Commissioner of Income Tax vs Distributors (Baroda) (P) Ltd.

P.D. Desai, J.—The familiar question, namely, whether the power to reassess escaped income was validly exercised, raises its head again in this Reference which relates to assessment year 1966-67, the corresponding previous year being calendar year 1975.

The assessee, a Private Limited Company, carried on business as a dealer in shares. It also derived dividend income from investment in shares. The original assessment was duly completed and in the course of the said assessment deduction of tax on intercorporate dividend was allowed u/s. 85-A from gross dividend income. As a result of the audit report made by the competent authority the Income Tax Officer initiated proceedings for reassessment u/s. 147(b) of the Income Tax Act, 1961 (hereinafter referred to as ''the Act'') on the ground that deduction of tax on intercorporate dividend should have been given not from the gross dividend income but from the net dividend. Upon receipt of the notice u/s. 148 the assessee objected to the initiation of the reassessment proceedings, inter alia, on the ground that it was not competent. The Income Tax Officer overruled the objections of the assessee and while recomputing the income he withdrew the excess rebate allowed u/s. 85A in the course of the original assessment proceedings.

On appeal, the Appellate Assistant Commissioner upheld the contention of the assessee that all the facts which were before the Income Tax Officer when he initiated the reassessment proceedings existed at the time of the original assessment and that, therefore, the provisions of S. 147(b) were not applicable. He also upheld the further objection of the assessee that an audit note in respect of a completed assessment could not be construed as information which could lead to the reopening of the assessment u/s. 147(b). The Appellate Commissioner observed :

"There are no few facts or any new information in the possession of the I.T.O. which would entitle him to invoke the provisions of S. 147."

In the light of these findings the Appellate Assistant Commissioner came to the conclusion that the action initiated u/s. 147(b) was wholly without jurisdiction and bad in law. The Appellate Assistant Commissioner, however, did not rest his order merely on this ground. He also went into the merits of the case and held that deduction of tax on intercorporate dividend could be claimed u/s. 85A from the gross and not net dividend income, as held by the Income Tax Officer. Even on merits, therefore, the Appellate Assistant Commissioner allowed the objection of the assessee. Consequently, the order made by the Income Tax Officer was set aside.

On further appeal, the Tribunal reversed the decision of the Appellate Assistant Commissioner on merits in view of the subsequent decision of this Court in Addl. C.I.T. vs. Cloth Traders (P) Ltd. wherein the view has been taken that tax rebate u/s. 85A can be claimed only from net dividend income and not gross dividend income. On the question of the validity of the reassessment proceedings u/s. 147(b), however, the Tribunal confirmed the view of the Appellate Assistant Commissioner. It held that the "information" with regard to the excess rebate wrongly allowed under S. 85A having come to the notice of the Income Tax Officer as a result of the audit report made by the competent authority, there was no ''information'' in the eye of law which could warrant the initiation of proceedings u/s. 147(b). In taking this view the Tribunal followed the decision of this Court in Kasturbhai Lalbhai vs. R. K. Malhotra, I.T.O. wherein this Court has taken the view that the audit Department was not an authority competent and authorised to declare the correct state of law or to pronounce upon it and that, therefore, the Income Tax Officer could not have re-opened the assessment in that case on the basis of audit report which had pointed out to him the true interpretation of a provision of the Act. In the light of its latter finding the Tribunal upheld the ultimate decision of the Appellate Assistant Commissioner.

At the instance of the Revenue, the Tribunal has referred to this Court the following question of law for its opinion :

"Whether on the facts and in the circumstances of the case, for the assessment year 1966-67, the Income Tax Appellate Tribunal was justified in law in holding that audit report did not constitute information within the meaning of S. 147(b) of the Income Tax Act, 1961, for initiation of proceedings u/s. 147(b) and the assessment made in pursuance thereof is ab initio void ?"

We have recently had an occasion to consider a similar question in Income Tax Reference No. 14 of 1975 decided on August 1, 1977. In that case, the Income Tax Officer, in the course of the original assessment proceedings, allowed as a permissible deduction certain amounts which were paid to the partners of the assessee firm as and by way of interest. After the completion of the assessment, the Audit Department pointed out that by virtue of the provisions of S. 40(b) of the Act, the claim for deduction of the amounts of interest paid to the partners ought not to have been allowed. The I.T.O. thereupon initiated proceedings for reassessment under S. 147(b) and the matter ultimately came upto High Court by way of reference. After reviewing some of the leading cases having a bearing on this aspect starting from the decision of the Supreme Court in C.I.T. vs. A. Raman & Co. and ending with the decision of this Court in Income Tax Reference No. 82 of 1974 decided on June 21, 1977, we hold that the true legal position which has now been settled appeared to be as follows :- (1) that "information" means instructive knowledge concerning a matter bearing on the assessment received after the completion of the original assessment; (2) that "information" may be as to the correct state of facts or law relating to the taxable income; (3) that such "information" must be capable of arousing or suggesting ideas or notions not before existent in the mind of the Income Tax Officer; (4) that it must be of such a nature as to acquaint, enlighten or instruct the mind of Income Tax Officer for the first time concerning a matter pertaining to the taxable income so that he could form a reasonable belief that there has been an escapement of assessment of tax which requires to be set right by taking steps for reopening the assessment : (5) that mere change of opinion on the part of the Income Tax Officer would not be sufficient and it would not constitute "information" : (6) that "information" as to any fact bearing on the assessment may be received from any external source, that is to say, from any person who knows the fact, or it may be obtained even from the record of the original assessment proceedings; and (7) that information not amounting to change of opinion as to the correct state of law may be received from research of law made by the Income Tax Officer or it may be received from an external source; if however, "information" as to the correct state of law is received from an external source, it must be derived from the judicial decision of a person, body or authority competent and authorised to pronounce upon the law. Applying those tests to the case before us we came to the conclusion in that case that it was not disputed that reassessment proceedings were there started solely and exclusively on the basis of the report of Audit Department which drew the attention of the Income Tax Officer to the correct state of law and that such information was not derived by the Income Tax Officer himself from any research made by him or from any judicial decision of a competent authority. We held that in view of the decision of this Court in Kastur Bhai Lalbhai''s case, such report would not constitute "information" within the meaning of S. 147(b) upon which the Income Tax Officer could have initiated proceedings for reassessment. Under the circumstances, we found that the case was one not of receiving "information" within the meaning of S. 147(b) as understood and explained and that under such circumstances the Income Tax Officer could not have initiated proceedings for reassessment.

