JUDGMENT Om Prakash, J.
1. The following questions have been referred by the Income-tax Appellate Tribunal under Section 256(2) of the Income-tax Act, 1961 (briefly, "the Act"), for the opinion of this court :
"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the proposal submitted to the Commissioner under Section 147(a) on March 20, 1965, was too vague to show that there were any reasonable grounds for the Income-tax Officer to believe that there had been any non-disclosure of facts having a material bearing on the question of underassessment ?
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in cancelling the reassessment made under Section 143(3)/147(a) of the Income-tax Act, 1961 ?"
2. The facts as briefly stated are that, for the consecutive assessment years 1957-58 to 1959-60, the Income-tax Officer made assessments under Section 143(3) of the Act on the assessee, a registered firm, at Rs. 4,03,952, Rs. 1,27,210 and Rs. 1,17,553, respectively. At the stage of the original assessments, the assessee claimed having taken hundi loans to the tune of rupees two lakhs from various parties during the accounting year 1956-57 relevant to the assessment year 1957-58. The said loans were accepted to be genuine in the original assessments and the interest liability having been claimed by the assessee on such loans, was allowed for all these years by the Income-tax Officer. Later, the Income-tax Officer was of the view that income relating to these years had escaped assessment and he, therefore, issued notices under Section 148 with a. view to framing reassessments under Section 147(a) of the Act. In the assessments made under Section 143(3)/148 of the Act, the Income-tax Officer commonly observed :
"During the course of assessment proceedings for succeeding years it was found that the assessee took hundi loans from several parties and these loans were not genuine."
3. That was why the Income-tax Officer issued notices under Section 148 and initiated reassessment proceedings under Section 147(a) of the Act.
4. In response to the notices issued under Section 148, the assessee filed returns showing income as determined in the original assessments. In Part "F" of such returns, the assessee gave the following note :
"During the accounting year 1956-57, the assessee had taken loans to the tune of Rs, 21 lakhs from various parties as per details mentioned in annexure 'A' to this return. The said loans were genuine and being accepted as such in the past. This fact is, however, disclosed in Section 'F' of the return in view of the attitude of the Department towards such loans as evidenced by the assessment orders for the assessment year 1960-61."
5. The assessee challenged the validity of the reassessment proceedings before the Income-tax Officer who rejected the assessee's contention saying that the assessee nowhere disclosed in the original assessment proceedings that the hundi loans were bogus. The Income-tax Officer further observed that many of the creditors had admitted that they were acting simply as name-lenders to accommodate the persons having unaccounted money. He, therefore, took the view that the hundi loans were nothing but the assessee's own unaccounted money introduced in the books in benami names. Taking such view, the Income-tax Officer made the following additions :
Assessment year On account of unproved hundi loans Interest on such loans Total Rs.
Rs.
Rs.
1957-58 2.00,000 8,000 2,08,000 1958-59 1,10,000 20,420 1,30,420 1959-60 2,10,000 26,050 2,36,050
6. The assessee then appealed to the Appellate Assistant Commissioner against the reassessment orders, but failed. The Appellate Assistant Commissioner eventually upheld the validity of the reassessment proceedings. The Appellate Assistant Commissioner observed that ; "On the basis of the inquiries conducted by the Income-tax Officer during the assessment year 1960-61, the Income-tax Officer came to know that some of the parties in whose names the hundi loans were shown in the assessee's books had admitted before the Income-tax Officer at Bombay that they were not giving any genuine loans but were only lending their names". This is how the additions made in the assessment orders by the Income-tax Officer were upheld by the Appellate Assistant Commissioner.
7. The assessee then carried the dispute in second appeal before the Appellate Tribunal. The Tribunal called upon the Departmental representative to furnish copies of the reasons as, recorded by the Income-tax Officer in his proposal made to the Commissioner of Income-tax for each year for initiating action under Section 147(a) of the Act. The proposals made to the Commissioner of Income-tax containing identical reasons for initiating proceedings under Section 147(a) were then furnished by the Departmental representative before the Tribunal which, except the variation in the figures of income originally assessed, are couched similarly as follows :
"During the year under consideration, the assessee had taken hundi loans which (sic) have been proved to be fictitious. The assessee was also allowed interest payments totalling more than Rs. 15,000 to these alleged money lenders as deduction from income. It is necessary to take action under Section 148 to assess income which has escaped assessment on account of the reasons given above. Permission is solicited."
