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Sassoon Spg. & Wvg. Co. Ltd. v. Commissioner Of Income-Tax, Bombay City-I.

Bombay High Court

Sep 10, 1981

Judgment

Subsequent
References

CaseIQ

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Judgment Summary — Rege, J. (Reference under s.256(1) of the I.T. Act, 1961)

Factual and Procedural Background

This reference arises under s.256(1) of the Income-tax Act, 1961 from the Income-tax Appellate Tribunal, Bombay Bench “D”, which referred two questions for opinion concerning (1) the validity of reopening an assessment under s.147(b) of the I.T. Act, 1961, and (2) the correctness of withdrawal of a corporation tax rebate of Rs. 90,472.40 by the Income-tax Officer (ITO).

The assessment year in issue is 1960-61 (accounting year ending 31 December 1959). The assessee was a company (later amalgamated in 1968). For assessment year 1959-60 (previous year), the assessee had filed a return showing a loss and had been assessed; an order under the earlier statute reduced the loss figure. For 1960-61 the original assessment (completed 14 February 1961) computed taxable income at Rs. 9,17,729 after adjusting brought-forward loss; the AAC reduced this to Rs. 9,06,816 on appeal.

By letter dated 11 October 1961 the ITO informed the assessee that a mistake had occurred in calculation of the corporation tax rebate in the 1960-61 assessment and proposed to rectify it under the earlier law's s.35. The ITO subsequently withdrew rebate to the extent of Rs. 90,482.40. On revision petition the Commissioner of Income-tax, relying on National Rayon Corporation's case, cancelled the ITO's s.35 order (7 Nov 1964) but advised that the ITO may revise the assessment under s.147(b) because an omission/inadvertence had resulted in excessive relief to the assessee.

The ITO initiated reassessment proceedings under s.147(b). The assessee protested, contending illegality and absence of "information" to justify s.147(b), and argued that the relevant proviso of the First Schedule to the Finance Act, 1960 did not permit withdrawal of the rebate. The ITO proceeded to reassess and withdrew the rebate. The AAC set aside the ITO's reassessment on the merits, holding no deduction from the rebate was permissible. The Revenue appealed to the Tribunal; the assessee cross‑objected on legality. The Tribunal allowed the Revenue's appeal, dismissed the cross‑objections, and supported reopening under s.147(b) on the basis that the ITO had acquired information subsequent to the assessment that certain deductions from the rebate had not been made.

The Tribunal's finding on reopening under s.147(b) was challenged before this court in the reference.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the assessment was validly reopened under section 147(b) of the Income-tax Act, 1961?
Whether, on the facts and in the circumstances of the case, the Income-tax Officer was right in withdrawing corporation tax rebate to the extent of Rs. 90,472.40, having regard to the relevant provisions of the Finance Act, 1960?

Arguments of the Parties

Assessee's Arguments

The reassessment proceedings under s.147(b) were illegal and ultra vires because the ITO did not have any new "information" to justify invocation of s.147(b).
The reopening was a disguised attempt to rectify an error or mistake discovered on reconsideration of the same material that was before the ITO at the time of the original assessment.
The proviso to Para. D in Part II of the First Schedule to the Finance Act, 1960, did not permit withdrawal of the corporation tax rebate in the facts of the case.

Revenue's Arguments (Appellant)

The ITO had come into possession of information that the corporation tax rebate had been allowed excessively, and that piece of information justified reopening under s.147(b).
Reliance was placed upon this court's earlier decision in Commissioner of Income‑Tax, Bombay City II v. H. Holck Larsen ([1972] 85 ITR 467), which had taken the view that the "information" required under the corresponding older provision could be found in material already before the ITO and that further material was not necessary.

