M/S. G.v.k. Gautami Power Ltd v. $ Asst. Commissioner Of Income Taxand Another

* THE HON’BLE SRI JUSTICE V.V.S.RAOAND * THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN + WRIT PETITION No.27817, 28515, 28530, 28542, 28640,28870, 29334, 29356, 29374 of 2009 % Dated 26-04-2011 M/s. G.V.K. Gautami Power Ltd. Vs. $ Asst. Commissioner of Income TaxAnd another …. Petitioner …. Respondents ! Counsel for the Petitioners: Sri C.Kodandaram ^ Counsel for respondents : Sri J.V. Prasad, Sr. S.C. for Income Tax <GIST: > HEAD NOTE: ? Citations: 1)AIR 1961 SC 3722)AIR 1967 SC 2953) (1972) 3 SCC 2344)(1981) 3 SCC 1435)(2007) 289 ITR 341 (SC)6)(2008) 14 SCC 587)(2008) 14 SCC 2088)(2010) 329 ITR 110 (Delhi)9)(2009) 308 ITR 38 (Delhi)10)2010) 195 Taxman 117 (Bombay)11)(2003) 1 SCC 7212)(1979) 2 SCC 45513)(1991) 188 ITR 247 (SC)14)(1991) 189 ITR 285 (SC)15)(1991) 191 ITR 661 (SC)16)(1991) 191 ITR 662 (SC) 17)(1993) 203 ITR 456 (SC) 18)(1996) 217 ITR 597 (SC) 19)(1996) 221 ITR 538 (SC) 20)(1997) 224 ITR 560 (SC) 21)(1999) 236 ITR 34 (SC) 22)(2010) 320 ITR 561 (SC) 23)(1971) 79 ITR 603) (SC) 24)(2007) 1 SCC 732 25)(2007)8 SCC 559 26)(1988) 174 ITR 714 (Calcutta) 27)(1991) Vol. 188 ITR 247 (SC) 28)(1985) 1 SCC 345 29)(2004) 6 SCC 186 30)1951 AC 737 31)(1970) 2 ALL.E.R 294 32)1971 (1) WLR 1062 33)1972 (2) WLR 537 34)AIR 1968 SC 647 35)1901 AC 495 36)2004(5) ALD 180 (DB) 37)(1971) 3 SCC 20 38)(1994) 2 SCC 481 39)AIR 1955 S.C.425 40)AIR 1987 SC 2235 41)AIR 1987 SC 1972 42) 1954 SCR 738 THE HON’BLE SRI JUSTICE V.V.S.RAOANDTHE HON’BLE SRI JUSTICE RAMESH RANGANATHAN WRIT PETITION No.27817, 28515, 28530, 28542, 28640,28870, 29334, 29356, 29374 of 2009 COMMON ORDER:(Per Hon’ble Sri Justice Ramesh Ranganathan) INTRODUCTION:The “Satyam Scam”, allegedly running into a fewthousand crores, came to light on a letter of confession dated 7.1.2009being addressed to the Board of Directors of Satyam ComputerServices Limited (“SCSL” for short) by Sri B. Ramalinga Raju, the thenChairman. This was followed by his alleged confession in prison on23.2.2009 to the effect that the books of accounts had been fudged;Rs.1230 crores was arranged to SCSL to run their operations; andmoney was raised by pledging the shares of M/s Maytas Infra Limited,apart from the shares of SCSL. Several agencies, including theIncome Tax department, caused investigation into different aspects ofthe “Scam”. According to the Income Tax Department, more than 370companies were promoted by Sri B. Ramalinga Raju and hisimmediate family members. Commencing March, 2009 assessments,finalized for the year 2002-03, of several of these companies weresought to be reopened, and notices under Section 148 of the Income Tax Act (“Act” for brevity) were issued calling upon them to showcause why the assessments should not be reopened under Section147 of the Act. Several of these companies invoked the extra-ordinaryjurisdiction of this Court under Article 226 of the Constitution of Indiaand filed W.P. No.28300 of 2009 & batch. Either before Writ Petitionswere filed, or during the period they were pending before this Court,the assessing authority passed re-assessment orders aggrieved bywhich some of these companies preferred appeals before theCommissioner of Income Tax (Appeals) (“CIT(A)” for brevity). Fiftyeight Writ Petitions filed before this Court, (in W.P. No.28300 of 2009 &batch) by companies against whom reassessment orders werepassed, were dismissed as infructuous by the order of this Court dated02.02.2011 giving them liberty to raise all questions, including on thejurisdiction of assessing authority to reopen assessment, before theCIT (A). Nine Writ Petitions, wherein reassessment orders have notyet been passed as a result of the interim stay granted by this Court,were heard elaborately, and are now being disposed of by thiscommon order. FACTS IN BRIEF: FACTS IN BRIEF: 2. The facts in W.P.No.27817 of 2009 may be taken as illustrativeof all the cases in this batch of Writ Petitions. The notice issued underSection 148 of the Act dated 26.3.2009, seeking to reopen assessmentof the year 2002-03, and the notice issued under Section 142(2A) ofthe Act dated 15.12.2009, for the assessment years 2002-03 and2007-08, are under challenge by the petitioner - a company engagedin setting up plants for generation of power. As stated in the affidavit,filed in support of the said Writ Petition, the petitioner was originallyone amongst the Satyam Group of companies. After July, 2003, the petitioner – Gautami Power Limited - was taken over by the GVK groupof companies. The name of the petitioner company was, subsequently,changed to GVK Gauthami Power Limited. 3. For the assessment year 2002-03 the petitioner filed its return ofIncome on 28.3.2003. It is their case that during the accounting year,relevant to the assessment year 2002-03, they were in the process ofsetting up a power plant and, therefore, did not submit any profit andloss account. The 1[st] respondent completed assessment, and passedthe assessment order dated 21.3.2005 under Section 143(3) of the Act.The petitioner claims to have paid the tax levied without prejudice totheir remedies under the Act. They also filed a return of income on23.10.2007 for the assessment year 2007-08. It is their case that,during the accounting year relevant to the assessment year 2007-08,they had not commenced business and, therefore, did not submit theirprofit and loss account. The 2[nd] respondent assessed the returns filedby the petitioner, under Section 143(1) of the Act, and granted refund oftax. 