure-8), the petitioner-company denied and disputed the allegations made in the aforesaid annexure-5 notice dated March 30/31, 1989. By the said annexure-7 letter, the petitioner had informed the authority that all the necessary material particulars had been produced and also denied that the petitioner had escaped assessment.
11. According to the petitioner, the impugned notice annexure-5 issued by the first respondent in purported exercise of the power under Section 148 of the Act was ex facie void, illegal and without jurisdiction and violative of law inasmuch as the conditions precedent for exercise of the power under Section 148 was absent. The petitioner-company informed the concerned authority that all the material facts had been produced before the authority in pursuance of a notice under Sections 142(1) and 143(2) of the Act. The entire action of the respondents in issuing annexure-5 letter was misconceived and on the basis of wrong interpretation of the provisions of law and, therefore, annexure-5 was not tenable and is liable to be quashed. Hence, the present petition.
12. Respondents Nos. 1, 2 and 3 filed an affidavit-in-opposition. The petitioner also filed an additional affidavit.
13. In the affidavit-in-opposition the said respondents have stated that the Assistant Director of Income-tax (Investigation), North-Eastern Region, was the Assistant Commissioner of Income-tax, Special Circle-II, Guwahati, at the material time holding concurrent jurisdiction with the Deputy
Commissioner of Income-tax (Assessment), Special Range-II, Guwahati, in the matter of assessment of the petitioner-company for the assessment years 1985-86 and 1986-87 as per the Notification No. 2(c) of 1988-89 and, therefore, he was fully acquainted with the facts and circumstances of the case. The respondents have denied the statements made by the petitioner-company in its petition that the company disclosed fully and truly all the material and primary facts necessary for assessment of income of the petitioner-company for the assessment years in question. In the affidavit, it has also been stated that Shri R.J. Mandha, chief executive of the petitioner-company, submitted before the deponent, namely, the Assistant Commissioner of Income-tax, in the course of hearing for the assessment year 1986-87 that the advances were granted by the Forest Utilisation Officer, Dimapur, on actual verification of stock and on the basis of passing certificates issued by, him on such physical verification of stock. On the basis of this statement and on verification of the relevant records for the assessment year 1985-86, it was clear that the petitioner-company did not disclose material facts in regard to the receipt of advance from the Forest Utilisation Officer and the sale or supply made to the Forest Utilisation Officer and other relevant documents and the details in regard thereto. Annexure-3 letter was issued to the petitioner-company for showing cause against the initiation of the reassessment proceedings for the assessment year 1985-86. A confidential enquiry was also conducted by the first respondent from the Forest Utilisation Officer, Government of Nagaland, Dimapur, through the Income-tax Officer, Special Ward-II, and the Income-tax Officer, Dimapur, and the Forest Utilisation Officer, the authority who advanced the money to the petitioner-company confirmed that 50 per cent. advance payment of Rs. 4,40,16,000 had been made. The respondents have denied all the averments made in the writ petition regarding escapement of the assessment. Impugned annexure-5 notice dated March 30/31 of 1989, was issued under Section 148 of the Act as there was reason to believe that the income of the petitioner-company chargeable to tax for the assessment year 1985-86 escaped assessment within the meaning of Section 147 of the Act and, therefore, it was proposed to reassess the same. The contention of the respondents is that the action taken by the respondents in issuing annexure-5 notice was just and proper and it was within the scope of the Act.
14. I heard both sides.
15. Learned counsel for the petitioner, Mr. J.P. Bhattacharjee urged before me that issuance of annexure-5 notice was illegal on the face of it and, therefore, it was liable to be set aside. According to him, the condition
precedent to exercise the power under Section 148 being absent in the instant case inasmuch as there was no material on record to show that the authority had reason to believe that certain income escaped assessment, issuance of annexure-5 notice was illegal, void and without jurisdiction and/or without authority of law and accordingly, liable to be set aside and quashed. Mr. Bhattacharjee further submitted that it was evident from the records that notice was issued for collateral purposes. It was nothing but a roving and fishing investigation which was not permissible under the law. Relevant materials necessary for the purpose of making the assessment were placed before the authority at the time of assessment. No new information or material came to the knowledge of the first respondent for the purpose of taking the action. There was no omission on the part of the petitioner-company to disclose fully and truly all the materials necessary for the purpose of assessment. Besides, the first respondent having finalised the assessment for 1985-86 after completing all investigation, the impugned notice was bad in law.
