U.L. Bhat, C.J.
1. This is a reference under Section 250(1) of the Income-tax Act, 1961 (for short, ' the Act' ), by the Income-tax Appellate Tribunal, Guwahati Bench, Guwahati, at the instance of the assessee. The assessee sought reference of six questions, but the Tribunal referred only the following two questions :
' (1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the action taken by the Income-tax Officer under Section 147(a) for the assessment year 1972-73 was proper and valid ?
(2) Whether, on the facts and in the circumstances of the case, the addition of Rs. 5,04,137 representing the difference between the stock value shown in the books of account of the assessee and the value disclosed to the bank was justified ?'
2. The relevant assessment year is 1972-73. The assessee is the proprietor of a business engaged in manufacture and sale of iron and steel pipes, buckets and in fabrication of steel structures. Original assessment was made under Section 143(3) of the Act by the Income-tax Officer determining the income at Rs. 27,230. There was an appeal before the Appellate Assistant Commissioner and a further appeal before the Tribunal. The assessment on the basis of the Tribunal's order was revised under Section 254. Assessment for the assessment year 1973-74 was dealt with by the successor Income-tax Officer. He reopened the assessment for the year 1972-73 in terms of Section 147(a) by issuing a notice under Section 148 on the ground that the assessee failed to make full and true disclosure of the stock pledged to the State Bank of India, Tinsukia, which was in excess of the value disclosed in the account books and balance-sheet of the assessee by a sum
of Rs. 5,04,137. The assessee did not submit any return or reply in response to this notice. The Income-tax Officer subsequently issued a notice in terms of Section 142(1) of the Act and it was served on the assessee on July 26, 1980. In spite of time being granted repeatedly to him, the assessee failed to comply with the terms of the notice. Thereupon the Income-tax Officer completed the assessment under Section 144.
3. The Income-tax Officer found that loans were being taken from the bank against goods, fixed assets and fixed deposit certificates : (i) Mandi type loans to the extent of Rs. 2,52,012.19 and (ii) Lock and Key loans to the extent of Rs. 4,16,815.81, the total being Rs. 6,68,828. The bank was advancing loans to the extent of a maximum of 70 per cent. of the value of the securities offered. The assessee, in order to secure loan of Rs. 6,68,828, had to offer securities to the extent of Rs. 9,95,000. As per the balance-sheet of the assessee as on March 31, 1972, security had been offered to the tune of Rs. 6,42,703, that is, closing stock of Rs. 4,17,370, fixed assets being Rs. 1,75,333 and fixed deposit certificates being Rs. 50,000. Enquiry conducted in the course of assessment proceedings for 1973-74 with the bank showed that the assessee had disclosed stock amounting to Rs. 9,21,507 as on March 31, 1972, and certified the statement of stock to be true and correct. The Income-tax Officer therefore found suppression of stock to the extent of Rs. 5,04,137 in the accounts of the assessee. The Income-tax Officer also noted that in the statement of stock position as on March 31, 1972, given to the bank, the assessee had certified that the statement of stock was true and correct. In the absence of any explanation, the difference was held by the Income-tax Officer to be undisclosed income for the year and assessment was made accordingly.
4. In appeal by the assessee, the Commissioner of Income-tax reversed the decision of the Income-tax Officer. In further appeal by the Revenue, the Appellate Tribunal set aside the decision of the Commissioner of Income-tax and restored the decision of the Income-tax Officer.
5. Question No. 1.--It is argued for the assessee that Section 147 of the Act could not have been validly invoked by the Income-tax Officer since the conditions precedent contemplated therein did not exist. It is pointed out that the Tribunal did not set aside the findings forming grounds for the ultimate decision of the Commissioner of Income-tax. Learned counsel sought to justify the findings arrived at by the Commissioner of Income-tax. It is also contended that the principles of natural justice were violated by the Income-tax Officer.
