INDIAN AND EASTERN NEWSPAPER SOCIETY, NEW DELHI v. COMMISSIONER OF INCOME TAX, NEW DELHI (2)

Citation: [1980] 1 S.C.R. 442

Court: Supreme Court of India

Bench: P.N. BHAGWATI, V.D. TULZAPURKAR, R.S. PATHAK

Case summary

The assessee applied for a reference, and having t regard to the difference between the High Courts on the point, the Tribunal has considered it expedient to refer the following question of law directly to this Court:- • "Whether, on the facts and in the circumstances ·of the...

Judgment text

INDIAN AND EASTERN NEWSPAPER SOCIETY. NEW DELHI v. COMMISSIONER OF INCOME TAX, NEW DELHI ,. August 31, 1979 [P. N. BHAGWATI, V. D. TuLZAPURKAR AND R. S. PATHAK, JJ. ] Income Tax Act 1961--S. 147(b)--Scope of-"Information" "Reason to believe"-Meaning of-Opinion of audit party of Income Tax Department-If would comtitute "information". Section 147(b) of the Income Tax Act, 1961 provides that if an Income Tax Officer has, in consequence of information in his possesaion, reason to believe that income chargeable to tax has escaped assessment for any asc;essment year, he may assess or re~s such income. l he internal audit organisation of the income tax department, in the course of auditing the income tax records pertaining to the assessee for certain assessment. years stated that the assessee's in. come on account of letting out of halls and rooms should not have been assessed as income from business but an asses! - -ment should have been niade uiider the head "Income from property".

Treating the report as,information in his possession under s. 147(b) the Income Tax Officer re-t:lSseSsed the assessee's income. The Appellate Assistant ·Com. mi. 1sioner reversed th~ Income Tax Officer's order. On the other band, the Appellate Tribunal took the view that the Income Tax Officer bad jurisdiction to proceed under s. 147(b). In a reference under s. 257 of the Income Tax Act the question was whether the Income Tax Officer was legally justified in reopening the assessment under s. 147(b) on the basis of the view expressed by the Internal Audit party received by him subsequent to the original assessment. Allowing tho appeal, HELD : The opinion of the internal audit organization of the Department on a point of law cannot be regarded as information within the meaning r. f s. 147(b) of the Act. [455A]. 1. {a) An assessment proceeding, which is a quasi-judicial proceeding, acquires hnality on the assessment order being made.

The finality of such an order can be disturbed only in proceedings, and within the confines, provided by Jaw. An appeal, revision and rectification are proceedings in which the fin51Jity of the assessment may be questioned. Section 147, under ·which an assessment may be reopened, is a proceeding for assessing income which has f another by the Income Tax Officer is not law because it is not a declaration by a body authorised to declare the law. [450B-F] ' 444 SUPREME COURT ·REPORTS (1980] l S. C. R. 5. While the law may be enacted or laid down only by a body or person with authority in that behalf, knowledge or awareness of the law may be communicated by any one. No authority is required for the purpose of communicating knowledge or awareness of the law. [4500] 6. (a) In every case the Income Tax Officer must determine for himself what the effect and consequence of the law mentioned in the audit note. a.

i-e and whether in consequence of the law which has come to his notice he can reasonably believe that income had escaped assessment. The basis of his belief must be the law of which he has now become aware. The true evaluation of the law in its bearing on the assessment must be made directly and oolely by the Income Tax Officer. [4,lC-Dl Maharai Kamal Singh v. Commissioner of Income Tax 35 I. T. R. 1 (SC)= [1959] SUp. 1 SCR 10, Commissioner of Income Tax v. Raman & Company 67 I. T. R. 11 (SC)=[1968] 1 SCR 10, Banklpur Club Ltd. v. Commissioner of Income Tax [1971] 82 I. T. R. 831 followed. R. K. Malhotra, Income Tax Officer, Group Circle 110), Ahmedabad v. Kasturbhai Lalbhai, 109 I. T. R. 537, Kalyanii Mav;i & Co. v. Commissianer of Income Tax, 102 I. T. R. 287, over-ruled. ASsistant Controller of Estate Duty v. Nawab Sir Mir Osman Ali Khan D Bahadur, 72 I. T. R. 376, referred to. Commissioner of. Income Tax v. H. H. Smt. Chand Kanwarii Alwar 84 I. T.

