Aryodaya Spg. and Wvg. Co. Ltd. vs Commissioner of Income Tax

Mankad, J.—Whether the ITO, Companies Circle-V, Ahmedabad, the respondent herein could have entertained a reasonable belief that there was escapement of income from assessment on account of the failure on the part of the petitioner to disclose fully and truly material facts necessary for its assessment for the assessment years 1970-71 and 1974-75, justifying initiation of action for reopening of the assessments for the said assessment years? So far as the assessment year 1974-75 is concerned, there is a further question, namely, whether the respondent could have entertained a reasonable belief that there was escapement of income from assessment in consequence of information in his possession? These are the questions which we are called upon to answer in this petition filed under article 226 of the Constitution of India. The petitioner is a company registered under the Indian Companies Act, 1913, and it is engaged in the business of manufacturing textiles for the last several years. The respondent is the ITO having jurisdiction to assess the petitioner. The relevant assessment years with which this petition is concerned are assessment years 1970-71 and 1974-75, corresponding years of account being financial years 1969-70 and 1973-74, respectively. The petitioner was following cost method for the purpose of valuing its opening and closing stocks of cloth and yarn for the purpose of the income tax assessment for the last several years. Common method was followed for the purpose of valuing the stocks of cloth and yarn, both for the purposes of income tax and balance sheet and profit and loss account up to the assessment year 1965-66, Departure was, however, made in the assessment year 1966-67 that is financial year 1965-66. In that year, the petitioner changed the method of valuation of stocks of yarn-in-process and cloth for the purposes of the Companies Act, Balance sheet and profit and loss account required to be prepared under the provisions of the Companies Act were prepared on the basis of the new method and while the old method was continued to be followed for the purposes of the income tax. It is not necessary to set out the method which the petitioner followed in valuing its stocks of cloth and yarn which was not in process, since controversy in this petition arises only on account of the valuation of that stock of yarn in process. So far as the yarn in process was concerned, the petitioner followed a uniform method of valuing the stock at 12 p. per kg. or 6 p. per lb. for the purposes of income tax. Cost of yarn in process for the purposes of balance sheet was worked out by adding 25 per cent weaving charges to the cost of ready yarn Along with the return of income submitted for the assessment year 1966-67, the petitioner filed a statement in which difference between the valuation of the closing stock shown in the balance sheet and its valuation for the purpose of income tax assessment and the necessary adjustment to be made in its valuation for the purpose of income tax assessment were stated. It appears that standard queries were issued by the ITO for the purpose of assessing the petitioner to income tax for the year 1966-67, which, as pointed out above, was the first year in which petitioner changed the basis or method for valuation of the stock for the purpose of balance sheet and profit and loss account. In reply to query No. 21 regarding stock valuation, the petitioner stated as follows:

Stocks of cotton and yarn are valued as cost as in the past. Stocks of yarn in process and cloth are valued at cost on a slightly different method for the purposes of balance sheet. Rs. 1,55,127 is the amount of over-valuation on the basis of valuation at cost on the basis of method followed for the purposes of income tax. Valuation of stocks at cost is given in a statement with the return income.

In the statement showing valuation for the purpose of income tax filed along with the return cost of yarn in process as was shown at 12 p. per kg. In another statement, working of valuation according to the method followed in balance sheet was shown. The final working was shown as follows:

Cost of stock on old method up to 31-3-1965 for 31-3-1966

Rs.

Yarn in process

8,74,025

Cloth

60,20,038

68,94,063

Cost of stock on new method:

Yarn in process

9,79,564

Cloth

60,69,620

70,49,184

Difference:

+1,55,127

In the course of assessment proceedings for the assessment year 1966-67; the petitioner also submitted the following note showing difference in valuation:

Note: Over-valuation in the closing stock in yarn in process as on 31-3-1966, on the basis of method followed for income tax purposes till now is as follows:

Rs.