6. The Commissioner of Income-tax relied on the following grounds, namely, (a) the Income-tax Officer who made the original assessment made some notings on the stock list showing the closing stock position vis-a-vis the bank overdrafts, the numerous notings on the balance-sheet show that he had examined the bank overdraft accounts, his notings show that he had noted the opening balance, further advances received and the closing balance in the overdraft account ; the value of the closing stock shown in the accounts as Rs. 4,17,270 was not sufficient for obtaining the overdraft of Rs. 6,68,828, that the records do not show as to what enquiries he made on this point and how he became satisfied in spite of the large difference in the value ; (b) there is no indication as to what information and at what point of time and from which source the Income-tax Officer obtained the alleged new information ; (c) the alleged new information was there even before the completion of the original assessment and it came to the surface of the records for the first time in the draft order under Section 144B for the assessment year 1973-74 ; (d) the original assessment records do not give any indication of the nature of the enquiries made by the then Income-tax Officer regarding the difference in the value of the stocks but there is sufficient indication from his notings that the matter did receive his thoughtful consideration ; (e) it is probable that, after discussion with the appellant, the then Income-tax Officer was satisfied with the explanation of the appellant and it is equally probable that he missed to consider this point through inadvertence. On these grounds, the Commissioner of Income-tax came to the conclusion that it was only a case of two successive Income-tax Officers' forming different opinions on the same set of facts and not a case of omission or failure on the part of the appellant to make a full and complete disclosure of the facts and a mere change of opinion cannot confer jurisdiction on the Income-tax Officer to initiate proceedings under Section 147(a).
7. The judgment of the Tribunal refers in detail to all the above grounds, reasoning and conclusions of the Commissioner of Income-tax. The Tribunal observed that it could be said that the Income-tax Officer did not form any opinion on that score and, in such a situation, there was no question of an opinion being changed and change of opinion was not the basis for the action of the successor Income-tax Officer. The Tribunal referred to the decision of the Supreme Court in CIT v. T.S.PL.P. Chidambaram Chettiar : [1971]80ITR467(SC) where it was held that the fact that there was some vague information before the Officer at the time of the original assessment was by itself not sufficient to bring to tax the amount particularly in view of the fact that the assessee had denied it and that the fact that the Officer
could have made further enquiries, but did not do so, did not take the case out of Section 34 of the Indian Income-tax Act, 1922, as the assessee had failed to place truly and fully all the material facts before the Officer and the notings made by the Officer in the order sheet did not amount to a decision taken by him on the basis of facts found but amounted only to casual observations. The Tribunal observed that, in the present case also, the notings have to be considered as casual observations and the then Income-tax Officer did not form any opinion and the records did not show what enquiries he had made. The Tribunal also held that the Commissioner of Income-tax was in error in drawing an inference from the file relating to the assessment year 1973-74 of change of opinion.
8. In order that Section 147(a) should apply, two conditions must be satisfied, namely, (i) that the Officer has reason to believe that income chargeable to tax has escaped assessment for the year ; (ii) fie must have reason to believe that this was by reason of the omission or failure on the part of the assessee to make a return under Section 139 or to disclose fully or truly all material facts necessary for the assessment for that year. The assessee has a duty to disclose all primary facts before the Officer. He has no duty to disclose inferential facts, i.e., inferences which could be drawn from primary facts. See the Supreme Court decisions in Calcutta Discount Co. Ltd. v. ITO : [1961]41ITR191(SC) and CIT v. Bhanji Lavji : [1971]79ITR582(SC) . The fact that there was some vague information before the Officer indicating receipt of income not shown in the account by itself would not be sufficient to bring to tax the amount. The fact that the Officer could have made further enquiries into the matter but did not do so is not a circumstance which would render Section 147(a) inapplicable. See CIT v. T.S.PL.P. Chidambaram Chettiar : [1971]80ITR467(SC) . Reason for formation of belief for reopening an assessment must have a rational connection or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or link between the material coming to the notice of the Officer and the formation of his belief that there was escaped income because of failure to disclose fully or truly all material facts. The court cannot go into the sufficiency or adequacy of the material or substitute its own opinion for that of the Officer. It is for the Officer to draw necessary inferences from the facts. If an inference drawn by the Income-tax Officer appears to be erroneous, a mere change of opinion with regard to that inference would not justify initiation of action under Section 147(a) of the Act. See ITO v. Lahhmani Mewal Das : [1976]103ITR437(SC) .
