Commissioner Of Income Tax-Ii v. Shiv Ratan Soniaaykar Bhawan, Jodhpur

IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN ATJODHPUR. D.B. INCOME TAX APPEAL NO. 44/2004 Commissioner of Income Tax-II Vs. Shiv Ratan SoniAaykar Bhawan, Jodhpur. PRESENT HON'BLE MR JUSTICE RAJESH BALIAHON'BLE MR JUSTICE BHANWAROO KHAN Mr Sangeet Lodha, for the petitioner. Mr Anjay Kothari, for the respondent. BY THE COURT (PER HON'BLE JUSTICE R.BALIA): This appeal is directed against the order ofIncome Tax Appellate Tribunal, Jodhpur Bench, Jodhpurdated 26.5.2003 and relates to Assessment Year 1986-87.The order of the Tribunal is common deciding appealsarising out of Assessment Year 1986-87 to 1988-89. The brief facts giving rise to this appealare that the assessee is engaged in the activity ofmoney lending and gold smithy. A search was conductedin the premises of the assessee on 18.11.1988 andfollowing assets/valuable articles were found :- a]-Business income :-Rs.24,00,000(Including money lending and pawaing) b]-Investment in house :-Rs. 3,73,000c]-Unaccounted marriage :-Rs. 1,50,000expenses-------------Rs.29,23,000 Besides those, some papers were also foundduring the course of search. under Section 132(4), he agreed to surrenderRs.24,00,000 as his income from money lending and goldsmithy business, investment, unexplained investment inhouse amounting to Rs.3,73,000 and unaccounted marriageexpenses amounting to Rs.1,50,000. In all Rs.29,23,000were surrendered as his income from money lending andgoldsmithy which is represented through aforesaidassets found during the search. As a result of search, order under Section132(5) was passed by Assistant Commissioner of IncomeTax, Ward-I, Jodhpur, with previous approval of DeputyCommissioner, Income Tax, Jodhpur, for the purpose ofretaining the assets seized during the course of searchby estimated assessment of the tax liability which mayarise as a result of material discovered during theaforesaid search. In the case of assessee, he assessed the taxliability for three Assessment years 1986-87, 1987-88and 1989-90 to the tune of Rs.18,11,000/-. After the order under Section 132(5) on10.3.1987, notices under Section 148 were issued forAssessment Years 1986-87, 1987-88 and 1988-89. Year1989-90 being the assessment year relevant to previousyear ending on 31.3.1989 during which search wasconducted, the necessity of issuing notice underSection 148 did not arise. The Tribunal has quashed the notices issuedunder Sec. 148 inter alia on the ground that thesatisfaction of Income Tax Officer about the escapementof income could not be discovered from the reasonsstated by him which are vague and which are not foundedon existing material on applying his mind thereto andthe notices have been issued purely following the orderpassed under Section 132(5) without application of hismind to the material before it. It was pointed outthat in the order under Section 132(5) itself it hasbeen stated that material found during search shall belooked into by the Assessing Officer during theassessment proceedings clearly indicates that orderunder Section 132(5) itself was not founded on anyanalysis of the documents or material seized duringsearch. Hence, it could not provide basis for formationof necessary belief required under Section 147 before The appeal relating to assessment year 1988-89 against the very same order was dismissed by thisCourt finding that the Assessing Officer hasinterpolated the record and has recorded his reasons byantedating the same after issuing notices. This Courtfound from the material produced before it that in thenote sheet dated 30.9.91 he has referred to the noticesissued in October,1991 and served in October,1991 whichwas clear demonstration of the fact that assessingofficer has tampered with the record and tried tocreate the record to support the notices under Section148 which had been issued without fulfilling thecondition precedent before issuing the same. The appeal relating to assessment year 1988-89 against the very same order was dismissed by thisCourt finding that the Assessing Officer hasinterpolated the record and has recorded his reasons byantedating the same after issuing notices. This Courtfound from the material produced before it that in thenote sheet dated 30.9.91 he has referred to the noticesissued in October,1991 and served in October,1991 whichwas clear demonstration of the fact that assessingofficer has tampered with the record and tried tocreate the record to support the notices under Section148 which had been issued without fulfilling thecondition precedent before issuing the same. The Assessing Officer is not required to givean opportunity to the assessee before resorting toSection 148. But he is