(1) Over-valuation in weaving process due to change in method of adding 6 p. per lb. to cost of ready yarn and that method followed for balance sheet on 31-3-1966 by adding 25 per cent of weaving charges to cost of ready yarn

90,565

(2) Over-valuation in stock in ready yarn, spinning process, weaving process and cloth on 31-3-1966, due to change in method of valuing cotton on basis of loss percentage to that of valuing cotton on the basis of yarn manufactured

63,349

1,53,914

It would, thus, appear that working of valuation on the basis of both the methods was placed before the ITO. The ITO while framing the assessment for the assessment year 1966-67, on 17-2-1968, stated as follows:

The assessee-company has claimed deduction of Rs. 1,55,127, being over-valuation in closing stock of cotton yarn in process and cotton cloth and Rs. 1,70,615 being the over-valuation in closing stock of terry-cotton yarn and cloth, from the profits during the year. It is contended that hitherto the assessee-company was valuing cost of ready yarn, spinning process and weaving process and cloth by including therein the cost of cotton arrived at by dividing the value of cotton consumed by the quantity of cotton consumed and adding thereto average percentage of loss of cotton. For balance sheet purposes, the assessee-company has changed the method of valuing the closing stock of the cotton, etc, arriving at the cost of clean cotton by dividing the value of cotton consumed by quantity of yarn manufactured. For income tax purposes, the method hitherto employed has been followed and on the said basis, the over-valuation for the balance sheet purposes is claimed as deduction in respect of the following items:

Rest.

Closing stock of ready yarn, spinning process and cloth

63,349

Over-valuation in weaving process

90,565

1,53,914

So also cost of weaving process of terry-cotton is valued on the basis of 25 per cent of weaving charges instead of additional 6 p. per pound to cost of ready yarn, Terry-cotton is manufactured only from 1964-65 and so no adjustments are made thereto according to the basis hitherto followed, viz., adding 6 p. per pound to cost of ready yarn. The valuation of I closing stock of terry-cotton at cost has been worked out and the over-valuation on 31-3-1966 as per balance sheet figure works out to Rs. 1,54,892, is (sic) the aggregate adjustments on revaluation of closing stock comes to Rs. 3,08,806.

From the assessment year 1966-67, the petitioner is consistently following two methods for valuing its closing stock of yarn and cloth, one for the purpose of income tax and another for the purpose of balance sheet and profit and loss account as stated above. In the income tax assessment proceedings, income was computed on the basis of valuation of closing stock shown for the purpose of income tax in each year; Every year, one of the standard queries put by the ITO related to the two different methods of valuation adopted by the petitioner for valuing its opening and closing stocks and it is the petitioner''s case that from year to year the said query has been replied consistently in the same manner as stated above explanation (sic), the difference between the two methods of valuation and pointing out the adjustment which was required to be made as a result of the difference in framing the income tax assessment. Every year assessment was completed on the basis of the valuation of the opening and closing stock shown by the petitioner for the purpose of income tax assessment.

For the assessment year 1970-71, which is one of the years under our consideration, the petitioner filed return of income along with statements showing computation of total income. According to the petitioner in one of the statements two valuations of closing stock of yarn and cloth, one for the purposes of income tax proceedings as per the method consistently adopted by it from year to year, and another for the purpose of balance sheet, were disclosed giving details as to how the valuations were worked out. The valuation of the closing stock in method described as cost method were shown as follows:

Valuation for income tax

Valuation as per balance sheet

Over-valuation in balance sheet

Rs.

Rs.

Rs.

