Hon'ble Dr. Satish Chandra, J.
(Per: Tarun Agarwala, J.) (Delivered on 5th September, 2014) The petitioner is a publisher and is engaged in the printing and sale of books prescribed by the State Government for Class I to VIII. An agreement has been executed between the State Government and the petitioner for publication, supply and sale of books. The agreement indicates that the State Government is the owner of the books and that the petitioner would be responsible for publishing and selling the books on which the petitioner would pay a royalty to the State Government. The agreement further indicates that if the books are sold to the State Government or to its departments, the petitioner would sell them at a discounted rate. Based on this agreement, the petitioner has received various purchase orders from various District Basic Siksha Adhikari and, in pursuance thereto, has been supplying the books and have received the price of the books from these authorities.
For the purpose of selling the books, the petitioner was required to print these books for which purpose the petitioner has purchased ink and chemicals from outside the State. For the assessment year 2003-04 and 2004-05, the Deputy Commissioner, Commercial Tax, Agra, respondent no.3, after considering the matter in detail, passed an assessment order granting exemption from payment of trade tax on the sale of books made by the petitioner in view of the Notification No.TT-2-63/XI-9(116)/94-U.P. Act-15/48-Order-95 dated 16th January, 1995 whereby sale of books was exempted from payment of trade tax.
Subsequently, respondent no.2, namely, the Additional Commissioner, Grade-I, Commercial Tax, Agra issued a notice under Section 21(2) of the U.P. Trade Tax Act (hereinafter referred to as the Act) for the assessment year 2003-04 and 2004-05 directing the petitioner to show cause as to why reassessment should not be made on the ground that on inquiry it was found that the petitioner had purchased ink from outside the State of Uttar Pradesh amounting to Rs.6,23,096/- for the purpose of publication of the books and, therefore, such purchase of ink was used for the purpose of execution of a works contract, which was liable to tax under Section 3F of the Act. The petitioner submitted his reply to the notice specifically contending that he is not involved in the execution of any works contract but is involved only in the publishing and sale of books for which purpose ink was purchased as a raw material. Inspite of giving a specific reply, respondent no.2 passed an order dated 7th March, 2008 authorizing the Assessing Officer to make reassessment for the assessment year 2003-04 and 2004-05.
The petitioner, being aggrieved by the order dated 7th March, 2008 filed Writ Petition No.1222 of 2009, which was allowed in part by judgment dated 8th May, 2009. The writ Court held that the Additional Commissioner had neither given any reasons nor dealt with the objections raised by the petitioner and, consequently, in view of the decision laid down in case of M/s S.K. Traders Vs. Additional Commissioner, Ghaziabad, 2008 UPTC 392, the order of the Additional Commissioner cannot be sustained and was quashed. The writ Court directed the Additional Commissioner to pass a fresh order after considering the reply briefly stating the reasons as to why permission should be granted for reassessment. Pursuant to the said decision, respondent no.2 again issued a notice. The petitioner in response to the said notice filed a detailed reply and reiterated that he was only involved in the publication and sale of books and ink imported by him was used in the printing of the books published by him and that he was not involved in any works contract. Respondent no.2 by an order dated 4th August, 2009 again passed an order of authorization directing the Assessing Officer to make the reassessment under Section 21 of the Act. The reasons recorded by him is, that the petitioner has concealed material fact inasmuch as, for the publication of the books, the petitioner has entered into an agreement dated 19th April, 2003, which contains 31 conditions and, therefore, such publication of books is in pursuance of a works contract. The petitioner, being aggrieved by said order, has filed the present writ petition praying for the quashing order of authorization dated 4th August, 2009 passed by respondent no.2 for the assessment year 2003-04 and 2004-05 and the consequential notice dated 11th February, 2010 issued by the Assessing Officer.
We have heard Sri Aloke Kumar, the learned counsel for the petitioner and Sri C.B. Tripathi, the learned Special Counsel for the State.
The contention of the petitioner is, that the reply of the petitioner was not considered nor any cogent or valid reason has been given by the authority while granting approval to the Assessing Officer to reopen the assessment proceedings under Section 21 of the Act. The order granting permission has been passed without any application of mind and, consequently, the notice issued under Section 21 of the Act was liable to be quashed.