required to record his reasonsin writing about his satisfaction related to escapementof income from assessment of tax before issuing noticesand validity of such notices, if the same ischallenged, have to be judged in the light of reasonsrecorded by the assessing officer, as they are onlymaterial by which process of reaching subjectivesatisfaction by the Assessing Officer can be lookedinto by the Court within its power of judicial review,or even by the Appellate Authority. If the validity ofnotice is challenged. The fulfillment of required condition precedent has to be established and thereasons recorded before issuance of notice gives apeep into the mind of the officer, who assumedjurisdiction to initiate proceeding under Section147/148 of the Income Tax Act, 1961. Therefore,recording of reasons before issuing notice is anessential pre-requisite and failure to do so results invitiating the proceedings. Since from record of 1986-87 and 1987-88, this discrepancy is not visible from the recordproduced before us, we may not follow our conclusion inrelation to year 1988-89. However, one factor whichis common in the recorded reasons in all three yearsis that it refers to order under Section 132(5) framedby the Assistant Commissioner, to which we havereferred to above. The amount of escaped income filledin the form provided for submitting to the Commissionerfor seeking his approval before issuing notice tallieswith assessment made by the Assistant Commissioner inorder under Section 132(5) at verbatim and does notrefer to any material or the contents of material fromwhich he has drawn his own conclusion or has satisfiedhimself about the conclusion drawn by the authoritymaking an order under Section 132(5) for the purpose ofretaining the seized assets against the possible futureliability. communication made to the Commissioner for seeking hisapproval, reads as under :- “According to Sec. 132(5) & Seizedrecordstheassesseeunderassessedwithreferencetoundisclosed investment & underassess of business income. HenceI have reason to believe thatassessee's income has escaped fortaxes.” In Clause No.6 of the format, the quantum ofincome shows escaped assessment from the tax for theyear 1986-87, to be Rs.2,41,300. The authority passingorder under Section 132(5) has assessed income ofundisclosed income for the year 1986-87 at Rs.2,60,000.By deducting the amount already disclosed by theassessee in return submitted for the year 1986-87balance Rs.2,41,300/- has been stated to be the incomethat has escaped assessment. Even without entering into the controversy for the time being whether for the purpose ofconsidering the validity of notice under Sec. 148 only,the reasons submitted before the Commissioner isrelevant, but reasons, if any, recorded in the note-sheet of proceeding of Assessing Officer independentlyto communicate to the Commissioner for his approval arerelevant, it would be apposite to refer to the reasonsrecorded in the note-sheet dated 14.10.1991, which arereproduced as under :- Even without entering into the controversy for the time being whether for the purpose ofconsidering the validity of notice under Sec. 148 only,the reasons submitted before the Commissioner isrelevant, but reasons, if any, recorded in the note-sheet of proceeding of Assessing Officer independentlyto communicate to the Commissioner for his approval arerelevant, it would be apposite to refer to the reasonsrecorded in the note-sheet dated 14.10.1991, which arereproduced as under :- “Assessee income under assessed inA.Y. 1986-87. Income assessedRs.18,700 as per filed return onlybut as per 132(5) order passed bythe assessing officer and on thebasis of seized records assesseeincome for A.Y. 1986-87 should beassessed Rs.2,60,000. Hence I havereason to believe that assessee'sincome under assessed during A.Y.1986-87. Therefore, action u/s148 is compulsory required. Timelimit for issue of notice u/s 148lapsed prior approval in this caserequired. Necessary form regardingworthy CIT permission in this casehas been send as on 14.10.91through D.C. Range.” Apparently, this note-sheet is prepared aftersending the form, containing reasons on the basis ofwhich approval of the Commissioner for proposed actionis sought. After sending the format alongwith reasonsrecorded by him to the Commissioner for his approval,reason, if any, recorded cannot be a basis for seekingapproval of Commissioner. Apparently, apart from whether the order dated 14.10.91, on the order-sheet or the reasonsplaced before the Commissioner seeking his approval,for some unacceptable reasons, appears to have notbeen acted upon and another formate with the samereasons in the same form as earlier was issued on13.11.1991 because the assessing