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Judgment
Chandurkar, C.J.—These four tax cases can be disposed of by this common judgment because the only material question which arises in
these cases which relate to the same assessee is whether the assessment proceedings were validly reopened by the ITO under s. 147(b) of the I.T.
Act, 1961. T.Cs. Nos. 634 and 635 relate to the assessment under the I.T. Act and the question referred to this court reads as follows :
Whether, on the facts and in the circumstances other case, the Appellate Tribunal was right in holding that the reopening of the assessment made
under the provisions of section 147(b) for the assessment years 1965-66 and 1966-67 themselves were not proper ?
T.C. Nos. 1538 and 1539 of 1977 arise out of the assessment to surtax and reopening of the assessments under s. 8 of the Surtax Act for the
assessment years 1965-66 and 1966-67. The question referred in these cases is as follows :
Whether, on the facts and in the circumstances of the case, it has been rightly held that the reopening of the assessments made u/s 8 of the Surtax
Act for the assessment years 1965-66 and 1966-67 themselves were not proper and accordingly setting aside the assessment made by the
Income Tax Officer ?
The orders in the original assessment proceedings have not been made a part of the statement of the case while reproducing the facts as set out
in the statement of the case. The statement of the case relating to the proceedings under the I.T. Act shows that while making the assessment for
the assessment years 1965-66 and 1966-67, the ITO had allowed the claim of rebate under s. 84 of the I.T. Act and for calculating the rebate,
what the ITO did was that he computed the capital by including half the profits that had accrued during the respective years. There was later an
audit inspection and on the basis of the audit inspection note, the ITO took the view that the inclusion of half year''s profit was not correct. The
ITO reopened the proceedings and reduced the rebate allowable under s. 84 by reducing the capital computation by the extent of half the profits
which were added in the original assessments. When an objection was taken to the validity of reopening the assessment, the ITO referred to the
decision of this court in the case of Salem Provident Fund Society Ltd. Vs. Commissioner of Income Tax, Madras, and the decision of the Kerala
High Court in the case of United Mercantile Co. Ltd. Vs. Commissioner of Income Tax, Kerala, .
The appeals filed by the assessee came to be dismissed. When the matter was taken to the Tribunal by the assessee, the Tribunal took the view
that the case involved merely by interpretation of sub-rule (5) of rule 19 of the I.T. Rules and information regarding a position of the law had to
come from a person in whom the statute vested powers to decide questions of law if it is to constitute information for the purpose of s. 147(b). The
Tribunal took the view that the audit cannot be accepted as ""an authority on law or on a proper interpretation of the legal provisions"" and,
therefore, there was no information on which the ITO could reopen the proceedings under s. 147(b). The Tribunal thus allowed the appeals and
held that the reassessment proceedings were invalid. The Tribunal declined to go into the question as to ""whether rule 19(5) was properly
interpreted by the Revenue"".
The statement of the case relating to the reopening of the assessment under the Surtax Act merely referred to the statement of the case in the
proceedings under s. 147(b) of the I.T. Act. It is not in dispute that the surtax proceedings were reopened only on the ground that the regular
assessment proceedings were reopened. These cases had come up before Division Bench of this court on an earlier occasion. By an order dated
February 3, 1982, the Division Bench found that the discussion in the appellate order of the AAC was general in character and did not particularly
turn on whether the information in question was what the officer himself had ferretted from the old records or whether the information came to him
from an external source. At the time when the Division Bench heard the matter, the law with regard to the scope of s. 147(b) of the I.T. Act had
come to be settled by the Supreme Court in Indian and Eastern Newspaper Society, New Delhi Vs. Commissioner of Income Tax, New Delhi, .
The Division Bench took the view that there was nothing in the order of the Tribunal ""to show what kind of audit note which, according to the
Tribunal, the records disclosed"" and since it was essential for the disposal of the reference on the question of law propounded by the Tribunal to
get to know what the records disclosed as respects ""the audit note, its contents and its timing"", it was necessary to direct the Tribunal to draw up a
supplemental statement to of the case and annex the audit note to the statement of the case. Accordingly, the Tribunal was directed to draw up a
supplemental statement of the case and if the Tribunal considered it fit, to annex to the statement of the case extracts from the ITO''s note-sheet in
the assessment file.