This decision, in our opinion, delivered in circumstances which are identical with the circumstances found in the present case, must govern the determination of the question referred to us. In the present case, as in that case, the finding of the Tribunal is that the information on which the Income Tax Officer acted and initiated reassessment proceedings was derived from of the audit report made by the competent authority. Not only is this a clear finding recorded by the Tribunal but the question with which we are concerned itself proceeds on the footing that such in fact was the case. The question referred to us in terms wants us to express our opinion on the question whether the Tribunal was justified in law in holding that the audit report did not constitute "information" within the meaning of S. 147(b). The very assumption underlying this question is that the information on which the Income Tax Officer in the present case initiated reassessment proceedings constituted solely and exclusively of the audit report. It would thus appear that there can be no escape from the conclusion that having regard to our decision in Income Tax Reference No. 14 of 1975, the answer to the question referred to us in this case must be in the affirmative.

It was strenuously contended on behalf of the Revenue that this case is distinguishable from the said case because all that had happened here was that the audit report had merely drawn the attention of the Income Tax Officer to an apparent error of law committed by him in the application of S. 85A and that the Income Tax Officer had thereafter on his own research initiated the reassessment proceedings. We are afraid that the superstructure of this whole argument is without any foundation. Not only does this argument fly in face of the finding recorded by the Tribunal but it also ignores the assumption underlying the formulation of the question and there is also no material on record in support of such a contention. Having regard to this factual position, we are not called upon to go into the question as to whether, when the attention of an Income Tax Officer is drawn by the audit report to an apparent error of law committed by him in the course of the original assessment proceedings and he thereafter on his own research for the first time feels satisfied that there was, in fact, such a mistake committed by him, the Income Tax Officer could initiate proceedings for reassessment under S. 147(b). It is a question which will have to be dealt with as and when it arises in the facts found in a given case in the light of the well-settled legal position.

It may be pointed out in this connection that as observed in C.I.T. vs. Simon Carves Ltd. there is necessarily an element of error in cases of income escaping assessment mentioned in S. 147(b). However, it is not every such error which could be corrected in the reassessment proceedings on a mere change of opinion. It is only when such error resulting in income escaping assessment becomes manifest in the light of information coming subsequently into the possession of the Income Tax Officer that the case would fall within the ambit of S. 147(b). It would be a question of fact in each case whether the order making the original assessment was a legally correct order and was not vitiated by any error at the point of time when it was made or whether it was an order which was at its inception an incorrect order and was vitiated by an error or law which came to be subsequently discovered in the permissible manner. The note of caution sounded in Simon carve''s case makes it amply clear that it is not open to the Income Tax Officer ordering reassessment to substitute his own opinion on a particular aspect which has been subjected to scrutiny by the Income Tax Officer who made the original assessment. If the order which the Income Tax Officer, who completed the original assessment, made was a legally correct order and it was not vitiated by any error which subsequently came to light in a permissible manner, the mere fact that as a result of the view taken by him tax liability of the assessee was reduced, would not justify the reopening of the assessment.

In the present case, as earlier pointed out, the Income Tax Officer in the course of the original proceeding could not have allowed rebate on the inter-corporate dividend income unless he had resort to S. 85A and applied his mind to the same.It may be that his view as to the provision of the said section was subsequently found to be incorrect and that his attention was drawn to the same by the audit report. However, the mistake being a mistake of law, turning upon the true interpretation of S. 85A, any information from an external source as to such mistake should have come to him from the relevant judicial decision either of the Income Tax Authorities or other Courts of law which decide the Income Tax matters and not from an audit note. The Audit Department is not competent to advise the Income Tax Officer to discharge his quasi-judicial functions on matters of law and it is not open to the Income Tax Officer to set upon the ipse dixit of such report and to initiate proceedings for reassessment. Such a case in substance and effect would be a case merely of change of opinion. Whether or not he could have initiated reassessment proceedings even in the present case had he made further research into the law and derived some fresh light from such research pursuant to the audit report is a question on which, as earlier stated, we pronounce no opinion, because on the facts of this case, such a situation does not arise. The question, which requires deeper examination in the light of the well-settled legal position will be dealt with as and when it arises in appropriate circumstances and on findings of facts properly recorded by the authorities.

The foregoing discussion would show that we are of the view that the Tribunal was right in law in holding that in the facts and circumstances of the case the audit report did not constitute "information" within the meaning of S. 147(b) upon which the Income Tax Officer could have initiated reassessment proceedings in the present case. Accordingly, we answer the question referred to us in the affirmative, that is to say, in favour of the assessee and against the Revenue. The Commissioner will pay the costs of this Reference to the assessee.