1985 (3) TMI 55 - HC - Income Tax

Summary

Issues Involved:
1. Validity of reopening assessment proceedings under section 147(b) of the Income Tax Act, 1961.
2. Validity of reopening assessment proceedings under section 8 of the Surtax Act for the assessment years 1965-66 and 1966-67.

Issue-wise Detailed Analysis:

1. Validity of reopening assessment proceedings under section 147(b) of the Income Tax Act, 1961:

The primary issue was whether the Income Tax Officer (ITO) validly reopened the assessment proceedings under section 147(b) of the Income Tax Act, 1961 for the assessment years 1965-66 and 1966-67. The ITO had originally allowed a rebate under section 84 by including half the profits accrued during the respective years in the capital computation. Following an audit inspection, the ITO concluded that this inclusion was incorrect and reopened the proceedings to reduce the rebate.

The Tribunal held that the case involved merely an interpretation of sub-rule (5) of rule 19 of the Income Tax Rules and that information regarding a position of law had to come from a person vested with the authority to decide questions of law. The Tribunal concluded that an audit note could not be considered "an authority on law or on a proper interpretation of the legal provisions" and thus, there was no valid information for reopening the proceedings under section 147(b).

The Tribunal's decision was supported by the Supreme Court's ruling in Indian & Eastern Newspaper Society v. CIT [1979] 119 ITR 996, which stated that an audit party's opinion on a point of law could not be regarded as "information" enabling the ITO to initiate reassessment proceedings under section 147(b). The Tribunal found that the audit note merely pointed out an error in the application of rule 19(5), which was a matter of legal interpretation and not new factual information.

2. Validity of reopening assessment proceedings under section 8 of the Surtax Act for the assessment years 1965-66 and 1966-67:

The reopening of the surtax assessments was based on the same grounds as the reopening under section 147(b) of the Income Tax Act. The Tribunal referred to the statement of the case under the Income Tax Act proceedings and noted that the surtax proceedings were reopened solely because the regular assessment proceedings were reopened.

The Tribunal's supplementary statement of the case included extracts from the ITO's records, showing that the ITO initially contemplated rectification proceedings under section 154 but later decided to reopen the proceedings under section 147(b). The audit report indicated that the ITO had granted excess relief under section 84 due to errors in the computation of capital, which necessitated recomputation for surtax purposes as well.

The Tribunal concluded that the audit note pointed out an error in the application of sub-rule (5) of rule 19, which could not be treated as information for the purpose of section 147(b). The Tribunal's decision was consistent with the Supreme Court's ruling in Indian & Eastern Newspaper Society v. CIT, which emphasized that an error discovered on reconsideration of the same material does not constitute fresh information.

Conclusion:

The High Court upheld the Tribunal's view, agreeing that the audit note's indication of an error in the application of rule 19(5) was a matter of legal interpretation and not fresh factual information. Consequently, the reopening of the assessments under section 147(b) of the Income Tax Act and section 8 of the Surtax Act was deemed invalid. The questions referred to the court were answered in the affirmative and in favor of the assessee, with costs awarded to the assessee.