Yarn

10,71,560

11,91,788

1,20,228

Cotton cloth

1,23,116

71,74,584

51,468

Terry-cotton

24,02,724

28,36,670

4,33.946

6,05,642

On the same basis, the opening stock of that year was also revalued for the purposes of income tax proceedings as per the past practice and the said revaluation resulted in over-valuation in the aforesaid three categories of stock aggregating in all to Rs. 14,96,316, which was also shown in the statement accompanying the return of income. The net result of this difference in the two methods both as regards the opening and the closing stock was reflected by a net addition of Rs. 8,90,674 which was required to be made for income tax purposes to arrive at the net income. This figure was also shown in the statement accompanying the computation of total income filed by the petitioner along with the return of income. In this year also, standard queries were put by the ITO and query relating to the closing stock was query No. 21. In answering this query, the petitioner stated that yarn in process and cloth were valued at cost but on a slightly different method than for the purpose of balance sheet and the same has resulted in over-valuation as regards the closing stock to the extent mentioned above. It was also stated that the valuation of the stock was given in a statement with the return of income. The ITO thereafter passed the assessment order on 18-12-1972 making addition on Rs. 8,90,674 which reflected the effect of the revaluation of stock as stated above. It may be stated here that besides the statement referred to above, the petitioner had also placed on record balance sheet of the petitioner wherein the basis on which the stock was valued by the petitioner was shown.

In the same manner, while filing return of income for the assessment year 1974-75, the petitioner filed a statement showing computation of net income and in this year the revaluation as aforesaid resulted in a net overvaluation to the extent of Rs. 27,11,024 which amount was to be deducted from the profit as per the profit and loss account. In a statement accompanying the return detailed computation of income was made and the basis on which closing stock was valued for the purpose of income tax was also stated. The difference in the valuation between that adopted in the balance sheet and the valuation for the income tax purposes was pointed out. The working as regards the valuation, which was shown was as follows:

Valuation for income tax purpose

Valuation as per balance sheet

Over-valuation in balance sheet

Rs.

Rs.

Rs.

Cloth including terry-cotton cloth

83,03,657

1,27,86,222

44,82,565

Yarn

15,48,375

17,38,489

1,90,114

46,72,679

As against this difference in valuation, the difference in the valuation of the opening stock came to Rs. 19,61,595 resulting in a net difference of Rs, 27,11,084 which amount as stated above was to be deducted from the profit as per the profit and loss account. In this year also, while replying query No. 21 put by the ITO, as in the earlier year, it was pointed out that method of valuation for the purpose of income tax was explained as a statement accompanying the return of income. The ITO, while framing the assessment for the assessment year 1974-75 gave effect to the difference in valuation by deducting Rs. 27,11,084 as stated above.

The respondent issued notice, dated 19-3-1979, u/s 148, read with section 147, of the income tax Act, 1961 (''the Act''), stating that he has reason to believe that the petitioner''s income for the assessment year 1974-75 had escaped the assessment and, there fore, he proposed to reassess the same and called upon the petitioner to file a return of income in the prescribed form within 30 days. This notice was received by the petitioner on 28-3-1979. A similar notice, dated 29-3-1979, u/s 148 read with section 147 was issued by the respondent for the assessment year 1970-71. In this notice also, the respondent stated that he had reason to believe that the petitioner''s income chargeable to tax for the assessment year 1970-71 had escaped the assessment and, therefore, he proposed to reassess the income for the said assessment year. The petitioner was required to deliver to the respondent within 30 days from the date of the service of the notice a return of income in the prescribed form, for the said assessment year. The petitioner filed returns in pursuance of the said notice on 16-4-1979, along with a covering letter accompanying the returns. It was pointed out that the returns were filed under protest and without prejudice to the petitioner''s right to challenge the validity of the notices and initiation of reassessment proceeding. It was pointed out that provisions of section 147(a) or section 147(b) were not attracted as there was no concealment of any income particularly nor was there any information in possession of the respondent for reopening of the assessment. The petitioner contends that since it had made full, complete and true disclosure regarding all material facts relevant for the purpose of making assessment, there was no justification for reopening the assessment for the aforesaid assessment years. It is contended that the petitioner had placed on record all material facts as regards the valuation of the closing and opening stocks and the basis adopted by it for such valuation. It is pointed out that the basis for valuing the closing and opening stocks were fully explained in the statement filed by the petitioner along with the return. It is further pointed out that the petitioner was consistently following one method for income tax purposes and this method was accepted by the income tax Department for the last many years. The petitioner further contended that the respondent was not in possession of any information in consequence of which he could entertain reasonable belief that there was escapement of income from assessment in the aforesaid years. The petitioner has, therefore, filed this petition challenging the validity of the aforesaid notices issued by the respondent u/s 148 read with section 147 and prayed that the said notices be quashed and set aside.

