Hon'ble S.C. Nigam, J.
(Delivered by Hon'ble Rajes Kumar, J.) By means of the present writ petition, the petitioner is challenging the order passed under Section 21 (2) of the U.P. Trade Tax Act (hereinafter referred to as the "Act") dated 06.08.2005 passed by Additional Commissioner (Assessment), Grade-I, Trade Tax, Agra for the assessment year 1999-2000 and in pursuance thereof, the notice issued under Section 21 of the Act dated 15.09.2005 issued by Deputy Commissioner (Assessment)-III, Trade Tax, Agra, annexure-6 to the writ petition.
The petitioner is a registered dealer and was carrying on the business of liquid glucose etc. During the course of the assessment proceedings for the assessment year 1999-2000, the petitioner had admitted the tax liability on the liquid glucose @ 7.5% for the period 01.04.1999 to 16.01.2000 and @ 8% for the period 17.01.2000 to 31.03.2000, which is applicable to the food product. The assessing authority while passing the assessment order on 20.08.2001 levied the tax @ 7.5% on the turnover of Rs.41,76,447/- for the period 01.04.1999 to 16.01.2000 and @ 8% on the turnover of Rs.16,41,710/- for the period 17.01.2000 to 31.03.2000. It appears that the limitation of four years had expired and, therefore, under the Proviso of Section 21 (2) of the Act notice under Section 21 of the Act was issued by the Deputy Commissioner (Assessment)-III, Trade Tax, Agra on the ground that in accordance to law, the rate of tax on the turnover of liquid 2 glucose should be taxable as an unclassified item.
The petitioner filed the reply and stated that in the case of Spyers Enterprises, Agra, the Tribunal vide its order dated 31.05.1999 and 19.11.2003 has treated the liquid glucose as food product. Additional Commissioner vide order dated 06.08.2005 has granted the approval to initiate the proceedings under Section 21 of the Act beyond the period of four years on the ground that against the decision of the Tribunal in the case of Spyers Enterprises, Agra, the Revenue has filed the revision, which is pending and, therefore, he concluded that the tax which has been assessed by the assessing authority is not in accordance to law. In pursuance thereof, the notice under Section 21 of the Act has been issued by the assessing authority.
Heard Sri R.R.Agarwal, learned counsel for the petitioner and Sri S.P. Kesarwani, learned Standing Counsel.
Learned counsel for the petitioner submitted that the proceedings under Section 21 of the Act can only be initiated when there is material on the basis of the belief is formed about the escaped assessment. He submitted that neither there was any material before the Additional Commissioner to grant the approval under Section 21 (2) of the Act to initiate the proceedings beyond the period of four years nor there was any material before the assessing authority to form the belief that there was escaped assessment. The proceeding has been initiated on account of change of opinion in the absence of any material.
Sri S.P. Kesarwani, learned Standing Counsel submitted that liquid glucose can not be said to be food stuff. He submitted that rate of tax has been wrongly applied in the assessment year, therefore, there was escaped assessment and the proceeding has been rightly initiated.
We have perused the impugned orders and considered the rival submission.
Section 21 (1) and (2) of the Act reads as follows:
"Section 21. Assessment of tax on the turnover not assessed during the year.
(1) If the assessing authority has reason to believe that the whole or any part of the turnover of the dealer, for any assessment year or part thereof, has escaped assessment to tax or has been under assessed or has been assessed to tax at a rate lower than that at which it is assessable under this Act, or any deductions or exemptions have been wrongly allowed in respect thereof the assessing authority may, after issuing notice to the dealer and making such inquiry as it may consider necessary, assess or reassess the dealer or tax according to law:
Provided that the tax shall be charged at the rate at which it would have been charged had the turnover not escaped assessment, or full assessment as the case may be.
Explanation I :
Nothing in this sub-section shall be deemed to prevent the assessing authority from making an assessment to the best of its judgment.
Explanation II :
For the purpose of this section and of section 22, "assessing authority: means the officer or authority who passes the earlier assessment order, if any, and includes the officer or authority having jurisdiction for the time being to assess the dealer.
Explanation III :
Notwithstanding the issuance of notice under this sub-section, where an order of assessment or re-assessment is in existence from before the issuance of such notice it shall continue to be effective as such, until varied by an order of assessment or re-assessment made under this section in pursuance of such notice. (2) Except as otherwise provided in this section, no order of assessment or re- assessment under any provision of this 4 Act for any assessment year shall be made after the expiration of three years from the end of such year or March 31, 1996, whichever is later.