Income-tax Officer / Tribunal's Position (as recorded)

The ITO's original notice (11 Oct 1961) stated a "mistake was apparent from the record", and he regarded discovery of excessive rebate as information permitting reopening.
The Tribunal sustained reopening on different reasoning: it held the ITO had no occasion to consider reduction in rebate during the original proceedings, there was nothing to show he had considered the point and come to any definite conclusion, and therefore the ITO had obtained information subsequent to completion of assessment that deductions from the rebate had not been made.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Indian and Eastern Newspaper Society v. CIT, [1979] 119 ITR 996	Held that an error discovered on reconsideration of the same material (and no more) does not give the ITO power to reopen an assessment under s.147(b).	The court treated this decision as controlling and applied it to hold that reopening in the present case (which was to rectify a mistake discovered on the same material) was not permissible under s.147(b).
Maharaj Kumar Kamal Singh v. CIT, [1959] 35 ITR 1 (SC)	One of the earlier decisions forming part of the line of authority considered in Indian and Eastern Newspaper Society's case (relating to scope of reopening where error is discovered).	Referred as part of the ratio acknowledged in Indian and Eastern; used to support the proposition that error on same material does not permit reopening.
CIT v. A. Raman and Co., [1968] 67 ITR 11 (SC)	Earlier authority relied upon in the series of Supreme Court decisions concerning reopening assessments (part of the precedential background).	Cited by the Tribunal; the present court treated it as part of the earlier ratio affirmed by Indian and Eastern but applied the later controlling decision to the facts.
Bankipur Club Ltd. v. CIT, [1971] 82 ITR 831 (SC)	Also one of the earlier decisions in the line considered on the scope of reopening assessments.	Considered as part of the series of authorities to which Indian and Eastern Newspaper Society referred; the court relied on the later pronouncement rather than any inconsistent view.
Kalyanji Mavji & Co. v. CIT, [1976] 102 ITR 287 (SC)	The case where a Bench had observed that oversight, inadvertence or mistake of the ITO must fall within the corresponding reopening provision; the Supreme Court (in Indian and Eastern) described that proposition as stated too widely.	The present court noted that the wider proposition in Kalyanji Mavji was disapproved by the Supreme Court and therefore could not justify reopening here.
National Rayon Corporation's case, [1965] 56 ITR 114	Relied upon by the Commissioner when he cancelled the ITO's order under the earlier s.35 in this matter.	The Commissioner used this decision to cancel the ITO's s.35 order; the court recorded that the Commissioner relied on it when directing reassessment under s.147(b).
Commissioner of Income-Tax, Bombay City II v. H. Holck Larsen, [1972] 85 ITR 467	This court's earlier view that "information" under the older provision could be found in material already before the ITO (i.e., further material not necessary).	The Revenue relied on this decision, but the court observed that the Supreme Court's later authority (Indian and Eastern) settled the matter against that view, so Holck Larsen was not followed for validating the reassessment.

Court's Reasoning and Analysis

The court began by identifying the statutory requirement of s.147(b): the ITO must have, in consequence of information in his possession, reason to believe that income chargeable to tax has escaped assessment. (See s.147(b) quoted in the opinion.)

The court then turned to controlling precedent. It observed that the Supreme Court in Indian and Eastern Newspaper Society v. CIT expressly held that an error discovered on a reconsideration of the same material (and no more) does not confer power on the ITO to reopen an assessment under s.147(b). The Supreme Court had treated that conclusion as the ratio of a line of earlier decisions and had disapproved a broader proposition (from Kalyanji Mavji) that oversight, inadvertence or mistake by the ITO automatically fell within the reopening provision.

Applying those principles to the facts, the court examined the materials that triggered the ITO's action:

The ITO's 11 October 1961 notice expressly stated the proposed action was because "a mistake was apparent from the record". This demonstrates the reopening was to correct an apparent mistake on the record (i.e., the same material).
The Commissioner's note cancelling the s.35 order and directing revision under s.147(b) explicitly stated that an omission/inadvertence was detected later, and that the assessee had obtained excessive relief; the Commissioner therefore considered s.147(b) applicable and directed reassessment.

Given those documents, the court concluded the reassessment under s.147(b) was prompted solely by the ITO's and Commissioner's realization of an error or omission in the original assessment on material already before the ITO. The Revenue did not contend that the ITO had obtained any subsequently received material (not before him at the time of the original assessment) which gave him reason to believe income had escaped assessment.