The assessments are sought to be opened by the respondent on account of method of valuation adopted by the petitioner for valuing yarn in process for income tax purposes. In the respondent''s affidavit, it is stated that on perusal of the method adopted for the valuation of the yarn in process, it was found that the petitioner had shown cost in respect of such yarn at 12 p. per kg. whereas the actual cost as discussed in the balance sheet was more. According to the respondent, the correct cost of yarn in process was shown in the balance sheet whereas the valuation for the purpose of income tax was adopted on estimate basis. It is stated that the method which the petitioner had declared for the purpose of income tax was unscientific, arbitrary and unreliable and it was wrongly described as ''cost method'', according to the respondent, the petitioner had misled the department by stating that the method which it followed for valuing yarn in process was cost method. The respondent recorded the following reasons for reopening the assessment for the assessment year 1974-75:

In this case, the revenue audit has pointed out that while valuing the stock in process, the assessee has valued the stock by adopting fixed cost at 12 p. In the balance sheet the figures adopted are different and, therefore, income to the extent of Rs. 1,34,216 has escaped assessment. In view of the audit objection received, I have reason to believe that due to failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment, income chargeable to tax has escaped assessment.

It is stated before us that identical reasons were recorded for reopening assessment for the assessment year 1970-71. It is submitted that the petitioner was guilty of suppression of material facts and had not fully and truly disclosed all material facts for forming assessment. As the facts which were not disclosed by the assessee came to light subsequently, assessments are sought to be reopened. In paragraphs 7(k) of the affidavit-in-reply of the respondent, it is conceded that for the assessment year 1970-71, assessment could not be reopened u/s 147(b). It is clarified that for the said assessment year, action was taken u/s 147(a) and not u/s 147(b). This position was accepted by Mr. S.N. Shelat, learned counsel for the respondent, at the time of hearing of this petition. However, so far as the assessment year 1974-75 is concerned it is contended that apart from the fact that the petitioner was guilty of suppression of material facts justifying reopening of the assessment u/s 147(a), the respondent had reason to believe that there was escapement of income in consequence of an information in his possession and, therefore, it was open to him to reopen assessment u/s 147(b). According to the respondent, such information came in his possession as a result of audit objection which we shall refer to when we deal with the question whether assessment could he reopened u/s 147(b).

Now, so far as reopening of assessment u/s 147(a) is concerned, as observed by this Court in ARIVND BOARDS AND PAPER PRODUCTS LTD. Vs. M. T. KESHRUWALA, Income Tax OFFICER, WARD A (REV.), NAVSARI., , it is well settled that two conditions have to be satisfied before the ITO acquires jurisdiction to issue notice u/s 148 in respect of an assessment beyond the period of four years but within a period of eight years from the end of the relevant year, namely (i) that the ITO must have reason to believe that the income chargeable to tax has escaped assessment; and (ii) that he must have reason to believe that such income has escaped assessment by reason of the omission or failure on the part of the assessee (a) to make a return u/s 139 of the Act, for the assessment year to the ITO; or (b) to disclose fully and truly material facts necessary for the assessment for that year. Both these conditions must co-exist to confer jurisdiction on the ITO. It is also imperative for the ITO to record his reasons before initiating proceedings as required by section 148(2). Another requirement is that before notice is issued after the expiry of four years from the end of the relevant assessment years, the Commissioner should be satisfied on the reasons recorded by the ITO that it is a fit case for the issue of such notice. In the present case, this last condition is satisfied and there is no dispute on that count. In the present case reassessment is not resorted to on the ground that there was omission or failure on the part of the assessee to make returns u/s 139 for the assessment years in question. The ground which is common to both the assessment years on which the proceedings are sought to be initiated, is that there was failure on the part of the petitioner to disclose fully and truly material facts which are necessary for its assessment for the assessment years in question. The law on this aspect is also well settled. The duty which is cast upon the assessee, is to make a true and full disclosure of the primary facts at the time of the original assessment. Once he has done that, his duty ends. It is for the ITO to draw correct inferences from those primary facts. It is not the responsibility of the assessee to advise the ITO with regard to the inference which he should draw from the primary facts. If the ITO draws an inference which appears subsequently to be erroneous, mere change of opinion with regard to that inference would not justify initiation of action for reopening assessments. What facts are material and necessary for assessment will differ from case to case. But once those primary facts are disclosed and all the facts which would help the ITO in coming to the correct conclusion are brought to his notice, the assessee''s duty ends. From these primary facts and the further facts inferred from them, the taxing authority has to draw the proper legal inferences and ascertain on a correct interpretation of the taxing enactments the proper tax leviable� Parashuram Pottery Works Co. Ltd. Vs. Income Tax Officer, Circle I, Ward A, Rajkot, .