16. The next point urged by Mr. Bhattacharjee was that the second respondent not being a competent authority to issue the letter dated August 2, 1989, the impugned annexure-5 notice dated March 30/31 of 1989, and the initiation of proceeding pursuant thereto were wholly illegal and liable to be quashed. The second respondent not being the assessing authority as contemplated under the law, the satisfaction arrived at by the second respondent was contrary to the provisions of law and the issuance of a notice was nothing but an abuse of the process of law.
17. Mr. G.K. Joshi, learned counsel appearing on behalf of the respondents, on the other hand, supported the impugned action. According to him, annexure-5 notice dated March 30/31 of 1989, was issued in accordance with the provisions of law. No interference was called for. Mr. Joshi further submitted that necessary facts for the purpose of making the assessment having not been disclosed by the petitioner-company fully and truly, the authority had to initiate the proceeding under Section 147(a) of the Income-tax Act and such proceedings cannot be said to be invalid. He also submitted that the satisfaction arrived at by the authority could not be questioned. Besides, according to him, annexure-3 notice dated February 8, 1989, was not open for challenge.
18. On the contentions of the parties the following points require determination :
(I) Whether annexure-5 impugned notice dated March 30/31 of 1989, is valid and in accordance with the provisions of law ?
(II) Whether the second respondent had the authority to issue letter dated February 8, 1989, and the impugned annexure-5 notice dated March 30/31 of 1989, and whether the proceedings initiated pursuant to the said notice was issued under the authority of law
19. Before considering the present case, it will be apposite to refer to some of the provisions of the Income-tax Act.
20. Under Section 139 of the Act, every person whose total income during the previous year exceeded the maximum amount which is not chargeable to income-tax shall furnish a return of his income in a prescribed form and verify in the prescribed manner and setting forth such other particulars as may be prescribed. In case of failure to fill in the form properly, there will be a breach of obligation as referred to under Section 139(1) and the provisions of Section 271(1) of the Act shall be attracted. In case any person who, in the opinion of the Income-tax Officer, is assessable under the Act on the total income, the Income-tax Officer may, before the end of the relevant assessment year, issue a notice on him requiring him to furnish within 30 days from the date of service of the notice a return of his income in the prescribed form and verified in the prescribed manner and also supplying the particulars that may be prescribed.
21. Under Section 142 of the Act for the purpose of making an assessment under the Act, the Income-tax Officer may serve on any person who made a return under Section 139 or to whom notices were issued under Sub-section (2) of Section 139, a notice requiring him to produce or cause to be produced the books of account and/or documents as the Income-tax Officer may require or to furnish in writing and verified in the prescribed manner information in such form and on such points or matters as the Income-tax Officer may deem fit.
22. Under Section 143 of the Act, where a return has been filed under Section 139, the Income-tax Officer may make an assessment with necessary adjustment with reference to the past record, accounts and documents filed with the record. Under Section 144 of the Act if any person fails to make a return required by any notice given under Sub-section (2) of Section 139 or has not made any return or a revised return under Sub-section (4) or Sub-section (5) of Section 139, or fails to comply with all the terms of a notice issued under Sub-section (1) of Section 142 or having made a return fails to comply with all the terms of notice issued under Sub-section (1) of Section 143, the Income-tax Officer, after taking into account all the relevant materials which the Income-tax Officer has gathered, shall make an assessment of the total income or loss to the best
of his judgment and determine the sum payable by the assessee or refundable to the assessee on the basis of such assessment. Therefore, as per Section 144, three conditions are required to be fulfilled and failure to comply with any one of the three conditions will make the assessee liable for best judgment assessment.
