The recorded reasons for reopening my assessment say only that I am believed to have made secret profits and believed to have received a large sum. Is that reason to believe?
No. The Supreme Court quashed the notices. The words reason to believe mean the belief of an honest and reasonable person on reasonable grounds; the officer may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour. He acts without jurisdiction if the reason for his belief does not exist or is not material or relevant to the belief the section requires, and the court can always examine that, though it cannot investigate the sufficiency of the reasons. Here the recorded reasons stated no material fact at all - they were themselves expressed as beliefs, an obvious self-contradiction.
Decided by the Supreme Court (Supreme Court of India - K.S. Hegde and A.N. Grover JJ; judgment by Grover J) on 1971-08-12, reported as (1971) 82 ITR 147; 1971 AIR 2451; 1972 SCR (1) 175; 1973 SCC (Tax) 621; (1971) Tax LR 1747. It bears on section 34(1A) of the Indian Income-tax Act, 1922, section 147, section 148 of the Income Tax Act 1961, in Reassessment & Reopening matters.
This is the case that tests a reopening against what is actually written in the recorded reasons, and it is quoted in almost every challenge to a reassessment notice. It fixes three things. The standard: honest and reasonable belief on reasonable grounds, evidence direct or circumstantial, but never suspicion, gossip or rumour. The reviewability: existence, materiality and relevance of the reasons are for the court, while sufficiency is not - the line that keeps such challenges within bounds. And the practical consequence, seen at its sharpest here, that reasons which merely assert a belief supply nothing on which a belief can be founded. It applies Chhugamal Rajpal, where a report referring vaguely to communications about name-lenders was held insufficient. It is also a useful illustration of the Court requiring the Department to produce the record and deciding on what that record showed.
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The assessee held shares in a number of hotel companies and had been a director and managing director of several. He came to own a large block of shares in Spencer's Hotel Limited and became its managing director, and with M.S. Oberoi acquired interests in Associated Hotels of India Limited and Hotels (1938). In 1944 Oberoi bought his shareholding in Associated Hotels of India for Rs 20,65,705-13-0, and in or about 1949 his holding in Hotels (1938). The assessee said he had disclosed that receipt to the Income-tax Officer during the assessment for 1945-46, that it was held to be a capital receipt not liable to tax, and that in later years he had returned the interest earned on the amount. Oberoi's case went to the Investigation Commission set up under the Taxation on Income (Investigation Commission) Act 1947, and the assessee was served a notice under section 5(4) of that Act in about August 1951 for assessment year 1940-41. He moved the Punjab High Court in March 1953 to quash those proceedings, and says the Solicitor General undertook that all proceedings against him would be dropped, on which the rule was discharged. On 5 November 1954 the Income-tax Officer issued seven notices under section 34(1A) for assessment years 1940-41 to 1946-47, and despite the assessee's objection that there was no material, assessed him for 1942-43 to 1945-46. On appeal the Appellate Assistant Commissioner remanded for a report, one question being what fresh material the officer had to treat the sum of Rs 20 lakhs, previously treated as capital, as income. In 1961 the assessee moved the Calcutta High Court under Article 226 against the Appellate Assistant Commissioner's order. The High Court dismissed the petition on 6 October 1966: it sustained a preliminary objection that having appealed the assessee could not pursue the writ, rejected the challenge to the constitutionality of section 34(1A), and then went on to hold that the assessee had failed to establish that the preconditions were not satisfied.
The appeal was allowed with costs, the High Court's judgment set aside and the impugned notices quashed. The requirements of section 34(1A) were not satisfied and the notices were wholly illegal and invalid. Section 34(1A) required the officer to have reason to believe both that income chargeable to tax had escaped assessment for a year in the specified period and that it amounted or was likely to amount to a lakh of rupees or more, with a proviso barring a notice unless he had recorded his reasons and the Central Board of Revenue was satisfied on those recorded reasons that it was a fit case. The Court called for the record. What was produced were reports in Form B, one for each year, in which against the item for brief reasons the officer had written that the reasons were on a separate sheet, and against the item on the Board's satisfaction the Secretary had signed yes, satisfied. The separate sheet gave two reasons: that the assessee, then a managing director in about a dozen limited companies, along with the Oberois, was believed to have made some secret profits not offered for assessment; and that he was believed to have received a sum of Rs 22 lakhs from the Oberois, of which this or at least part represented income that had escaped assessment. Those reasons hopelessly fail to satisfy the requirements of the statute. No material or fact is stated on which any belief of the nature the section contemplates could be founded, and the so-called reasons are themselves stated to be beliefs, an obvious self-contradiction. Although the High Court should have dismissed the writ petition once it sustained the preliminary objection, it had gone on to decide the jurisdictional question, and since that decision would bind the Appellate Assistant Commissioner this Court declined to leave it standing.