8. The Income-tax Officer made separate proposal for each year in the following identical terms :
"8. Whether the Commissioner is satisfied that it is a fit case for the issue of notice under Section 148."
9. which was approved by the Commissioner of Income-tax on March 30, 1965. The Appellate Tribunal held (at paragraph 12) ;
"We have considered the above reasons carefully. A first comment would be that they are vague. There is no mention of any particular account in the books of the assessee for the relevant years. The reasons are stated in very broad terms. The Income-tax Officer says 'These loans have been proved to be fictitious'. It is not clear what loans he had in mind. The loan accounts are not mentioned except for the vague reference 'running into lakhs'. In short, the proposals do not show ground or material on which a belief that income escaped assessment for these three years could be reasonably founded."
10. The Tribunal having discussed further concluded in the following words :
". . . . We have no hesitation in holding that the proposals are too vague to show that there were many reasonable grounds for the Income-tax Officer to believe that there had been any non-disclosure as regards any facts which could have a material bearing on the question of underassessment for the three years in appeal here. In this view, we hold that the assumption of jurisdiction under Section 147(a) by the Income-tax Officer was not valid in law for any of these three years and that the reassessments made in pursuance thereof require to be cancelled. We direct accordingly."
11. This is how the Appellate Tribunal cancelled the reassessment orders. Aggrieved, the Revenue approached this court under Section 256(2) of the Act which directed the Appellate Tribunal to draw up a statement of the case and refer the abovementioned questions for the opinion of this court and hence this reference.
12. The short question for consideration before us is whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the reassessment proceedings initiated by the Income-tax Officer under Section 147(a)/148 of the Act for all these years were invalid. The answer to this question will not detain us for long as sufficient guidelines have been given by the Supreme Court in this behalf in ITO v. Lakhmani Mewal Das [1976] 103 ITR 437. In Lakhmani Mewal Das' case, the original assessment for the assessment year 1958-59 was made on the respondent on June 14, 1960, under Section 23(3) of the Indian Income-tax Act, 1922, after allowing deduction of a sum of Rs. 10,494 towards interest to certain creditors. On March 14, 1967, the respondent received a notice dated March 8, 1967, issued by the appellant under Section 148 of the Act stating that he has reason to believe that the respondent's income had escaped assessment within the meaning of Section 147 of the Act and that the notice was being issued after obtaining the necessary satisfaction of the Commissioner of Income-tax. The respondent then challenged the validity of the proceedings initiated under Section 147(a) before the Calcutta High Court under Article 226 of the Constitution. The appellant then filed an affidavit stating that one Mohansingh Kanyalal who was shown as one of the creditors of the assessee had since confessed that he was doing only name-lending. On these facts, the Income-tax Officer asserted that he had reason to believe that the hundi loan in the name of Mohansingh Kanyalal was not genuine and interest on that loan was wrongly allowed to the respondent (assessee) in the original assessment. He, therefore, initiated proceedings under Section 147(a) of the Act. Whereas, one of the learned judges upheld the validity of the notice issued to the respondent, the remaining two learned judges forming the majority quashed the notice. The judgment of the Calcutta High Court was then assailed in appeal before the Supreme Court. As indicated by the report sent by the Income-tax Officer to the Commissioner of Income-tax seeking approval for initiating proceedings under Section 147, it appears that there was an entry in the name of Mohansingh Kanyalal about the payment of Rs. 74, annas 3, as interest in the books of the respondent (assessee). He made a confession that he was doing only name-lending. On these facts, the Income-tax Officer drew an inference that the hundi loan in the name of the creditor, namely, Mohansingh Kanyalal, appearing in the books of account of the assessee, was not genuine. The Supreme Court, taking a contrary view, observed (at page 447) :
"There is nothing to show that the above confession related to a loan to the assessee and not to someone else, much less to the loan of Rs. 2,500 which was shown to have been advanced by that person to the assessee-respondent. There is also no indication as to when that confession was made and whether it relates to the period from April 1, 1957, to March 31, 1958, which is the subject-matter of the assessment sought to be reopened. The report was made on February 13, 1967. In the absence of the date of the alleged confession, it would not be unreasonable to assume that the confession was made a few weeks or months before the report. To infer from that confession that it relates to the period from April 1, 1957, to March 31, 1958, and that it pertains to the loan shown to have been advanced to the assessee, in our opinion, would be rather far-fetched."