The court examined and rejected the ITO's asserted reasoning (that discovery of excessive rebate was "information" justifying reopening), because such a "realisation" is precisely the type of error-on-reconsideration that Indian and Eastern ruled does not constitute the requisite "information" under s.147(b). The Tribunal's alternative reasoning — that the ITO had no occasion to consider the question during the original assessment and thus must have obtained information later — was also rejected for two reasons:

The Tribunal's factual premise (that the ITO had no occasion to consider the rebate reduction in the original proceedings) had no basis in the record and was inconsistent with the ITO's own account of events; the ITO himself had said the mistake was apparent from the record.
Even if the ITO had not formed a definite opinion on the rebate point originally, mere absence of an earlier decision does not convert a subsequent realisation of an error into "information" within s.147(b).

The court further addressed the Revenue's reliance on this court's Holck Larsen decision (which had permitted "information" to be found in material already before the ITO). The court observed that Holck Larsen was decided in a context of conflicting High Court views, but the later Supreme Court decision in Indian and Eastern resolved the matter by holding that an error discovered upon re-appraisal of the same material does not permit reopening. Consequently, Holck Larsen could not be used to validate the reassessment in the face of the Supreme Court's authoritative ruling.

On the combined analysis of the documents, the statutory test, and controlling precedent, the court held that the ITO had no lawful basis under s.147(b) to reopen the assessment because the reopening was based on a discovered error in computation on the same material rather than on new information giving reason to believe that income had escaped assessment.

Holding and Implications

Holding: Question No. 1 is answered in the negative and in favour of the assessee. The reassessment under s.147(b) of the I.T. Act, 1961 was not validly made.

Further disposition: Question No. 2 was not answered, as it was rendered unnecessary by the answer to Question No. 1.

Consequences and implications:

The immediate effect is that the reopening of the assessment under s.147(b) (and the consequent withdrawal of the rebate by way of reassessment) cannot stand; the assessee prevails on the validity point.
The court awarded costs in favour of the assessee (Revenue to pay the assessee's costs).
The court's decision applies established Supreme Court authority (Indian and Eastern Newspaper Society) to restrict the scope of s.147(b): specifically, a mere discovery of an error on re-appraisal of the same material does not constitute the "information" required to reopen an assessment. The opinion does not purport to lay down a new precedent beyond applying that controlling authority to the present facts.

Note: This summary is limited strictly to the matters and materials contained in the provided opinion. No extra-textual facts or inferences have been added.

Show all summary ...

Rege, J.:— This is a reference under s. 256(1) of the I.T Act, 1961, by the Income-tax Appellate Tribunal, Bombay Bench “D”, referring the following two questions for our opinion:

“(1) Whether, on the facts and in the circumstances of the case, the assessment was validly reopened under section 147(b) of the Income-tax Act, 1961?

(2) Whether, on the facts and in the circumstances of the case, the Income-tax Officer was right in withdrawing corporation tax rebate to the extent of Rs. 90,472.40, having regard to the relevant provisions of the Finance Act, 1960?”

2. We are concerned with the assessment year 1960-61, corresponding to the accounting year ending 31st December, 1959. The assessee was a company registered under the Companies Act, 1956, which has been amalgamated with Mafatlal Fine Spg. & Mfg. Co. Ltd. with effect from 1st April, 1968. During the accounting year under consideration the paid-up share capital of the assessee-company was Rs. 37,70,000. In the previous year ending 31st December, 1958 (assessment year 1959-60), the assessee had filed a return showing a loss of Rs. 1,73,542. It was assessed for the said assessment year 1959-60, under s. 23(3) of the Indian I.T Act, 1922, on 26th September, 1960, when its loss was determined at Rs. 2,20,016. In the calendar year 1958 the assessee-company had declared a dividend of Rs. 7,51,020. By an order dated 22nd November, 1960, made under s. 35 of the Indian I.T Act, 1922, the said quantum of loss was reduced to Rs. 1,99,829. The assessment in respect of the assessment year under consideration, namely, 1960-61, was completed on 14th February, 1961, and the taxable income was computed at Rs. 9,17,729, after an adjustment of the brought-forward loss of Rs. 1,99,829 for the previous assessment year. On appeal to the AAC, the said income of Rs. 9,17,729 was reduced to Rs. 9,06,816. The ITO by his letter dated 11th October, 1961, informed the assessee that a mistake had occurred in the calculation of the corporation tax rebate in the assessment order for the assessment year 1960-61 and that it was proposed to rectify it under s. 35 of the Indian I.T Act, 1922. The mistake alleged in the notice was excess grant of corporation tax rebate to the assessee in the assessment year 1960-61. The said notice is annex. ‘E’ to the statement of the case. The assessee protested against the issuance of the said notice. However, the ITO, acting under s. 35, withdrew the rebate granted to the assessee in his assessment for the assessment year 1960-61 to the extent of Rs. 90,482.40. The assessee filed a revision petition to the Commissioner of Income-tax against the said order of the ITO withdrawing the rebate. The Commissioner, relying on the decision of this court in National Rayon Corporation's case, [1965] 56 ITR 114, accepted the assessee's contention and by his order dated 7th November, 1964, cancelled the ITO's said order under s. 35. In a note forwarded by the Commissioner to the ITO, it was observed:

