1984 PTD 210 (PLP)

(2) On 25th August, 1958 be made a loan to Ganga Saran Sharma. 2,25,000.00 Total 2,37,550.00 and thereafter, out of the amount lying to his credit in the account with the assessee he had made the following gifts: On 5th December, 1960 gift to Brahma Devi Rs. wife of Ganga Saran Sharma. 1,01,101.00 On 21st December, 1960 gift to Indu Sharan daughter‑in‑law of Ganga Saran Sharma. 15,101.00 On 26th December, 1961 gift to Hemlata Sharan daughter‑in‑law of Ganga Saran Sharma. 50,101.00 The Income‑tax Officer stated that out of the total amount of remuneration of Rs. 3,51,000 received by Deo Datt Sharma during the period up to 31st March, 1962, he had paid tax in sum of about Rs. 65,000 and spent a total sum of Rs. 2,37,550 on account of gifts and loan as aforesaid and the withdrawals made by him for his own purposes thus did not amount to more than Rs. 4,000 per year. These facts, according to the Income‑tax Officer showed that the remuneration paid to Deo Datt Sharma was not genuine and was sham and bogus and the amount of such remuneration alleged to have been paid to Deo Datt Sharma was wrongly allowed as a permissible deduction and hence the assessment of the assessee was liable to be reopened by issue of a notice under section 147 (a).

5. The learned Single Judge of the Calcutta High Court who heard the writ petition took the view that there was no omission or failure on the part of the assesses to disclose any material facts relating to his assessment and that, in arty event, there was no reason to believe that any part of the income of the assessee had escaped assessment at the time of the original assessment by reason of wrong allowance of the remuneration paid to Deo Datt Sharma as a permissible deduction. The writ petition was accordingly allowed by him and the notice issued by the Income‑tax Officer was quashed and set aside. The Income‑tax Officer thereupon preferred an appeal before a Division Bench of the Calcutta High Court and the learned Judges constituting the Division Bench allowed the appeal, holding that the Income tax Officer had reason to believe that the amount of remuneration paid to Den Datt Sharma had been wrongly allowed as a permissible deduction by reason of omission or failure on the part of the assessee to disclose the material facts set out above and the notice issued by the Income‑tax Officer was justified. The assessee thereupon preferred the present appeal in this Court after obtaining certificate of fitness from the High Court of Calcutta.

6. It is well‑settled as a result of several decisions of this Court that two distinct conditions must be satisfied before the Income‑tax Officer can assume jurisdiction to issue notice under section 147 (a). First, be must have reason to believe that the income of the assessee had escaped assessment and secondly, he must have reason to believe that such escapement is by reason of the omission or failure on the part of the assesses to disclose fully and truly all material facts necessary for his assessment. It either of these conditions is not fulfilled, the notice issued by the Income‑tax Officer would be without jurisdiction. The important words under section 147 (a) are "has reason to believe" and these words are stronger than the words "is satisfied". The belief entertained by the Income‑tax Officer must not be arbitrary or irrational. It must be reasonable or in other words it must be based o reasons which are relevant and material. The Court, of course, cannot investigate into the adequacy or sufficiency of the reasons which have weighed with the Income‑tax Officer in coming to the belief, but the Court can certainly examine whether the reasons are relevant and have a bearing on the matters in regard to which he is required to entertain the belief before be can issue notice under section 147 (a). If there a no rational and intelligible nexus between the reasons and the brief, so that on such reasons, no one properly instructed on facts and law could reasonably entertain the belief, the conclusion would be in escapable that the Income‑tax Officer could not have reason to believe that any part of the income of the assessee had escaped assessment and such escapement was by reason of the omission o failure on the part of the assessee to disclose fully and truly all material facts and the notice issued by him would be liable to be struck down as invalid.

7. Now here on the facts as admitted or found it is clear that Deo Datt Sharma was carrying on the carne business prior to the incorporation of the assessee as a private limited company and the business was yielding him an average profit of ‑ about Rs. 36,000 per year. When the assessee, on incor poration, took over the business as a going concern from Deo Datt Sharma it appointed Deo Datt Sharma as a director and placed him in sole charge of the management of the Delhi Branch of the business. In fact, it could not be disputed on behalf of the Revenue that Deo Datt Sharma was looking after the business of the Delhi Branch of the assessee in the same manner in which he was doing when be was sole proprietor of the business and for this work done by him, Deo Datt Sharma was paid salary at the rate of Its. 1,000 per month, commission at the rate of 1 per cent. on the sales of the Delhi Branch and bonus equivalent to three month's salary. The amount of remuneration paid, to Deo Datt Sharma was thus not without consideration; in fact, it was paid for valuable services rendered by Deo Datt Sharma in solely managing the business of the Delhi Branch of the assessee. Now once it is conceded that Deo Datt Sharma was in sole charge and management of the business of the Delhi Branch of the assessee and was rendering full time service to the assessee in that capacity, it is difficult to see how anyone could reasonably come to the belief that the payment of remuneration made to him was sham and bogus. Surely, the Income‑tax Officer could not expect Deo Datt Sharma to devote his full time and energy to the business of the Delhi Branch of the assessee without arty remuneration whatsoever. The actual remuneration paid to Den Datt Sharma was in fact found to be genuine and reasonable by the Appellate Assistant Commissioner while disposing of the appeal of the assessee for the assessment year 1949‑50 as also by the Income‑tax Tribunal while disposing of the appeal for the assessment year 1957‑