A supplementary statement of the case has now been submitted by the Tribunal. The supplementary statement of the case give exhaustively the
extracts of the day-to-day proceedings which had taken place before the ITO. One of the entries in the records, dated November 26, 1969, reads
as follows :
In the assessment completed on June 21, 1968, while computing the capital for purposes of allowing relief u/s 84 in respect of the new
transformer until, it is seen that the proportionate profit attributable to the new unit has been added back. This is not correct as the capital has been
computed on average assets and liabilities method which also includes the average profit. As excess relief has been granted, the assessment
requires revision. A notice u/s 154 put up.
However, the further note dated March 25, 1970, reads :
As directed by the Income Tax Officer, notice u/s 148 put up.
This shows that the ITO originally contemplated rectification proceedings to be taken under s. 154 but for reasons best known to the ITO and
which are not found on record, he decided to reopen the proceedings under s. 147(b) of the Act. The statement of the case further shows that
though the order sheet dated November 26, 1969, for the assessment year 1965-66 did not make any direct reference to the audit report, the
entry of the same date for the assessment year 1966-67 refers to the Accountant-General''s audit objection filed in the assessment records. In the
statement of the case, the Tribunal states that the entry for the year 1965-66 must also have been induced by the Accountant-General''s audit
report. The tribunal also annexed the audit report to the statement of the case.
The audit report shows that the according to the audit, for the assessment year 1965-66 relief under s. 84 of the Act has been granted on an
excess amount of Rs. 45,491 resulting in under assessment of Income Tax of Rs. 22,060. The reason disclosed is that the ITO had given relief
admissible under s. 84 of the I.T. Act in respect of the new transformer production unit on a sum of Rs. 1,86,710 which has been arrived at by the
adoption of the ""average assets and liabilities method"" contemplated in rule 19 of the I.T. Rules, 1962. The audit note points out that proportionate
profit attributable to the new unit amouting to Rs. 7,58,183 had also been included in the calulation of the average value of the assets and liabilities
and that this profit should be ignored as such profit would already stand included in the total assets and liabilities of the assessee as shown in the
balance-sheet. This was for the assessment year 1965-66. For the assessment year 1966-67, it was indicated that the figure for ""additions to
common assets"" has been erroneously taken to be Rs. 2,61,613 whereas the correct figure was Rs. 1,12,381 and on account of the said errors,
relief under s. 84 has been granted on an excess amount of Rs. 66,013 as against Rs. 25,290, resulting in underassessment of tax to the extent of
Rs. 23,600. Consequent upon these errors which, according to the audit note, had occurred, recomputation with regard to surtax also became
necessary.
The Tribunal has taken the view that the audit note has pointed out that the provisions of sub-r. (5) of r. 19 have been wrongly applied and,
therefore, such an error which was pointed out by the audit note cannot be treated as information for the purpose of s. 147(b) of the I.T. Act.
It is vehemently pressed upon the learned counsel for the Revenue that notwithstanding the decision of the Supreme Court in Indian and
Eastern Newspaper Society, New Delhi Vs. Commissioner of Income Tax, New Delhi, , we should follow the decision of the Supreme Court
under the Sales Tax Act in Anandji Haridas & Co. (P.) Ltd. v. Kushare, STO [1968) 21 STC 326. According to the learned counsel, in this
decision of the Supreme Court which was rendered by a larger Bench of five judges, the Supreme Court has approved to the decision of this court
in Salem Provident Fund Society Ltd. Vs. Commissioner of Income Tax, Madras, . This court in Salem Provident Fund Society''s case had
observed that in cases obvious mistakes apparent on the face of the record of assessment, that record itself can be source of information, if that
information leads to discovery or belief that there has been an escapement of the assessment or under assessment. The learned counsel, therefore,
vehemently contended before us that the mistake in computation of tax having been pointed out by audit note, such communication would amount
to information for the purpose of s. 147(b) of the I.T. Act. Now, it is difficult for us to see how the fact that the decision in Anandji Haridas case
[1968] 21 STC 326 which has been rendered by Bench of judges can take away the binding nature of decision of the Supreme Court in Indian
and Eastern Newspaper Society, New Delhi Vs. Commissioner of Income Tax, New Delhi, , which was expressly rendered on a construction of