Bearing in mind this settled legal position, we would now proceed to consider the question whether in this case, there was material on the basis of which the respondent could have entertained a reasonable belief that there was escapement of income from assessment on account of failure on the part of the petitioner to disclose fully and truly material facts necessary for the purpose of assessment for the years in question justifying reopening of the assessments u/s 147(a). As pointed out above, the ground on which the assessments are sought to be reopened u/s 147(a) is that the assessee had valued its stock of yarn in process at 12 p. per kg. In other words, the stock of yarn in process was valued at a uniform rate of 12 p. though in the balance sheet, the figures of cost adopted were different. Now, as pointed out above, the petitioner has been consistently following the method of valuing its stock of yarn in process at the fixed or uniform rate of 12 p. per kg. This method of valuation of stock of yarn in process has been followed for the last several years for income tax purposes. However, from the assessment year 1966-67, that is financial year 1965-66 the petitioner adopted two methods of valuation of the stock, one for the purpose of income tax and another for balance sheet and profit and loss account. For the purpose of income tax, it followed the past practice of valuing the stock, while for the purpose of balance sheet and profit and loss account, it adopted a slightly different method of valuation. Cost of yarn in process was shown at 12 p. per kg. for the purpose of valuing its stock as in the past for the purposes of income tax. For the assessment years under reference, that is the assessment years 1970-71 and 1974-75, the petitioner followed the same method of valuation of its stock which it had followed from the assessment year 1966-67. In other words, it valued its stock of yarn in process at 12 p. per kg. for the purpose of income tax, while it adopted a slightly different method of valuation for the purpose of balance sheet and profit and loss account. Statements containing details of methods of valuation adopted by it were filed along with its returns of income. Balance sheet in which method different from the one adopted for the purpose of income tax was followed also filed in the course of assessment proceedings. In answer to the queries put by the ITO in both the years in question, the petitioners had explained the methods of valuation of stock adopted by it. It was after taking into consideration valuation of stock for the purpose of income tax and valuation of stock for the purpose of balance sheet that the ITO while framing the assessments for the said years made suitable adjustments and made addition or deduction as a result of such adjustment. The grievance of the respondent is that the petitioner had valued its stock of yarn in process at 12 p. per kg. stating that it was valuing its stock on cost method, though in fact it was not a cost method which it was following. It is contended that the fact the petitioner was not valuing its stock of yarn in process at actual cost was evident from the method adopted by it in the balance sheet. It is contended that the balance sheet showed the correct method of valuation still, however, for the purpose of income tax, the petitioner adopted a different method. It is contended that the statement made by the petitioner that it was valuing its stock by actual cost method was false and misleading and, therefore, it could not be said that the petitioner had fully and truly disclosed all material facts necessary for its assessment. It was submitted that both the method of valuation adopted by the petitioner and the actual valuation made by it were primary facts which the petitioner was required to state fully and truly. If both or either of the facts was found to be untrue or false, it was open to the respondent to initiate proceedings for reassessment of the petitioner''s income for the assessment years 1970-71 and 1974-75.

