JUDGMENT Rajes Kumar, J.
1. By means of the present revision, following reliefs has been claimed.
a) issue a writ, order or direction in the nature of certiorari quashing the slow cause notice dated 26.7.1999 issued by the respondent (Annexure No. IX).
a-1) to issue a writ order or direction in the nature of certiorari quashing the notice under Section 148 of the Income Tax Act dated 24.12.1998 received on 11.1.1999 issued by the respondent (Annexure No. 1).
b) issue any other writ, order or direction as this Hon'ble court deems fit and proper.
c) award the cost of the petition to the petitioner.
2. The brief facts of the case-giving rise to the present petition are that the petitioner is a Company carrying on the business of construction of building in the city of Agra. The Company was incorporated on 31st January, 1994. For the assessment year 1995-96, the petitioner filed its return regarding the construction of the building showing the loss of Rs. 2,77,400/-. The assessment was completed under Section 143(1) of the Income Tax Act (hereinafter referred to as the "Act"). The respondent issued a notice under Section 148 of the Act on 24.12.1998 to reopen the case for the assessment year 1995-96. On the request of the petitioner, on 267 1999. reason for issue of the notice and reopening of the case has been supplied which is Annexure-9 to the writ petition, which reads as follows:
"During the course of assessment proceedings for the A.Y.96-97 the books of account of assessee were rejected Under Section 145(2) for the detailed reasons given in the order passed Under Section 143(3) dated 18.12.98 it was found that:
1. That the assessee is not maintaining the stock register even for the major items such as steel, cement, bricks etc.
2. Work in progress register has also not been maintained form which expenditure incurred on the project can be verified.
3. No details of day-to-day consumption of material is maintained.
And net income was estimated 10% of the gross receipts during the course of assessment proceedings it was found that the assessee has also not maintained the details/information has also not mentioned above at (1), (2) & (3) for the assessment year 1995-96 also and the loss has been shown at Rs. 2,77,400/-. The receipts under the hand "deposit from customers" have been shown at Rs. 46, 77,190.35. Therefore, net profit (a) 10% works out to Rs. 4,67,719/- as against loss of Rs. 2,77,400/-.
Therefore, I have reason to believe that income to the extent of Rs. 7,45,119/- (4, 67, 719 + 2,77,400) has escaped assessment as per provisions of Section 147 of the I.T. Act, 1961. Issue notice Under Section 148."
3. Heard Sri S.O.P. Agarwal, learned counsel for the petitioner and Sri Govind Krishna, learned Standing Counsel appearing on behalf of the respondent.
4. Learned counsel for the petitioner submitted that under Section 147 of the Act, case can be reopened only when there is material of escaped income. He submitted that the reason recorded by the respondent for the reopening of the case shows that there was no material of any escaped income for the year under consideration. He submitted that only material referred is that the defects were found in the books of account for the assessment year 1996-97 and the estimate of the income by way of best judgment assessment, but no material has been referred relating to the year under consideration on the basis of which a believe could be formed about the escaped income. He submitted that unless there is specific material for the year under consideration that any income has been escaped, proceeding under Section 147 of the Act cannot be taken.
5. Learned Standing Counsel submitted that during the course of the assessment proceeding for the assessment year 1996-97, it was found that the petitioner has not maintained the proper books of account and it was also found that the proper books of account has not been maintained for the year under consideration and there was a receipt under the head "deposit from customer to the extent of Rs. 46,77, 190.35 paise", therefore, the assessing authority on the basis of the previous year estimated the income which was made at 10 percent of the gross receipt estimated the net profit at Rs. 4,67,719/- as against the disclosed loss of Rs, 2,77,400/- which shows that there was an escaped income. He submitted that the material mentioned in the reason recorded is sufficient to reopen the case and this court in writ jurisdiction cannot examine the sufficiency of the material. In support of his contention, he relied upon the decisions in the cases of Raymond Woollen Mills Ltd. v. Income Tax Officer and Ors. reported in 236 ITR, 34, Kundan Lal Ratan Lal Jain v. Assessing Officer, reported in 245 ITR, 434 and Ess Ess Kay Engineering Co. P. Ltd. v. Commissioner of Income Tax reported in 247 ITR 818.
6. We have given our anxious consideration to the submissions of the learned counsel for the panics and perused the reasons recorded for reopening of the case under Section 147 of the Act, which has been, referred hereinabove. It is settled principle of law that in a writ jurisdiction court cannot examine the sufficiency of the material on the basis of which notice under Section 148 of the Act is issued but it is open to this Court in writ jurisdiction to examine, whether there was any material or the material mentioned in the reason recorded is relevant material to form a believe of an escaped income. Section 147 of the Act reads as follows:
"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 recomputed 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 this assessment, for that assessment year.
Explanation-1- Production before the Assessing Officer of accounts book 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 assessee has made out, but --
(i) income chargeable to tax has been under - assessed; 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."
7. Under Section 147 of the Act, the case can be reopened if there is reason to believe that there is an escaped income for the assessment year. Therefore, what has to be examined is whether there was any material for the year under consideration of escaped income. Perusal of the reason recorded shows that the material referred is relating to the assessment year 1996-97 in which on the basis of the defects found in the books of account, the assessing authority estimated the income by way of best judgment assessment. If on the basis of defect found in the books of account for the assessment year 1996-97, the income has been estimated by way of best judgment assessment by taking 10 percent profit of the gross receipt, it does not mean that same profit would have been earned in the year under consideration. The assessing authority only proceeded under the presumption in estimating the net profit at the rate of 10 percent on the gross receipt. No material has been referred relating to the assessment year 1995-96 on the basis of which it could be believed that some profit was earned in this year also and loss shown was incorrect. In the circumstances, we are of the considered opinion that there was no material relating to the assessment year under consideration of any escaped income. The basis for the reopening of the case is only a presumption and guess work and does not construe material to reopen the case.
