Commissioner of Income Tax vs Jawahar D. Dholakiya

B.C. Patel, J.—The CIT, Rajkot has moved this Court by filing these three applications under s. 256(2) of the IT Act, 1961, (thereinafter referred to ''as the Act'') as application under s. 256(1) of the Act preferred by the applicant before the Tribunal to draw up a statement of the case and to refer it to this Court along with the question of law based on facts, came to be rejected. The Tribunal was requested to refer the following question :

"Whether, the Tribunal is right in law and on facts in holding that the assessment was not validly reopened ?"

Assessee at the relevant time was a Development Officer in Life Insurance Corporation and was drawing incentive bonus. The Assessing Officer (AO) applied his mind to the question of claim of deduction from incentive bonus and thereafter he has come to the conclusion that deduction is permissible, allowed the same and assessed accordingly. It is also clear from the record that for asst. yrs. 1981-82 and 1982-83 such claim being rejected by the AO, in appeals, contentions of the assessee were upheld by the CIT(A). These orders were challenged by the Department before the Tribunal and the Tribunal upheld the claim of the assessee. Decisions of Tribunal were pointed out to show that deduction is permissible. Over and above these decisions, AO allowed the claim keeping in mind the instruction of CIT contained in his letter dt. 1st Dec., 1986 bearing No. RR/GC/86-87.

It appears that AO received a Circular No. 1774 under F. No. 2000/17284-II(AT) dt. 29th Sept., 1987/14th Oct., 1987 issued by CBDT clarifying incentive bonus and/or bonus commission. This is clear from the order of assessment dt. 24th Feb., 1988. Notice came to be issued under s. 148 r/w s. 147(b) of the Act as the AO had reason to believe that income to the extent of claim of deduction from incentive bonus had escaped assessment for asst. yrs. 1984-85, 1985-86 and 1986-87. The AO, after hearing the assessee and his representative, disallowed the expenditure on incentive bonus, and added it to the total income.

The assessee preferred three appeals before the CIT(A) II, Rajkot and pointed out that AO, for deciding p1 the issue before him, considered earlier orders and decisions of the Tribunal and came to a definite finding and allowed the deduction claimed by the assessee. The AO has not at all collected "information" from any source. By a common order dt. 9th Aug., 1989, the appellate authority allowed the appeals. In paragraph 12 of the order, the appellate authority held as under :

"From the fact that the ITO has considered the assessee''s submissions and allowed the assessee''s claim on the basis of the decision of the Tribunal and the decision of the CIT in question goes to show that the ITO has subsequently changed his mind and reopened the assessment under s. 147(b) of the Act. In view of the case law as cited by the assessee''s representative, in my opinion, the ITO was not justified in reopening the assessment in question. As such the reopening was not justified and proceedings under s. 147(b) are invalid."

Not only that, but CIT(A) on merits and in view of consistent decisions of Tribunal held that disallowance of claim was unjustified and disallowance was ordered to be deleted by order dt. 9th Aug., 1989.

Aggrieved by the aforesaid decision, Revenue preferred three appeals before the Tribunal, Ahmedabad. By order dt. 6th Sept., 1994, the Tribunal dismissed the appeals and held as under :

"In such a situation, it cannot be said that the AO came into possession of additional information subsequent to the completion of the assessments which could enable him to invoke the provisions of s. 147(b) of the Act and reopen the assessment."

Revenue thereafter preferred three applications before the Tribunal under s. 256(1) to refer the aforesaid question to this Court. The Tribunal, by its order dt. 17th May, 1995 rejected the applications. In paragraph 4 of the order, the Tribunal held as under :

"The materials available in the appeal record suggest that the information which the AO claimed to have gathered as a fresh material was very much available in the appeal record from before and that is why the first appellate authority as well as the Tribunal have held that reopening is bad in law."