officer has receiveda communication dated 29.10.1991 inquiring about thefact whether the proposed action is required to be taken under Section 147(a) as existed prior toamendment of Section 147 w.e.f. 1.4.1989 or the amendedprovision of Section 147. However, there is no change or additionalreasons which have come to be recorded prior to seekingapproval vide letter dated 13.11.1991. Learned counsel for the appellant has urgedthat the order passed under Sec. 132(5) was relevantmaterial for the purpose of forming necessary beliefabout the escapement of income from assessment to taxor was under assessment by the assessing officer andsince there is relevant material having nexus with theformation of the belief, further enquiry in theadequacy and sufficiency of the material for holdingsuch belief, as if the belief has to be formedobjectively is not permissible. On the other hand, learned counsel for therespondent has urged that the order passed underSection 132(5) may be a relevant material, but thereasons recorded by the assessing officer must showindependent application of mind in respect of facts andmaterial which has gone into consideration underSection 132(5). He further contends that the AssessingOfficer cannot abdicate his function of his ownapplication of mind to facts to authorities passingorder under Sec. 132(5). In other words, it cannot be a borrowed satisfaction unless a basic nexus isestablished between the formation of belief onapplication of mind by the Assessing Officer with thematerial, considered by him. On the other hand, learned counsel for therespondent has urged that the order passed underSection 132(5) may be a relevant material, but thereasons recorded by the assessing officer must showindependent application of mind in respect of facts andmaterial which has gone into consideration underSection 132(5). He further contends that the AssessingOfficer cannot abdicate his function of his ownapplication of mind to facts to authorities passingorder under Sec. 132(5). In other words, it cannot be a borrowed satisfaction unless a basic nexus isestablished between the formation of belief onapplication of mind by the Assessing Officer with thematerial, considered by him. In the present case, one thing is apparentthat the assessing officer has not referred to anyspecific material in any of the reasons recorded by himwhich could give rise to a clue as to the process bywhich he could have related any material found duringsearch to be the income escaped from assessment for theassessment year in question. In the absence of any suchmaterial finding reference in the reasons recorded bythe Assessing Officer, the reasons recorded by theAssessing Officer remain very vague. Reasons recordedbefore initiating proceeding under Section 148 if needrecord to find some material which could be related byCourt to satisfaction of Assessing Officer, does notsatisfy the test of an honest belief or satisfactionreached by Assessing Officer about escapement of theincome before issuance of notice. It remains an actionmore on suspicion. Law requires where Assessing Officerhas reason to believe and does not rest at his reasonto suspect that income of the assessee has escapedassessment. Such a stand cannot be supported onspecious plea that one can make a search or enquiryinto any material on record which is relevant for theassessment year for holding the belief whether incomefor particular assessment year has escaped assessment. If that were so, Legislature would not have provided animportant safeguard against unnecessary harassment thatreasons for such belief must be recorded beforeissuance of notice, and the existence of suchsatisfaction has to be supported within the parameterof reasons and not outside. One does not have toremember the contents of material that has gone intoconsideration but material that has gone intoconsideration must have specific reference so thatcheck on ultra vires exercise of powers can beeffectively exercised through judicial review. Stating that considering the material seizedduring the search is infinitely vague, it does notrefer to any material referable to assessment year inquestion. One is left stranded to exercise in the heapof documents to find a supportive material which theofficer himself may or may not have seen. It need to bekept in mind that for issuance of notice under Section147 for each assessment year the material on the basisof which the Assessing Officer could found his beliefmust relate to concern period and must have relevantnexus to formation of belief about escapement of taxrelevant for assessment year for which re-assessmentproceedings are initiated. Therefore, the order passedunder Section 132(5) for retaining seized assets