58. It is true that Den Datt Sharma was the brother‑in‑law of Ganga Saran Sharma, the manag ing director of the assessee, but this circumstance cannot by any stretch of imagination lead to an inference that payment of remuneration to Deo Datt Sharma who was solely managing and looking after the business of the Delhi Branch of the assessee was sham and bogus, Ever: a close relative who is in management and charge of a business on a full time basis is entitled to be paid remuneration and, in fact, it would be wholly unreasonable to expect him to work free of charge.

8. The Revenue, however, rolled strongly on the fact that out of the total amount of remuneration of Rs. 3,51,000 received by Deo Datt Sharma and credited to his account with the assessee, he had not withdrawn more than Rs. 4,000 per year for himself and an aggregate sum of Rs. 2,37,550 was expended by him in giving a loan to Ganga Saran Sharma and making gifts to the son, wife and daughters‑in‑law of Ganga Saran Sharma on diverse dates between 31st July, 1957 and 26th December, 1961. We fail to see how this fact can lend itself to the inference that the payment of remunera tion to Deo Datt Sharma was bogus and not genuine. It is an admitted fact that Deo Datt Sharma was the brother‑in‑law of Ganga Saran Sharma and there is nothing unusual in Deo Datt Sharma giving a loan to Ganga Saran Sharma or making gift to the son, wife and daughters‑in‑law of Ganga Saran Sharma who were his close relatives. It is indeed difficult to appreciate how any inference can reasonably drawn that the payment of remuneration to Deo Datt Sharma was sharp and bogus merely from the manner in which he expended the amount of remuneration received by him particularly when the persons to whom he gave a loan and made gifts were his close relatives. It is possible that Deo Datt Sharma had other financial resources apart from the remuneration derived by him from the assessee and he therefore decided to give a loan and make gifts to his close relative out of the remuneration received by him for valuable services rendered to the assessee. In fact, if he had no either financial resources, it is extremely difficult‑‑one might say, almost impossible‑‑to believe that he worked for the assessee and managed and looked after the business of the Delhi Branch on a full time basis without any remuneration or in any event on a paltry remuneration of Rs. 4,000 per year when the Managing Director and other directors who were working like him were getting much more from the assessee and as the proprietor of the business prior to its taking over by the assessee, tae was earning an average profit of about Rs. 36,000 per year. We are clearly of the view that on these facts the Income‑tax Officer could have no reason to believe that the payment of remuneration to Deo Datt Sharma was sham and bogus and thaw the amount of remuneration paid tit him was wrongly allowed as a permissible deduction.

9. We may point out that, in fact, the statements of account of Deo Datt Sharma with the assessee for the relevant accounting year as also the previous years were with the Income‑tax Officer at the time of the original assessment and these statements of account clearly showed that out of the amount of remuneration credited to his account he had made a gift of Its. 12,550 to son of Ganga Saran Sharma on 31st July, 1957 and given a loan of Rs. 2,25,000 to Ganga Saran Sharma on 25th August, 1958, and the Income‑tax Officer was fully aware that Ganga Saran Sharma was the Managing Director of the assessee. It is possible and we may assume it in favour of the Revenue, that the subsequent gifts made by Den Datt Sharma to the wife and daughters‑in‑law of Ganga Saran Sharma were not disclosed to the income‑tax officer at the time of the original assessment but these gifts being subsequent to the relevant accounting year, the assessee was not bound to disclose the same to the Income‑tax Officer. Moreover, it is difficult to appreciate how the assessee could be said to be under an obligation to disclose to the Income‑tax Officer in the course of its assessment as to how a director who was in sole charge of the management of the business of the assessee and who was being paid remuneration of services rendered by him to asse3see, had utilised the amount of remuneration received by him. We do not think it possible to sustain the conclusion that the assessee omitted or failed to dis closed fully and truly any material facts relating to his assessment.

10. We must in the circumstances hold that neither of the two conditions necessary for attracting the applicability of section 147 (a) was satisfied in the present case and the notice issued by the Income‑tax Officer must be held to be without jurisdiction.

11. We accordingly allow the appeal, set aside the judgment of the Division Beach and restore that of the learned Single Judge quashing and setting aside the notice dated 28th March, 1968, issued by the Income‑tax Officer against the assessee. The Revenue will pay the costs of the assessee throughout. M. A. K Appeal allowed.