4. Thereafter, in exercise of his powers under Section 148 of theAct, the 2[nd] respondent issued notice dated 26.3.2009 informing thepetitioner that, since their income for the assessment year 2002-03 hadescaped assessment, he proposed to reopen the assessment afterobtaining sanction of the Commissioner of Income Tax (Central),Hyderabad(CIT). The petitioner was called upon to file their return inthe prescribed form. In reply thereto the petitioner vide letter dated26.5.2009, while enclosing their return for the assessment year 2002-03, requested that the reasons for reopening the assessment be furnished to them as the notice dated 26.3.2009 was bereft of reasons.An order under Section 281-B of the Act was passed vide proceedingsdated 13.8.2009, and the property of the petitioner was attached. The1[st] respondent, vide proceedings dated 17.8.2009, called for variousrecords and information relating to the assessment year 2002-03. On14.9.2009 the 2[nd] respondent furnished to the petitioner the reasonsfor issuance of the notice under Section 148 of the Act for theassessment year 2002-03 which, amongst others, records that he hadreason to believe that income chargeable to tax, which had escapedassessment, was more than Rs.1.00 lakh in terms of Section 149 readwith Section 148 of the Act. The petitioner, vide letter dated 22.9.2009,filed their reply and objections to the assessment for the year 2002-03being reopened. The 1[st] respondent, vide proceedings dated9.12.2009, informed the petitioner that their objections were notacceptable. A notice dated 15.12.2009 was issued under Section142(2A) calling upon the petitioner to submit their comments on theproposal to refer their case for audit. Aggrieved thereby, this WritPetition was filed. CONTENTIONS: CONTENTIONS: 5. Sri C. Kodandaram, Learned Senior Counsel appearing onbehalf of the petitioner, would submit that, in the absence of specificinformation available with the department that the petitioner had eitherconcealed their income or had furnished inaccurate particulars ofincome and as the reasons recorded were general and vague, the 2[nd]respondent was not justified in issuing notice under Section 148 of theAct; the impugned notice was based on the mere suspicion that thepetitioner’s income may have escaped assessment since M/s MaytasInfra Limited, a company of the Satyam Group, had made substantial investment towards the equity capital of the petitioner company; invocation of Section 142 (2A) was only to harass the petitioner; thenotice issued under Section 148 of the Act on 26.03.2009 is bereft ofreasons; the reasons furnished by the assessing authority on14.09.2009, (at the petitioner’s request), merely referred to theconfessional statements of Sri B. Ramalinga Raju dated 07.01.2009and 21.02.2009 which related only to the books of accounts of SCSL,and not to the petitioner company; merely because the petitioner wasoriginally incorporated by Sri B. Ramalinga Raju, his confessioncannot form the basis for reopening assessment of the petitioner; thepetitioner has no direct nexus with the alleged fraud committed by SriB. Ramalinga Raju; its management was taken over by the GVK groupway back in the year 2003; during the said period the father of Sri B.Ramalinga Raju was the director of the petitioner company; thepetitioner’s case falls within the proviso to Section 147; whilesuspicion may be the initial trigger for exercising jurisdiction underSections 147 and 148, the reason to believe that income has escapedassessment must be based on the material on record and should becertain; no fishing expedition or a roving enquiry is permissible; the“reasons to believe” should be relatable to non-disclosure, fully andtruly, of all material facts; the impugned notice under Section 148suffers from non-application of mind; there is no material on which theassessing authority could have arrived at his subjective satisfactionthat income of the petitioner had escaped assessment; the reasonsassigned in the proceedings dated 26.03.2009, and in the subsequentnote dated 09.12.2009, are at variance with each other; at the stage ofissuance of notice under Section 148, “reason to believe” should becapable of being co-related with the averments in the counter-affidavitfiled by the assessing authority; and the reasons now furnished to this Court, in the counter-affidavits filed by the assessing authority, has noconnection with the reasons which were furnished earlier. LearnedSenior Counsel would rely on Calcutta Discount Company Limitedv. Income-tax Officer, Companies District-I, Calcutta[[1]];BariumChemicals v Company Law Board[[2]];Sheonathsingh v.Commissioner of Income Tax Calcutta[[3]];S Ganga Saran andSons Private Limited Calcutta v. Income Tax Officer[[4]];ManishMaheshwari v. Asst. CIT[[5]];Ramesh Chandra Sankla v. VikramCement[[6]];Asst. CIT v. Rajesh Jhaveri Stock Brokers (P) Ltd[[7]];Sarthak Securities Co. P. Ltd. v. ITO[[8]];Haryana AcrylicManufacturing Co. v. Commissioner of Income-tax[[9]];TheCommissioner of Income-tax v. Jet Airways (I) Limited[[10]]. Court, in the counter-affidavits filed by the assessing authority, has noconnection with the reasons which were furnished earlier. LearnedSenior Counsel would rely on Calcutta Discount Company Limitedv. Income-tax Officer, Companies District-I, Calcutta[[1]];BariumChemicals v Company Law Board[[2]];Sheonathsingh v.Commissioner of Income Tax Calcutta[[3]];S Ganga Saran andSons Private Limited Calcutta v. Income Tax Officer[[4]];ManishMaheshwari v. Asst. CIT[[5]];Ramesh Chandra Sankla v. VikramCement[[6]];Asst. CIT v. Rajesh Jhaveri Stock Brokers (P) Ltd[[7]];Sarthak Securities Co. P. Ltd. v. ITO[[8]];Haryana AcrylicManufacturing Co. v. Commissioner of Income-tax[[9]];TheCommissioner of Income-tax v. Jet Airways (I) Limited[[10]]. 