Sec.147(b)-Ambit of word 'Information'. - Income Tax - 1344/CBDT

INSTRUCTION NO. 1344/CBDT Dated: August 7, 1980 In the case of Indian and Eastern Newspapers society, the supreme court held that the opinion of the IAP of the I.T.Department on a point of law cannot be regarded as information within the meaning of sec.147(b) of the I.T.Act. This judgement which considered the courts earlier decision in R.K.Malhotra vs. Kasturbhai Lalbhai(109 ITR 537) has made important observations on (i) the role of the Internal and Receipt Audit, and (ii) the scope of the expression information in sec.147(b) of the I.T.Act. 2. Some of the important observations made by the Supreme court in this case are reproduced below:- i) When sec.147(b) of the I.T.Act is read as referring to information as to law what is contemplated is information as to the law created by a formal source. It is law, we must remember which because to issues from a competent legislature or a competent judicial or quasi-judicial authority, influences the source of the assessment and decides any one or more of those matters which determine the assessees tax liability. ii) In every case, therefore to be law, it must be a creation by a formal source either legislative or judicial authority. A statement by a person or body not competent to create or define the law cannot be regarded as law. iii) Whether it is the internal audit party of the I.T.Department or any audit party of the C AG they perform essentially administrative or executive functions and cannot be attributed the power of judicial supervision over the quasi-judicial acts of the Income-tax authorities. iv) While the law may be enacted or laid down only by a person or body with authority in that behalf the knowledge or awarness of the law may be communicated by anyone. v) That part of the note of an audit party which mentions that law alone constitutes information within the meaning of sec.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 ITO. In every case the ITO 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. In short the true evaluation of the law in its bearing on the assessment must be made directly and solely by the ITO. 3. The board considered certain issues arising out of the supreme court judgement. They have been advised as under: i) Opinion of an audit party in regard to the application or interpretation of law cannot constitute information for the purpose of re-opening an assessment u/s.147(b). However if the audit objection Communicates law created by legislature or by a judicial or quasi-judicial authority it will constitute information. ii) The decision in R.K.Malhotra vs. Kasturbhai Lalbhai (109 ITR 537) has been over-ruled by the supreme court in I.E.N.S judgement(119 ITR 996) iii)The instructions/circulars issued by the board similarly cannot constitute information within the meaning of sec.147(b). If the instructions/circulars communicate law, on the analogy of the communication of law by an audit party they would constitute information. iv) change in the legal position made by a retrospective amendment of law is information u/s.147(b). v) A decision of the supreme court or a high court will constitute information for the purpose of sec.147(b), if the ITO was ignorant of the said decision. 4. In view of the above, the following guidelines are issued to the assessing officers for taking remedial action wherever it is decided to give effect to audit objections(both Internal and Receipt Audit):- a) Where the objections point obvious mistakes which are apparent from record, such mistakes can be rectified u/s.154. b) The information for the purpose of sec.147(b) falls in two categories namely i) factual information and ii) information relating to the state of law. So far as factual information is concerned the position continues to remain the same except that as per supreme courts judgement in the I.E.N.S. case action u/s.147(b) will not lie in a case where an error is discovered on a reconsideration of the same material already considered by the ITO at the time of the original assessment. As regards information relating to the state of law, it is only if the knowledge or awarness of the law is communicated by the Audit that it will constitute information. c) It is emphasised that while recording reasons for reopening the assessment su/s.147(b) the ITO should not treat the Audit objection itself as information but the facts or the law of which he has now become aware as a result of the audit objection, should be recorded as his reasons to believe that income has escaped assessment. d) Where it is decided to take remedial action as a result of an audit objection but it is not possible to take recourse to section 154 or sec.147 it should be examined whether remedial action is possible u/s.263 and if so a proposal to this effect should be sent to the CIT immediately. Where no remedial action is at all possible, u/s.154,147 and 263 and the point raised in the audit objections is valid and applicable in the pending assessments such assessments may be completed taking into account the points raised in the audit objection and Internal/Receipt Audit informed accordingly. 5. Since there are definite time limits for taking action u/s. 263,147(b) and 154 it is absolutely necessary that audit objections, especially the major ones which are later converted into draft paras for inclusion in the Audit report are examined expeditiously. 6. The Boards instructions contained in Instruction No.1179 dated 23-5-78 following the earlier decision of the supreme court in Kasturbhai Lalbhai are hereby cancelled. 7. As regards assessments which were re-opened u/s.147(b) after the receipt of the boards Instruction No.1179 dated 23-5-78 and which are still pending, the ITO should re-examine the contents of the audit objections in the light of what is stated above and decide whether the re-assessment should be completed or dropped. If it is decided to complete the re-assessments, the ITO should emphasise in the assessment order the facts, or the law, of which he became aware as a result of the audit objection. If he feels that re-assessment proceedings need to be dropped, he should do so only taking prior approval of the Inspecting ACIT. While doing so it may also be examined whether it is possible to take action u/s.154 or sec.263 or even to re-initiate the proceedings u/s.147(b) after recording proper reasons.