23. It is settled law that if there is no valid return a best judgment assessment is justified. There must be a finding that there has been a non-compliance with the notice issued under Section 142(1), 142(1)(a) and 142(3) before the best judgment assessment can be made. The best judgment assessment on the basis of a best judgment assessment of the earlier years may be valid.
24. Section 147 of the Act deals with the provisions relating to escaping of assessment. I quote Section 147 :
'147. Income escaping assessment.--If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of Sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in Sections 148 to 153 referred to as the relevant assessment year) :
Provided that where an assessment under Sub-section (3) of Section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under Section 139 or in response to a notice issued under Sub-section (1) of Section 142 or Section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year.
Explanation 1.--Production before the Assessing Officer of account books or other evidence from which material evidence could, with due diligence, have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso.
Explanation 2.--For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely :--
(a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax ;
(b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return ;
(c) where an assessment has been made, but -
(i) income chargeable to tax has been underassessed ; or
(ii) such income' has been assessed at too low a rate ; or
(iii) such income has been made the subject of excessive relief under this Act ; or
(iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed.'
25. From the section quoted above, it appears that the Income-tax Officer acquires jurisdiction to assess or reassess any such income or recompute the loss or depreciation allowance, as the case may be, for the assessment year concerned, if he has reason to believe that by reason of omission or failure on the part of the assessee to make a return under Section 139 or to disclose fully or truly material facts necessary for his assessment in that year, income chargeable to tax has escaped the assessment of that year, or also in case of no omission or failure on the part of the assessee to file return or to disclose fully and truly material facts, if the Income-tax Officer on receipt of information has reason to believe that the income chargeable to tax had escaped the assessment in any year, may assess or reassess such income or recompute the loss or depreciation allowance for the assessment year concerned.
26. The expression, 'reason to believe' means an honest belief of a reasonable person. This is hot a purely subjective satisfaction on the part of the officer. The ground for belief as contemplated under Section 147(a) must have connection with the question of escapement of income. This reason must be on the basis of some materials on record. This reason to believe is again open to the court to examine whether the reason for the
formation of belief has rational connection with or relevant bearing on the formation of a belief. It must not be extraneous or irrelevant consideration. The Income-tax Officer has no jurisdiction to form such opinion on a mere suspicion or gossip or rumour. It must have a valid source. This is stronger than the expression 'is satisfied'. It must not be arbitrary where the Income-tax Officer knew all the facts on record and made a best judgment assessment he cannot take recourse to Section 147. The provisions of Section 147 will apply only when the assessee fails to file a return, or a particular income has not been shown in the return. The conditions precedent for initiating a reassessment proceeding are reasonable belief reached by the Income-tax Officer under Clause (a) or Clause (b) of Section 147 or recording the reasons of the Income-tax Officer under Section 148(2). The conditions are cumulative in nature and these conditions have been introduced only to safeguard the public interest. The requirements of the section are mandatory in nature.