6. Ms. K. Mamatha, Learned Counsel appearing for some of thepetitioners, would submit that, in as much as the assessing authoritydid not have reason to believe that income had escaped assessment,the petitioner cannot be subjected to the needless ordeal of having toappear before him in reassessment proceedings; the confession of SriB. Ramalinga Raju, as recorded in the subsequent assessment orderof Maytas Infra-tec Private Limited, was false; as the earlier noticeissued on 26.03.2009 was not accompanied by reasons it is not anotice in the eye of law; the reasons for reopening must be furnishedwithin a reasonable time; the reasons were, however, furnished morethan six months after the notice dated 26.3.2009 was issued, and justbefore the time limit for passing the reassessment order was drawingto a close; and by the time the reasons were furnished, at thepetitioner’s request on 14.09.2009, the limitation of six years forreopening the assessment had elapsed. Learned Counsel would rely on Haryana Acrylic[9]; GKN Driveshafts India Limited v. Income TaxOfficer[[11]];Income Tax Officer v. M/s. Madnani Engineering WorksLtd, Calcutta[[12]]. 7. Sri J.V. Prasad, Learned Senior Standing Counsel for Income-tax, would submit that the petitioner company was incorporated by SriB. Ramalinga Raju; their admission that the GVK group had taken overthe petitioner company in July, 2003 meant that they were part of theSatyam Group of companies for the year 2001-2002; they were underthe influence and control of Sri B. Ramalinga Raju who had set up asmany as 370 companies including the petitioner; in the light of the“scam” in SCSL necessary steps to protect the interests of the revenuewere required to be taken; when Sri B. Ramalinga Raju confessed tohave fudged accounts, the completed proceedings under Section143(3) of the Act was required to be looked into again; reopening ofthe assessment was on the basis of information gathered by thedepartment after the confession of Sri B. Ramalinga Raju on 7.1.2009;the authorized officer had caused investigation at his end, and hadtaken the decision to reopen assessment of the petitioner for theassessment year 2002-03; the assessing officer had recorded hisreasons and satisfaction which was endorsed by the AdditionalCommissioner, and the CIT; the assessing officer had applied his mindand had caused due verification; the satisfaction recorded forreopening the assessment cannot be said to be arbitrary as there wasmaterial based on which the assessing officer had reason to believethat there was escapement of income; at the stage of issue of notice itwould suffice if prima facie material is available with the assessingofficer; the assessing officer is not required to conclusively establishthat there was escapement of income; as the petitioner did not reply to the show cause notice dated 15.12.2009, proposals for special auditwere sent to the CIT for approval; after due approval the company wasdirected to get its accounts audited as its financial results were indoubt because of their inter-relationship with SCSL, and the influenceof Sri B. Ramalinga Raju over the affairs of the petitioner; havingregard to the complexity and the circumstances it was the consideredopinion of the assessing officer that, in the interest of revenue, theveracity of the accounts could only be ascertained by carrying out anaudit under Section 142(2A) of the Act; the petitioner had not madeout any case for interference by this Court under Article 226; largerpublic interest required reopening of the assessment; the mere fact thatthe notice dated 26.03.2009 does not disclose all the reasons wouldnot render the proceedings initiated under Section 147 invalid as it isevident from the material on record that the assessing officer hadreason to believe that income had escaped assessment; thesufficiency or adequacy of such reasons are not matters which wouldbe examined by this Court, more so as no order of re-assessment hasas yet been passed; the petitioners have a remedy under the Act toappear before the ITO and, in case they suffer an adverse order, tocarry the matter in appeal to the CIT(A) before whom they can raise allquestions including on the jurisdiction of the ITO to reopenassessment under Section 147 of the Act; and, in the light of themassive fraud committed by Sri B. Ramalinga Raju and as thepetitioner is one of the several companies floated by him to evade tax,this Court should refrain from exercising its discretion under Article 226as any finding recorded by this Court, on the question of jurisdiction,would effect the appeals pending before the CIT (A). Learned SeniorStanding Counsel would place reliance on M/s. Calcutta DiscountCo. Ltd.[1]; Bhimraj Pannalal v. CIT Bihar & Orissa[[13]];A.L.A. Firm v. CIT[[14]];Inspecting Asst. CIT v. V.I.P. Industries Ltd[[15]];CentralProvinces Manganese Ore Co. Ltd v. ITO, Nagpur[[16]];Phoolchand Bagranglal v. ITO[[17]];ITO v. Selected Dalurband CoalCo. Pvt. Ltd[[18]];Srikrishna Pvt. Ltd v. ITO[[19]];Associated StoneIndustries Ltd. v. CIT[[20]];Raymond Woolen Mills Ltd. v. ITO[[21]];Rajesh Jhaveri[7]. MATERIAL ON RECORD: 8. The records placed before us, in so far as they relate to thepetitioner in W.P. No.27817 of 2009, contain copies of theshareholders agreement executed on 2.7.2003 between Maytas InfraLimited, M/s IJM Corporation, Malaysia and M/s NagarjunaConstruction Co. Ltd on the one hand and G.V.K. companies on theother. The said agreement shows that M/s. Maytas Infra Ltd, M/s IJMCorporation, Malaysia and M/s. Nagarjuna construction Co. Ltd,together with their affiliates, held 100% of the equity share capital ofthe petitioner