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Judgment
Thanikkachalam, J.—At the instance of the Department, the Tribunal referred the following common question for the asst. yrs. 1972-73 to
1974-75 in the case of one assessee and for the asst. yrs. 1972-73 and 1973-74 in the case of another assessee, in both WT assessment as well
as IT assessment, for the opinion of this Court, under s. 256(1) of the IT Act, r/w s. 27(1) of the WT Act :
Whether, on the facts and circumstances of the case, the Tribunal is justified in holding that the reassessments made on the basis of the directions
issued by the IAC of Income Tax are invalid and cannot stand in law ?
In the case of the assessee Sri S. Subramania Udayar, there are three appeals relating to IT assessment for the asst. yrs. 1972-73 to 1974-75,
and two appeals relating to WT assessment for the years 1972-73 and 1973-74, while in the case of Sri S. Muthukumarasamy Udayar, there are
only two appeals relating to WT assessments for the years 1972-73 and 1973-74. Both the assessees are Hindu undivided families (HUF)
represented by their respective Karthas, Subramania Uyadar and Muthukumarasamy Udayar, who are brothers. They had moneys in a partnership
firm of M/s Udayar & Co., from which they derived share income, they being represented in the firm by their respective HUF. The HUF of
Subramania Udayar made gifts of Rs. 10,000 on each day, viz., 31st Dec., 1967 and 31st Dec., 1968 to Smt. Kamalthachi, wife of S.
Muthukumarasamy Uydar, the assessee''s brother; Rs. 5,000 on each date 31st Dec., 1970 and 31st Dec., 1971 to minor Somasundaram, son of
S. Muthukumarasami Udayar. The HUF of Sri Muthukumarsamy Udayar correspondingly gifted amounts of Rs. 10,000 on each date 31st Dec.,
1967 and 31st Dec., 1968 to Smt. Mangalathachi, wife of Subramania Udayar and Rs. 5,000 on each date 31st Dec., 1970 and 31st Dec., 1971
to minor Palanisamy, son of Subramania Udayar. It appears that these amounts transferred to the wife and minor son of the Kartha of each HUF,
were fetching interest and that this interest income relatable to each assessment year involved that has been sought to be included in the
reassessments.
The ITO held that the transactions mentioned above clearly amounted to cross gifts made by each family within the meaning of the expression
considered in the Supreme Court decision in Commissioner of Income Tax, Madras Vs. C.M. Kothari, Madras (Dead), and after him his Legal
Representative, . According to the ITO, the effect of these transfers by way of gifts did in no way result in depletion of the funds of the two families
and consequently interest earned out of these funds were liable to be included in the total income in the IT assessment. He similarly considered that
the amounts gifted by the HUFs, to the members of the other HUF, having come back to it by the corresponding gifts of the other HUF, the same
is required to be included in the net wealth. It is the inclusion of the interest income in the IT assessment and the amount of gift in the WT
assessment of each of the assessees, which is the subject-matter of re-assessments.
The reassessments are challenged by the assessee on the ground that all the relevant facts including the relevant copies of accounts were already
before the ITO/WTO, when the assessments were made originally and there was no new information, which came into the possession of the
ITO/WTO, warranting a re-opening and that the reopening has been done only on the change of the opinion with regard to the law applicable to
the facts already on record at the time of original assessment. The AAC accepted the assessees'' claim and cancelled the reassessments.
Aggrieved, the Revenue preferred appeals before the Tribunal.
The contention of the Department was that the reassessment having been made on the basis of the directions of the IAC received in 1974 after
the assessments were originally made, whereby he communicated the knowledge of law to the ITO/WTO, the latter had acted within the
parameters of his powers in reopening the assessment and bringing to charge additional income/wealth. The assessees'' learned counsel contended
that the question of merits of the inclusion does not arise for consideration and need not be gone into. It was his submission that the IAC was not
competent or entitled to express an opinion with regard to the interpretation of law or application thereof and in this respect he submitted that the
judgment of the Supreme Court in the case of Indian and Eastern Newspaper Society, New Delhi Vs. Commissioner of Income Tax, New Delhi,
would be applicable to the facts of this case. It was thus submitted that the IAC is not competent to interpret or pronounce on a question of law
and hence his directions to the ITO cannot constitute information for the purpose of reopening the assessment.
The Tribunal pointed out that a memorandum containing the directions of the IAC was furnished before it and the directions clearly contain the
views and interpretation of the IAC on points of law, applicable to the situation and a direction to reopen the assessment to be made afresh.