8. Under Section 147 of the Act, the words are "has reason to believe" and not "reason to suspect", The belief entertained by the Assessing Officer must not be arbitrary or irrational. It must be reasonable and based on reasons, which are relevant. It must be in good faith and not in mere pretence, should have a rational connection and relevant bearing on the formation of the belief, and should not be extraneous or irrelevant. The material should be relating to the particular year for which the assessment is sought to be reopened. 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.
9. In the case of Johri Lal (HUF) v. Commissioner of Income-tax, U.P. , the Apex Court has held as follows:-
"The formation of required belief by the Income Tax Officer before proceedings can be validly initiated under Section 34(1)(a) is a condition precedent: The fulfillment of this condition is not a mere formality, it is mandatory, and failure to fulfill that condition would vitiate the entire proceedings. Further, the formation of the required belief is not the only requirement: The officer is further required to record his reasons for taking action under Section 34(1)(a) and obtain the sanction of the Central Board or the Commissioner, as the case may be."
10. In Joti Prashad v. State of Haryana the Hon'ble Supreme Court while dealing with the meaning of expression 'reason to believe' in Section 26 of the Indian Penal Code held that the reason to believe is not the same as suspicion and a person must have reason to believe if the circumstances are such that a reasonable man would, by probable reasoning, conclude or infer regarding the nature of the thing concerned.
11. In Income Tax Officer v. Lakhani Mewal Dutt, , the Hon'ble Supreme Court held that the reasons for the formation of the belief contemplated by reopening of 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 live link between the material coming to the notice of the Income Tax Officer and the formation of his belief. The Hon'ble Supreme Court further observed that though it is 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 the assessment yet at the same time we have to bear in mind that it is not any and every material, however, vague and indefinite or distant, remote and farfetched, which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment.
12. In Commissioner of Sales Tax v. Bhagwan Industries (P) Ltd., (1973) 31 STC 293. it was held that reasonable grounds necessarily postulate that they must be germane to the formation of the belief regarding escaped assessment. If the grounds are of an extraneous character, the same would not warrant initiation of proceedings under this section. If however, the grounds are relevant and have a nexus with the formation of belief regarding escaped assessment, the Assessing Authority would be clothed with jurisdiction to take action under this section.
13. The question whether the Assessing Officer had reasons to believe is a question of jurisdiction, a vital thing, which can always be investigated by the Court under Article 226 of the Constitution as held in Daykatran Rawatmal v. Income Tax Officer, ; Jamna Lal Kabra v. Income Tax Officer, (1968) 69 I.T.R. 461 (All); Calcutta Discount Co. Ltd. v. Income Tax Officer, ; C.M. Rajgharia v. Income Tax Officer, and Madhya Pradesh Industries Ltd. v. Income Tax Officer, .
14. 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 reasonable entertain the belief, the conclusion would be inescapable that the Assessing Officer could not have reason to belief. 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. Income Tax Officer, .
15. In the case of Indra Prastha Chemicals Pvt. Ltd. v. Commissioner of Income-tax reported in 2005 UPTC, 53, this court held as follows:
"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 Assessing Officer for initiating the proceedings under Section 147/148 of the Act. The sufficiency of the material cannot be gone into but relevancy certainly be gone into."
16. In the present case, there was no material relating to the assessment year 1995-96. what to say the relevant material relating to the escaped income. The escaped income for the year under consideration has been inferred on the basis of assessed income in the assessment year 1996-97 by way of best judgment assessment due to defect found in the books of account. There is no material that some income was been earned in the assessment year 1995-96. Thus, the information is based on only on guess, presumption and on extraneous and irrelevant consideration, Therefore, in view of the principle of law referred / hereinabove, in the absence of specific material of escaped income for the year under consideration, no belief could be formed about the escaped income mere on the basis of the assessment for the year 1996-97.
17. Now let us deal with the decisions cited by the learned Standing Counsel.
18. In the case of Raymond Woollen Mills Ltd. v. Income Tax Officer and Ors. reported in 236 ITR 34. the Apex Court held that in a writ jurisdiction the court can only consider whether there was 4 prima facie case for reassessment and sufficiency of the material cannot be considered.
19. In the case of Kundan Lal Ratan Lal Jain v. Assessing Officer reported in 245 ITR 434 in which notice under Section 148 of the Act was issued on the basis of information relating to the enquiries in which it was found that the land holders whose name was found entered had denied having leased out any land to the assessee and the court had not found the case fit for interference.
20. In the case of Ess Ess Kay Engineering Co. P. Ltd. v. Commissioner of Income Tax reported in 247 ITR 818, the case was reopened on the basis of the fresh material obtained in the course of assessment for the next year. The Apex Court found the material sufficient to reopen the assessment proeeeding.
21. The aforesaid cases are not of much help to the learned Standing Counsel as they are based on their own facts.
22. For the reasons staled above, we are of the considered view that the initiation of the proceedings under Section 147 of the Act was without any material of escapement income for the assessment year 1995-96. Thus, the entire proceedings is held to be illegal and is accordingly, quashed.
23. In the result, the writ petition is allowed. The notice under Section 148 of the Act for the assessment year 1995-96 and the consequential proceedings thereof are quashed. However, there shall be no order as to costs.