SABYASACHI MUKHARJI, J.

(1) THE challenge in this case is to the notice issued under Section 148 of the I. T. Act, 1961, dated 23rd February, 1972. The impugned notice was issued for the assessment year 1963-64. It was contended, firstly, that there are no materials for the ITO to form the belief that there was any failure or omission on the part of the assessee to disclose fully or truly any material or relevant fact or that as a result of such failure the income of the assessee has escaped assessment. It was, secondly, contended that the Commissioner was not competent on the facts and circumstances of the case to grant sanction for reopening. It was urged that there was no application of mind by the Commissioner. In answer to the rule nisi issued in this case in the affidavit in opposition on behalf of the respondent it was stated, inter alia, as follows :

" (a) The original assessment for the assessment year 1963-64 was completed on 31st August, 1964, under Section 143 (3) of the Act on a total income of Rs. 23,773. The assessee claimed to have received loans from various parties including loan of Rs. 25,000 from one Lachmi Narayan Atmaram (Bombay Office--Ram Gopal Nand Kishore) of P-36, India Exchange Place on 24th May, 1962, and of Rs. 35,000 from Goel Bros. of P-36, India Exchange Place on 10th May, 1962. Confirmation letters from the alleged creditors were filed and the assessment was completed accepting the assessees claim about the genuineness of the said loans from the aforesaid two parties.

(b) Subsequent to the completion of the original assessment information was received that one Rangabeharilal Atmaram Goel carrying on business in the name of M/s. Ramgopal Nand Kishore, Bombay, and in other names in different places, confessed before ITO, Bombay, about carrying on bogus Hawala transaction in various names one of them being Lachmi Narayan Atmaram, Calcutta. Copy of the two confessional statements of the said Sri Goel dated 2nd February, 1970, and 16th February, 1971, is enclosed and marked together as annexure "a". It was also noticed that the confirmation letters in both the cases of Lachmi Narayan Atmaram and Goel Bros. , filed by the assessee at the time of original assessment were signed by the same person. I crave leave to refer to the confirmation certificates filed at the time of hearing.

(c) On the basis of the above information proceedings under Section 147 (a) of the Act were initiated as there was reason to believe that the loan shown at least in the name of Lachmi Narayan Atmaram in the books of accounts of the assessee of Rs. 25,000 was bogus and represented the. undisclosed income of the assessee. Notice under Section 148 of the Act was issued on 23rd February, 1972, after obtaining necessary sanction of the then CIT, West Bengal. Since the address of both Lachmi Narayan Atmaram and Goel Bros, was the same and the confirmation certificate in both the cases were signed by the same person, the ITO also presumed that the transaction in the name of Goel Bros, might also be the same party, the exact nature of which would be ascertained at the time of reassessment. A copy of the ITOs report dated 31st January, 1972, addressed to the CIT, West Bengal, and enclosed with the report in connection with the starting of proceedings under Section 147 for the assessment year 1963-64 is enclosed and marked as annexure B. "

(2) THE report in connection with the starting of the proceedings by the ITO which was annexed to the said affidavit-in-opposition stated, inter alia, as follows:

"at the time of original assessment income of Rs. 25,000 from business has not been disclosed by the assessee. I have reason to believe that for this failure and/or omission on the part of the assessee to disclose fully and truly all material facts necessary for his assessment the above income has escaped assessment. "

(3) IT appears that along with the report on the 31st January, 1972, the ITO had forwarded a letter to the Commissioner in which it was stated as follows:

"it appears that the assessee had loan transaction with M/s. Laxminarayan Atmaram for a sum of Rs. 25,000 on 24-5-62. As the assessee has confessed stating that the transactions are not genuine I propose to re-open the case and formal proposal Under Section 147 (a) is sent separately for your kind approval. In this connection, I am to state that I find that this year the assessee had another transaction of Rs. 35,000 on 10-5-62 with M/s. Goel Bros, having its office at P-36, India Exchange Place, Calcutta-1, and the confirmation has been signed by the same person as that of Laxminarayan Atmaram whose office is also located at P-36, India Exchange Place, Calcutta-1. I presume that this transaction may also be of the same party, i. e. , R. L. A. Goel, and there is every possibility that this transaction is also not genuine. As the full confession is not with me it is not possible to ascertain if this Goel Bros, is the benami concern of R. L. A. Goel. However, as both the transactions relate to the same year, viz. , 1963-64, and if the assessment is reopened Under Section 147 (a) for transaction with M/s. Lachminarayan Atmaram, at the time of reassessment the transaction with Goel Bros, may be looked into if the transaction is genuine or not. "