“…The question of reducing the rebate of super-tax on the basis of the dividend declared in 1959-60 where the assessee had suffered a loss was not considered by the Income-tax Officer at all while making the original assessment. This omission or inadvertence is now detected and since the assessee has thus obtained an excessive relief, the provisions of sec. 147(b) become applicable. The Income-tax Officer may be directed to revise the assessment under sec. 147(b).”

(Underlining* supplied.)

3. Accordingly, the ITO started reassessment proceedings under s. 147(b) of the I.T Act, 1961, for the assessment year 1960-61. The assessee protested against the said proceedings on the ground that they were illegal, ultra vires and contrary to the provisions of law. It also took the contention that the proviso to Para. D in Part II of the First Schedule to the Finance Act, 1960, had no application to the facts of the case and the same did not permit the withdrawal of the corporation tax rebate. The ITO negatived the said contention of the assessee by holding that the fact that the ITO came to know that the corporation tax rebate was allowed excessively was clearly a fresh piece of information which justified the reopening of the assessment. He accordingly passed an order of reassessment by withdrawing the rebate of Rs. 90,482 for the assessment year 1960-61. The AAC, in appeal by the assessee against the said order, did not consider the question as to the legality of the proceedings. However, on merits, he set aside the order of the ITO holding that there could not be any deduction in the rebate granted to the assessee.

4. Against the said order the Revenue filed an appeal to the Tribunal. The assessee also filed cross-objections on the question of the legality of the proceeding. The assessee's contention was that the proceedings under s. 147(b) of the I.T Act, 1961, were misconceived as the ITO had not come into possession of any information so as to justify the action under that section. The Tribunal by its order allowed the appeal of the department and dismissed the cross-objections. While dismissing the cross-objections of the assessee as regards the validity of the proceedings under s. 147(b), the Tribunal, relying on the decision of the Supreme Court in the case of CIT v. A. Raman and Co., [1968] 67 ITR 11, observed:

“The Income-tax Officer had no occasion to consider this question of reduction in the rebate in the course of the original proceedings. There is nothing to show that the Income-tax Officer had considered the point and had come to any definite opinion. Therefore, it cannot be said that the reopening was caused by a mere change of opinion on the part of the Income-tax Officer. In our opinion, the Income-tax Officer came by information subsequent to the completion of the assessment that certain deduction from the rebate had not been made.”

(Underlining supplied.)

5. The said finding of the Tribunal is challenged before us.

6. In this case the ITO has sought to reopen the assessment under s. 147(b) of the I.T Act, 1961. The said section provides:

“147. Income escaping assessment.—If—…

(b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Income-tax Officer has in consequence 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 assessment year concerned (hereafter in sections 148 to 153 referred to as the relevant assessment year)……….”

(Underlining supplied)

7. In order to comply with the provisions of the said section it was necessary to show that the ITO has got some information in his possession in consequence of which he has reason to believe that income chargeable to tax has escaped assessment.

