The validity of the assumption of jurisdiction by the Income-tax Officer under Sec. 147(a) of the Income-tax Act, 1961 can be tested only by reference to the reasons recorded under Sec. 148(2) of the Act, and the Income-tax Officer is not authorized to refer to any other reason even if it can be otherwise inferred and/or gathered from the records.

G.C.Bharuka, J.

1. The present two tax cases are being disposed of by a common judgment because the answer to the question referred in Tax Case No. 40 of 1978 is intimately dependent on the answer to the question involved and referred in Tax Case No. 39 of 1978. The Income-tax Appellate Tribunal has referred the following questions of law under Sec. 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act") only :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in cancelling the entire assessment under Sec. 147(a) of the Income-tax Act, 1961 for the assessment year 1962-63 ? (referred in Tax Case No. 39 of 1978)

2. Whether, on the facts and in the circumstances of the case, the cancellation of the penalty under Sec. 271(1)(c) of the Income-tax Act, 1961, by the Tribunal was legal ? (referred in Tax Case No. 40 of 1978)."

2. For the assessment year 1962-63 pertaining to the accounting year ending on December 31, 1961, the assessment of the assessee, namely, Agarwalla Brothers, had been completed on May 25, 1964, by determining a loss of Rs. 7,361. During the assessment proceedings as disclosed by the assessee, the Income-tax Officer noted that the assessee had started construction of four buildings during this year and an investment of Rs. 1,15,100 was shown during the year under assessment. While computing the income , he also assessed the rental income arising out of the said buildings.

3. Subsequently, it appears that, on the basis of some complaints, enquiries were made in respect of the investments made in the constructions undertaken by the assessee and investments made therein in the year on hand as well as in subsequent years. According to the Inspector who enquired into the matter by visiting the buildings to ascertain the nature of the construction and went through the municipal records, the total investment made in the construction in all the years was Rs. 9,18,519 out of which, as per his estimate, the investment during the previous year relevant to the assessment year 1962-63 was to the extent of Rs. 7,79,805. This report of the Inspector was dated June 16, 1969. Since there was a wide difference between the cost of construction estimated by the Inspector and the cost as shown by the assessee, the Income-tax Officer referred the matter to the valuation cell in order to get the cost of construction valued by an expert. The valuer, after making local inspection along with the Income-tax Officer, submitted his report some time in March, 1971. According to the report of the valuer, the cost of construction was Rs. 7,19,000.

4. In view of the aforesaid facts, the Income-tax Officer initiated reassessment proceedings under Sec. 147(a) of the Act by recording the following reasons :

"The assessee constructed a number of houses in Ashok Nagar, Dhanbad, and showed in his books a sum of Rs. 1,15,100 only as investment towards construction during the relevant accounting period. Taking into consideration all the relevant facts, the cost of construction as per the estimate of the Department comes to Rs. 6,79,805 during this period. Thus, a sum of Rs. 5,64,705 is taken as investment in house construction not accounted for. In the absence of satisfactory explanation from the assessee regarding the source of this sum, this is treated to have come out of the assessees undisclosed income during the year.

I have reason to believe that, by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment for that year, income chargeable to tax amounting to Rs. 5,64,705 has escaped assessment. I, therefore, propose to assess this income under Sec. 147 of the Income-tax Act, 1961."

5. After recording the aforesaid reason as required under Sec. 148(2), sanction of the Commissioner was obtained under Sec. 151(2) of the Act on the basis of the reason so recorded. Thereafter, a notice dated March 16