(4) THEREFORE, the question is whether on these materials it could be said that there were materials to form the belief that the income of the assessee had escaped assessment as a result of the failure or omission on the part of the assessee to disclose either fully or truly any material or relevant fact. The confessions were alleged to have been made by one Rangabeharilal Atmaram. He had stated that he did certain fictitious transactions and certain genuine transactions. He did not state that all his transactions were fictitious. This is important to remember. He has further stated that he did his fictitious transactions in various names including the name of Lachminarayan Atmaram. He, however, had not stated that all the transactions of his in the name of Laxminarayan Atmaram were fictitious. The present petitioner had in the relevant assessment year a loan transaction of Rs. 25,000 allegedly with Laxminarayan Atmaram. The question is whether on the materials available it could be said that the ITO was justified in believing that the income of the assessee had escaped as a result of the failure or omission on the part of the assessee to disclose fully or truly a material or relevant fact. In view of the decisions of the Special Bench of this court in the case of Lakhmani Mewal Das v. ITO it must he held that the ITO did not have materials to form the requisite belief to fulfil the condition precedent for issue of the notice under Section 148 of the Act. It appears, further, that the Commissioner could not have been satisfied properly. In the letter to the Commissioner it was stated that the assessee had confessed. That is an incorrect statement. The assessee had not confessed. It shows that there was complete non-application of mind both by the ITO and the Commissioner concerned in this matter.

(5) IN the aforesaid view of the matter the challenge to the notice must be upheld and the impugned notice is hereby set aside. The respondents are restrained from giving any effect to the same. If in the meantime the assessment has been completed pursuant to the impugned notice the same is also quashed.

(6) THE rule is made absolute to the extent indicated above. There will be no order as to cots. JUDGMENT OF THE DIVISION BENCH m. M. Dutt, J.

(7) THIS appeal is directed against the judgment of Sabyasachi Mukharji J. (see p. 328 supra) whereby the learned judge made the rule, obtained by the respondent-firm on its application under Article 226 of the Constitution, absolute.

(8) THE respondent is an assessee under the I. T. Act, 1961 (hereinafter referred to as "the Act"). The ITO completed the assessment of the respondent for the assessment year 1963-64 and computed the total income of the respondent at a sum of Rs. 23,773. On February 24, 1972, the respondents received a notice dated February 23, 1972, issued by the ITO under Section 148 of the Act. By the said notice, the ITO purported to reopen the assessment of the respondent for the assessment year 1963-64. It was alleged in the notice that the ITO had reason to believe that the respondents income chargeable to income-tax for the said assessment year had escaped assessment within the meaning of Section 147 of the Act. The respondent, by its application dated March 28, 1972, filed before the ITO, asserted that there was no material in the possession of the ITO for the formation of a reasonable belief that the income of the respondent chargeable to tax had escaped assessment for the said assessment year 1963-64. As the ITO overruled the said contention of the respondent and directed him to file a return of its income for the said assessment year, the respondent moved a writ petition in this court and obtained a rule nisi out of which this appeal arises. In the writ petition, the respondent challenged the authority of the ITO to reopen the assessment under Section 147 (a) of the Act.

(9) THE appellants, who are the income-tax authorities, opposed the said rule and filed an affidavit-in-opposition. Their case was that the original assessment for the assessment year 1963-64 was completed on August 31, 1964, under Section 143 (3) of the Act on a total income of Rs. 23,773. The assessee claimed to have received loans from various parties including a loan of Rs. 25,000 from one Lachminarayan Atmaram (Bombay Office--Ram Gopal Nand Kishore) of P-36, India Exchange Place, on 24th May, 1962. Subsequent to the completion of the original assessment, information was received that one Rangabeharilal Atmaram Goel carrying on business in the name of M/s. Ramgopal Nand Kishore, Bombay, and in other names in different places, confessed before the ITO, Bombay, about carrying on bogus hawala transactions in various names, one of them being Lachminarayan Atmaram, Calcutta. Copies of two confessional statements of the said Sri Goel dated February 2, 1970, and February 16, 1971, were annexed to the affidavit-in-opposition and marked collectively as annexure "a". Further, it was alleged that on the basis of the above information proceedings under Section 147 (a) of the Act was initiated as there was reason to believe that the loan shown in the name of Lachminarayan Atmaram in the books of accounts of the assessee for Rs. 25,000 was bogus and represented the undisclosed income of the assessee. The notice under Section 148 of the Act was issued by the ITO on February 23, 1972, after obtaining the necessary sanction of the CIT, West Bengal.

(10) COPIES of the confessional statements of the said Sri Goel have been recorded by the ITO, Bombay, in the shape of answers to questions put by him to the former. On February 2, 1970, in answer to question No. 7, the said Sri Goel stated as follows :

"i had done genuine business and also I had lent names of my various firms to different parties to credit monies in my firms name and I used to get 1 anna per cent. per month for this business. I had also received profits to allow the other parties to show losses in their own account books. "

(11) ON February 16, 1971, it appears from question No. 3 that Sri Goel had submitted a list containing the names of certain firms under which the said Sri Goel had carried on bogus loan transactions. Such firm names included the name of Lachminarayan Atmaram, Calcutta. On that date, in answer to question No. 8, he stated, inter alia, as follows :