8. The said provisions came to be considered by the Supreme Court in its recent decision in the case of Indian and Eastern Newspaper Society v. CIT, [1979] 119 ITR 996, 1004. The Supreme Court in that case held that “an error discovered on reconsideration of the same material (and no more) does not give the Income-tax Officer that power, that is, the power to reopen an assessment”. This according to the Supreme Court was also the ratio of its three earlier decisions, namely, (1) Maharaj Kumar Kamal Singh v. CIT, [1959] 35 ITR 1 (SC), (2) CIT v. A. Raman and Co., [1968] 67 ITR 11 (SC), relied upon by the Tribunal, and (3) Bankipur Club Ltd. v. CIT, [1971] 82 ITR 831 (SC). Then, dealing with its earlier decision in the case of Kalyanji Mavji & Co. v. Cit, West Bengal-Ii , [1976] 102 ITR 287 (SC), where the court had observed that a case where income had escaped assessment due to oversight, inadvertence or mistake of the ITO must fall under s. 34(1)(b) of the Indian I.T Act, 1922 (which was the same as s. 147(b) of the I.T Act, 1961), the Supreme Court, while disapproving of the said wide proposition, observed at p. 1004 of the report:

“Reliance is placed on Kalyanji Mavji & Co. v. CIT, [1976] 102 ITR 287 (SC), where a Bench of two learned judges of this court observed that a case where income had escaped assessment due to the ‘oversight, inadvertence or mistake’ of the ITO must fall within s. 34(1)(b) of the Indian I.T Act, 1922. It appears to us, with respect, that the proposition is stated too widely and travels farther than the statute warrants in so far as it can be said to lay down that if, on reapprising the material considered by him during the original assessment, the ITO discovers that he has committed an error in consequence of which income has escaped assessment, it is open to him to reopen the assessment. In our opinion, an error discovered on a reconsideration of the same material (and no more) does not give him that power.”

9. The court also further negatived the contention made by the Revenue that the expression “information” in s. 147(b) of the I.T Act, 1961, referred to the realisation by the ITO that he has committed an error when making the original assessment.

10. As we will presently point out, orders passed by the tax authorities clearly manifest that the ITO has sought to reopen the assessment under s. 147(b) of the I.T Act, 1961, purely for the purposes of rectifying an error or mistake supposed to have been committed by him in the first assessment order, on discovering the same on a reconsideration of the same material. It is not the case of the Revenue that on some subsequent information received by the ITO on material which was not before him at the time of making the first assessment, he had reason to believe that some income had escaped assessment.

11. Firstly, the notice dated 11th October, 1961, issued by the ITO to the assessee (part of annex. ‘E’ (Colly.) to the statement of the case) while seeking to start proceedings under s. 35 of the Indian I.T Act, 1922, was expressly given on the basis that “a mistake was apparent from the record”

12. Secondly, the note sent by the CIT to the ITO (part of which as reproduced in the statement of the case, is quoted above—See p. 429 supra) while cancelling the proceedings under s. 35 of the Indian I.T Act, 1922, and directing the ITO to revise the assessment under s. 147(b) of the I.T Act, 1961, in terms pointed out that due to omission or inadvertence, which was detected later, the ITO had not considered, while making the original assessment, the question of reducing the rebate on super-tax on the basis of the dividend declared in 1959-60 when the assessee had suffered a loss during that year and that since the assessee has thus obtained an excessive relief, the provisions of s. 147(b) became applicable. It is clear that the ITO reopened the assessment under s. 147(b) because of the said note of the Commissioner.

13. The said averments, therefore, clearly show that the assessment was reopened specifically on the basis that there was a mistake or omission or inadvertence on the part of the ITO in not detecting on the material before him the excess in relief granted to the assessee. The facts of the case, therefore, would squarely fall within the aforecited decision of the Supreme Court in Indian and Eastern Newspaper Society's case, [1979] 119 ITR 996, and the same would not entitle the ITO to avail himself of the provisions of s. 147(b) of the I.T Act, 1961.

14. The ITO in his order of reassessment dated 30th January, 1965, (annex. ‘B’ to the statement of the case), while rejecting the assessee's contention as to the legality of the proceedings under s. 147(b) of the I.T Act, 1961, had observed that the ITO came to know that the corporation tax rebate had been allowed excessively was clearly a piece of information which justified the reopening of the assessment. However, the Tribunal in its order dated 22nd July, 1970, has sought to support the said proceedings under s. 147(b) not on the reasoning given by the ITO but on altogether different grounds. According to the Tribunal, the ITO had no occasion to consider this question of reduction in rebate in the course of the original proceedings, that there was nothing to show that the ITO had considered the point and had come to any definite conclusion, that, therefore, it could not be said that the reopening was caused by any change of opinion and, therefore, it could be said that the ITO came by information subsequent to the completion of the assessment that certain deductions from the rebate had not been made.