may ormay not have any relevance to income of any particularassessment year. In the absence of which no validfoundation for initiating proceedings under Section 148 can be laid. Permitting otherwise would be taking awaythe only limited safeguard provided to the assessee,against enormous powers conferred on the AssessingOfficer for opening a completed assessment time andagain. A vague reference of 'material found duringsearch' on the basis of which subjective satisfactionhas been arrived at, in the present case so much soduring the long course of hearing not a single documentcould be referred having relevance to escapement ofincome from tax for period in question except the orderunder Section 132(5). can be laid. Permitting otherwise would be taking awaythe only limited safeguard provided to the assessee,against enormous powers conferred on the AssessingOfficer for opening a completed assessment time andagain. A vague reference of 'material found duringsearch' on the basis of which subjective satisfactionhas been arrived at, in the present case so much soduring the long course of hearing not a single documentcould be referred having relevance to escapement ofincome from tax for period in question except the orderunder Section 132(5). A perusal of Section 132(5) goes to show thatprimarily retention of assets seized during searchagainst the possible estimated liability that may becreated is not in exercise of finding the undisclosedincome for any particular assessment year. Be that as it may, we do not find force inextreme position taken by the assessee that in nocircumstance an order under Section 132(5) can beconsidered a relevant piece of material for framing ofnecessary belief before initiating proceedings underSection 148. Undoubtedly, when any order like underSection 132(5) may contain the material which may haverelevant contents for the purpose of holding beliefrequisite for initiating proceedings under Section 148 and when brought to the notice of Assessing Officerlike any other material, an order under Section 132(5) to provide such foundation also has to be judged onthe touch stone of having relevant nexus to theformation of belief. We have already noticed above the quantum ofassets found during search and quantum of assets seizedand the income from undisclosed sources surrendered bythe assessee in the course of statement under Section132(4). We have also noticed that assessee hassurrendered his income from business to the tune ofRs.24,00,000 and he has also said that this undisclosedincome is represented in the form of assets foundduring search. It is not in dispute before us thatsaid Rs.24,00,000 which has been surrendered during thecourse of search has been subjected to estimate indifferent assessment year and is not related toassessment year 1986-87 in question. In thisbackground, reading of order under Sec. 132(5) clearlygoes to show that it has remanded the income fromundisclosed sources to the assets seized from theassessee and explanation furnished by the assessee inrespect thereof. Apparently, once the assessee hassurrendered the income from his business to the tune ofRs.24,00,000 represented by the assets found duringsearch and the same has been subjected to assessment,the question of considering the very same assets asrepresenting income from undisclosed sources other than surrendered by the assessee could not be reachedreasonably by any person of ordinary prudence in thefacts and circumstances. This further goes to show thatorder under Section 132(5) was merely an exercise toestimate the total tax liability that may arise as aresult of search and to retain assets worth that valuefor the purpose of discharge of such liability as andwhen it crystallises into a demand on completion ofregular assessment proceedings. It is not directed tofind income from undisclosed sources for eachassessment year. We have already noticed the bifurcation ofincome surrendered by the assessee. The assessmentorder under Section 132(5) refers to gold and silverornaments found during search and seizure andinvestment made in immovable properties and aboutunspecified documents. We have already noticed the bifurcation ofincome surrendered by the assessee. The assessmentorder under Section 132(5) refers to gold and silverornaments found during search and seizure andinvestment made in immovable properties and aboutunspecified documents. The discussion in respect of loose papersfound during the search shows that officer passingorder under Section 132 (5) had not really made anyinquiry thereto. He records that assessee has said that“unless specific query with reference to specificseized document is raised, it is impossible to submitan explanation”. He further says