company and, with effect from the effective date, whileM/s Maytas Infra Limited and M/s IJM Corporation were to reduce theirholding to 20% each of the petitioner’s equity capital, M/s NagarjunaConstruction Company Limited was to hold 10% and the remaining50% of the equity capital of the petitioner company was to be held bythe GVK companies. The shareholders agreement was signed onbehalf of Maytas Infra Ltd by its Director Sri B. Teja Raju. (son of Sri B.Ramalinga Raju). The shareholders agreement was amended initiallyon 11.6.2004, and later on 23.10.2006, and the share holding of M/sMaytas Infra Ltd was reduced to 19.50% of the petitioner’s equitycapital. The record also contains the Director’s report, for the financialyear ending 31.3.2002, which reveals that Sri B. Rama Raju S/o. Sri B. Ramalinga Raju was then the Vice-Chairman and Managing Directorof the petitioner company. The record contains several other letterswhich, for reasons stated hereinafter, need not be referred to in thisorder. SECTIONS 147 TO 149 OF THE ACT: ITS SCOPE AND AMBIT: Ramalinga Raju was then the Vice-Chairman and Managing Directorof the petitioner company. The record contains several other letterswhich, for reasons stated hereinafter, need not be referred to in thisorder. SECTIONS 147 TO 149 OF THE ACT: ITS SCOPE AND AMBIT: 9. Before considering the question, whether this Court shouldexercise discretion to adjudicate upon the jurisdiction of the ITO toissue notice under Section 147, it is useful to examine the scope andpurport of Sections 147 to 149 of the Act, and cull out the principleslaid down in this regard by various judicial pronouncements of theSupreme Court. 10. Section 34 of the Income Tax Act, 1922 related to incomeescaping assessment. In Calcutta Discount Co. Ltd.[1]the SupremeCourt held that, in order to confer jurisdiction under Section 34 to issuenotice in respect of assessments beyond four years from the end of therelevant year, two conditions must be satisfied (i) the ITO should havereason to believe that there has been under-assessment, and (ii) heshould have reason to believe that such under-assessment hasresulted from non-disclosure of material facts; and both theserequirements were conditions precedent to be satisfied before the ITOwould have jurisdiction to issue the notice. 11. Section 147 of the Income Tax Act, 1961 as it originally stoodwas similar to Section 34 of the Income Tax Act, 1922. Section 147was amended firstly by the Direct Tax Laws Amendment Act, 1987,and later by the Amending Act, 1989. It is useful to read Section 147 ofthe Income Tax Act, 1961 as it originally stood, after it was amendedby the Direct Tax Laws Amendment Act, 1987, and later by the Amending Act, 1989, in juxta-position with each other. Prior to Direct Tax LawsAfter enactment of(Amendment) Act, 1987,Direct Tax LawsSection 147 read as(Amendment) Act, 1987,under:i.e., prior to 1[st] April,1989, Section 147 of theAct, read as under: After the Amending Act,1989, Section 147 readas under: 1 4 7 . I n c o m e escaping assessment: 1 4 7 . I n c o m e escapingassessment:- 1 4 7 . I n c o m e escapingassessment:- 1 4 7 . If the AssessingOfficer has reason tobelieve that any incomechargeable to tax hasescaped assessment forany assessment year, hemay, subject to theprovisions of Sections148 to 153, assess orreassess such incomea n d also any otherincome chargeable totax which has escapedassessment and whichcomes to his noticesubsequently in thecourse of theproceedings under thissection, or recompute theloss or the depreciationallowance or any otherallowance, as the casemay be, for theassessment yearconcerned (hereafter inthis section and inSections 148 to 153referred to as the relevantassessment year). Provided that wherean assessment undersub-section (3) of Section143 or this Section hasbeen made for therelevant assessmentyear, no action shall betaken under this Sectionafter the expiry of fouryears from the end of therelevant assessmentyear, unless any incomechargeable to tax hasescaped assessment for If- If the Assessing Officer,for reasons to berecorded by him inwriting, is of theopinion that any incomechargeable to tax hasescaped assessment forany assessment year, hemay, subject to theprovisions of Sections148 to 153, assess orreassess such incomea n d also any otherincome chargeable totax which has escapedassessment and whichcomes to his noticesubsequently in thecourse of theproceedings under thissection, or recompute theloss or the depreciationallowance or any otherallowance, as the casemay be, for theassessment yearconcerned (hereafter inthis section and inSections 148 to 153referred to as the relevantassessment year). If- If the Assessing Officer,for reasons to berecorded by him inwriting, is of theopinion that any incomechargeable to tax hasescaped assessment forany assessment year, hemay, subject to theprovisions of Sections148 to 153, assess orreassess such incomea n d also any otherincome chargeable totax which has escapedassessment and whichcomes to his noticesubsequently in thecourse of theproceedings under thissection, or recompute theloss or the depreciationallowance or any otherallowance, as the casemay be, for theassessment yearconcerned (hereafter inthis section and inSections 148 to 153referred to as the relevantassessment year). [a] the Income-tax Officerh a s reason to believethat, by reason of theomission or failure onthe part of an assesseeto make a return underSection 139 for anyassessment year to theIncome-tax Officer or todisclose fully and trulyall material factsnecessary for hisassessment for thatyear, income chargeableto tax has escapedassessment for thatyear, or[ b ] notwithstanding thatthere has been noomission or failure asmentioned in Clause (a)on the part of theassessee, the Income-tax Officer has inconsequence ofinformation in hispossession reason tobelieve that incomechargeable to tax hasescaped assessment forany assessment year, hem a y , subject to theprovisions of Sections148 to 153, assess orreassess such income orrecompute the loss or thedepreciation allowance, asthe case may be, for theassessment yearconcerned (hereafter inSections 148 to 153 referred to as the relevantsuch assessment yearassessment year).by reason of the failure onthe part of the assesseeto make a return underSection 139 or inresponse to a noticeissued under sub-section(1) of Section 142 orSection 148 or to disclosefully and truly all materialfacts necessary for hisassessment for thatassessment year. 12. Under Section 147 of the Income-tax Act, 1961, as it originallystood, an assessment could be reopened only if the ITO had reason tobelieve that income chargeable to tax had escaped assessment undertwo situations i.e., (i) omission or failure on the part of the assessee tomake a return under Section 139 for any assessment year; or (ii)disclose fully and truly all material facts necessary for his assessment.Under the Direct Tax Laws (Amendment) Act, 1987, Parliament notonly deleted the words "reason to believe" but also inserted the word"opinion" in Section 147 of the Act. However, on receipt ofrepresentations from companies against omission of the words"reason to believe", Parliament re-introduced the said expression anddeleted the word "opinion" on the ground that it would vest arbitrarypowers in the Assessing Officer. But in Section 147 of the Act, witheffect from 1[st] April, 1989, the twin conditions of the pre-amendedSection 147 were given a go-by and only one condition remained viz.,where the Assessing Officer had reason to believe that income hasescaped assessment. Post-1[st] April, 1989, the power to re-openassessment under Section 147 is much wider. (Commissioner ofIncome Tax v. Kelvinator of India Ltd[[22]]). The scope and effect ofSection 147 as substituted with effect from 1-4-1989, and Sections 148to 152, are substantially different from the provisions as they stood prior to such substitution. Under the substituted Section 147 if theassessing officer, for whatever reason, has reason to believe thatincome has escaped assessment, he has the jurisdiction to reopen theassessment. (Rajesh Jhaveri[7]). prior to such substitution. Under the substituted Section 147 if theassessing officer, for whatever reason, has reason to believe thatincome has escaped assessment, he has the jurisdiction to reopen theassessment. (Rajesh Jhaveri[7]). 13. It is only in cases where an assessment under Section 143(3) orSection 147 has been made for the relevant assessment year that thefirst proviso to Section 147 prohibits action from being taken underSection 147 after expiry of four years from the end of the relevantassessment year unless (i) any income chargeable to tax has escapedassessment for such assessment year by reason of the failure on thepart of the assessee to make a return under Section 139; or (ii) inresponse to a notice issued under Section 142(1) or Section 148, theassessee does not disclose fully and truly all material facts necessaryfor that assessment year. After expiry of four years, but not after sixyears, from the end of the relevant assessment year the jurisdictionconferred on the assessing officer to reopen assessment underSection 147 is similar to Section 34 of Income Tax Act, 1922, andSection 147 of the Income Tax Act, 1961 as it originally stood. Theconditions, stipulated in Section 147 of the Income-tax Act, 1961 as itoriginally stood, must be fulfilled if the case falls within the ambit of thefirst proviso to Section 147 of the Act. (Rajesh Jhaveri[7]). 14. The word "reason", in the phrase "reason to believe" in Section147, would mean cause or justification. If the assessing officer hascause or justification to know or suppose that income has escapedassessment he can be said to have reason to believe that income hasescaped assessment. The expression cannot be read to mean that the assessing officer should have finally ascertained the fact by legalevidence or conclusion. (Central Provinces Manganese Ore Co.Ltd.[16]; Rajesh Jhaveri[7]). The words “has reason to believe” arestronger than the words “is satisfied”. (S. Ganga Saran & Sons (P)Ltd[4]). A schematic interpretation should be given to the words"reason to believe" failing which Section 147 would give arbitrarypowers to the assessing officer to re-open assessments, on the basisof "mere change of opinion", which cannot per se be a reason to re-open assessment. The assessing officer has no power to review. Hehas the power to re-assess. But re-assessment has to be based onfulfillment of certain pre-conditions and, if the concept of "change ofopinion" is removed, then, in the garb of re-opening the assessment,review would take place. The concept of "change of opinion" must betreated as an in-built test to check abuse of power by the assessingofficer. Hence, after 1[st] April 1989, the assessing officer has the powerto re-open provided there is "tangible material" to come to theconclusion that there is escapement of income from assessment.Reasons must have a live link with the formation of the belief. (Kelvinator of India Ltd[22]). 