The arguments advanced on behalf of the respondent in the present case are, in our opinion, covered by decisions of the Supreme Court in The Commissioner of Income Tax, Calcutta Vs. Burlop Dealers Ltd., and Income Tax Officer and Others Vs. Madnani Engineering Works Ltd., Calcutta, . In Burlop Dealer Ltd.''s case (supra), the assessee in the course of its original assessment to income tax for the assessment year 1949-50 had produced a partnership agreement with one Ratiram Tansukhrai and claimed that the profits earned by it from H. Manory Ltd. had been divided between itself and Ratiram Tansukhrai under the partnership agreement and its one-half share of the profit, namely, Rs. 87,937 was the only amount assessable to tax in respect of this course. The ITO accepted the partnership agreement and assessed the assessee only on the profit of Rs. 87,937. It appears that while making assessment for the assessment year 1950-51, the ITO found that the partnership agreement between the assessee and Ratiram Tansukhrai was got up as a device to reduce the profit received from H. Manory Ltd. and the assessee was, therefore, liable to tax on the entire amount of profit coming from H. Manory Ltd. This view taken by the ITO was confirmed on appeal by the AAC and the Tribunal. The High Court also on a reference agreed with the view of the Tribunal. The ITO thereupon issued a notice u/s 34(1)(a) of the Indian income tax Act, 1922 (''the 1922 Act'') to reopen the assessment of the assessee for the assessment year 1949-50 in order to bring to tax the further amount of Rs. 87,937 being the half share of the profit from H. Manory Ltd. alleged to have been paid for Ratiram Tansukhrai under the partnership agreement. The assessee contended that it had produced all the relevant accounts and documents necessary for completing the assessment and it was under no obligation to inform the ITO about the true nature of the transaction and there was, accordingly, no failure on its part to disclose fully and truly all material facts necessary for its assessment. This contention was negatived by the ITO and the income of the assessee was reassessed by adding Rs. 87,937 to the income returned by the assessee. This view taken by the ITO was confirmed on appeal by the AAC but on further appeal, the Tribunal accepted the contention of the assessee and held that there was no failure on the part of the assessee to make a full and true disclosure of the material facts and, hence, the ITO was not justified in seeking to reopen the assessment u/s 34(1)(a) of the 1922 Act. The revenue applied to the Tribunal for a reference but the application was rejected and the High Court also dismissed the application of the revenue for calling for a reference from the Tribunal. The revenue thereupon preferred appeal to the Supreme Court by special leave. The appeal was rejected by the Supreme Court on the ground that the assessee had disclosed all its books of account and evidence from which material facts could be discovered and it was under no obligation to inform the income tax Department about the possible inference which might be raised against it and, hence, there was no failure on its part to disclose the preliminary facts relevant to the assessment which would invite the applicability of section 34(1)(a). It would, thus, be seen that according to this judgment there was no obligation on the assessee to disclose that the partnership agreement produced by it was bogus and that the entries made by it in its books of account were false. The assessee discharged the obligation which lay upon it by disclosing its books of account and evidence from which material facts could be discovered and it was for the ITO to decide whether the documents produced by the assessee were genuine.

In Madnani Engg. Works Ltd.''s case (supra), in the course of original assessment for the assessment year 1959-60, which were completed on 23-8-1960, certain interest paid by the assessee to its creditors from whom it claimed to have borrowed moneys on hundis was allowed as deductible expenditure. Subsequently on 25-1-1968, i.e., after a lapse of four years from the end of the assessment year, a notice was issued by the ITO to reopen the assessment of the assessee on the ground that the transactions of loan represented by the hundis were bogus and no interest was paid by the respondent to any of the creditors and interest was wrongly allowed. The assessee challenged the validity of the notice by filing writ petition in the High Court. On 5-12-1968, the ITO in his counter affidavit declined to disclose the facts on the ground that if such facts were disclosed it would cause great prejudice to the interests of the revenue and would frustrate the object of reopening the assessment. Thereafter, he filed a further affidavit on 27-1-1970, stating that in the course of the assessment of the respondent for the assessment year 1963-64 it was discovered that various items shown as loans against the security of hundis in the respondent''s books of account for the assessment year 1959-60 were in fact fictitious and credits against the names of certain persons, viz., A.G.R.M. and D were found not to be genuine and that in that premise it appeared to the ITO that the assessee had failed to disclose fully and truly all material facts necessary for its assessment and by reason of such failure a portion of its income had escaped assessment. The learned single judge of the High Court dismissed the writ petition but on appeal, the Division Bench of the High Court allowed the petition and quashed the notice. On appeal, the Supreme Court held that the case was directly covered by its decision in Burlop Dealers Ltd.''s case (supra) as here also the assessee had produced in the original assessment proceedings all the hundis on the strength of which it had obtained loans from creditors as also entries in the books of account showing payment of interest and it was for the ITO to investigate and determine whether these documents were genuine or not, the assessee could not be said to have failed to make a true and full disclosure of the material facts by not confessing before the ITO that the hundis and the entries in the books of account produced by it were bogus. The Supreme Court held that there was no distinction at all between Burlop Dealers Ltd.''s case (supra) and the aforesaid case and the language of section 147(a) of the 1961 Act, being identical with that of section 34(1)(a) of the 1922 Act, the ratio of the decision in Burlop Dealers Ltd.''s case (supra) must govern the decision of the aforesaid case. The Supreme Court, therefore, held that there was no failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment and the condition for the applicability of section 147(a) was not satisfied.