15. However, in our view, on the facts of this case, none of the said reasonings can be sustained to bring the case within the provisions of s. 147(b) of the I.T Act, 1961.

16. If, on the same material which was before the ITO while making the original assessment, the ITO were to find out on a reconsideration thereof, after the assessment order was made, that the assessee was allowed rebate in excess, that would be a clear case of mistake committed by the ITO in computing the rebate. The fact of the ITO coming to know about such mistake later cannot be considered to be information requisite for the proceedings under s. 147(b) of the I.T Act, 1961. As pointed out by the Supreme Court in its aforecited decision in the case of Indian and Eastern Newspaper Society, [1979] 119 ITR 996, information under s. 147(b) did not refer to a realisation by the ITO that he had committed an error in making the original assessment. The said reasoning of the ITO, therefore, cannot be sustained.

17. The Tribunal in its order has not supported the said reasoning of the ITO but has given its own different reasoning, as mentioned above. Firstly, the said reasoning of the Tribunal, if inconsistent with that of the ITO, who passed the order of reassessment and who would be the only person to state under what circumstances he came to pass the order, cannot be considered in preference to that of the ITO. However, apart from that, even otherwise, the said reasoning of the Tribunal also cannot be sustained. The basis of the Tribunal's reasoning was that the ITO had no occasion to consider the question of reduction in rebate during the original proceedings, and it cannot be said that he had considered the question and come to any definite conclusion so as to hold that he had changed his opinion, and, therefore, it could be said that the ITO came by information subsequent to the original assessment. The said reasoning has, firstly, factually no basis. It is not even the case of the ITO, and even on the material on the record also it cannot be said, that the ITO had no occasion to consider the question of reduction of rebate in the original proceedings, as the Tribunal has sought to make out in its reasonings. It is also difficult to see how the fact of not considering the said question and thereby not coming to a definite conclusion would amount to the ITO coming by the information subsequently.

18. The upshot of the reasoning both by the ITO and the Tribunal, in whatever manner put, appears to be that in the initial assessment the ITO had committed a mistake in computing the rebate permissible to the assessee and the proceedings under s. 147(b) of the I.T Act, 1961, were taken to rectify that mistake, in neither case there being a plea that it was done by reason of any material other than the one that was already before the ITO. That, as the Supreme Court in its aforecited decision in the Indian and Eastern Newspaper Society's case, [1979] 119 ITR 996, has pointed out, was not permissible for the proceedings under s. 147(b).

19. To support the validity of the proceedings under s. 147(b) of the I.T Act, 1961, in this case the learned counsel for the Revenue has relied upon the decision of this court in the case of Commissioner Of Income-Tax, Bombay City Ii v. H. Holck Larsen, [1972] 85 ITR 467, which had taken the view, while interpreting s. 34(1)(b) of the Indian I.T Act, 1922 (present s. 147(b)), that information which the ITO was required to have under that provision could be also on the material that was already before the ITO, and for that purpose it was not necessary to have any further material. That was a decision given when there was an apparent conflict among various High Courts about the interpretation of s. 34(1)(b), some courts having taken the view that the information which the ITO was required to have under that section was to be from some material other than the one which was already before him. The question has now been set at rest by the aforecited decision of the Supreme Court which has now expressly held that an error discovered on the same material (and no more) does not give the ITO power under s. 147(b). Therefore, it is not necessary to deal with the said decision in detail.

20. In that view of the matter, the contention of the learned counsel for the Revenue supporting the validity of the proceedings under s. 147(b) of the I.T Act, 1961, cannot be accepted. In the result, we answer the questions as follows:

Question No. 1: In the negative and in favour of the assessee.

Question No. 2: In view of our answer to question No. 1, it is not necessary to answer question No. 2.

21. Revenue to pay costs of the assessee.