It was urged that there was no material before the authority to come to a conclusion that income had escaped assessment and, in the absence of any material, proceedings under Section 21 of the Act could not be initiated. The learned counsel contended that since there was no fresh material, the satisfaction of the authority that income had escaped assessment was nothing else but a change of opinion.
On the other hand, Sri C.B. Tripathi, the learned Special Counsel appearing for the State contended that assessment proceedings can be reopened if one finds that there was a case of under assessment or escaped assessment or that there was sufficient reasons to believe that the tax was not assessed in accordance with law.
In the instant case, the learned counsel for the State submitted that upon inquiry it was found that the petitioner had purchased ink for the purpose of printing, which by itself was sufficient to indicate that the petitioner was engaged in a works contract, which was exigible to trade tax under Section 3F of the Act. Since this essential fact had escaped in the assessment order, notice under Section 21 of the Act was rightly issued. The learned counsel submitted that respondent no.2 had validly issued the authorization order contending that in view of the conditions mentioned in the agreement executed between the petitioner and the State Government, it was clear that the petitioner had concealed material facts as he was engaged in the execution of a works contract and, was therefore, liable for reassessment.
The learned counsel submitted that in view of the amended definition of works contract printing of books is a works contract and, therefore, exigible to tax under Section 3F of the Act. In support of his submission, the learned counsel has placed reliance upon a decision of Supreme Court in Larsen and Toubro Limited and another Vs. State of Karnataka and another, 2014 (1) SCC 708, Associated Cement Company Ltd. Vs. Commissions of Customs, 2002 NTN (20) 73, State of Maharashtra Vs. Sarvodya Printing Press Fine Art Printer, 1999 (9) SCC 65, Commissioner of Trade Tax Vs. M/s Aristo Printers Pvt. Ltd., 2011 Tax Law Diary 11 to buttress his submission that activity of printing amounts to a works contract.
In M/s Manaktala Chemicals Pvt. Ltd. Vs. State of U.P. and others, 2006 UPTC 1128 it was held that where reasons recorded while granting permission was not rational, genuine or relevant, such permission so granted would be illegal since it was not making out a case for reassessment. The Court held that reasons for being satisfied that it was just and expedient to reopen assessment while granting sanction for reopening the assessment proceedings has to be recorded and if reasons are not recorded the order sanctioning would be wholly illegal.
In M/s S.K. Traders, Modi Nagar, Ghaziabad Vs. Additional Commissioner, Grade-I, Trade Tax, Zone Ghaziabad and another, 2008 UPTC 392 a Division Bench held:
"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 & Sons P. Ltd. v. Income Tax Officer, (1981) 130 ITR 1 (SC) .
The expression "reason to believe" in Section 147 does not mean purely subjective satisfaction on the pan of the Assessing Officer The belief must be held in good faith; it cannot be merely a pretence. It f 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. Commissioner of Income Tax, (1967) 63 ITR 219 (SC); Kantamani Venkata Narayana and Sons Vs. Additional Income Tax Officer, (1967) 63 ITR 638 (SC), Madhya Pradesh Industries Ltd. v. Income Tax Officer, (1970) 77 ITR 268 (SC); Sowdagar Ahmed Khan v. Income Tax Officer, (1968) 70 ITR 79 (SC), Income Tax Officer v. Lakhmani Mewal Das, (1976) 103 ITR 437 (SC); Income Tax Officer v. Nawab Mir Barkat Ali Khan Bahadur, (1974) 97 ITR 239 (SC); Commissioner of Sales Tax v. Bhagwan Industries (P) Ltd., (1973) 31 STC 293 (SC) and State of Punjab v. Balbir Singh (1994) 3 SCC 2999.
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 fulfillment of this condition is not a mere formality but it is mandatory. The failure to fulfill that condition would vitiate the entire proceedings as held by the Apex Court in the case of Johrilal v. Commissioner of Income Tax, (1973) 88 ITR 439 (SC) and Sheo Nath Singh v. Appellate Assistant Commissioner, (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 Income Tax Officer 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 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 & Sons P. Ltd. v. Income Tax Officer, (1981) 130 ITR 1 (SC)."