"i say that there are still some more genuine money transactions of which I could not give you the details as the account books had been lost. I say that in view of the loss of my account books, I have not been able to complete the lists of non-genuine money transactions as well as genuine money transactions. I say that I have already submitted the lists of most of the parties of non-genuine money transactions as well as genuine money transactions but I say that there are still some parties left to whom I had lent my name and also some with whom I have had genuine money transactions. I could not complete the record as my account books had been lost, and I hope that I will be able to complete such lists by 15th March, 1971. I shall also complete the list of genuine money transactions by that date. "

(12) THE ITO submitted a report to the CIT, West Bengal. The said report, inter alia, contained the following statement:

"at the time of original assessment, income of Rs. 25,000 from business has not been disclosed by the assessee. I have reason to believe that for this failure and/or omission on the part of the assessee to disclose fully and truly all material facts necessary for his assessment, the above income has escaped assessment. "

(13) THE learned judge placed reliance on a decision of the Special Bench of this court in Lakhmani Mewal Das v. ITO. It may be stated that the said decision has since been upheld by the Supreme Court ([1976] 103 ITR 437 [LQ/SC/1976/144] ). The learned judge, after considering the facts and circumstances of the case and also the said confessional statements of Sri Goel, came to the finding that the ITO did not have materials to form the requisite belief to fulfil the condition precedent for the issue of the notice under Section 148 of the Act. In that view of the matter, he made the rule absolute and quashed the impugned notice. Hence this appeal.

(14) IT is clear from the said confessional statements of the said Sri Goel that he had done both genuine and bogus transactions. We have quoted in extenso his statements made on February 16, 1971, in answer to question No. 8. The said statements disclosed that he had submitted the list of genuine and non-genuine transactions. Nowhere did he say that the loan transaction of Rs. 25,000 with the respondent was a bogus one. The confessions which have been made by him cannot be linked up with the loan of Rs. 25,000, alleged to have been advanced by the firm. Lachminarayan Atmaram, Calcutta. It may be that the said loan transaction is a genuine one. There is nothing to suggest in the statements of the said Sri Goel that he had carried on bogus loan transactions with the respondent. In the case of ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 [LQ/SC/1976/144] , the Supreme Court observed as follows (p. 448):

"as stated earlier, the reasons for the formation of the belief must have a rational connection with or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Income-tax Officer and the formation of his belief that there has been escapement of the income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts. It is no doubt true that the court cannot go into the sufficiency or adequacy of the material and substitute its own opinion for that of the Income-tax Officer on the point as to whether action should be initiated for reopening assessment. At the same time we have to bear in mind that it is not any and every material, however vague and indefinite or distant, remote and farfetched, which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment. "

(15) IN the instant case also, we do not find that there is any direct nexus or live link between the material which came to the notice of the ITO and the formation of his belief that there has been escapement of the income of the respondent from assessment in the particular year because of his failure to disclose fully and truly all- the material facts. As has been stated already, there is no indication whatsoever in the confessional statements made by the said Sri Goel on which reliance was placed by the ITO, that he had carried on a bogus loan transaction with the respondent in the name of the firm Lachminarayan Atmaram, Calcutta. The appellants have not also disclosed the lists of genuine transactions which were submitted by the said Sri Goel to the ITO, Bombay. In these circumstances, we agree with the view taken by the learned judge that the ITO had no material before him so that he could form a reasonable belief that the income of the respondent had escaped assessment in the assessment year 1963-64. Mr. Pal, learned advocate appearing on behalf of the appellants, sought to connect the said confessional statements of Sri Goel with the advancement of the loan of Rs. 25,000 by the said firm, Lachminarayan Atmaram, Calcutta, to the respondent and in that connection he has placed strong reliance on the confirmation letter dated June 16, 1963, issued by the firm, Lachminarayan Atmaram. The said letter was also signed by the said Sri Goel. He submits that as Lachminarayan Atmaram had been carrying on bogus loan transactions, the alleged loan of Rs. 25,000 advanced by the said firm is also a bogus transaction. This argument of Mr. Pal is based en mere assumption. It has been pointed out above that the said Sri Goel had categorically stated that he had done both genuine and non-genuine transactions. In these circumstances, we do not find any substance in the said contention.

(16) BEFORE we part with this appeal, we may also notice one other fact. Along with his report the ITO also forwarded a letter to the CIT, West Bengal, in which it was stated as follows :

"it appears that the assessee had loan transaction with M/s. Lachminarayan Atmaram for a sum of Rs. 25,000 on 24-5-1962. As the assessee has confessed stating that the transactions are not genuine, I propose to reopen the case and formal proposal Under Section 147 (a) is sent separately for your kind approval. "

(17) IT is not the case of either party that the respondent had made any confession to the effect that the transactions were not genuine. The CIT, West Bengal, seems to have not applied his mind before he granted sanction. In any event, it may be said that the Commissioner proceeded on the footing that the respondent had made a confession that the transactions were not genuine. No other point has been argued in this appeal.

(18) FOR the reasons aforesaid, this appeal is dismissed but there will be no order for costs.

(19) AS prayed for by the learned advocate for the appellants, the operation of this judgment will remain stayed for a period of six weeks from date.