15. The words “reason to believe” suggest that the belief must bethat of an honest and reasonable person based upon reasonablegrounds. The ITO may act on direct or circumstantial evidence but noton mere suspicion, gossip or rumour. The ITO would be acting withoutjurisdiction if the reason for his belief, that the conditions are satisfied,do not exist or is not material or relevant to the belief required bySection 147. (Sheo Nath Singh[3]; Chhugamal Rajpal v. S.P. 15. The words “reason to believe” suggest that the belief must bethat of an honest and reasonable person based upon reasonablegrounds. The ITO may act on direct or circumstantial evidence but noton mere suspicion, gossip or rumour. The ITO would be acting withoutjurisdiction if the reason for his belief, that the conditions are satisfied,do not exist or is not material or relevant to the belief required bySection 147. (Sheo Nath Singh[3]; Chhugamal Rajpal v. S.P. Chaliha[[23]]). The belief entertained by the ITO must not be arbitraryor irrational. At the stage of initiation of action under Section 147, thefinal outcome of the proceeding is not relevant. In other words, at theinitiation stage, what is required is “reason to believe” but not theestablished fact of escapement of income. At the initiation stage theonly question is whether there was relevant material on which areasonable person could have formed the requisite belief. Whether thematerial would conclusively prove the escapement is not of concern atthat stage as the formation of belief by the assessing officer is withinthe realm of his subjective satisfaction. (Selected Dalurband CoalCo. (P) Ltd[18]; Raymond Woollen Mills Ltd.[21]; Central ProvincesManganese Ore Co. Ltd.[16]; Rajesh Jhaveri[7]). Whether the materialis relevant for formation of the requisite belief will differ from case tocase. (Sri Krishna Pvt. Ltd.[19]). 16. The words failure to disclose “fully and truly all material factsnecessary for his assessment”, in the first proviso to Section 147,postulate a duty on every assessee to disclose fully and truly allmaterial facts necessary for his assessment. (Calcutta Discount Co.Ltd.[1]). The disclosure must not only be true but must be full -"Fullyand truly". A false assertion, or statement, of material fact thereforeattracts the jurisdiction of the ITO under Section 147. (Sri Krishna PvtLtd[19]). The expression "material facts" refers only to primary facts,and the duty of the assessee is to disclose primary facts. There is noduty cast on the assessee to indicate or draw the attention of the ITO tothe inferences that can be drawn from the primary facts disclosed.(Calcutta Discount Co. Ltd.[1]; Associated Stone Industries (Kotah) Ltd.[20]). Every disclosure is not and cannot be treated as a true and fulldisclosure. A disclosure may be false or true. It may be a full disclosureor it may not. A partial disclosure may very often be misleading. Whatis required is a full and true disclosure of all material facts necessaryfor making assessment for that year. (Sri Krishna Pvt. Ltd.[19]). Whatfacts are material, and necessary for assessment, will differ from caseto case. (Calcutta Discount Co. Ltd.[1]). The duty of disclosing allprimary facts, relevant to the decision on the question before theassessing authority, lies on the assessee. The assessee’s omission tobring to the assessing authority's attention particular items in theaccount books, or the particular portions of the documents which arerelevant, amount to "failure to disclose fully and truly and truly allmaterial facts necessary for his assessment." It is the assessee'sduty to disclose all primary facts which could have been discovered bythe assessing authority from the documents and other evidencedisclosed. (Calcutta Discount Co. Ltd.[1]). The assessee’s duty todisclose is in the context of the two requirements - called conditionsprecedent - which must be satisfied before the ITO gets jurisdiction tore-open assessment under Section 147/148. This obligation canneither be ignored nor watered down. Nor can anyone suggest that afalse disclosure satisfies the requirement of full and true disclosure.(Sri Krishna Pvt. Ltd.[19]). Finality of proceedings is certainly aconsideration, but that avails one who has fully and truly disclosed allmaterial facts necessary for his assessment for that year - and not toothers. (Sri Krishna Pvt. Ltd.[19]). 17. All that is necessary to give special jurisdiction is that the ITO 17. All that is necessary to give special jurisdiction is that the ITO had, when he assumed jurisdiction, some prima facie grounds forbelieving that there had been some non-disclosure of material facts. Whether these grounds are adequate or not, for arriving at theconclusion that there was non-disclosure of material facts, would notbe open for the court’s investigation. (Calcutta Discount Co. Ltd.[1]). Atthe stage of examining the validity of the notice under Section 148/147,the enquiry is only to see whether there are reasonable grounds for theITO to believe, and not whether the omission/failure and theescapement of income is established. It is necessary to keep thisdistinction in mind. (Sri Krishna Pvt. Ltd.[19]). 18. An ITO may start reassessment proceedings either becausesome fresh facts have come to light which where not previouslydisclosed or some information, with regard to the facts previouslydisclosed, comes into his possession which tends to expose the falsityof those facts. In such situations it is a case of acting on freshinformation. One of the purposes of Section 147 is to ensure that aparty cannot get away by wilfully making a false or untrue statement atthe time of original assessment and, when that falsity comes to notice,to turn around and say "you accepted my lie, now your hands aretied and you can do nothing". It would be a travesty of justice toallow the assessee that latitude. (Phool Chand Bajrang Lal[17]). 