9. We are not able to agree that the Commissioner of Income-tax came to a definite conclusion that the information that stock worth Rs. 9,21,507 was given as security to the bank for the loan advanced or that the assessee had given a certified declaration to the bank that he had stock worth Rs. 9,21,507 was either disclosed by the assessee to the Officer who completed the original assessment or that the Officer by his enquiries came by such information. The observations in the Commissioner of Income-tax's order would only mean that the Officer who made the original assessment realised that the stock shown in the account books would not be adequate security for the loan taken from the bank since the bank would advance only up to 70 per cent. of the value of the security. This would have been capable of a variety of explanations such as that the bank made an exception in the case of the assessee and departed from the normal rule or that the assessee misled the bank into thinking that the requisite stock was available though actually it was not available or that the bank committed an error in this regard. The Commissioner of Income-tax did not find that the Officer who made the original assessment made enquiries at the bank or came to know that stock of a value in excess of the value shown in the account books had been hypothecated to the bank or that a certified declaration showing the value of the stock at an amount higher than the value shown in the accounts had been submitted the bank or that the bank had acted on such declaration. The order of the Commissioner of Income-tax itself shows that there was some definite information obtained in the course of proceedings relating to the assessment year 1973-74 which led to a proposal to add Rs. 5,04,137 to the income but it did not receive the approval of the Inspecting Assistant Commissioner. This was based on enquiries made at the bank which showed that the assessee, in order to obtain loan, disclosed hypothecated stock valued at Rs. 9,21,507. The Tribunal pointed out that the notings made by the Officer in the course of original assessment on the balance-sheet and the stock list reveal only that the Officer had the information that the bank had advanced a loan of an amount higher than what was justified by the stock shown in the accounts. This is not sufficient to indicate that the Officer had made enquiries at the bank and had come to know about the correct state of affairs before completing the original assessment. It may be that he should have enquired at the bank. There is no finding that he did so or that he got information from the bank. As suggested in the orders of all the three statutory authorities, the enquiries made by the successor Income-tax Officer, in the course of the assessment proceedings relating to the assessment year 1973-74 brought forth information that the assessee had disclosed stock amounting to Rs. 9,21,507 as on March 31, 1972, to the
bank. It was the duty of the assessee to have disclosed this information to the Officer who completed the assessment for the assessment year 1972-73 and he failed to do so. That, if the Officer had gone to the bank and made direct enquiries at the bank or had examined the records available in the bank, he would have obtained this information, does not alter the position that the assessee had failed to disclose it.
10. It is contended for the assessee that there has been violation of the principles of natural justice since the Income-tax Officer did not issue a notice to him informing him that he proposed to add Rs. 5,04,137 to the income and assess tax on that basis. There is no dispute that the Income-tax Officer had issued notice under Section 148 of the Act followed by a notice under Section 142(1) of the Act and no return or reply was submitted. It is not contended before us that notices were not self-explanatory. Our attention has not been drawn to any provision in the Act requiring the Officer to inform the assessee about the specific proposal to add a particular amount as income, nor can such a requirement be read into the Act as a principle of natural justice. Learned counsel for the assessee placed reliance on the decisions in Dhakeswari Cotton Mills Ltd. v. CIT [1954] 26 ITR 775 and Dwijendra Kumar Bhattacharjee v. Superintendent of Taxes [1989] 2 GLR 461. In the former case, the Tribunal received some information from the Department and acted on the same without disclosing the same to the assessee and without giving him an opportunity to rebut the additional information. In this view, the Supreme Court held that the Tribunal violated the rules of natural justice. The case was remanded to give full opportunity to the assessee to place relevant materials. The Supreme Court has not held that the assessee must be given notice of the exact amount which was proposed to be added to the income. The decision emphasises that though the authority is not fettered by technical rules of evidence and pleadings and is entitled to act on materials which may not be accepted as evidence in a court of law, it is not entitled to make a pure guess or make an assessment without reference to any evidence or material at all. The second decision relied on also does not support the proposition canvassed on behalf of the assessee. Therefore, the contention that the proceedings are vitiated must fail.
