JUDGMENT R.K. Agrawal, J.
1. By means of the present writ petition filed under Article 226 of the Constitution of India, the petitioners seek a writ, order or direction in the nature of certiorari calling for record of assessment of M/s Indra Prastha Chemicals (P) Ltd., petitioner No. 1, for the asst. yrs. 1993-94 and 1994-95 and quashing the entire proceedings including the notices under Section 148 of the IT Act, 1961, hereinafter referred to as the Act, and other consequential reliefs.
2. Briefly stated, the facts giving rise to the present petition are as follows :
The petitioner No. 1 is a private limited, company incorporated under the provisions of the Companies Act, 1956. It was incorporated in the year 1989. Its registered office is situate at Isha Nagli, Mawana Road, Meerut. The petitioner No. 1 had established its factory for the manufacture of ethyl acetate, a chemical used in the manufacture of paints, etc. during financial year 1993-94. It commenced production on 16th Jan., 1995. The petitioners Nos. 2 and 3 became directors of the petitioner No. 1 during the asst. yr. 1993-94. However, they resigned from the directorship of the petitioner No. 1 on 25th March, 1996, the fact which was recorded by the Registrar of Companies, in March, 1996, itself. The petitioner No. 1 had received share application money from its directors and other- individuals to the extent of Rs. 38,66,000 during the previous year relevant to the asst. yr. 1993-94. The petitioner No. 1 also borrowed money from various sources during this period aggregating Rs. 12,23,000. Similarly, during the previous year relevant to the asst. yr. 1994-95, petitioner No. 1 had received share application money from its directors and other individuals to the extent of Rs. 19,34,000 and borrowed money from various other sources aggregating Rs. 2,19,000.
According to the petitioners, as no income had been earned during the asst. yrs. 1993-94 and 1994-95, the petitioner No. 1 did not file any return of income for these assessment years. It is alleged by the petitioners Nos. 2 and 3 that they had not been served with any notice for the assessment of petitioner No. 1 for the asst. yrs. 1993-94 and 1994-95 and when they went to the State Bank of India, Branch Palhera, Meerut, to withdraw the pension from the account of petitioner No. 3 in May 2003 they were informed that pension account has been attached in recovery of arrears of demand of income-tax of the petitioner No. 1 for the asst. yrs. 1993-94 and 1994-95. On enquiry they came to know that the Asstt. CIT, Circle 1, Meerut, respondent No. 2, has vide order dt. 26th March, 2002 assessed the income of the petitioner No. 1 for asst. yrs. 1993-94 and 1994-95. After obtaining copies of the assessment order they preferred revisions before CIT, Meerut, under Section 264 of the Act. The CIT, Meerut, respondent No. 1, vide order dt. 21st Nov., 2003, had allowed the revisions and after setting aside the assessment order dt. 26th March, 2002, remanded the matter to the assessing authority for making assessment afresh in accordance with law in the light of the directions contained in the order. After the matter was remanded, it is alleged by the petitioners that they had inspected the assessment record for the two assessment years in question and have found that on the basis of a report submitted by the IT Inspector on 20th April, 1999, proceedings under Section 147 of the Act have been initiated. The report of IT Inspector, dt. 20th April, 1999 as also the note put up by the Asstt. CIT, Circle 1, Meerut, dt. 26th April, 1999, has been field as Annex. 5 to the writ petition. The order dt. 21st Nov., 2003 passed by the GIT, Meerut, is under challenge in the present writ petition on the ground that he had not decided the plea of the petitioner that notice issued under Section 148 of the Act had not been served upon petitioner No. 1. Certain additional grounds have also been raised in the present writ petition regarding jurisdiction assumed by the Asstt. CIT, Circle 1, Meerut, respondent No. 2, for taking proceedings under Section 147 of the Act. The main ground of challenge is that the Asstt. CIT had not recorded any reasons for initiating the proceedings under Section 147 and issuance of the notices under Section 148 of the Act. Moreover, the reasons given in the report of the IT Inspector did not constitute relevant material for initiating the proceedings under Section 147 and issuance of notices under Section 148 of the Act.
3. We have heard Sri S.P. Gupta, learned senior counsel assisted by Sri S.D. Singh on behalf of the petitioners and Sri Ashok Kumar, learned standing counsel appearing for the respondents.
4. Sri S.P. Gupta, learned senior counsel, submitted that as the notices issued under Section 148 of the Act had not been served upon the petitioner No. 1, the entire reassessment proceedings are void and liable to be quashed. In the alternative he submitted that the present proceedings under Section 147 of the Act have been initiated on the basis of the report dt. 20th April, 1999 submitted by the IT Inspector and the Asstt. CIT, Circle 1, Meerut, without any application of mind had directed for issuance of notices under Section 148 of the Act for these two assessment years. Relying upon a decision of the Hon'ble Supreme Court in the case of Chhugamal Rajpal v. S.P. Chaliha and Ors. (1971) 79 ITR 603 (SC) he submitted that the proceedings under Sections 147/148 of the Act cannot be initiated as the assessing authority had not set out any reasons for coming to the conclusion that it is a fit case for issue of notices under Section 148 of the Act.