19. It is the duty of the assessee, who wants the court to hold thatjurisdiction was lacking, to establish that the ITO had no material at allbefore him for believing that there had been escapement of income.(Calcutta Discount Co. Ltd.[1]). It is for the assessee to establish thatthere existed no belief or that the belief was not bonafide or was basedon vague, irrelevant and non-specific information. 20. All the requirements stipulated by Section 147 must be givendue and equal weight. (Sri Krishna Pvt. Ltd.[19]). The Court may lookinto the conclusion arrived at by the ITO and examine whether therewas any material available on the record from which the requisitebelief could be formed by him and further whether that material hadany rational connection or a live link for the formation of the requisitebelief. Since the belief is that of the ITO the sufficiency of reasons forforming the belief is not for the Court to judge. (Phool Chand BajrangLal[17]). The Court cannot investigate into the adequacy or sufficiency ofthe reasons which weighed with the ITO in coming to the belief, butcan examine whether the reasons are relevant and have a bearing onmatters in regard to which the ITO is required to entertain the beliefbefore he can issue notice under Section 147. If there is no rationaland intelligible nexus between the reasons and the belief so that, onsuch reasons, no one properly instructed on facts and law couldreasonably entertain the belief, the conclusion would be inescapablethat the ITO could not have reason to believe that any part of theincome of the assessee had escaped assessment, and the noticeissued by him would be liable to be struck down as invalid. (S. GangaSaran[4]). 21. The order of the authority can be challenged if it is beyond thelimits of the Act or is passed on grounds extraneous to the Act or ifthere are no grounds at all for passing it or if the grounds are such thatno one can reasonably arrive at the opinion or satisfaction requisiteunder the legislation. In any one of these situations it can well be saidthat the authority did not honestly form its opinion or that, in forming it, itdid not apply its mind to the relevant facts. (Barium Chemicals Ltd.[2]). 21. The order of the authority can be challenged if it is beyond thelimits of the Act or is passed on grounds extraneous to the Act or ifthere are no grounds at all for passing it or if the grounds are such thatno one can reasonably arrive at the opinion or satisfaction requisiteunder the legislation. In any one of these situations it can well be saidthat the authority did not honestly form its opinion or that, in forming it, itdid not apply its mind to the relevant facts. (Barium Chemicals Ltd.[2]). 22. As the formation of belief by the ITO is essentially within hissubjective satisfaction, (Selected Dalurband Coal Co. Pvt. Ltd[18]), theCourt has only to see whether there was prima facie some material onthe basis of which the Department could reopen the case. Thesufficiency or correctness of the material is not a matter to beconsidered at this stage. (Raymond Woollen Mills Ltd.[21]). Even if theformation of opinion is subjective, the existence of circumstancesrelevant to the inference as the sine qua non for action must bedemonstrable. If the action is questioned on the ground that nocircumstances leading to an inference of the kind contemplated by theSection exists, the action might be exposed to interference unless theexistence of the circumstances is made out. It is not sufficient to assertthat the circumstances exist and give no clue to what they are becausethe circumstances must be such as to lead to conclusions of certaindefiniteness. (Barium Chemicals Ltd.[2]). 23. The necessary jurisdictional facts must exist before the ITO canexercise jurisdiction under Section 147 of the Act. A ‘jurisdictional fact’is a fact which must exist before a tribunal or an authority assumesjurisdiction over a particular matter. If the jurisdictional fact does notexist the tribunal or authority cannot act. If a tribunal or authoritywrongly assume the existence of such a fact, a writ of certiorari lies.The underlying principle is that, by erroneously assuming existence ofa jurisdictional fact, an inferior tribunal or authority cannot confer uponitself jurisdiction which it otherwise does not possess. The existence ofa jurisdictional fact is thus the sine qua non or condition precedent forthe exercise of power by an authority or a tribunal of limitedjurisdiction. (Ramesh Chandra Sankla[6]; Arun Kumar v. Union of India[[24]];Carona Ltd. v. Parvathy Swaminathan & Sons[[25]]). 24. While examining the question whether there was relevantmaterial before the assessing authority based on which he hadreasons to believe that income has escaped assessment it must beborne in mind that, in sending his report to the Commissioner, the ITOmight not fully set out what he thought amounted to reasons as it isconceivable that the report may not be drawn up carefully and may notcontain a reference to all the reasons that operated on his mind.(Calcutta Discount Co. Ltd.[1]). The Calcutta and Delhi High Courts,i n Equitable Investment Co. (P.) Ltd. v. ITO[[26]]; and SarthakSecurities Co. P. Ltd.[8]held that where a notice issued under Section148 of the Act, after obtaining sanction of the CIT is challenged, theonly document to be looked into for determining the validity of thenotice is the report on the basis of which sanction of the CIT has beenobtained; and the Income-tax Department cannot rely on any othermaterial apart from the report. As the Constitution Bench of theSupreme Court, in Calcutta Discount Company Limited[1], has heldotherwise, reliance placed by the petitioners on Equitable InvestmentCo. (P) Ltd[26] and Sarathak Securities Co. (P) Ltd[8] is misplaced. 