11. The Commissioner of Income-tax examined the merits and recorded a finding in favour of the assessee taking the view that larger stock could not have been hypothecated to the bank and the stock revealed by the accounts must be correct since raw materials are supplied by Government agencies under permits issued by the Director of Industries, that the raw
materials are subject to rigid control and check by the Directorate of Industries, the receipt and utilisation of the material is checked by the Government agencies periodically and the registers are signed by the Superintendent of Industries, that annual returns are submitted to the Directorate of Industries in the prescribed form and that at no time the Government agencies had found fault with the assessee in regard to the stock and therefore the probability of the assessee having more stocks than that supplied by the Government agencies is negligible. The Commissioner of Income-tax also took the view that there was a practice in vogue of businessmen declaring non-existent stock to cover overdraft limits and banks do not exercise effective control to check the correctness of bank declarations made by businessmen and that, as long as the transactions go on satisfactorily, the banks do not bother much about the direct security. The Tribunal disagreed with this view. The reasoning of the Commissioner of Income-tax appears to be perverse. The question for consideration is not whether the bank was satisfied or whether the Director of Industries was satisfied; the question is whether the Income-tax Officer's finding that larger stock was disclosed and hypothecated to the bank is supported by materials or is perverse. The assessee does not have a case that he did not give a certified declaration to the bank showing stock valued at Rs. 9,21,507. He did not appear before the Income-tax Officer to place any material or address any argument. The assessee argued before the Commissioner of Income-tax that he had given a false declaration to the bank showing nonexistent larger stock in order to obtain higher overdraft facility. The order of the Commissioner of Income-tax does not disclose that the assessee had placed any material before it in support of this statement. The Commissioner of Income-tax accepted the statement observing that there was such a practice in vogue. The Tribunal pointed out that this observation was not supported by any material.
12. Our attention, in this connection, is drawn to two decisions of the Madras High Court in CIT v. Ramakrishna Mills (Coimbatore) Ltd. : [1974]93ITR49(Mad) and in Coimbatore Spinning and Weaving Co, Ltd. v. CIT : [1974]95ITR375(Mad) . In the earlier case, there was a discrepancy between the stock book of the assessee and the stock declaration made to the bank to which stock had been hypothecated. The Income-tax Officer added the difference to the income as income from undisclosed sources. The assessee pointed out that the declaration given to the bank was wrong and the stock in the account book tallied with the stock declaration given from time to time to the Textile Commissioner. The assessee also stated that he gave declaration to the bank based on a rough estimate. The Tribunal accepted this
explanation and held that there was no suppression of stock. The High Court declined to interfere with the order of the Tribunal on the ground that the stock in the account book tallied with the stock declaration made to the Textile Commissioner and the bank declaration was based on a rough estimate and not accurate. In the latter decision, there was discrepancy between the stock in the books of account and the stock declared to the banks. The assessee, when asked to explain, stated that the stock declared to the banks was inflated in order to secure higher loan facility. The Income-tax Officer rejected the accounts and made an addition in the gross profit which he even otherwise concluded was too low. The Appellate Assistant Commissioner agreed with the Income-tax Officer and stated that it was impossible that the banks would have accepted the assessee's declaration of stock without proper verification. The Tribunal declined to interfere except in regard to the quantum of addition. Reliance was placed before the High Court on its earlier decision referred to above. The High Court observed that the earlier decision cannot be regarded as an authority for the proposition that stock declaration made to a bank should not be taken into consideration and pointed out that in the earlier case the accounts of the assessee agreed with the declaration made to the Textile Commissioner and the bank declaration was given on a rough estimate. Dealing with the argument that there was a practice followed by businessmen of declaring larger stock to banks for the purpose of getting higher loans, the High Court observed (at page 379 of 95 ITR) :
' We are not convinced that any such practice is shown to exist or that it has been recognised in the commercial circles or by courts. Even assuming that such a practice exists the Tribunal is not expected to take judicial notice of such sub-standard morality on the part of the assessees so as to enable them to go back on their own sworn statements given to the banks as to the stocks held and hypothecated by them to the banks. In a case like this where the assessee is confronted with his own sworn statements which show a different state of affairs than the one shown in his own books of account, a heavy burden lies on the assessee to prove that the books of account alone give the correct picture, and the sworn statements given to the banks were motivated . . . Having regard to the assessee's own statements given to the banks which show a larger stock of cotton in respect of C.O. 4 and Cambodia than had been actually shown in the account books, it cannot be said that the rejection of the stock account of the assessee is not warranted, so long as the assessee's explanation that the stocks were purposely inflated for the purpose of getting higher overdraft facilities from the banks had not been accepted.'
