Hon. Dr. Satish Chandra,J.
The assessee is a HUF and filed a return showing total income of Rs. 36,532/-. Subsequently, on the basis of the information received from the Investigation Wing, action under Section 147 of the Income Tax Act, 1961 (hereinafter referred to as the Act) was taken and, accordingly, a notice under Section 148 of the Act was issued. The Assessing Officer completed the assessment making the following additions:-
The assessee, being aggrieved, filed an appeal under Section 148 of the Act. The appellate authority dismissed the appeal questioning the validity of the issuance of notice under Section 148 of the Act. The appellate authority dismissed the appeal holding that the proceedings under Section 147 of the Act were validly initiated by the Assessing Officer and that the notice under Section 148 was properly served on the assessee. The assessee, being aggrieved, preferred a Second Appeal before the Tribunal, who by its order allowed the appeal and quashed the re-assessment order made by the Assessing Officer. The Tribunal held that the initiation of proceedings under Section 147 of the Act was invalid. The Department, being aggrieved, has filed the appeal under Section 260A of the Act, which was admitted on the following substantial questions of law:
"(1) Whether the Income Tax Appellate Tribunal was justified in law in allowing the appeal of the assessee by cancelling the re-assessment proceedings made by the Assessment Officer u/s 147 of the I.T.Act, 1961 without appreciating the facts of the case and without going to the sprit of the provision of section 147 of the I.T.Act?
(2) Whether the Income Tax Appellate Tribunal was justified in law in cancelling the re-assessment proceedings u/s 147 of the I.T.Act on technical ground and not adjudicated the issue on the merit of the case?"
We have heard Sri Shambhu Chopra, the learned counsel for the appellant.
Having heard the learned counsel for the parties, we find that the Assessing Officer had recorded the reasons for issuing the notice under Section 148, namely-
"in this case enquiries were conducted by the DDIT (Inv.) Unit II (i) Kanpur. The DDIT's report containing information in respect of investments made by the assessee in acquisition of immovable properties, purchase of car and in business as well as deposits made in various banks has been received.
The assessee's jurisdiction was with erstwhile ACIT Cir 2(3) Kanpur. Therefore, ACIT II, Kanpur was requested to intimate whether the assessee has filed return for the assessment year 1995-96. The ACIT has intimated that there is no control register and it is very difficult to ascertain as to whether the return of income has been filed or not.
The assessee has not disclosed the investments as reported by the DDIT (Inv.) Unit II (i) Kanpur. We have therefore, reason to believe that the assessee has not truly and fully disclosed the particulars of income and investments in properties, cars and in bank deposits. It is estimated that the assessee has escaped assessments exceeding Rs. 1.0 lac for which provisions of section 147 of the Act are clearly attracted for which notice u/s 148 is required to be issued."
From the aforesaid, it is clear that the reasons recorded by the Assessing Officer mentions about the undisclosed investments in the business, purchase of car, acquisition of immovable properties as well as the deposits in various banks. Nothing has been stated or indicated in the reasons so recorded with regard to any undisclosed investments made by the assessee in the purchase of shares. We find from a perusal of the assessment order that the addition had been made on account of investments made in the purchase of shares. We are of the opinion that the reasons recorded by the Assessing Officer has no nexus or a live link with the addition made by him in the assessment order. There has to be a live link between the reasons recorded and the additions so made in the assessment order.
Income chargeable to tax that has escaped assessment has been provided under Section 147 of the Act. With effect from 1st April, 1989, Section 147 underwent an amendment to the effect that if the Assessing Officer had "reasons to believe" that any income chargeable to tax had escaped assessment, the Assessing Officer could assess or reassess such income. "Reasons to believe" has been a subject matter of interpretation by various Courts in various decisions. A Division Bench of this Court in Indra Prastha Chemicals Pvt. Ltd. and others Vs. Commissioner of Income Tax and another, 271 ITR 113, after considering various decisions of Supreme Court and other High Court, culled out the following:-
"Under Section 147 of the Act the proceedings for the assessment can be initiated only if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year. The question whether the Assessing Officer had reasons to believe is not a question of limitation only but is a question of jurisdiction, a vital thing, which can always be investigated by the Court in an application under Article 226 of the Constitution as held in Daulatram Rawatmal v. ITO (1960) 38 JTR 301 (Cal), Jamna Lal Kabra v. ITO (1968) 69 ITR 461 (All), Calcutta Discount Co. Ltd. v. ITO (1961) 41 ITR 191 (SC), CM. Rajgharia v. ITO (1975) 98 ITR 486 (Pat) and Madhya Pradesh Industries Ltd. v. ITO (1965) 57 ITR 637 (SC).