In Writ Petition No.704 of 2010, Catalysts Vs. State of U.P. and others decided on 4th August, 2014, this Court, after analysing various decisions, including the decisions cited aforesaid held:
"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 on 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 of sub-section (1) of Section 21 of the Act 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."
From the aforesaid, it is clear that the foundational requirement of sub-section (1) of Section 21 of the Act for reopening the assessment is, that there must be a reason to believe that income had escaped assessment and such reason to believe must be formed on some tangible material. The reason for the formation of the belief must have a rational connection, which is based on relevant material. The rational connection postulates that there must be a direct nexus or a live link between the material coming to the notice of the authority and the formation of his belief that there had been an escapement of income of the assessee from assessment in a particular year. If there is no rational or intelligible nexus between the reasons and the belief, the conclusion would be inescapable that the Assessing Officer could not have reasons to believe and, consequently, the notice would be liable to be held as invalid as held by the Supreme Court in the case of Ganga Saran & Sons P. Ltd. Vs. Income Tax Officer, (1981) 130 ITR 1 (SC).
In the light of the aforesaid, the show cause notice initially issued to the petitioner for invoking Section 21 of the Act indicates one of the reasons, namely, that the petitioner has imported ink for the purpose of publication of books. Therefore, such printing of books amounts to a works contract exigible to tax under Section 3F of the Act. The order of authorization only indicates that since there is an agreement between the petitioner and the State Government for printing of books and, therefore, such agreement is a works contract.
Having heard the learned counsel for the parties at some length and having perused the reasoning, we are of the opinion that there has been a total non application of mind. The mere fact that the petitioner is importing ink for the purpose of importing books does not lead to any conclusion that the printing of books is for the purpose of execution of a works contract. There must be more material other than the purchase of ink to come to a prima facie satisfaction that the purchase of ink was for the execution of a works contract. Mere purchase of ink is not sufficient to hold that the petitioner was engaged in the execution of a works contract. The decision cited by the learned counsel for the State has no application at this stage.
The order of authorization does not indicate that the authority had perused the terms and conditions of the contract, which led him to believe that the contract was nothing else but a works contract and was not a contract for the publication of books. The reasons given by the authority in the authorization order is, that since there exists a contract between the petitioner and the State Government, therefore, it is presumed that it is a works contract. On such presumption, notices under Section 21(2) of the Act cannot be issued nor can authorization be granted for reassessment.
The petitioner has filed a copy of the contract, which is annexure 1 to the writ petition. A perusal of the terms and conditions mentioned in the contract indicates that the petitioner is required to publish and sell the books at his own cost and risk and that the petitioner would pay royalty to the State Government on the sale of each book as they have the copyright. The contract further indicates that sale made by the government and to its departments would be at a discounted rate. The contract does not indicate that the petitioner has entered into a works contract. Necessary ingredients as defined under the definition Section 2(m) of the Act is lacking.
The contract clearly indicates that it relates to printing and supply of printed material and is not a works contract. Works contract is normally done on the basis of specification of printing given by the buyer, which in the instant case is lacking. There is nothing on record to indicate that the petitioner is executing the printing of the books as a works contract for a buyer.
In the light of the aforesaid, we are of the opinion that the foundational requirement of sub-section (1) of Section 21 of the Act for reopening the assessment is lacking. The reason to believe that income had escaped assessment is not based on any tangible material and the reasons to believe that has been formed that some income had escaped assessment is not based on any relevant material nor there is a live link between the formation of the belief and the material available before the authority.
In the absence of a vital link having not being established between the reasons and the evidence before the authority, we are of the opinion that the reason to believe for reopening the assessment was not given in good faith but was based on extraneous or irrelevant consideration. The reasons recorded is not based on any material evidence and, consequently, the impugned order of authorization and the consequential notice issued for reassessment cannot be sustained and are quashed. The writ petition is allowed.