that “he wouldcertainly like to get explanation about each paper andnot a few ones”. He also records that “assessee iswilling to furnish fullest and correct explanation with reference to any seized documents as may be required”and he goes on to say that “he will be getting fullestopportunity at the time of regular assessment toexplain his case. At present, I would treat thetransactions of loose papers as undisclosed businessactivity” and close discussion with followingobservations: “It will be necessary for the assesseetoexplaintheaboveentriessatisfactorily at the time of regularassessment. At present, the aboveundisclosed income is also taken intoconsiderationforestimatinganticipated liability.” Similarly, considering the accounts showing`making charges', the Assessing officer records asunder:- “This appears to be account showingmaking charges received by the assesseeduring the period 1.8.88 to 15.11.188.This is a sort of cash book showingevery day opening balance as Rs.111/-and then receipts are entered for a daylike Rs.151/-, 832/-, 2012/-, 2300/-,3086/- etc. The total receipts for thisperiod are around Rs.41,000/- whichgives a broad indication of assessee'sbusiness income. Taking these receiptsas base for three months earning, theaverage monthly receipts can beestimated around Rs.12,000/-, thus, teh annual income may be estimated safelyaround Rs.1,50,000/- leaving aside thematter for earlier years to beinvestigatedbytheAssessingAuthority, the current income will haveto be estimated around Rs.1,50,000/-,apart from undisclosed investment asdiscussed above.” Apparently, Officer passing order under Section 132(5) had made additions by referring tobunch of loose papers and the account showing makingcharges receipts by the assessee during the period1.8.88 to 15.11.88 without applying their relevance forholding belief on that basis that income for assessmentyear 1986-87 had also escaped assessment. We have already noticed above that the assessee had surrendered in all Rs.29,23,000 as incomefrom different sources detailing Rs.25,00,000/- asincome from his business including money lending andpawning, Rs.3,73,000/- as investment in house andRs.1,50,000/- as undisclosed income utilised inmarriage expenses. All these were considered incomepertaining to current assessment year. Even computingthe estimated tax liability, investment in the househas been shown to be in assessment year 1988-89 andthat did not relate to assessment year 1986-87. Theadditions made in the name of investment and businessincome for assessment year 1986-87 were referable onlyto discussion which we have referred to above i.e to say on the basis of loose papers and estimated incomeof business on the basis of accounts of making chargesexamined by the concerned officer had entries for theperiod 1.8.88 to 13.11.88 only. Thus, estimated incomefrom undisclosed sources for assessment year 1986-87under Order 132(5) were not founded on any specificmaterial referable to assessment year 1986-87 could notprovide any nexus and basis for formation of necessarybelief about escapement of income for assessment year1986-87 by the assessing officer before issuing noticeunder Section 148. say on the basis of loose papers and estimated incomeof business on the basis of accounts of making chargesexamined by the concerned officer had entries for theperiod 1.8.88 to 13.11.88 only. Thus, estimated incomefrom undisclosed sources for assessment year 1986-87under Order 132(5) were not founded on any specificmaterial referable to assessment year 1986-87 could notprovide any nexus and basis for formation of necessarybelief about escapement of income for assessment year1986-87 by the assessing officer before issuing noticeunder Section 148. There is yet another aspect of the matter,the assessee during the course of his examination underSection132(4)hadsurrenderedincomeofRs.29,23,000/-, as aforesaid, and has clearly statedthat same is represented through assets found duringsearch. Question of initiating proceedings forreassessment in respect of surrendered income on thebasis of value of assets found during the course ofsearch would not arise as the same can be takenoutrightly as income from undisclosed sources, in theassessment of assessment year during previous yearduring which search was conducted and such disclosurehad been made, yet the order under Section 132(5)relied on by the assessing officer for recording hisreasons reveals in detail the item of assessment foundduring search for the purpose of estimating income as aresult of unexplained investment in those assets. That is only to point out that really speaking, order underSection 132(5) was focused on estimating liability forthe purpose of retaining the assets