It is not the case of the Revenue that the assessee has failed to disclose fully and truly all relevant facts necessary for assessment. It is not the case of the Department that the returns filed by the assessee were with bundles of documents. It is very clear that the AO, after considering previous orders, decisions rendered by the Tribunal based on facts and judicial pronouncements and a circular issued by the Department, scrutinised the returns and decided the issue, i.e., allowed the deductions from incentive bonus. There is nothing to show that after previous assessment, AO derived knowledge or information from an external source. At the time of previous assessment, the AO was aware about the deduction claimed and in the light of decisions rendered by the Tribunal, returns were assessed.

The question is : whether the circular received after returns are assessed would confer jurisdiction ? With regard to audit note, this Court, in the case of Surat District Co-operative Purchase Andsale Union Ltd. Vs. Income Tax Officer, Circle-I, Ward-B, Surat, referring to the judgment of Indian and Eastern Newspaper Society, New Delhi Vs. Commissioner of Income Tax, New Delhi, , observed as under at page 722 of 129 ITR :

"The opinion rendered by the audit party in regard to the law cannot, for the purpose of such belief, add to or colour the significance of such law. The true evaluation of the law in its bearing on the assessment must be made directly and solely by the ITO. It was, therefore, held that the opinion of the audit party on a point of law could not be regarded as "information" enabling the ITO to initiate reassessment proceedings under s. 147(b)."

Law is well settled that the audit party does not possess power to pronounce the law.

In the case of Union of India and another Vs. Arvind N. Mafatlal, Trustee of Seth Hemantbhagubhai Trust and another, , the Bombay High Court had an occasion to consider a similar aspect. In that case, the CBDT revised its stand subsequently by its instructions wherein it was directed that earlier circular issued by it did not apply to valuation of shares covered by s. 37 of the ED Act and that valuation of shares was governed by the Board''s letter dt. 3rd May, 1965 and 5th July, 1965. On the basis of the circular, a notice of reassessment was issued against which a writ petition was filed and the learned Single Judge quashed the said notice and restrained the Revenue from taking any proceedings to enforce the same. The correctness of the decision of the Single Judge was in challenge before the Division Bench in the aforesaid decision. The Division Bench, relying on an earlier decision in Commissioner of Income Tax, Bombay City-III Vs. H.D. Dennis and others, reiterated that :

"Information within the meaning of s. 147(b) of the IT Act may consist of facts or of law. The information must be fresh or subsequent to the original assessment. The opinion expressed by the Department or by the CBDT is not law. Law is that which is laid down either by the legislature or judicial decision and it is a change in such law which constitutes a fresh or subsequent information."

Thus, to us, it appears that AO was obliged to change his opinion and to reopen the cases in view of a circular issued by CBDT referred to hereinabove, ignoring the decisions rendered by the Tribunals. Kanga & Palkhivala, in their book The Law and Practice of Income Tax, eighth Edn. at page 1202 have noted that "to hold that any assessment can be reopened on the opinion of the Revenue Audit or the Ministry of Law or the CBDT is virtually to empower the establishment at its pleasure to rob assessments of their finality and to introduce a dangerous element of uncertainty in the administration of this Act". In these cases the circular constrained the AO to reopen the cases. If the AO considered and formed an opinion on the same material in the original assessment itself, then he would be powerless to start the proceedings for reassessment. Apex Court in the case of Indian & Eastern Newspaper Society vs. CIT (supra) has held :

"It appears to us with respect that the proposition is stated too widely and travels farther than the statute warrants insofar 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 his assessment, it is open to him to reopen the assessment. In our opinion an error discovered on reconsideration of the same materials (and no more) does not give him the power".

We find that in the facts of these cases, the AO was conscious about the claims made to which his attention was focussed and in the light of the decisions rendered by the Tribunal, orders, etc., assessed the returns previously and no other material whatsoever was before him. To justify the exercise of powers under s. 147(b) of the Act, there must be other material and not the same material which was considered.

In the circumstances, we find no substance, hence, the applications stand rejected.

Rule is discharged with no order as to costs.