We are of the view, prima facie, that on the facts and in the circumstances of the case, the appendage or label which the petitioner gave to the method of valuation of stock of yarn, namely, valuation of stock at cost, is not by itself a primary fact. The description, accordingly, given by the petitioner is really in the nature of an inference even if it be an ill-informed inference drawn by it as to the nature and character of valuation adopted by it. The details of the basis on which the stock was valued were simultaneously placed on the record of the original assessment proceedings and the case is not one where the final figure of valuation alone was given with the statement that it was arrived at on the basis of actual cost. That apart, even assuming that the description, accordingly, given by the petitioner about the method of valuation constituted a primary fact, the petitioner, as earlier stated, had simultaneously placed on record in the form of a statement the details or particulars in relation to the valuation of stock. In other words, the actual method adopted by the petitioner for valuing the stock was laid bare in all its essential particulars in the course of the original assessment proceedings. Such material also constituted a primary fact which was fully disclosed. There was, thus, a true and full disclosure of all the primary facts at the time of the original assessment. Once the petitioner had done this, his duty ended. It was for the ITO to draw correct inference from all those primary facts taken together and to decide, inter alia, whether or not the stock could be said to have been valued at cost as claimed by the petitioner, having regard to the method adopted. It was no part of the duty or responsibility of the petitioner to advise the ITO with regard to the true and correct inference which should be drawn from those primary facts as regards the method of valuation. If the ITO draws an inference, which appears subsequently to be erroneous, mere change of opinion with regard to that inference would not justify initiation of action for reopening the assessment. From all the primary facts and the further facts inferred from them, the ITO had to draw the proper legal inference at the relevant time and to ascertain on a correct interpretation the proper tax leviable. We are, therefore, of the view that there is absolutely no justification to reopen assessment in either of the assessment years under consideration u/s 147(a).

So far as the assessment year 1974-75 is concerned, the additional contention which is raised on behalf of the respondent is that he had reason to believe that there was escapement of income from assessment in consequence of information in his possession. The information on the basis of which the assessment is sought to be reopened consists of an audit objection, a copy of which is placed on record at Ex. A to the affidavit in reply. The audit objection was in the following terms:

A company engaged in manufacture of cotton cloth valued its closing stock under the cost method. In valuing the cost of cotton consumed in manufacture of cotton cloth during the previous year relevant to assessment year 1974-75, the total quantity of cotton consumed was taken as 32,07,355 kg. as against 30,76,723 kg. as shown in the quantity amount of raw material consumed. By taking the correct quantity of consumption into consideration, the cost of cloth would work out to Rs. 9.32 per kg. including the wastage of 21.6 per cent as against Rs. 8.94 per kg. adopted in valuation of this item. This resulted in undervaluation of closing stock of 3,52,847 kg. of cotton to the extent of Rs. 134 lakhs involving short levy of tax of Rs. 77,430. The ITO agreed to take necessary action after calling for further information from the assessee.

