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INCOME-TAX OFFICER V. LAKHMANI MEWAL DAS (1976) 3 SCC 757

INCOME-TAX OFFICER V. LAKHMANI MEWAL DAS (1976) 3 SCC 757

FACTS

  • The respondent, assessee, was assessed for the assessment year 1958-59 under Section 23(3) of the Indian Income-tax Act, 1922.
  • The Income-tax Officer allowed a deduction of Rs. 15,991 as expenses, including Rs. 10,494 as interest.
  • The respondent received a notice under Section 148 in 1967, stating that his income had escaped assessment.
  • The Income-tax GEMINI LEATHER STORES V. THE INCOME-TAX OFFICER, ‘B’ WARD AGRA AIR 1975 SC 1268 Officer, the appellant claimed that certain loans and interests were not genuine, leading to the reopening of the assessment.
  • The Income-tax Officer relied on grounds such as confessions of name-lending and known name-lenders to justify the reopening of the assessment.
  • The case went through appeals, where the High Court by majority quashed the notice issued by the appellant.
  • Hence, the present appeal by the revenue department.

ISSUE

  • Whether the Income-tax Officer had valid reasons to believe that the respondent's income had escaped assessment due to his failure to disclose fully and truly all material facts.

RULE

  • There should be a close nexus between the material available and reason to believe formed by Income Tax Authorities.

HELD

  • The confessions of name-lending and known name-lenders were not directly linked to the assessment period or the loans in question.
  • The Court reiterated that the formation of belief by the Income-tax Officer must be held in good faith and should not be merely a pretence. It emphasized that the powers to reopen assessments are not unlimited and should be exercised with caution.
  • There must be a live link or close nexus between the material before the Income-tax Officer and the belief formed regarding the escapement of income due to the assessee's failure to disclose material facts. In this case, the link between the provided material and the belief was deemed too tenuous to justify reopening the assessment.
  • The Court acknowledged the seriousness of reopening assessments, highlighting the departure from the normal rule of finality in judicial proceedings. It emphasized the need for strict adherence to the legal requirements before initiating such actions.
  • Ultimately, the Court upheld the majority view of the High Court, affirming the decision to quash the notice issued by the appellant. 
  • It concluded that the material provided did not meet the legal standards for reopening the assessment and lacked a rational basis for the belief that income had escaped assessment due to the assessee's failure to disclose material facts fully and truly.

COMMENTARIES RATIO/NOTE

  • In determining whether commencement of reassessment proceedings is valid, the court has only to see whether there is prima facie some material on the basis of which the department opened the case. The sufficiency or correctness of the material is not a thing to be considered at this stage- Raymond Woollen Mills Ltd. v. ITO [1999] 236 ITR 34 (SC), Green Arts (P.) Ltd. v. ITO (2005) 257 ITR 639 (Delhi). 

What is the ultimate result of enquiry is not material for deciding the jurisdiction of the Assessing Officer to reopen assessment, even if it is found ultimately that there has been no escapement of income-Mahasukhram Madan Lal v. CIT [1955] 28 ITR 299 (Pat.).