s. 147(b) of the I.T. Act. The Supreme Court has clearly laid down in that decision that the opinion of the audit party on a point of law could not
be regards as ""information"" enabling the ITO to initiate reassessment proceedings under. 147(b). In that case, the ITO, when he made the original
assessment, had considered the provisions of ss. 9 and 10 of the Indian I.T. Act, 1922, and the Supreme Court took the view that any different
view taken by the ITO afterward soon the application of those provisions would amount to change a of opinion on material already considered by
him. This decision of the Supreme Court took the view that any different view taken by the ITO aftewards on the application of those provisions
would amount to a change of opinion on material already considered by him. The decision of the Supreme Court has been considered by the
Bombay High Court in two later decision which have been cited before us behalf of the Revenue. It was considered in Commissioner of Income
Tax, Bombay-II Vs. Killick Industries Ltd., , to which one one of us was a party. In that case, the ground on which the ITO sought to initiate the
reassessment proceedings under s. 34(1)(b) of the Indian I.T. Act, 1922, was that the income from house property was not offered by the
assessee under the correct head in the return. It was held to be case of mere change of opinion on the part of the ITO and the reassessment
proceedings were held not to have been validly initiate. The learned counsel for the Revenue has invited our attention to the extract reproduced in
that decision from the earlier decision of the Supreme Court in (1976) 102 ITR 287 (SC) . When the Division Bench of the Bombay High Court
was referring to the decision in (1976) 102 ITR 287 (SC) , what was being done was to set out the law relating to the construction of s. 147(b)
prior to the decision in Indian and Eastern Newspaper Society, New Delhi Vs. Commissioner of Income Tax, New Delhi, . But we may point out
that even in (1976) 102 ITR 287 (SC) , the Supreme Court had pointed out that where the ITO gets no subsequent information but merely
proceeds to reopen the original assessment without any fresh facts or material or without any equity into the materials which form part of the
original assessment, s. 34(1)(b) would have no application. We may point out that in the later decision of the Supreme Court in Indian and Eastern
Newspaper Society, New Delhi Vs. Commissioner of Income Tax, New Delhi, , the Supreme Court had clearly observed that the proposition in
the decision of the Supreme Court in the case of (1976) 102 ITR 287 (SC) to the effect that a case where income had escaped assessment due to
oversight,. inadvertence or mistake"" of the ITO must fall within s. 34(1)(b) of the Indian I.T. Act, 1922, was stated too widely and travels father
than the statute warrants in so far as it can be said to lay down that if, on reappraising the material considered by him during the original
assessment, the ITO discovers that he has committed an error in consequence of which income has escaped assessment, it was open to him to
reopen the assessment. The Supreme Court clearly pointed out that an error discovered on a reconsideration of the same material (and no more)
does not give him that power. The decision in (1976) 102 ITR 287 (SC) was clearly departed from by the Supreme Court and when the Supreme
Court added the words ""and no more"", it had clearly indicated that before the ITO invokes this power under s. 147(b), the material in his
possession must be something more than what he had at the time when the original assessment was made. The Supreme Court''s decision in Indian
and Eastern Newspaper Society, New Delhi Vs. Commissioner of Income Tax, New Delhi, was once again considered at length by the Bombay
High Court in Commissioner of Income Tax, Bombay City-III Vs. H.D. Dennis and others, to which also one of us was a party. In that decision,
five proposition were laid down which would given a case under s. 147(b) of the I.T. Act. We may reproduce the following passage from that
decision (p.14).
""The whole controversy centres round the question as to what does and does not constitute information within the meaning of s. 147(b). The
position of law with regard to the said controversy is that -
(1) the information may consist of facts or of law.
(2) the information must be fresh or subsequent to the original assessment.
(3) the factual information may be derived from external sources or may be gleaned from the material which was already on record at the time of
the original assessment.
(4) a mere change of opinion on the material already considered or occasioned by a reappraisal of the same material is not information. The change
of opinion must be supported by fresh information obtained from the record.
(5) opinion expressed by the department or by the CBR is not law. Law is that which is laid down either by the Legislature or judicial decisions
and it is the change in such law which constitutes a fresh or subsequent information.