Therefore, the Tribunal came to the conclusion that the reopening in the case of both the IT assessment and the WT assessment was not based
upon correct information. Accordingly, the Tribunal agreed with the view by the first appellate authority.
Before us, the learned standing counsel appearing for the Department submitted that the memorandum of IAC, bearing No. EER 7/73-74, dt.
22nd Oct., 1974 merely pointed out only the law that has got to be applied in the present case. There is no interpretation of the law given by the
IAC in that memorandum. Therefore, even according to the decision of the Supreme Court i Indian and Eastern Newspaper Society, New Delhi
Vs. Commissioner of Income Tax, New Delhi, , the information received by the ITO is a valid information, on which he can reopen the assessment
originally made. On the other hand, the learned counsel appearing for the assessee, while supporting the order passed by the Tribunal, submitted
that the IAC has no jurisdiction to instruct the ITO to reopen the assessment. Further, according to the learned counsel, the memorandum issued
by the IAC contained interpretation of law by the IAC that has got to be applied in the present case. The IAC also has given a direction to reopen
the assessment on the lines suggested by him. Therefore, it was submitted that the Tribunal was correct in holding that reopening was bad.
We have heard both the learned standing counsel appearing for the Department as well as the learned counsel appearing for the assessee. In the
present case, the ITO as well as the WTO reopened the original assessment to bring to tax the interest accrued on cross-gifts made by two of the
Karthas of their respective HUF. According to the assessee, even at the time when the original assessment was made, all the accounts and
necessary particulars were placed before the assessing authority and it is only after perusing all the materials, the assessing authority came to the
conclusion that the interest received on the gifts is not taxable under the IT Act and not includible in the net wealth under the WT Act. Therefore,
without proper information, the assessing authority cannot reopen the assessment. In the present case, the IAC in a memorandum directed the
assessing authorities to reopen the assessments and make fresh assessment. It is no doubt true that generally only the internal audit party would
point out the mistake committed by the assessing authority and direct the assessing authorities to reopen the assessment for making fresh
assessments, in accordance with law. In the present case, the IAC in his memorandum directed the assessing authorities to reopen the assessment.
The Tribunal had an opportunity of going through the memorandum issued by the IAC. On such perusal, the Tribunal found that the directions
given by the IAC are nothing but interpretation of law applicable on points arising in this case and a direction was also given to reopen the
assessment so as to enable the assessing authorities to make fresh assessments.
The Supreme Court in Indian and Eastern Newspaper Society, New Delhi Vs. Commissioner of Income Tax, New Delhi, held that the internal
audit party can merely point out the law and cannot interpret the same. If the law is interpreted by the internal audit party, then that would not
constitute information so as to enable the assessing authority to reopen the assessment under s. 147(b) of the IT Act, 1961. But, in the present
case, it is the IAC, who is superior to the assessing authorities, issued direction to reopen the assessment by interpreting the law on this point. Even
assuming that the superior authorities can point out the mistake committed by the assessing authority and direct him to reframe the assessment by
applying the correct law on the point, but, in the present case, inasmuch as the IAC has interpreted the law on the subject and directed the
assessing authorities to reopen the assessments on that basis, which would be directly hit by the decision of the Supreme Court reported in Indian
and Eastern Newspaper Society, New Delhi Vs. Commissioner of Income Tax, New Delhi, .
In in the case of Munna Lal and Sons Vs. Commissioner of Income Tax, , the Allahabad High Court held that a proceeding or remarks of the
IAC could not constitute information within the meaning of s. 147(b) of the IT Act, 1961. Therefore, the reopening of the assessment was not
valid.
A similar view was taken by this Court in G.K. Devarajulu Naidu Vs. Commissioner of Income Tax, Madras, .
In the case of Bireswar Sarkar Vs. Gift Tax Officer and Others, , the Calcutta High Court held that notice issued by the IAC instructing to
reopen the assessment is not valid information, so as to enable the AO to reopen the assessment.
In the case of Arvind Kumar and Another Vs. Income Tax Officer, , the Madhya Pradesh High Court held that a letter from IAC pointing out
omission would constitute information under s. 147(b) of the Act.
Inasmuch as the Tribunal being the highest fact-finding authority, after perusing the memorandum issued by the IAC, came to the conclusion
that the IAC has interpreted the law and directed the assessing authority to reopen the assessment, it is not possible to come to a different
conclusion as suggested by the learned standing counsel for the Department that the IAC has merely pointed out the law and not interpreted the
law. In view of the foregoing reasons, we consider that the order passed by the Tribunal in the case of both the assessees appears to be in order.
In that view of the matter, we answer the question referred to us in the affirmative and against the Department. No costs.