1979 (8) TMI 1 - SC - Income Tax

Reopening of assessment u/s 147 - Can the view expressed by an internal audit party of the income-tax department on a point of law be regarded as information for the purpose of initiating proceedings under s. 147(b)? - Whether ITO was legally justified in reopening the assessments on the basis of the view expressed by the internal audit party and received by him subsequent to the original assessment - question referred by Tribunal is answered in the negative, in favour of the assessee

Issues Involved:
1. Whether the view expressed by an internal audit party of the income-tax department on a point of law can be regarded as "information" for the purpose of initiating proceedings under Section 147(b) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Definition and Scope of "Information" under Section 147(b):
The core issue in the judgment revolves around the interpretation of "information" as mentioned in Section 147(b) of the Income Tax Act, 1961. The court examined whether the opinion of an internal audit party on a point of law could be considered "information" for reopening assessments.

The court clarified that "information" under Section 147(b) includes both facts and law. It cited previous judgments, including Maharaj Kumar Kamal Singh v. CIT [1959] 35 ITR 1 (SC) and CIT v. A. Raman & Co. [1968] 67 ITR 11 (SC), which defined "information" as instruction or knowledge derived from an external source concerning facts or particulars, or as to law, relating to a matter bearing on the assessment.

2. Nature and Scope of Internal Audit Reports:
The court delved into the nature and scope of the functions of an internal audit party. It emphasized that the primary role of the internal audit organization within the income-tax department is to check the arithmetical accuracy of income computations and tax determinations, and to identify errors before records are scrutinized by the Comptroller and Auditor-General of India.

The court noted that the internal audit party performs administrative or executive functions and does not possess judicial or quasi-judicial authority to declare or interpret the law. Therefore, the opinion of the internal audit party on legal matters cannot be considered binding or authoritative.

3. Communication of Law vs. Declaration of Law:
The judgment distinguished between the source of law and its communication. While law must be enacted or declared by competent legislative or judicial authorities, its communication can be done by anyone. The court made it clear that the audit party's role is limited to drawing the attention of the Income Tax Officer (ITO) to the law, but not to declare or interpret it.

4. Reassessment Based on Audit Party's Opinion:
The court held that the opinion of the internal audit party regarding the application or interpretation of law does not constitute "information" under Section 147(b). It emphasized that the ITO must independently determine the effect and consequence of the law mentioned in the audit note and form a reasonable belief that income has escaped assessment.

The court also referred to the case of Kalyanji Mavji & Co. v. CIT [1976] 102 ITR 287 (SC), where it was observed that an error discovered on reconsideration of the same material does not empower the ITO to reopen the assessment under Section 147(b).

5. Review of Previous Judgments:
The court reviewed several judgments, including R. K. Malhotra, ITO v. Kasturbhai Lalbhai [1977] 109 ITR 537 (SC), where the opinion of the audit party was considered "information". The court disagreed with this view, stating that the audit party's opinion does not hold the status of law and cannot be treated as "information" for the purpose of reopening assessments.

The court also examined other cases such as CIT v. H. H. Smt. Chand Kanwarji [1972] 84 ITR 584 (Delhi) and CIT v. Kelukutty [1972] 85 ITR 102 (Ker), and concluded that the views taken by the Delhi and Kerala High Courts were incorrect.

Conclusion:
The Supreme Court held that the opinion of an internal audit party of the income-tax department on a point of law cannot be regarded as "information" within the meaning of Section 147(b) of the Income Tax Act, 1961. The question referred by the Income-tax Appellate Tribunal was answered in the negative, in favor of the assessee and against the revenue. The assessee was entitled to one set of costs in these appeals.

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