The second proposition will show that for the purpose of s. 147(b), the information must be fresh or subsequent to the original assessment. The
learned counsel for the Revenue has argued that the Revenue is relying on the third proposition and, according to him, the factual information in the
instant case has been derived form an external source, namely the audit note, and, therefore, there was no justification for reopening the assessment
under s. 147(b) of the Act. We have repeatedly tried to ascertain from the learned counsel for the Revenue as to what was the a exact nature of
the information on which the Revenue was relying when it sought to justify the reassessment proceedings under s. 147(b) of the I.T. Act. The
learned counsel made it clear to us that the information consisted of the fact that the audit note has informed the ITO that the he has committed a
mistake while computing the income and giving a effect to the deductions for the purpose of s. 48 of the I.T. Act. In other words, the contention of
the Revenue appears to be that whenever the audit note points out a mistake in the order of the ITO, such mistake will enable the ITO to take
recourse to his power under s. 147(b) of the I.T. Act. If the argument of the learned counsel is carried to its logical conclusion the audit may also
point out a mistake of law which has resulted in a mistake in the computation made by the ITO and even on such a mistake being pointed out, the
ITO would be entitled to reopen the assessment which, of course, would be wholly contrary to the law laid down by the Supreme Court in Indian
and Eastern Newspaper Society, New Delhi Vs. Commissioner of Income Tax, New Delhi, . It is obvious that the information contemplated by s.
147(b) has to be fresh information and the ITO must come to know the of that information subsequent to the assessment order. If there are facts
which are already on record of which the ITO has knowledge and knowingly on the basis of those facts, he applies a provision of law - rule 19(5)
in the instant case -erroneoulsy and if such an error is pointed out to the ITO by the audit note, it would obviously be an information as to the law
as was the case in Indian and Eastern Newspaper Society, New Delhi Vs. Commissioner of Income Tax, New Delhi, . Putting the ITO in the
knowledge of the construction which the audit party was inclined to place on a particular rule which has been interpreted in a different manner by
the ITO while giving relief to the assessee a can, in our view, in on sense of the term constitute an information of fact as forged before us by the
learned counsel for the Revenue. We may in passing refer to an earlier decision of this court in United India Fire and General Insurance Co. Ltd.
Vs. Commissioner of Income Tax, , in which, after referring to the decision of the Supreme Court in Indian and Eastern Newspaper Society, New
Delhi Vs. Commissioner of Income Tax, New Delhi, , the Division Bench observed as follows (at p. 29 of 153 ITR) :
In cases where the ITO is moved to tarpon an assessment on the basis of information as to a fact, it is essential that the information must be
subsequent to the conclusion of the original assessment. But it is not necessary that the information should have an outside source. The information
my be found in the assessment records themselves. Without information of this kind, the ITO cannot go over the same ground of the original
assessment, and seek to reopen it under the enabling provisions of the statute merely on the score that he had rendered a wrong decision the facts
or on a wrong understanding of the facts relevant to the assessment while making the original order of assessment.
These observations have our respectful concurrence. The learned counsel appearing on behalf of the assessee has invited our attention to rule
19(5) of the Rules which reads as follows :
19(5) For the purpose if ascertaining the average amount of capital employed in a business during any computation period, the profits or losses
made in that period shall, except so far as the contrary is shown, be deemed -
(a) to have accrued, at an even rate, throughout the said period; and
(b) to have resulted, as they accrued, in a corresponding increase or decrease, as the case may be, in the capital employed in the business.
It is argued by the learned counsel and, in our view, with justification, that the audit note has differed form the interpretation placed on this rule
by the ITO himself and since the ITO has construed the rule in a manner different form what according to the Audit Department was the correct
content of rule 19(5), the instant case would be squarely covered by the decision in Indian and Eastern Newspaper Society, New Delhi Vs.
Commissioner of Income Tax, New Delhi, . We are inclined to accept this contention. The question of ascertaining the average amount of capital
employed in the business during any computation period for the purpose of relief under s. 84 is dealt with by rule 19(5). There is obviously
difference of opinion between the ITO and the Audit Department as the true meaning and content of rule 19(5). By the audit note, the Audit
Department wanted the ITO to construe rule 19(5) according to the construction placed by the Audit Department. It is, therefore, clearly case a
where and error of law is ought to be pointed out to the ITO, and, in our view, this case would be squarely covered by the decision in Indian and
Eastern Newspaper Society, New Delhi Vs. Commissioner of Income Tax, New Delhi, . Having regard to the view the which we have taken, we
do not find any error in the view taken by the Tribunal.
The questions referred to us in all the of our cases are, therefore, answered in the affirmative and in favour of the assessee. Assessee to get the
costs in these cases - one set.