R 584, Commissioner of Income Tax v. Kalukutty 85 I. T. R. 102, Vashist Bhargava v. Income Tax Officer, 99 I. T. R. 148, Muthukrishna Reddier v. Com; missioner of Inc. ome Tax, Kerala, 90 I. T. R. 503, Raj Kumar Shrawan Kumar v. Central Board of Direct Taxes & Anr. 107 I. T. R, 570, Elgin Mills Co. Ltd. , v. Income Tax Officer, Companies Circle, 'A' Ward, Kanpur, 111 I. T. R. 287 not approved. (b) The error discovered by the Income Tax Officer on a reconsideration of the same material (and nothing n:iore) does not give the Income Tax Offic. er the power to reopen the assessment. [451G) (c) The sllbmission of the Revenue that upon receipt of the audit note the F Income Tax Officer discovers or realises that a mistake has been commi'ted in the original assessment and therefore the discovery of th'e mistake would be "'informaition" within the meaning of s. 147(b) is inconsistent wi1h the terllJS J of the section.

What the section envisages is that the Income Tax Officer must firs• have information in his possession and then in consequence of such infor· mation be must have reason to believe that income has ~aped assessment. The realisation that income has escaped 369CS6ment is covered by the words "reason to believ'C", and it follows from the "information" received by him. The information is not the realisation; the informetion gives birth to the realisation. ' [452C-D] • CIVIL APPELLATE JURJSDICTION : Tax Reference Case Nos. 1 to 4 of 1973. t. D Income Tax Reference under section 257 of Income Tax Act 1961 _}made by I T. Appellate Tribunal Delhi Bench 'C' in R. A. Nos. 491 to 494 of 1971-72 (I. T. A. Nos. 6992, 19629-19631 of 1967-68). IE Ns V, c IT (Pathak, J. ) V S, Desai, (Mrs,) A. M, Verma, A. N. Haskar and J, B. Dadachanji for the appellant. T. A. Ramachandran and Miss A. Subhashini for the respondent. (Dr. ) Devi Pal, Ravinder Narain and J. B, Dadachanji for the Intervener.

\ The Judgment- of the Court was delivered by PATHAK, J,-Can the view expressed by an intern,;! audit party of the Income Tax Department on a point of law be regarded as "information"' for the purpose of initiating proceedings under section 147(b) of the Income Tax Act, 1961? Opinion on the question has been divided among the High Courts, and accordingly the present cases have been referred by the Income-tax Appellate Tribunal under s, 257 of the Act. The assessee, Messrs. Indian and Eastern Newspaper Society, is a society registered under the Indian Companies Act. It is a professional association of newspapers established with the principal object of promoting the welfare and interest of all newspapers, The assessee owns a building in which a conference hall and rooms are let out on rent lo its members as well as to outsiders.

Certain other services are also provided to the members, The income from that source was assessed to tax all along as income from business, It was so assessed for the years 1960-61, 1961-62, 1962-63 and 1963-64 also. 'The Income Tax Department includes an internal audit organisation whose function it is to examine income-tax records and check mistakes made therein with a view ultimately to improve the quality of assessments. In the course of auditing the income-tax records pertaining to the assessee for the assessment years 1960-61 to 1963-64, the internal andit party expressed the view that the money realised by the assessee on account of the occupation of its conference hall and ·-.. , rooms should not have been assessed as income from business. It said that an assessment should have been made under the head "Income from property", The Income Tax Officer treated the contents of the report as "information" in his possession for the purpose of s.

147(b) of the Income Tax Act 1961, and reassessed the income on that basis. The Appellate Assistant Commissioner allowed the appeals filed by the assessee holding, inter alia, that in law it could not be said that the Income Tax Officer had any "information" in his possession enabling him to take action under s. 147(b), On appeal by the Revenue, the Income Tax Appellate Tribunal, Delhi Bench noticed a conilict of judicial opinion on the question whether the internal audit 10-53lSCI/79 report could be treated as "infonnation" for the purpose of s. 147(b). The Gujarat High Court in Kasturbhai Lalbhai v. R. K. ·Malhotra, btcome-tax Officer, Group Circle ll(l), Ahmedabad(') had held that an internal audit report could not be regarded as "information", while the Delhi High Court in Commissioner of Income-tar 2 v. H. H. Smt. Chand Kpnwarji Alwar( ) has expressed a contrary view.