The Court applied its recent decision in Chhugamal Rajpal v S.P. Chaliha, where on the Court's direction the Department had produced the officer's report to the Commissioner and the sanction. There the report referred to communications from another Commissioner from which it appeared that certain creditors were mere name-lenders and the loan transactions bogus, and said that proper investigation was necessary; the officer had set out no reason for concluding it was a fit case for notice, had not mentioned the material before him, and had referred only vaguely to the contents of the communications - so it was clear he could not have had reason to believe that income had escaped assessment through the assessee's failure to disclose. The same reasoning governs here. From it the Court drew the general statement of the standard: reason to believe means the belief of an honest and reasonable person based on reasonable grounds, and the officer may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour. He acts without jurisdiction if the reason for his belief does not exist, or is not material or relevant to the belief the section requires, and the court can always examine that aspect - though the declaration or sufficiency of the reasons cannot be investigated by the court. Measured against that, the two recorded reasons were fatally empty: neither stated a fact, both stated a belief, and a belief cannot be its own foundation. The Court also noted the procedural history without resting on it - that the earlier writ in the Punjab High Court had been discharged on an undertaking said to have been given that proceedings would be dropped, and that the sum in question had been treated as a capital receipt in the original assessment for 1945-46.
The Income Tax Officer may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour.
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Handle my notice → Ask a CA on WhatsAppNo. The Supreme Court quashed the notices. The words reason to believe mean the belief of an honest and reasonable person on reasonable grounds; the officer may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour. He acts without jurisdiction if the reason for his belief does not exist or is not material or relevant to the belief the section requires, and the court can always examine that, though it cannot investigate the sufficiency of the reasons. Here the recorded reasons stated no material fact at all - they were themselves expressed as beliefs, an obvious self-contradiction. This was decided by the Supreme Court (Supreme Court of India - K.S. Hegde and A.N. Grover JJ; judgment by Grover J) and bears on section 34(1A) of the Indian Income-tax Act, 1922, section 147, section 148 of the Income Tax Act 1961. It is reported as (1971) 82 ITR 147; 1971 AIR 2451; 1972 SCR (1) 175; 1973 SCC (Tax) 621; (1971) Tax LR 1747. This is the case that tests a reopening against what is actually written in the recorded reasons, and it is quoted in almost every challenge to a reassessment notice. It fixes three things. The standard: honest and reasonable belief on reasonable grounds, evidence direct or circumstantial, but never suspicion, gossip or rumour. The reviewability: existence, materiality and relevance of the reasons are for the court, while sufficiency is not - the line that keeps such challenges within bounds. And the practical consequence, seen at its sharpest here, that reasons which merely assert a belief supply nothing on which a belief can be founded. It applies Chhugamal Rajpal, where a report referring vaguely to communications about name-lenders was held insufficient. It is also a useful illustration of the Court requiring the Department to produce the record and deciding on what that record showed. If it applies to you, the first step is this: Ask for the recorded reasons as recorded, and test them for material facts rather than conclusions; a reason that says the assessee is believed to have done something supplies no ground at all.