5. He further submitted that the very jurisdiction and the validity for taking proceedings can be raised at any stage. He referred and relied upon a Division Bench decision of this Court in the case of CST v. Mam Chand 1978 UPTC 399 and a Full Bench decision of this Court in the case of Laxmi Narain Anand Prakash v. CST 1980 UPTC 125.
6. Sri Ashok Kumar, learned counsel for the Revenue, submitted that the notice under Section 148 of the Act was issued on 26th April, 1999. It was served upon the company on 20th May, 1999. A notice under Section 142(1) of the Act was served upon the petitioner No, 3 and he had also appeared on 20th March, 2002. Thus, it is incorrect to say that notices were not served. He further submitted that the GIT, Meerut, has passed the order under Section 264 of the Act on 21st Nov., 2003, and in compliance of the order, the notices under Section 142(1) of the Act were issued on 8th Jan., 2004. The petitioner had approached this Court and filed the present writ petition on 17th Feb., 2004. Thus, there is delay and laches and they cannot be permitted to challenge the notices issued under Section 148 of the Act at this belated stage. He relied upon a Division bench decision of this Court in the case of Shyam Babu Vaishya and Co. and Am. v. Asstt. Commr. of Trade Tax and Ors. 2004 UPTC 210 and of the apex Court in the case of GKN Driveshafts (India) Ltd. v. ITO and Ors. (2003) 259 ITR 19 (SC). He further submitted that this Court cannot consider the sufficiency of material which led to the reopening of the assessment. He relied upon a decision of the apex Court in the case of Raymonds Woollen Mills Ltd. v. ITO and Ors. (1999) 236 ITR 34 (SC).
7. Having heard the learned counsel for the parties, we find that for the asst. yrs. 1993-94 and 1994-95, notices under Section 148 had been issued on 26th April, 1999, i.e., well within the period of limitation provided under Section 149 of the Act. It is not required to be served within the period of limitation. The apex Court in the case of R.K. Upadhyaya v. Shanabhai P. Patel, (1987) 166 ITR 163 (SC) and CIT v. Major Tikka Khushwant Singh (1995) 212 ITR 650 (SC) has held that from the 1922 Act position regarding service of notice under Section 148 has undergone a sea change in the 1961 Act and the only requirement for taking action for issuance of notice under Section 148 is that the notice should be issued within the period of limitation. Thus, the notices issued are held to have been issued within the prescribed period of limitation under Section 148 of the Act.
8. Under Section 147 of the Act the proceedings for the assessment can be initiated only if the AO has reason to believe that any income chargeable to tax has escaped assessment for any assessment year. The question whether the AO 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).
9. The words "has reason to believe" are stronger than the words "is satisfied". The belief entertained by the AO 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 (SC).
10. The expression "reason to. believe" in Section 147 does not mean purely subjective satisfaction on the part of the AO. 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 AO 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 2999.
11. The formation of the required opinion and belief by the AO 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, (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 AO 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 (supra). 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 AO 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 Satan and Sons (P)Ltd. v. ITO (supra).
12. 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.
13. In the present case, the proceedings under Section 147 of the Act has been initiated on the report of the IT Inspector, dt. 20th April, 1999. The report dt. 20th April, 1999, has been brought on record as Annex. 5 to the writ petition which is reproduced below :
"Report in the case of M/s Indra Prastha Chemical (P) Ltd., Quaroon House, P.L. Sharma Road, Meerut.
No business was done in the asst. yrs. 1993-94 and 1994-95. If the returns are filed in response to notice under Section 148 the proceedings may be filed on providing the subscription to equity and cash credits. However, the penalty under Section 271D in asst. yr. 1994-95 which involves the amount of Rs. 4,00,000 is mandatory.
Since admittedly no returns were filed for asst. yrs. 1993-94 and 1994-95, notice under Section 148 be issued. The escaped income is estimated below :
This report has not been denied by the respondents and that the action has been taken on the basis of the said report. From the reading of the aforesaid "report" it is clear that even the IT Inspector has not recorded any reasons that the income has escaped assessment. He has reported that no business was done in the asst. yrs. 1993-94 and 1994-95 and if the return are filed in response to the notice under Section 148, the proceedings may be filed on providing (sic-proving) the subscription to equity and cash credits. Thus, it does not give any material so as to form any reasonable belief that the income has escaped assessment. Merely noting "yes" for issuance of notice under Section 148 would not give jurisdiction to the AO to initiate proceedings.
