1977 (8) TMI 48 - HC - Income Tax

Summary

Issues Involved:
1. Validity of reassessment under section 147(b) of the Income-tax Act, 1961.
2. Definition and scope of "information" under section 147(b).
3. Role of audit reports in constituting "information" for reassessment.

Issue-wise Detailed Analysis:

1. Validity of reassessment under section 147(b) of the Income-tax Act, 1961:

The court examined whether the reassessment proceedings initiated by the Income-tax Officer (ITO) for the assessment years 1966-67, 1967-68, 1968-69, and 1969-70 were valid under section 147(b) of the Income-tax Act, 1961. The ITO had reopened the assessments based on the audit department's report, which pointed out that the interest paid to partners should not have been allowed as a deduction under section 40(b) of the Act. The assessee contended that the reassessment was not valid as the original assessments were completed on merits.

2. Definition and scope of "information" under section 147(b):

The court elaborated on the definition and scope of "information" under section 147(b) by referring to several precedents:

- Commissioner of Income-tax v. A. Raman and Co. [1968] 67 ITR 11 (SC): "Information" must mean "instruction or knowledge derived from an external source concerning facts or particulars, or as to law relating to a matter bearing on the assessment." Mere change of opinion on the part of the ITO cannot constitute "information."

- Kasturbhai Lalbhai v. R. K. Malhotra, Income-tax Officer [1971] 80 ITR 188 (Guj): This case examined the ratio in A. Raman and Co.'s case and held that "information" as to the correct state of law must come from a competent and authorized external source. The audit department was not such an authority.

- Bai Aimai Gustadji Karaka v. Gift-tax Officer [1975] 99 ITR 257 (Guj): Reaffirmed that mere change of opinion does not constitute "information." "Information" must be derived from an external source with some authenticity.

- Kalyanji Mavji & Co. v. Commissioner of Income-tax [1976] 102 ITR 287 (SC): Laid down that "information" could be derived from judicial decisions, oversight, inadvertence, or mistakes in the original assessment, or from new facts discovered later.

3. Role of audit reports in constituting "information" for reassessment:

The court scrutinized whether the audit report could be considered "information" under section 147(b). The audit department had pointed out that the interest paid to partners should not have been allowed as a deduction under section 40(b). However, following the precedents set in Kasturbhai Lalbhai's case and Kalyanji Mavji & Co.'s case, the court held that the audit department was not a competent authority to declare the correct state of the law. Therefore, the audit report did not constitute "information" within the meaning of section 147(b).

Conclusion:

The court concluded that the reassessment proceedings initiated by the ITO were not justified. The "information" received from the audit report did not meet the legal standards set by previous judgments. The reassessment was based on a mere change of opinion, not on new "information" as required under section 147(b). Thus, the Tribunal's decision to invalidate the reassessment was upheld. The question referred to the court was answered in the negative, in favor of the assessee and against the revenue. The Commissioner was directed to pay the costs of the reference to the assessee.