The assessee held shares in a number of hotel companies and had been a director and managing director of several. He came to own a large block of shares in Spencer's Hotel Limited and became its managing director, and with M.S. Oberoi acquired interests in Associated Hotels of India Limited and Hotels (1938). In 1944 Oberoi bought his shareholding in Associated Hotels of India for Rs 20,65,705-13-0, and in or about 1949 his holding in Hotels (1938). The assessee said he had disclosed that receipt to the Income-tax Officer during the assessment for 1945-46, that it was held to be a capital receipt not liable to tax, and that in later years he had returned the interest earned on the amount. Oberoi's case went to the Investigation Commission set up under the Taxation on Income (Investigation Commission) Act 1947, and the assessee was served a notice under section 5(4) of that Act in about August 1951 for assessment year 1940-41. He moved the Punjab High Court in March 1953 to quash those proceedings, and says the Solicitor General undertook that all proceedings against him would be dropped, on which the rule was discharged. On 5 November 1954 the Income-tax Officer issued seven notices under section 34(1A) for assessment years 1940-41 to 1946-47, and despite the assessee's objection that there was no material, assessed him for 1942-43 to 1945-46. On appeal the Appellate Assistant Commissioner remanded for a report, one question being what fresh material the officer had to treat the sum of Rs 20 lakhs, previously treated as capital, as income. In 1961 the assessee moved the Calcutta High Court under Article 226 against the Appellate Assistant Commissioner's order. The High Court dismissed the petition on 6 October 1966: it sustained a preliminary objection that having appealed the assessee could not pursue the writ, rejected the challenge to the constitutionality of section 34(1A), and then went on to hold that the assessee had failed to establish that the preconditions were not satisfied. The matter was decided on 1971-08-12 by the Supreme Court (Supreme Court of India - K.S. Hegde and A.N. Grover JJ; judgment by Grover J). On those facts the Supreme Court held as follows. The appeal was allowed with costs, the High Court's judgment set aside and the impugned notices quashed. The requirements of section 34(1A) were not satisfied and the notices were wholly illegal and invalid. Section 34(1A) required the officer to have reason to believe both that income chargeable to tax had escaped assessment for a year in the specified period and that it amounted or was likely to amount to a lakh of rupees or more, with a proviso barring a notice unless he had recorded his reasons and the Central Board of Revenue was satisfied on those recorded reasons that it was a fit case. The Court called for the record. What was produced were reports in Form B, one for each year, in which against the item for brief reasons the officer had written that the reasons were on a separate sheet, and against the item on the Board's satisfaction the Secretary had signed yes, satisfied. The separate sheet gave two reasons: that the assessee, then a managing director in about a dozen limited companies, along with the Oberois, was believed to have made some secret profits not offered for assessment; and that he was believed to have received a sum of Rs 22 lakhs from the Oberois, of which this or at least part represented income that had escaped assessment. Those reasons hopelessly fail to satisfy the requirements of the statute. No material or fact is stated on which any belief of the nature the section contemplates could be founded, and the so-called reasons are themselves stated to be beliefs, an obvious self-contradiction. Although the High Court should have dismissed the writ petition once it sustained the preliminary objection, it had gone on to decide the jurisdictional question, and since that decision would bind the Appellate Assistant Commissioner this Court declined to leave it standing.
The Court applied its recent decision in Chhugamal Rajpal v S.P. Chaliha, where on the Court's direction the Department had produced the officer's report to the Commissioner and the sanction. There the report referred to communications from another Commissioner from which it appeared that certain creditors were mere name-lenders and the loan transactions bogus, and said that proper investigation was necessary; the officer had set out no reason for concluding it was a fit case for notice, had not mentioned the material before him, and had referred only vaguely to the contents of the communications - so it was clear he could not have had reason to believe that income had escaped assessment through the assessee's failure to disclose. The same reasoning governs here. From it the Court drew the general statement of the standard: reason to believe means the belief of an honest and reasonable person based on reasonable grounds, and the officer may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour. He acts without jurisdiction if the reason for his belief does not exist, or is not material or relevant to the belief the section requires, and the court can always examine that aspect - though the declaration or sufficiency of the reasons cannot be investigated by the court. Measured against that, the two recorded reasons were fatally empty: neither stated a fact, both stated a belief, and a belief cannot be its own foundation. The Court also noted the procedural history without resting on it - that the earlier writ in the Punjab High Court had been discharged on an undertaking said to have been given that proceedings would be dropped, and that the sum in question had been treated as a capital receipt in the original assessment for 1945-46. In the words reproduced by the source cited on this page: "The Income Tax Officer may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour."
It was decided by the Supreme Court on 1971-08-12 and is reported as (1971) 82 ITR 147; 1971 AIR 2451; 1972 SCR (1) 175; 1973 SCC (Tax) 621; (1971) Tax LR 1747. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 34(1A) of the Indian Income-tax Act, 1922, section 147, section 148, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeal was allowed with costs, the High Court's judgment set aside and the impugned notices quashed. The requirements of section 34(1A) were not satisfied and the notices were wholly illegal and invalid. Section 34(1A) required the officer to have reason to believe both that income chargeable to tax had escaped assessment for a year in the specified period and that it amounted or was likely to amount to a lakh of rupees or more, with a proviso barring a notice unless he had recorded his reasons and the Central Board of Revenue was satisfied on those recorded reasons that it was a fit case. The Court called for the record. What was produced were reports in Form B, one for each year, in which against the item for brief reasons the officer had written that the reasons were on a separate sheet, and against the item on the Board's satisfaction the Secretary had signed yes, satisfied. The separate sheet gave two reasons: that the assessee, then a managing director in about a dozen limited companies, along with the Oberois, was believed to have made some secret profits not offered for assessment; and that he was believed to have received a sum of Rs 22 lakhs from the Oberois, of which this or at least part represented income that had escaped assessment. Those reasons hopelessly fail to satisfy the requirements of the statute. No material or fact is stated on which any belief of the nature the section contemplates could be founded, and the so-called reasons are themselves stated to be beliefs, an obvious self-contradiction. Although the High Court should have dismissed the writ petition once it sustained the preliminary objection, it had gone on to decide the jurisdictional question, and since that decision would bind the Appellate Assistant Commissioner this Court declined to leave it standing. It arises in Reassessment & Reopening matters, on section 34(1A) of the Indian Income-tax Act, 1922, section 147, section 148 of the Income Tax Act 1961, and was decided by Supreme Court of India - K.S. Hegde and A.N. Grover JJ; judgment by Grover J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Keep the challenge to existence, materiality and relevance of the reasons. Arguing that the material was insufficient invites the answer that sufficiency is not for the court. Note that an approval endorsed by a superior authority does not cure defective reasons; here the Board's Secretary had written yes, satisfied on the form and the notices still fell. Do not assume a writ is available as of course. The High Court sustained a preliminary objection that the assessee, having appealed, could not pursue the writ, and this Court entertained the point only because the High Court had gone on to decide it anyway. Apply the current reassessment machinery, which has been rebuilt since this case, while using this judgment for the meaning of reason to believe.