Following the view adopted by the Delhi High Court, the :I Tribunal held that the Income Tax Officer had jurisdiction to proceed under s. 147(b) . The assessee applied for a reference, and having t regard to the difference between the High Courts on the point, the Tribunal has considered it expedient to refer the following question of law directly to this Court:- • "Whether, on the facts and in the circumstances ·of the case, the Income-tax Officer was legally justified in reopening the assessments under section 147(b) for the years • 1960-61, 1961-62, 1962-63 and 1963-64 on the basis of ' the view expressed by the Internal Audit party and received by him subsequent to the original assessment? "' Since then, the judgment of the Gujarat High Court in Kasturbhai Lalbhai's case (supra) has, on appeal, been reversed . by this Court in R. K. Malhotra, Income Tax Officer, Group Circle ll(l) Ahmedabad 3 v. Kasturbhai Lalbhai( ).

It has been strenuously contended that the view taken by this Court calls for further consideration. Having regard to the dimensions of the controversy and the importance of the question, we have· been persuaded to take a fresh look at the point. An assessment proceeding is a quasi judicial proceeding. I( acquires finality on the assessment order being made. And the finality of such an order can be disturbed only in proceeding, and within •• the confines provided by law. An appeal, revision and rectification are proceedings in which the finality may be questioned. The assessment may also be reopened uuder section 147 of the Act. It is a proceeding for assessing income which has "escaped assessment". Section 147 reads:- ' I "147. If- (a) the Income. Tax Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under section 139 for any (I) 80 I. T. R. ! 88. (2) 84 I. 1'. R. 584. (3) 109 I. T. R. 537 (S. C. ). I E N s v.

c IT (Pathak, !. ) 44 '] assessment year to the Income Tax Officer or to dis- 'close fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, or . (b) notwithstanding that there has been no omission or 8 failure as mentioned in clause (a) on the part of the assessee, the Income-tax Officer has in consequence I of information in his possession reason to believe that '\ .. income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allOwance, as the case may be, for the assess- 1nent year concerned. " In cases falling under section 147(b), the expression "information" pre•cribes one of the conditions upon which a concluded assessment may be reopened under that provision. It is an indispensable ingre- , ection 147(b).

Plainly, the statutory provision envisages that the Income . ( Tax Officer must first have information in bis possession, and then in consequence of such information he must have reason to believe that ' income has escaped assessment. The realisation that income has escaped assessment is covered by the words "reason to believe", and it follows from the "information" received by the Income Tax Officer. The information is not the realisation, the information gives birth to the realisation. The recent decision of this Court in R. K. Malhotra v. Kasturbhai Lalbhai (supra) may be examined now. While making an assessment on a Hindu undivided family, the Income Tax Officer allowed a deduction of municipal taxeil in determining the annual value of two house properties occupied by the assessee. Subsequently, the Income Tax Officer re-opened the assessment ion receipt of a report from the office of the Comptroller and Auditor-General of India that on a true interpretation of s.

23(2) of the Income Tax Act, 1961, the deduction of municipal taxes was not admissible in the computation of the annual value of self-occupied house properties. The assessee contended that the report did not constitute "information" within the meaning of section 147(1i) of the Act, and the Gujarat High Court accepted the plea in the view that information as to Jaw would consist of a statement by a person, body or authority competent and authorised to pronounce upon the law and invested with the authority to do so, and that the Audit Department was not such competent or authoriiled authority. On appeal by the Revenue, a Bench o{ two learned Judges of this Court, although endorsing the principle enunciated by the High Court, said that the audit department was the proper niachinery to scrutinise assessments made by the Income Tax Officer and to point out ~rrors of Jaw contained therein, and the High Court had l E N s v. c I T (Pathak, J. ) 453 erred in taking the strict view which it.

did. The Court nsted its decision on Assistant Controller of Estate Duty v. Nawab Sir Mir Osman Ali Khan Bahadur('), Commissioner of Income Tax v. H. H. Smt. Chand Kanwarji (supra), Commissioner of Income Tax v. 2 Kalukutty( ) and Vashist Bhargava v. Income Tax Officer("). In Assista[lt Coniroller of Estate Duty v. Nawab Sir Mir Osman Ali Khan Bahadur (supra), this Court held the opinion of the Central Board of Revenue as regards the correct valuation of securities for the • purpose of estate duty to be "information" . within the meaning of section 59 of the Estate Duty Act, 1953 on the basis of which the Controller of Estate Duty was held entitled to entertain a reasonable belief that property assessed to estate duty had been under-valued.