27. Learned counsel for the parties had drawn my attention to various decisions in connection with the present case.
28. In Calcutta Discount Co. Ltd. v. ITO : [1961]41ITR191(SC) , the Supreme Court held that to confer jurisdiction under Section 34 of the Act (Act XI of 1922) to issue notice in respect of assessment, two conditions had to be satisfied. First, the Income-tax Officer must have reason to believe that income, profits or gains chargeable to income-tax had been underassessed. Secondly, he must have also reason to believe that such 'underassessment' had occurred by reason of either (1) omission or failure on the part of an assessee to make a return of his income under Section 22, or (2) omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment for that year. Both these conditions were conditions precedent to be satisfied before the Income-tax Officer could have jurisdiction to issue a notice for the assessment or reassessment of the year in question. In the said decision, it was further held that the words 'omission or failure to disclose fully and truly all material facts necessary for assessment for that year', used in Section 34 (Act XI of 1922) postulates a duty on every assessee to disclose fully and truly all material facts necessary for his assessment. What facts were material and necessary for assessment differed from case to case. In every assessment proceeding, the assessing authority would, for the purpose of computing or determining the proper tax due from an assessee, require to know all the facts which would help him in coming to the correct conclusion. From the primary facts in his possession, whether on disclosure by the assessee,
or discovered by him on the basis of the facts disclosed, or otherwise, the assessing authority had to draw inferences as regards certain other facts ; and ultimately from the primary facts and the further facts inferred from them, the authority had to draw the proper legal inferences and ascertain, on a correct interpretation of the taxing enactment, the proper tax leviable. So far as primary facts were concerned, it was the assessee's duty to disclose all of them including particular entries in account books, documents and other evidence which could have been discovered by the assessing authority, from the documents and other evidence disclosed. The duty, however, did not extend beyond the full and truthful disclosure of all primary facts. Once all the primary facts had been placed before the assessing authority, it was for him to decide what inferences of facts could be reasonably drawn and what legal inferences had ultimately to be drawn. It was not for anybody else--far less the assessee--to tell the assessing authority what inferences, whether of facts- or law, should be drawn. That if there were in fact some reasonable grounds for the Income-tax Officer to believe that there had been any non-disclosure as regards any primary fact, would be sufficient to give jurisdiction to the Income-tax Officer to issue the notices under the said Section 34. Whether those grounds were adequate or not for arriving at the conclusion that there was a non-disclosure of material facts was not open for the court's investigation. In other words, all that was necessary to give this special jurisdiction was that the Income-tax Officer had, when he assumed jurisdiction, some prima facie grounds for thinking that there had been some non-disclosure of material facts. It was the duty of the assessee, who wanted the court to hold that jurisdiction was lacking, to establish that the Income-tax Officer had no material at all before him for believing that there had been such non-disclosure.
29. In Madhya Pradesh Industries Ltd. v. ITO : [1965]57ITR637(SC) , the apex court following the decision of Calcutta Discount Co. Ltd.'s case : [1961]41ITR191(SC) held thus (page 642) :
'Jurisdiction of the Income-tax Officer obviously arises when he has reason to believe that by reason of omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment, income of the assessee has escaped assessment, or has been underassessed, and when the party claiming relief challenges on oath the existence of the conditions, which confer jurisdiction, and sets out facts which may, unless disproved, support his case, an order dismissing his petition in limine may not properly be made.'
30. The Supreme Court again in ITO v. Lakhmani Mewal Das : [1976]103ITR437(SC) held that in order to reopen an assessment reasons for the formation of the belief contemplated by Section 147(a) must have a rational connection or relevant bearing on the formation of such belief. Rational connection postulated that there must be a direct nexus or live link between the material coming to the notice of the Income-tax Officer and the formation of his belief that there had been escapement of the income of the assessee from assessment in a particular year because of his failure to disclose fully and truly all material facts. However, the court could not go into the sufficiency or adequacy of the material and substitute its own opinion for that of the Income-tax Officer on the point as to whether action should be initiated for reopening the assessment. The court further held that it was not any and every material, howsoever vague and indefinite or distinct, remote and far-fetched, which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment. The grounds or reasons which led to the formation of the belief contemplated under Section 147(a) of the Act must have a material bearing on the question of escapement of income of the assessee from assessment because of his failure or omission to disclose fully and truly all material facts. Once there existed reasonable grounds for the Income-tax Officer to form the above belief, that would be sufficient to clothe him with jurisdiction to issue notice. The court further observed that whether the grounds were adequate or not was not a matter for the court to investigate. The sufficiency of grounds which induced the Income-tax Officer was not a justiciable issue. However, it was open to the assessee to contend that the officer did not hold the belief that there bad been such non-disclosure.