25. Even if nothing relevant is disclosed, an opportunity may begiven to the Revenue to produce the records containing those reasonsfor the purpose of finding out whether the ITO had any reason tobelieve that income had escaped assessment. (Calcutta DiscountCo. Ltd.[1]; Sheo Nath Singh[3]; Chhugamal Rajpal[23]). 26. I n Calcutta Discount Co. Ltd.[1]the Supreme Court, whileholding that the ITO would have the opportunity to tell the Court in the 25. Even if nothing relevant is disclosed, an opportunity may begiven to the Revenue to produce the records containing those reasonsfor the purpose of finding out whether the ITO had any reason tobelieve that income had escaped assessment. (Calcutta DiscountCo. Ltd.[1]; Sheo Nath Singh[3]; Chhugamal Rajpal[23]). 26. I n Calcutta Discount Co. Ltd.[1]the Supreme Court, whileholding that the ITO would have the opportunity to tell the Court in the affidavit filed by him what reasons he took into consideration, askedthe Income Tax Department’s counsel what were the reasons whichweighed with the ITO. To quote:- “………..To ascertain whether the Income Tax Officer could havehad in mind any non-disclosure as a ground for thinking that by reasonof such non-disclosure an underassessment had occurred — apartfrom what was mentioned in the affidavit — we enquired fromrespondent’s counsel whether he could suggest any other non-disclosure that might have taken place. Mr Sastri suggested two. Oneis that the sales had not been disclosed; the other that thememorandum and articles of association of the Company had not beenshown. This suggestion is against the record and we have nohesitation in repelling it. Not only is it not the ground set out by theIncome Tax Officer at any stage not even in the affidavit in court, butthe matters mentioned by the officer that the assessee had claimedthat the profits realised were of a casual nature obviously indicate thatthe assessee disclosed that a surplus resulted from the sales whichwere also disclosed…..” 27. Even if the reasons furnished by the ITO to the assessee doesnot, ex-facie, disclose his satisfaction of the basic facts essential forexercise of jurisdiction under Section 147 of the Act, the Court can lookinto the records produced before it to ascertain whether there wasrelevant material which led the ITO to arrive at his satisfaction thatincome has escaped assessment. In Income-tax Officer, Cuttack v. Biju Patnaik[[27]], the Supreme Court observed:- “……….. It is undoubtedly true that the notice does not prima facie disclosethe satisfaction of the two conditions precedent enjoined under Section 147(a), but inthe Counter Affidavit filed by the Income-tax Officer in the High Court he stated all thematerial facts. Thus though ex facie the notice does not disclose the satisfaction ofthe requirement of Section 147(a), but from the record and the averments in thecounter affidavit it is clear that the Income-tax Officer had applied his mind to thefacts and, after prima facie satisfying himself of the existence of those two conditionsprecedent, reached the conclusion to reopen the assessment. It is settled law that inan administrative action, though the order does not ex facie disclose thesatisfaction by the officer of the necessary facts, but if the record discloses thesame, the notice or the order does not per se become illegal………(emphasissupplied)” 28. Even material gathered by other agencies may be relied upon by the ITO as reasons for his belief that there has been escapement ofincome. I n Central Provinces Manganese Ore Co. Ltd.[16], theSupreme Court opined:- “………..So far as the first condition is concerned, the Income TaxOfficer, in his recorded reasons, has relied upon the fact as found by theCustom Authorities that the appellant under-invoiced the goods he exported. Itis no doubt correct that the said finding may not be binding upon the IncomeTax Authorities but it can be a valid reason to believe that the chargeableincome has been under-assessed. The final outcome of the proceedings is notrelevant. What is relevant is the existence of reasons to make the Income TaxOfficer believe that there has been under-assessment of the assessee's incomefor a particular year. We are satisfied that the first condition to invoke the jurisdictionof the Income Tax Officer under Section 147(a) of the Act was satisfied………..”(emphasis supplied) “………..So far as the first condition is concerned, the Income TaxOfficer, in his recorded reasons, has relied upon the fact as found by theCustom Authorities that the appellant under-invoiced the goods he exported. Itis no doubt correct that the said finding may not be binding upon the IncomeTax Authorities but it can be a valid reason to believe that the chargeableincome has been under-assessed. The final outcome of the proceedings is notrelevant. What is relevant is the existence of reasons to make the Income TaxOfficer believe that there has been under-assessment of the assessee's incomefor a particular year. We are satisfied that the first condition to invoke the jurisdictionof the Income Tax Officer under Section 147(a) of the Act was satisfied………..”(emphasis supplied) 29. There is no single rule of universal application to determinewhether the material before the ITO is sufficient for his being satisfiedthat there has been escapement of income. This aspect would dependon the facts and circumstances of each case. In Raymond Woollen Mills Ltd.[21], the Supreme Court held:- …………we are of the view that the court cannot strike down the reopening ofthe case in the facts of this case.