The circumstance that the opinion of the Board was rendered in an appeal filed before it under the Estate Duty Act against the assessment made by the Assistant Controller of Estate Duty was apparently not brought to the notice of this Court when it heard R. K. Malhotra v. Kasturbhai Lalbhai (supra). The opinion of the Board represented its view as quasi-judicial authority· possessing jurisdiction to lay down the law. Although the Board did not enhance the valuation of the; securities in the appellate proceeding because of the argument advanced by the appellant, nonetheless its observations amounted to information as to the law. It was not a case where the Board was functioning as an extra-judicial authority, performing administrative or executive func- · tions, and not competent or authorised to pronounce upon the law. The Delhi High Court in Commissioner of Income Tax v. Ii. II. Smt.

Chand Kanwarji (supra) held that the scrutiny note of Revenue Audit constituted "information" withilll the meaning of section 147(b) of the Income Tax Act because the Comptroller and Auditor-General ·Of India was empowered by statute to scrutinise the proceedings of the Income Tax Department and to point out defects and mistakes which adTersely affected the Revenue. The High Court considered that the view that information as to law could be gathered only from the decisions of judicial or quasi-judicial authorities was unduly restrictive. In Commissioner of Income-tax v. Kalukutty (supra), the Kerala High Court also regarded the note put np by Audit as "information" within the meaning of section 147(b) of the Act, but it appears to have assumed, without anything more, that an audit note would fall within that expression. As regards Vashist Bhargava v. Income Tax Officu (supra) the "information" consisted in a ~ote of the Revenue Audit (I) 72 I. T. R. 376. (2) 85 I. T. R. 102. (3) 99 I.

T. R. J4g, and the Ministry of Law that. the payment of interest by the assessee. was in fact made to his own account in the Provident Fund and, therefore, in law the money paid did not vest in the Government and, consequently, the original assessment was erroneous in so far as it allowed the deduction of the interest as expenditure made by the assessee. The Delhi High Court upheld the reassessment on the finding that the t note of the Revenue Audit and the Ministry of Law had to be taken into account by the Income Tai< Officer, because in his executive capacity he had to be guided by the advice re11dered by the Ministry • of Law and he had to pay due regard to the note of the Revenue Audit because the officers of the Audit Department were expterts empowered to examine and check upon the work of the Income Tax Officers. It seems to us that the considerations on which the Delhi High Court rested its judgment are not correct.

But the decision of the case can be supported on the ground that the basic information warranting the re-opening of the assessment was the fact that the payment of interest was made to the Provident Fund account of the assessee himself. That the money so paid did not vest in the Government was a conclusion which followed a. utomatically upon that fact, and no controversy in law could possibly arise on that point. On the considerations prevailing with us, we are of opinion ihat the view taken by the Delhi High Court and the Kerala High Court in )'. '. '. , the aforementioned cases is wrong and we must, with great respect, hold that this Court was in error in the conclusion reached by it in R. K. Malhotra v. Kasturbhai Lalbhai (supra). Our attention has been drawn. to the further decision of the Kerala High Court in Muthukrishna Reddier v. Commissioner of Income Tax, Kerala(') and the decisions of the Allahabad High Court in Raj' 2 Kumar Shrawan Kumar v.

Central Board of Direct Taxes & Anr. ( ) and Elgin Mills Co. Ltd. v. Income Tax Officer, Companies Circle,. "A" Ward, Kanpur('). The Kerala High Court merely followed its earlier judgment in Commissioner . of Income Tax v. Kalukutty (supra) and the Allahabad High Court was impressed by the same reasons substantially which. persuaded the Delhi High Court and the • Kerala High Court in the cases referred to above. Therefore, whether considered on the basis that the nature and scope of the functions of the internal audit organisation of the Income Tax Department are co-extensive ~ith that of Receipt Audit or on the ff (I) 90 l. T. R. 503 (2) 107 I . 1'. R. 570 (3) 111 l. 1'. R. 287 I E N s v. c I T (Pathak, J. ) ~5 5 basis of the provisions specifically detailing its functions in the Inter- A.

nal Audit Manual,(') we hold 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 qnestion referred by the Income Tax Appellate Tribunal is s. answered in the negative, in favour of the ass·essee and against the Revenue. The assessee is entitled to one set of costs in these appeals. • P. B. R. Appeals allowed. \. ( .. . ~ (I) Internal A. dit Mnual, Vol. 2.