Provided that if the Commissioner on his own or on the basis of reasons recorded by the assessing authority, is satisfied that it is just and expedient so to do authorises the assessing authority in that behalf, such assessment or re-
assessment may be made after the expiration of the period aforesaid but not after the expiration of eight years from the end of such year notwithstanding that such assessment or re-assessment may involve a change of opinion:
Provided further that the assessment or re-assessment for the assessment year 1987-88 may be made by March 31, 1993:
Provided also that if the eligibility certificate granted under section 4-A has been amended or cancelled by the Commissioner under sub-section (3) of section 4-A, the order of assessment or re- assessment may be made within one year from the date of receipt by the assessing authority of the copy of the order amending or cancelling the aforesaid certificate or by March 31, 1995, whichever is later.
Provided also that the assessment or re-assessment for the assessment year 1989-90 may be made by March 31, 1995."
Perusal of Section 21 (2) of the Act reveals that the proceedings can only be initiated if there is reason to believe that there is escaped assessment. The word "reason to believe" came up for consideration before the Apex Court in several decisions. Apex Court held that the belief must be formed on the basis of the material, which has a nexus to the escaped turnover.
In the case of Johri Lal (HUF) Versus Commissioner of Income-tax, U.P. reported in (1973) 88 ITR 5 439 (SC), 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."
In Income Tax Officer Versus Lakhani Mewal Dutt, (1976) 103 ITR 437, 1976 UPTC 809 (SC), 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.
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 6 Officer, (1960) 38 I.T.R. 301 (Cal); Jamna Lal Kabra v. Income Tax Officer, (1968) 69 I.T.R. 461 (All); Calcutta Discount Co. Ltd. v. Income Tax Officer, (1961) 41 I.T.R. 191 (SC); C.M. Rajgharia v. Income Tax Officer, (1975) 98 I.T.R., 486 (Pat) and Madhya Pradesh Industries Ltd. v. Income Tax Officer, (1965) 57 I.T.R. 637 (SC).
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, (1981) 130 I.T.R. 1 (SC).
In the case of Indra Prastha Chemicals Pvt. Ltd., Versus 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."
In the case of M/s Royal Trading Co. Saharanpur Vs. Trade Tax Officer, Saharanpur, reported in 2000 NTN (Vol.16), 290, the Division Bench of this Court while considering the Section 21 of U.P. Trade Tax Act held as follows:
"Therefore, action under Section 21 7 of the Act cannot be taken on the whims of the assessing officer by resorting to conjecture of imagination. He has to have before him the facts which are germane to the issue and on the basis of which a rational man can have reason to believe that the whole or any part of the turnover has escaped assessment or has been under- assessed. In Income Tax Officer Vs. Madnani Engineering Works Ltd. (1979) 118 I.T.R., 1 the Hon'ble Supreme Court while dealing with some what similar provision under section 147 of the Income Tax Act, 1961 held that the existence of reason to believe on the part of the ITO was a justificable issue and it was for the court to be satisfied whether in fact the ITO had reason to believe that income had escaped assessment. In Joti Parshad vs. State of Haryana J.T. 1992 (6) S.C., 94 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 probabale reasoning conclude or infer regarding the nature of the thing concerned. In Income Tax Officer vs. Lakhmani Mewal Das (1976) 103 I.T.R. 437 the Hon'ble Supreme Court held that the reasons for the formation of the belief contemplated by section 147 (a) of the Income Tax Act, 1961, for the 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 this 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 8 material, howsoever 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. This view was reiterated by the Hon'ble Supreme Court while dealing with the provisions of Section 21 of the U.P. Trade Tax Act in Commissioner of Sales Tax vs. Bhagwan Industries (P) Ltd. (1973) 31 S.T.C. 293 in which 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."
Perusal of the order of the Additional Commissioner reveals that there was no material on the basis of which belief has been formed that tax has been wrongly assessed on the liquid glucose except that according to his view the correct rate of tax has not been applied by the assessing authority and the order of the Tribunal is subject matter of consideration before this Court. The assessing authority in the notice under Section 21 of the Act has also not recorded any reason on the basis of which belief of escaped turnover has been formed.
On the facts and circumstances, we are of the view that the proceedings under Section 21 (2) of the Act is without any material on the basis of which belief of escaped assessment could be formed, namely, that the tax on the liquid glucose has been wrongly assessed to tax.
In the facts and circumstances, the order under section 21 (2) of the Act passed by Additional Commissioner, dated 06.08.2005 and consequential notice under section 21 of the Act dated 15.09.2005 issued by Deputy Commissioner (Assessment) 9 for the assessment year 1999-2000, annexure-6 to the writ petition are liable to be set aside.
In the result, the writ petition is allowed. The order of the Additional Commissioner dated 06.08.2005 and the consequential notice dated 15.09.2005, annexure-6 to the writ petition are hereby quashed.
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