13. For the above reasons, the Supreme Court upheld the view of the majority.
14. The Supreme Court summed up the legal position emerging from Section 147/148 of Act thus (at page 448).
"The reasons for the formation of the belief must have a rational connection with or relevant bearing on the formation of the belief. Rational connection postulates 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 has been escapement of the income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts. It is no doubt true that the court cannot 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 assessment. At the same time, we have to bear in mind that it is not any and every material, howsoever vague and indefinite or distant, remote and far-fetched, which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment."
15. The Supreme Court was of the view that no proceedings under Section 147 could be taken up if the information is wholly vagxie, indefinite, far-fetched and remote and that the reason for the formation of the belief must be held in good faith and should not be a mere pretence.
16. Let us apply the aforesaid legal position as enunciated by the Supreme Court to the facts and circumstances involved in the case of the instant assessee. In his report made by the Income-tax Officer to the Commissioner of Income-tax in the form of proposal for obtaining the latter's approval for initiating the proceedings under Section 147(a), no details of the creditors who, in the opinion of the Income-tax Officer, were name-lenders and of the loans which, according to him, were bogus have been set out. He simply stated that, during the year under consideration, the assessee had taken hundi loans which proved to be fictitious. The Appellate Assistant Commissioner, while affirming the action taken by the Income-tax Officer under Section 147(a) read with Section 148 of the Act, however, stated that, on the basis of the inquiry conducted by the Income-tax Officer particularly during the assessment year 1960-61, the Income-tax Officer came to know that some of the parties in whose names loans had been shown in the assessee's books had admitted before the Income-tax Officer at Bombay that they were not giving any genuine loans but they were only lending their names. The question is whether initiation of proceedings under Section 147 can be justified on the basis of this material alone. What inquiry was made ; from whom inquiry was made ; which creditor at Bombay made a confession ; what were the details of the confession and whether any confession was made by such creditors with regard to the instant asses-see and the relevant period--all these questions remained unanswered. Therefore, the rule laid down by the Supreme Court in the case of Lakhmani Mewal Das [1976] 103 ITR 437 is squarely applicable to the facts of the case in hand and applying that rule to the facts of the instant case, it must be held that the Income-tax Officer could not have reason to believe that income of the assessee had escaped assessment for the years under consideration because of its failure to disclose fully and truly material facts necessary for the assessment. The basis of the belief of the Income-tax Officer is that the statement of the Bombay party revealed that he was only a name-lender and no genuine hundi loans were advanced by him. The statement of the Bombay party which was recorded by the Income-tax Officer at Bombay during the proceedings relating to the assessment year 1960-61 has not been reproduced by the Income-tax Officer in his report which was sent to the Commissioner of Income-tax in the form of proposal seeking approval nor has it been elaborated anywhere else. Therefore, it cannot be ascertained as to what was the precise statement of the Bombay party in so far as the instant assessee is concerned. The Appellate Tribunal was, therefore, absolutely right in holding that the proposal sent by the Income-tax Officer to the Commissioner of Income-tax was wholly vague and ambiguous and, on the basis of the reasons recorded by the Income-tax Officer, no reasonable belief could be had that the income of the assessee in the years under consideration had escaped assessment. The reasons as set out by the Income-tax Officer in his proposals sent to the Commissioner of Income-tax are nothing but a mere pretence to invoke Section 147/148 of the Act and, therefore, the proceedings initiated under Section 147/148 by the Income-tax Officer were rightly cancelled by the Appellate Tribunal.
17. In the result, we answer both the questions in the affirmative, that is, in favour of the assessee and against the Revenue. There will be no order as to costs.