13. We are in respectful agreement with the above view.
14. The Commissioner of Income-tax endorsed the argument of the assessee that there was such an immoral practice among the traders, without seeking any material or evidence in support thereof. In our opinion, it is not merely a question of morality ; such conduct may involve criminality also. The authority should be wary in accepting the self-serving explanation that the assessee deliberately inflated the stock in the declaration to the bank with a view to obtain higher loan facility. In any event, the mere statement of the assessee in that behalf could never be accepted. The Tribunal has considered all relevant materials in this behalf and its view is reasonable.
15. There was no material before the Commissioner of Income-tax indicating that the bank did not exercise effective control. The assessee did not have any material to show that raw materials could not be obtained from the open market. He produced only a certificate from the Director of Industries given to a sister concern allegedly having similar business. The Commissioner of Income-tax did not take into consideration the possibility of the assessee obtaining raw materials from irregular sources. The grounds stated by the Commissioner of Income-tax are either not relevant, or if relevant, not based on acceptable materials.
16. For the reasons indicated above, we are satisfied that the decision of the Tribunal that the action taken by the Income-tax Officer under Section 147(a) was proper and valid is justified. Question No. 1 has to be answered in the affirmative, i.e., in favour of the Revenue and against the assessee.
17. Question No. 2.--Learned counsel for the assessee contended that, in any view of the case, there was no justification for the addition of Rs. 5,04,137 in the income of the assessee for the assessment year 1972-73. The Income-tax Officer treated the above amount as income under Section G9B of the Act. According to this provision, where, in any financial year, the assessee has made investments or is found to be the owner of any bullion, jewellery or other valuable article, and the Income-tax Officer finds that the amount expended on making such investments or in acquiring such article exceeds the amount recorded in this behalf in the books of account maintained by the assessee for any source of income, and the assessee offers no explanation about such excess amount or the explanation offered by him is not, in the opinion of the Income-tax Officer, satisfactory, the excess amount may be deemed to be the income of the assessee for such financial year. The assessee in this case did not offer any satisfactory explanation before the Income-tax Officer and, therefore, the
Income-tax Officer could not be found fault with for deeming the excess amount to be the income of the assessee for the year concerned. On the finding of the Income-tax Officer, the addition to the income was justified under Section 69B of the Act. The Commissioner of Income-tax did not hold that, on the findings arrived at by the Income-tax Officer, Section 69B of the Act could not be invoked. Such a contention was not raised before the Commissioner of Income-tax. We, therefore, reject the above contention.
18. It is finally contended on behalf of the assessee that, since the proposed addition for the assessment year 1973-74 was not approved by the Inspecting Assistant Commissioner, there was no justification to make the addition for the assessment year 1972-73. While conceding that the principles of res judicata or estoppel do not apply to assessments for two different years under the income-tax law, learned counsel relied on the decision in Radhasoami Satsang, Saomi Bagh v. CIT : [1992]193ITR321(SC) where it is observed that a finding of fundamental fact for the previous year which remained unchallenged cannot be disturbed in the next year and the decision in CIT v. L. G. Ramamurthi : [1977]110ITR453(Mad) where the necessity of uniform conclusions on the same set of facts was stressed. Apart from the difference in stocks of over Rs. 5 lakhs in the previous year relating to the assessment year 1972-73, there is no material to show that there was a similar excess during the next year also. Assuming that the value of goods pledged to the bank in the previous year relevant to the assessment year 1973-74 was in excess of the stock shown in the accounts for that year, the fact that the difference in value was not added to the income of that assessment year cannot be a ground to hold that an addition should not be made for the assessment year 1972-73. We do not think the observations in the above decisions relied on by the assessee have any application to the facts of the present case. Question No. 2 has to be answered in the affirmative, that is, against the assessee and in favour of the Revenue.
19. We answer questions Nos. 1 and 2 in the affirmative, i.e., against the assessee and in favour of the Revenue. A copy of this judgment under the signature of the Registrar and seal of the High Court will be transmitted to the Income-tax Appellate Tribunal. The assessee shall pay the costs of the reference to the Revenue.
N.G. Das, J.
20. I agree.