31. In N. Sundareswaran v. CIT : [1972]84ITR173(Ker) , a Division Bench of the Kerala High Court also held that in order to issue notice under Section 34(a) of the 1922 Act corresponding to Section 147(a) of the 1961 Act, two conditions had to be satisfied, i.e., the Income-tax Officer must have reason to believe that income, profits or gains chargeable to income-tax had been underassessed and that he must have also reason to believe that such underassessment had occurred by reason of omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that year.
32. In Ganga Saran and Sons P. Ltd. v. ITO : [1981]130ITR1(SC) , the Supreme Court while dealing with Section 147(a) observed that the expression 'reason to believe' was stronger than the expression 'is satisfied'. The
belief entertained must not be arbitrary or irrational. It must be reasonable or in other words, it must be based on reasons which were relevant and material. The court, of course, could not investigate into the adequacy or sufficiency of the reasons which had weighed with the Income-tax Officer in coming to the belief, but the court could certainly examine whether the reasons were relevant and had a bearing on the matters in regard to which he was required to entertain the belief before he could issue, notice under Section 147(a). If there was 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.
33. The Bombay High Court in Nargis M. Baldiwala v. M.N. Sawant, Second ITO : [1990]185ITR143(Bom) while considering the validity of notice issued under Section 147 also held that when a writ petition was filed challenging the notice of reassessment, it was the duty of the Revenue to show that the Income-tax Officer had reason to believe that the assessee had escaped assessment by filing an affidavit to that effect. When the Income-tax Officer had failed to file such an affidavit, the court would definitely incline to hold that there was no reason to believe.
34. Mr. G.K. Joshi, learned counsel appearing on behalf of the Revenue also cited several decisions.
35. The decision of the Andhra Pradesh High Court in Anne Nagendram and Bommo Reddi Venkayya and Co. v. CIT : [1967]66ITR46(AP) is not applicable in the present case inasmuch as the facts of the said case are different. In that case the court held that the assessee did not fully and truly disclose the material information necessary for the assessment under Section 34(1)(a). In S. Narayanappa v. CIT : [1967]63ITR219(SC) ; Union Carbide (India) Ltd. v. ITO : [1973]87ITR529(Cal) and Indo-Aden Salt Mfg. and Trading Co. P. Ltd. v. CIT : [1986]159ITR624(SC) , the Supreme Court reiterated its earlier decision in Calcutta Discount Co. Ltd.'s case : [1961]41ITR191(SC) . Similarly, the Allahabad High Court also took the similar decision.
36. From the decisions cited above, it is clear that the Income-tax Officer acquires the jurisdiction to assess or reassess such income or recompute
the loss or depreciation allowances, as the case may be, only when he has the reason to believe that by reason of omission or failure on the part of the assessee to make return under Section 139 for any assessment year or to disclose fully or truly all material facts which are necessary for making the assessment. The obligation of an assessee is to disclose only those facts fully and truly which are necessary for making assessment. Beyond that it is not necessary for the assessee to give detailed information. Over and above the necessary information for making assessment, some other details may be there. It is not obligatory on the part of the assessee to make further disclosure. The Income-tax Officer also has no right to insist on such information beyond the information necessary for making the assessment and it is only withholding of necessary and material information by the assessee that confers jurisdiction on the Income-tax Officer to initiate a proceeding under Section 147 and the Income-tax Officer must have reason to believe that the assessee failed to disclose fully and truly those facts which are necessary for the purpose of making assessment. The reason to believe, however, must not be fanciful or arbitrary. It must be reasonable and based on material facts.
37. From the decisions cited above, it is also clear that formation of belief must have a rational connection and direct nexus between the materials coming to the notice of the Income-tax Officer and formation of belief that there had been an escapement of income. Besides, this belief must not be arbitrary and capricious.
