Commissioner of Income Tax vs Sant Ram Mangat Ram

M.M. Kumar, J.—At the instance of the revenue the Income Tax Appellate Tribunal, Chandigarh Bench, Chandigarh (''the Tribunal'') has referred the following question of law for determination of this Court by exercising jurisdiction u/s 256(1) of the Income Tax Act, 1961 (hereinafter referred to as ''the Act), which is stated to have emerged from order dated 8-1-1992, passed in ITA No. 408/Chandi./88, in respect of assessment year 1981-82:

Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in law to hold that the reassessment proceedings initiated in the case of the assessee in relation to assessment year under reference, are ab initio void?

Brief facts of the case are that the assessee-firm is engaged in the business of purchase and sale of gold, silver and diamond ornaments. The assessee-firm is stated to have been dissolved on 30-7-1980. One of the partner Shri Pawan Kumar Jain took over the business and assets on book value. For the assessment year 1981-82, the assessment of the assessee-firm was completed on 31-3-1983 by adopting the value of the closing stock at the original cost price, which was the method adopted by the firm. On 30-7-1980, the partnership ceased to exist and a proprietary concern came into existence. The closing stock of the assessee-firm on the dissolution was valued at cost price of Rs. 4,92,347. The assessing officer, how ever, found that it should have been valued at market price, which was Rs. 10,80,390. The difference of income was added to the income of the assessee and since it has escaped assessment within the meaning of Section 147(&) read with Section 148 of the Act. The assessing officer reframed the assessment by initiating proceedings u/s 147 of the Act and issued notice u/s 148 on 18-2-1986. The assessee filed return in response to that notice on 9-2-1987 showing total income at Rs. 15,088. It was pleaded in response to the notice that neither the Partnership Act, 1932 nor the Act provides as to how closing stock has to be dealt with. However, reliance was placed on Section 46 of the Partnership Act, 1932.

On appeal before the Commissioner (Appeals), the order passed by the assessing officer was upheld by holding that the closing stock of the assessee-firm as on the date of dissolution was required to be valued at market rate and not on the basis of the costs shown in the assessee''s books of account. On further appeal, the Tribunal held that the assessment could not be reopened merely upon the advise of the audit party because it would amount to change in opinion. The view of the Tribunal is discernible from the following observation:

2 ...In fact in the impugned assessment order made u/s 143(3) on 25-3-1987 read with Section 147(b) in para 2 he has frankly admitted that the case regarding valuation of closing stock of a partnership firm in the event of dissolution was referred to the Ministry of Law and it was opined by the Ministry that neither the Partnership Act nor the Income Tax Act, 1961 contain the specific provisions as to how closing stock has to be dealt with. This clearly shows a change of opinion from the opinion taken in the assessment made on31 -3-1983 by an officer who was different from the Officer who completed the impugned assessment. Such change of opinion cannot justify the re-assessment proceedings. It is also well settled now that the Income Tax Officer cannot merely act upon the advice of audit party and he has to inconsequence of information in his possession come to a judicial finding that income chargeable to tax has escaped assessment despite the fact that there was no failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment.

Taking into consideration the documents field before us including the dissolution deed of partnership and the orders of the authorities below, we are of the opinion that the re-assessment proceedings are ab initio. These are cancelled. Status quo ante restored.

After hearing learned Counsel at some length, we find that the matter is no longer res Integra. The question has been considered by the Hon''ble Supreme court in the case of Indian and Eastern Newspaper Society, New Delhi Vs. Commissioner of Income Tax, New Delhi, , wherein following observations have been made:

The opinion of an internal audit party of the Income Tax department on apoint of law cannot be regarded as "information1'' within the meaning of Section 147(b) of the Income Tax Act, 1961, for the purpose of reopening an assessment. But although an audit party does not possess the power to pronounce on the law, it nevertheless may draw the attention of the Income Tax Officer to it. Law is one thing, and its communication another. If the distinction between the source of the law and the communication of the law is carefully maintained, the confusion which often results in applying section \\47(b) may be avoided. While the law may be enacted or laid down only be a person or body with authority in that behalf, the knowledge or awareness of the law may be communicated by anyone. No authority is required for the purpose. That part alone of the note of an audit party which mentions the law which escaped the notice of the Income Tax Officer constitutes ''information'' within the meaning of Section 147 ( b); the part which embodies the opinion of the audit party in regard to the application or interpretation of the law cannot be taken into account by the Income Tax Officer. In every case, the Income Tax Officer must determine for himself what is the effect and consequence of the law mentioned in the audit note and whether in consequence of the law which has now come to his notice he can reasonably believe that income has escaped assessment. The basis of his belief must be the law of which he has now become aware. 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 Income Tax Officer.

The aforementioned view as also been followed and applied by a Division Bench of Gujarat High Court in the case of Adani Exports Vs. Deputy Commissioner of Income Tax, .

In view of above enunciation of law, we have no hesitation in answering the question against the revenue and in favour of the assessee.