14. In the case of Chhugarmal Rajpal (supra) the following report was submitted by the ITO, Muzaffarpur, to the CIT :
"During the year, the assessee had shown to have taken loans from various parties of Calcutta. From D.I.'s Inv. No. A/P/Misc.(5)D.I./63-64/5623, dt. 13th Aug., 1965, forwarded to this office under CIT, Bihar and Orissa, Patna's letter No. Inv. (Inv.) 15/65-66/1953-2017, dt. 24th Sept., 1965, it appears that these persons are name-lenders and the transactions are bogus. Hence, proper investigation regarding these loans is necessary. The names of some of the persons from whom money is alleged to have been taken on loan on Hundis are:
1. Seth Bhagwan Singh Sricharan.
2. Lakha Singh Lal Singh
3. Radhakissen Shyam Sunder The amount or escapement involved amounts to Rs, 1,00,0000.
Sd/-
S.P. Chaliha, 30-4-1966 ITO, A-Ward, Muzzaffarpur"
The apex Court had found that the report of the ITO does not set out any reasons for coming to the conclusion that this is a fit case to issue of notice under Section 148. The material that he had before him for issuing notice under Section 148 is not mentioned in the report and he vaguely refers to certain communications received by him from the CIT, Bihar and Orissa. He has not even come to a prima facie conclusion that the transactions to which he referred are not genuine transactions and appears to have had only a vague feeling that they may be bogus transactions. Such a conclusion does not fulfil the requirements of Section 151(2) of the Act, The apex Court, therefore, held that the ITO did not have any reason to believe that income chargeable to tax has escaped assessment, therefore, notice under Section 148 of the Act could not have been issued
15. Similar is the position here in the present case. As already mentioned hereinabove, the report submitted by the IT Inspector did not have any relevant material to point out that any income has escaped assessment for the asst. yrs. 1993-94 and 1994-95. Thus, notices under Section 148 are invalid and without jurisdiction.
16. So far as the question that the plea is being raised at such a belated stage is concerned, it may be mentioned here that the Asstt. CIT, respondent No. 2, can only assume the jurisdiction under Section 147 of the Act if he had reasons to believe that the income of the petitioner No. 1 had escaped assessment of tax. This goes to the very jurisdiction of the respondent No. 2 and can be raised at any stage as held by a Full Bench of this Court in the case of Laxmi Narain Anand Prakash (supra). Moreover, as held by the apex Court in Calcutta Discount and Madhya Pradesh Industries (supra) reasons recorded by the AO for initiating the proceeding under Section 147 can be scrutinized by this Court in the proceedings under Article 226 of the Constitution of India.
17. In the case of GKN Dnveshafts (India) Ltd. (supra) it was held as follows :
"When a notice under Section 148 of the IT Act, 1961, is issued, the proper course of action for the noticee is to file the return and, if he so desires, to seek reasons for issuing the notices. The AO is bound to furnish reasons within a reasonable time. On receipt of reasons, the noticee is entitled to file objections to issuance of notice and the AO is bound to dispose of the same by passing a speaking order.
On receiving notices under Section 148, the appellant filed the returns. The appellant also received notices under Section 143(2) calling for further information on certain points in connection with the returns. Thereupon the appellant filed writ petitions challenging the notices. The High Court dismissed the writ petitions holding that the petitioners were premature and the appellant could raise its objections to the notices by filing reply to the notices before the AO [see e.g., (2002) 257 ITR 702 (Del). The appellant preferred appeals and the Supreme Court dismissed the appeals, observing that since the reasons for reopening of assessments under Section 148 had been disclosed in respect of five assessment years, the AO had to dispose of the objections, if filed, by passing a speaking order before proceeding with the assessments for those years."
"The Constitution Benches of the Hon'ble Supreme Court, in K.S. Rashid and Sons v. Income-tax Investigation Commission and Ors. AIR 1954 SC 207; Sangram Singh v. Election Tribunal, Kotah and Ors. AIR 1955 SC 425; Union of India v. T.R. Varma AIR 1957 SC 882; State of UP and Ors. v. Mohammad Noon AIR 1958 SC 86 and K.S. Venkataraman and Co. (P) Ltd. v. State of Madras AIR 1966 SC 1089, held that Article 226 of the Constitution confers on all the High Courts a very wide power in the matter of issuing writs. However, the remedy of writ is an absolutely discretionary remedy and the High Court has always the discretion to refuse to grant any writ if it is satisfied that the aggrieved party can have an adequate or suitable relief elsewhere. The Court, in extraordinary circumstances, may exercise the power if it comes to the conclusion that there has been a breach of principles of natural justice or procedure required for decision could not be adopted.
In Harbans Lal Sahnia v. Indian Oil Corpn. Ltd. (2003) 2 SCC 107, the Hon'ble Supreme Court held that the rule of exclusion of writ jurisdiction by availability of alternative remedy is a rule of discretion and not one of compulsion and the Court must consider the pros and cons of the case and then may interfere if it comes to the conclusion that the petitioner seeks enforcement of any of the fundamental rights; where there is failure of principle of natural justice or where the orders of proceedings are wholly without jurisdiction or the vires of an Act is challenged."
18. As held by the apex Court in the case of Calcutta Discount Co. and Madhya Pradesh Industries Ltd. (supra), this Court under Article 226 is entitled to go into the relevancy of the reasons as also to scrutinize as to whether there was reasonable belief or not. Thus, the writ petition under Article 226 is maintainable,
19. In view of the foregoing discussion, we are of the considered opinion that the notice issued under Section 148 of the Act for the asst. yrs. 1993-94 and 1994-95 and the entire proceedings taken pursuant thereto are wholly without jurisdiction and hereby quashed.
In this view of the matter, the writ petition succeeds and is allowed. However, the parties shall bear their own costs.