38. In the case in hand, the return of income was filed by the petitioner-company for the assessment year 1985-86 corresponding to the accounting year ending June, 1984. Along with the return, the petitioner-company filed its audited profit and loss account, balance-sheet and other documents and particulars. The unadjusted amount of advance received from the Forest Utilisation Officer was clearly shown at Rs. 31,58,700 under the head 'Current liability' as 'advance received from the Forest Utilisation Officer'. The assessing authority prior to the completion of the assessment issued notice to the petitioner-company under Section 142(1) and Section 143(2) of the Act pursuant to which books of account of the petitioner-company had been produced before the assessing authority and the assessing authority fully examined the same. The Chief Executive Officer of the company also personally appeared and explained to the assessing authority all the relevant facts and circumstances. The petitioner-company also produced the records including the account of the Forest Utilisation Officer. This fact was not denied and assessment was made
accordingly after taking into consideration all those. However, annexure-5 notice dated March 30/31 of 1989, was issued. Annexure-5 is a printed notice and certain portions of it had been filled in. The notice said that , 'the income of the petitioner-company chargeable to tax for the assessment year 1985-86 had escaped assessment within the meaning of Section 147 of the Income-tax Act'. This notice simply said that the Deputy Commissioner had reason to believe that the income had escaped assessment within the meaning of Section 147. In my opinion, the notice is absolutely vague and indefinite. In view of the fact that the amount of Rs. 31,58,700 had been shown in the return and it was also informed to the assessing authority when the assessment was made under Sections 142 and 143, in my opinion, the assessee had given all materials necessary for making the assessment. Therefore, issuance of annexure-5 notice was not in accordance within the provisions of Section 147(a). Accordingly, annexure-5 notice is illegal, without jurisdiction and liable to be set aside and quashed.
39. The next point urged by learned counsel for the petitioner is that the power to issue notice under Section 147 is given to the Income-tax Officer. Income-tax Officer has been defined in Section 2(25). As per the said definition, the Income-tax Officer is a person appointed under Section 117. Under Section 117, the Central Government may appoint Income-tax Officers of Class-I service as it thinks fit. In the present case, the notice was issued not by the Income-tax Officer but by the Deputy Commissioner.
40. I have perused the annexure-3 letter dated February 8, 1989, issued by the Assistant Commissioner of Income-tax, Special Circle-II, Guwahati, and also annexure-5 notice issued by the Deputy Commissioner of Income-tax (Assessment), Special Range. The petitioner has challenged the authority of the persons who issued, annexure-3 and annexure-5. As stated above, under the law, a notice can be issued under Section 148 of the Income-tax Act before making assessment, reassessment or recomputation under Section 147 by the Income-tax Officer. Section 147 also empowers the Income-tax Officer to assess, reassess or recompute any income by the Income-tax Officer on fulfilment of the conditions mentioned in the said section. Therefore, issuance of a notice under Section 148 and initiation of a proceeding under Section 147 must be by an Income-tax Officer. The income-tax authorities can be appointed under the provisions of Section 117 of the Act and the Income-tax Officer has been clearly defined under Section 2(25).
41. Mr. Joshi, learned counsel appearing on behalf of the Revenue, could not show from the records that the Assistant Commissioner or the Deputy Commissioner was appointed by the Central Government as envisaged under the law. When the authority has been challenged, it is the duty of the Revenue to show that those officers who issued annexure-3 and annexure-5 and who initiated the proceeding under Section 147 had been appointed Income-tax Officers as contemplated under the law. In the absence of any such record it is difficult to accept that the proceeding was initiated by a competent authority and that annexure-3 letter and annexure-5 notice had been issued by the competent authority. Accordingly, I hold that annexure-3 letter dated February 8, 1989, and annexure-5 notice dated March 30/31 of 1989, were not issued by the competent authority and I further hold that the, proceeding was also not initiated by an authority having power to do so under the provisions of law.
42. In view of the above, the petition is allowed by setting aside the said annexure-3 letter dated February 8, 1989, and annexure-5 notice dated March 30/31 of 1989, and also the proceeding under Section 147.
43. In the facts and circumstances of the case, however, I make no order as to costs.