Still good law. I read the full judgment to its operative order quashing the notices. I checked no later authority or statutory history in this session. The formulation of reason to believe, and the distinction between the existence and relevance of the reasons on the one hand and their sufficiency on the other, are applied to this day. The provision construed is section 34(1A) of the 1922 Act, whose successor was section 147 read with section 148, and I state from my own knowledge, unverified here, that the reassessment machinery was rebuilt again with a preliminary enquiry and order stage before a notice may issue. A reader must apply this reasoning to the provision governing his own year. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Until build 87 this library carried a second entry on the same judgment, at /caselaw/case/sheo-nath-singh-v-aac-reason-to-believe-not-suspicion/, which asked: The reopening notice says the officer 'believes' I made secret profits, with nothing behind it — can I get the notice quashed? It was the shorter of the two write-ups and has been merged into this one. That address now redirects here, and every citation, section and subject it carried that this entry did not has been folded in. The Court did not decide whether the Rs 20 lakhs or Rs 22 lakhs was in truth capital or income, only that the notices could not stand; nor did it decide the effect of the undertaking said to have been given before the Punjab High Court, which it records as the assessee's account. It expressly did not disturb the High Court's view that a writ petition could not be pursued alongside the statutory appeal, entertaining the jurisdictional question only because the High Court had gone on to decide it. The harvested text is faulty at one point - the sentence in which the Court records giving the Revenue an opportunity to produce the record breaks off and resumes mid-sentence - so I cannot say exactly how the record came to be produced. The judgment also gives the sale consideration as Rs 20,65,705 in the narrative and about Rs 22 lakhs in the recorded reasons and pleadings, and both figures are reproduced here as the judgment has them. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was allowed with costs, the High Court's judgment set aside and the impugned notices quashed. The requirements of section 34(1A) were not satisfied and the notices were wholly illegal and invalid. Section 34(1A) required the officer to have reason to believe both that income chargeable to tax had escaped assessment for a year in the specified period and that it amounted or was likely to amount to a lakh of rupees or more, with a proviso barring a notice unless he had recorded his reasons and the Central Board of Revenue was satisfied on those recorded reasons that it was a fit case. The Court called for the record. What was produced were reports in Form B, one for each year, in which against the item for brief reasons the officer had written that the reasons were on a separate sheet, and against the item on the Board's satisfaction the Secretary had signed yes, satisfied. The separate sheet gave two reasons: that the assessee, then a managing director in about a dozen limited companies, along with the Oberois, was believed to have made some secret profits not offered for assessment; and that he was believed to have received a sum of Rs 22 lakhs from the Oberois, of which this or at least part represented income that had escaped assessment. Those reasons hopelessly fail to satisfy the requirements of the statute. No material or fact is stated on which any belief of the nature the section contemplates could be founded, and the so-called reasons are themselves stated to be beliefs, an obvious self-contradiction. Although the High Court should have dismissed the writ petition once it sustained the preliminary objection, it had gone on to decide the jurisdictional question, and since that decision would bind the Appellate Assistant Commissioner this Court declined to leave it standing.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
My return was only processed under 143(1). Does that stop the department reopening it later?
How much am I actually required to disclose — and can they reopen because the officer drew the wrong conclusion?
The sanctioning authority just wrote 'yes' and signed. Is that a sanction?
A reassessment was done in between. Does the two-year clock for s.263 restart from it?