1980 (2) TMI 50 - HC - Income Tax

Summary

Issues Involved:
1. Validity of the notice under Section 148 of the Income Tax Act, 1961.
2. Interpretation of "information" under Section 147(b) of the Income Tax Act, 1961.
3. Audit objections concerning Section 40A(7) (gratuity), extra shift depreciation allowance, Section 80J (new industrial undertaking), and Section 80M (inter-corporate dividends).

Issue-wise Detailed Analysis:

1. Validity of the Notice under Section 148:
The petitioner, a limited company, challenged the notice issued under Section 148 of the Income Tax Act, 1961, by the Income Tax Officer (ITO) proposing to reopen the assessment for the assessment year 1975-76. The notice was issued on February 23, 1978, on the basis that the petitioner's income chargeable to tax had escaped assessment. The court found that the notice was based on audit objections which did not constitute "information" as required under Section 147(b). Consequently, the notice was deemed illegal and void.

2. Interpretation of "Information" under Section 147(b):
Section 147(b) allows the ITO to reassess income if he has "information" that income has escaped assessment. The Supreme Court in Indian and Eastern Newspaper Society v. CIT [1979] 119 ITR 996 clarified that "information" must be derived from an external source concerning facts or law. The court emphasized that "information" must come from a formal source such as legislative or judicial authority, not merely from an internal audit party's interpretation.

3. Audit Objections:

a. Section 40A(7) (Gratuity):
The audit party's objection was based on its own interpretation of Section 40A(7) rather than any formal expression of law. The court held that since the audit party did not provide any new factual information or authoritative legal interpretation, this did not constitute "information" under Section 147(b).

b. Extra Shift Depreciation Allowance:
The audit party objected based on its interpretation of a circular issued by the Central Board of Direct Taxes (CBDT). The court noted that the audit party refused to follow CBDT orders and did not present any legislative or judicial pronouncement. Therefore, there was no "information" for the ITO to act upon under Section 147(b).

c. Section 80J (New Industrial Undertaking):
The audit party questioned whether the Naphthalene Intermediate Plant (NIP) Expansion unit qualified as a new industrial undertaking under Section 80J. The court found that the audit party did not provide any new factual information. The ITO had already considered relevant Supreme Court decisions in the original assessment. Therefore, the audit objection did not constitute "information" under Section 147(b).

d. Section 80M (Inter-Corporate Dividends):
The audit party suggested a method to allocate interest expenses to investments for calculating deductions under Section 80M. The court found that this was a matter of legal interpretation without reference to any authoritative source. Thus, it did not qualify as "information" under Section 147(b).

Conclusion:
The court concluded that none of the audit objections provided "information" within the meaning of Section 147(b) as interpreted by the Supreme Court. Consequently, the condition precedent for exercising powers under Section 147(b) was absent. The notice dated February 23, 1978, was quashed, and the respondent was restrained by permanent injunction from giving effect to the said notice. The special civil application was allowed with costs.