found during searchand seizure and not on any other issue. Nothing has been stated either in order underSection 132(5) or the reasons recorded by the assessingofficer that any asset or investment other thanrecorded under Order 132(5) were found and were notexplained by the assessee during the course of search. In the circumstances, we are of the opinionthat the conclusion arrived at by the assessing officerbefore issuing notice under Sec. 148 is not his own buta borrowed satisfaction held by the AssistantCommissioner of Income Tax, Ward-I, Jodhpur whilemaking order under Sec. 132(5) retaining the seizedassets until regular proceedings are held, pertinentlyleaving it to be investigated by the assessing officeras income from undisclosed sources of business forrelevant assessment year prior to current assessmentyear for which no material before the assessing officeror the authority passing the order under Sec. 132(5)has been placed. Apparently, the Assessing Officer has notapplied its mind to the facts and circumstances beforehim and was solely dependent on the conclusion noticedunder Sec. 132(5) for the purpose of retaining assets,apart from surrender Rs.24,00,000 as income from business and Rs.5,23,000 as income represented throughunexplained investment and expenses representing theassets found during the course of search and which ithas been accepted as assessment order for the currentyear, no other material was before the AssessingOfficer to hold on the basis of which the subjectivesatisfaction that the income for Assessment Year 1986-87 has escaped assessment could be reached. This is beside the fact that the conduct ofthe Assessing Officer in maintaining record is far fromsatisfactory standard and he has been foundmanipulating records at least for the assessment year1988-89, affecting his credibility in this regard asthe initiation of proceedings for assessment year inquestion is a part of the same exercise. That weakens the credibility of correctnessof record itself but we have found the conclusionindependent of the point by referring to the materialwhich has been placed before us which has gone intoconsideration as per Assessing Officer himself. This is beside the fact that the conduct ofthe Assessing Officer in maintaining record is far fromsatisfactory standard and he has been foundmanipulating records at least for the assessment year1988-89, affecting his credibility in this regard asthe initiation of proceedings for assessment year inquestion is a part of the same exercise. That weakens the credibility of correctnessof record itself but we have found the conclusionindependent of the point by referring to the materialwhich has been placed before us which has gone intoconsideration as per Assessing Officer himself. Before parting with this discussion, we mayrefer to contention of Revenue that since he hasreferred to the seized documents and the order underSec. 132(5), the Court must look to all the materialwhich was in possession of the assessing officer anddetails given in the order under Sec. 132(5). We do not The subjective satisfaction is state of mindwhich could be judged through reason recorded by theAssessing Officer before initiating proceedings underSec. 148. The statute requires recording of suchreasons prior to issuance of notice under Section 148with an object to keep a check on unruly horse ofsubjective satisfaction and if there is challenge toassumption of jurisdiction, the foundation of actioncan be tested on the basis of state of mind revealed inexpression of reasons. The limited ground on which the subjectivesatisfaction of the Assessing Officer could be judgedis to be found in those reasons through which theAssessing Officer discloses his mind. To travel beyondthe territory of reasons recorded and materialspecified therein would be to substitute thesatisfaction of Court for that of Assessing Officer,which is not permissible. In these circumstances, we are in agreementwith the Tribunal that the satisfaction aboutescapement of income for assessment year 1986-87 wasfounded without any relevant material going intoconsideration of the Assessing Officer and the materialwhich has been stated in the reasons recorded by theAssessing Officer does not connect any existing material which could relate to the assessment year inquestion having nexus for formation of belief by himthat income for assessment year 1986-87 has escapedassessment. Significantly, the Assessing Officer hasalso not recorded his satisfaction that under-estimatewas due to any failure on the part of the assessee todisclose his income for relevant assessment year inquestion. As a result, the appeal fails and is herebydismissed. (BHAWAROO KHAN),J. (RAJESH BALIA),J. Rm/-