The words "has reason to believe" are stronger than the words "is satisfied". The belief entertained by the Assessing Officer must not be arbitrary or irrational. It must be reasonable or, in other words, it must be based on reasons which are relevant and material as held by the apex Court in Ganga Saran and Sons (P) Ltd. v. ITO, (1981) 130 ITR 1.
The expression "reason to. believe" in Section 147 does not mean purely subjective satisfaction on the part of the Assessing Officer. The belief must be held in good faith; it cannot be merely a pretence. It is open to the Court to examine whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section. To this limited extent, the action of the Assessing Officer in starting proceedings under Section 147 is open to challenge in a Court of law as held in S. Narayanappa v. CIT (1967) 63 ITR 219 (SC). Kantamani Venkata Narayana and Sons v. Addl ITO (1967) 63 ITR 638 (SC), Madhya Pradesh Industries Ltd. v. ITO (1970) 77 ITR 268 (SC), Sowdagar Ahmed Khan v. ITO (1968) 70 ITR 79 (SC), ITO v. Lakhmani Mewal Das, (1976) 103 ITR 437 (SC), ITO v. Nawab Mir Barkat Ali Khan Bahadur, (1974) 97 ITR 239 (SC), CST v. Bhagwan Industries (P) Ltd., (1973) 31 STC 293 (SC) and State of Punjab v. Balbir Singh (1994) 3 SCC 299.
The formation of the required opinion and belief by the Assessing Officer is a condition precedent. Without such formation, he will not have jurisdiction to initiate proceedings under Section 147. The fulfilment of this condition is not a mere formality but it is mandatory. The failure to fulfil that condition would vitiate the entire proceedings as held by the apex Court in the case of Johri Lal (HUF) v. CIT, (1973) 88 ITR 439 (SC) and Sheo Nath Singh v. AAC of I.T., (1971) 82 ITR 147 (SC). The reasons for the formation of the belief must have rational connection with or relevant bearing on the formation of belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Assessing Officer and the formation of his belief that there has been escapement of income of the assessee from assessment in the particular year. It is not any and every material, howsoever vague and indefinite or distant, remote and farfetched, which would warrant the formation of the belief relating to escapement of income of the assessee from assessment, as held by the Hon'ble Supreme Court in the case of ITO v. Lakhmani Mewal Das (1976) 103 ITR 437. If there is 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 Assessing Officer could not have reason to believe. In such a case, the notice issued by him would be liable to be struck down as invalid as held in the case of Ganga Saran and Sons P. Ltd. v. ITO (1981) 130 ITR 1 (SC).
Thus, it is well settled that the 'reason to believe' under Section 147 must be held in good faith and should have a rational connection and relevant bearing on the formation of the belief and should not be extraneous or irrelevant. Further, this Court in proceedings under Article 226 of the Constitution of India can scrutinize the reasons recorded by the AO for initiating the proceedings under Sections 147/148 of the Act. The sufficiency of the material cannot be gone into but relevancy certainly be gone into."
There is no quarrel with the aforesaid proposition. The reason to believe does not mean purely subjective satisfaction on the part of the Assessing Officer. It means that the belief must be held in good faith. Further, the formation of the opinion and belief is a condition precedent without which the Assessing Officer will not have jurisdiction to initiate proceedings for reassessment. The reasons for the formation of the belief must have a rational connection, which is germane to the issue and must have a direct nexus. Normally, there must be some fresh material, which would give rise to the formation of the belief that income had escaped assessment and, therefore, the fresh material, which comes to the notice of the Assessing Officer has to have a direct nexus or a live link with the formation of the belief that there has been an escapement of income. The foundational requirement for reopening the assessment is, that there must be a reason to believe that income had escaped assessment. There has to be some tangible material on the basis of which a reason to belief can be formed that some income had escaped assessment.
In the light of the aforesaid, we find that the Assessing Officer has failed to prove any escapement of income. Accordingly, initiation of proceedings under Section 148 of the Act is invalid.
In view of the aforesaid, we do not find any error in the order of the Tribunal. The questions of law framed are answered in favour of the assessee and against the Department. The appeal fails and is dismissed.
Dated: 22.08. 2014 MAA/-
(Dr.Satish Chandra,J.) (Tarun Agarwala,J.)