We have already set out above the reasons recorded by the respondent for reopening the assessment for the assessment year 1974-75. It is obvious from the reasons recorded by the respondent that assessment was not reopened on the basis of the audit objection or the factual information supplied by the audit objection. The audit objection was with regard to valuation of stock of cloth whereas the reason for reopening assessment recorded by the respondent is valuation of stock of yarn in process. What would constitute ''information'' in consequence of possession on which the ITO can act within the meaning of section 147(b) has been the subject-matter of many decisions. This Court in K. Mansukhram and Sons Vs. Commissioner of Income Tax, Gujarat-I, reviewed the legal position on the question in the light of the decision of the Supreme Court in Indian and Eastern Newspaper Society, New Delhi Vs. Commissioner of Income Tax, New Delhi, and observed that the view which finally prevailed as to the legal position governing the applicability of section 147(b) was as follows:

This decision clarifies the legal position on the question as to when instruction or knowledge as to facts of the correct state of law constitute ''information'' within the meaning of section 147(b). Instruction or knowledge concerning any fact relating to the assessment, which has a concrete existence and definite vitality and which is capable of influencing the determination of an issue arising in the course of an assessment but has escaped notice of the ITO, would constitute ''information'', if it is derived from any external source after the completion of the assessment. However, instruction or knowledge as to law, in order to constitute ''information'' must be relatable to statutory or judge-made law and traceable to a formal source competent to enact or declare law. A statement of law by a person or body not competent to create or define law, such as a competent legislative judicial or quasi-judicial authority, cannot be regarded as providing instruction or knowledge as to law. But attention as to the existence of such law may be drawn by any person or authority and there upon only that part of the communication, which mentions the law and which has escaped the notice of the ITO at the time of the original assessment, would constitute ''information''. It would not be open to the ITO, however, to reopen a completed assessment upon reappraisal of the material considered by him during the original assessment. An error discovered on a reappraisal of the same material, without anything more, does not give him the power to reopen the assessment (p. 73)

As pointed out by this Court in the case of K. Mansukhram & Sons (supra), it would not be open to the ITO to'' reopen the completed assessment upon reappraisal of the material considered by him during the original assessment. An error discovered on a reappraisal of the same material without anything more does not give him the power to reopen the assessment.

We have already set out in details the facts disclosed by the assessee and considered by the ITO in the course of the assessment proceedings in the present case. It is clear from what is disclosed above that the audit objection merely draw the attention of the ITO to the material which was already on record and which was considered by the ITO at the time of original assessment. In other words, the factual information supplied by the audit objections was already considered by the ITO when he framed the assessment. The audit had not informed the ITO of any fact which had escaped the notice of the ITO or which was not considered by the ITO. Therefore, apart from the fact that reopening of assessment was not on the basis of any information supplied by the audit objection, no fact which had gone unnoticed or which had not been considered by the ITO was disclosed by such information. The ITO had already considered the material to which his attention was drawn by the audit, as also the method of valuation adopted by the petitioner in valuing the stock of yarn in process, when he framed the original assessment. The reasons recorded by the respondent to reopen assessments made it clear that according to him there was error in accepting the basis adopted by the petitioner in valuing the stock -of yarn in process. It is obvious that this error, if any, is discovered on reappraisal of the same material without anything more. Here what seems to have happened is that the respondent has upon review of the material on record, arrived at a different conclusion on the above aspects of the case. This is, therefore, a case of mere change of opinion which does not give power of jurisdiction to the respondent to reopen the assessment. We are, therefore, of the opinion that there is no jurisdiction for reopening the assessment for the assessment year 1974-75 u/s 147(b). For the foregoing reasons, we hold that the impugned notices issued by the ITO for the assessment years 1970-71 and 1974-75 are void and without jurisdiction.

In the result, this petition succeeds. The impugned notices dated 10-3-1979 and 29-3-1979 Exs. C(3) and C(1), respectively, are quashed and set aside. The respondent shall pay the costs of the petitioner. Rule made absolute accordingly.