Shelat, C.J:— This is a petition for quashing and setting aside a notice under section 148 read with section 147(b) of the Income-tax Act, 1961, dated July 18, 1964, in respect of the assessment year 1960-61, and for restraining the respondent-Income-tax Officer from taking any further proceedings thereunder. The petition also challenged another notice of the same date in respect of the assessment year 1961-62. But when the petition came up for admission before us, we issued a rule with regard only to the notice in respect of the assessment year 1960-61, and, therefore, we are no more concerned with the notice relating to the assessment year 1961-62.
2. The petitioner is a company registered under the Indian Companies Act, 1956, its object being, inter alia, the promotion and protection of the interests of its members who deal in cotton and other allied commodities, the maintenance of uniformity in the said trade and the regulating and controlling of transactions in cotton and other commodities. The petitioner-company was incorporated on October 29, 1957. The first year in which it became assessable to income-tax was the assessment year 1959-60, of which the accounting period was from October 29, 1957, to December 31, 1958. The petitioner-company derived income from (1) subscriptions from members, (2) lagas, (3) powernama lavajam, transfer fees and penalties from members, (4) commission from banks for fixed deposits and interest on fixed deposits and (5) licence fees for cabins and charges for electricity consumed by those using the said cabins. The Income-tax Officer held that income derived from subscriptions and lagas totalling Rs. 38,906 was not taxable on the ground of mutuality, relying upon a decision of the Bombay High Court in the case of Surat District Cotton Dealers' Association1, and assessed the petitioner-company to a total loss of Rs. 30,072, presumably treating the activities of the petitioner-company as business and also treating the receipts excluding the exempted receipts as falling under section 10 of the 1922 Act. For the assessment year 1960-61, of which the year of account was calendar year 1959, the Income-tax Officer again held that receipts by way of subscription and lagas amounting to Rs. 37,989 were not taxable on the ground of mutuality and assessed the petitioner-company to a total loss of Rs. 19,378, again treating the receipts excluding the exempted receipts as receipts from business activities under section 10. The auditor's statement of account furnished by the petitioner-company to the Income-tax Officer showed net profits of Rs. 18,611, and the membership fee and lagas receipts aggregating to Rs. 37,989, being exempted receipts, assessment was made to a loss of Rs. 19,378. During the assessment for the assessment year 1961-62, of which the year of account was the calendar year 1960, the Income-tax Officer enquired of the petitioner-company why certain receipts of income should not be considered as falling under section 12 and why the expenses incurred by the association should not be bifurcated between expenses incurred in relation to the exempted receipts and expenses incurred in relation to non-exempted income as well as in regard to the activities of the petitioner-company falling respectively under section 10 and section 12. The petitioner-company in reply raised objections to such a course being adopted by the Income-tax Officer and gave an Explanation as regards the work done by each member of its staff relating to exempted and non-exempted income. According to the petitioner-company it was shown at that time that one clerk attended to the work in regard to receipts of exempted income for two hours a day. The Income-tax Officer, after considering the Explanation, held that Rs. 26,766, being the amount of subscriptions and lagas, were exempted receipts and that Rs. 45,874, being licence fees for the cabins, electric charges, interest on fixed deposits, etc., were income from other source's falling under section 12. Regarding expenses, he did not allow all the expenses as was done in the earlier years but allowed Rs. 22,231 as against the income derived from cabin licence fees and Rs. 1,132, that is, five per cent, of the total income from interest, commission, powernama lavajam and other sundry receipts as expenses incurred for earning those items of income which, according to him, fell under section 12. The Income-tax Officer rejected the contention that all the expenses shown by the petitioner-company constituted integrated expenditure incurred in carrying out integrated activities of the petitioner-company or that there could be no allocation or bifurcation thereof attributable to activities falling under section 10 and section 12. He also rejected the contention urged by the petitioner-company that all its activities were business activities falling under section 10. The Income-tax Officer assessed the petitioner-company to a total income of Rs. 22,511 as against its claim for assessing it at a loss of Rs. 22,143. The petitioner-company thereupon filed an appeal before the Appellate Assistant Commissioner. In his order dated April 22, 1964, the Appellate Assistant Commissioner analysed the receipts as follows:
Rs.
I.
Subscriptions, lagas, etc.
…
26,766
II.
Cabin licence fees, and electric charges
…
23,223
III.
Powernama lavajam and powernama transfer fees
…
2,435
IV.
Interest on commission and fixed deposits, and
…
19,900
V.
Miscellaneous receipts—penalty and defaulter members' account
…
317
3. He then classified these receipts under three heads: (A) exempted receipts, Rs. 26,766 item I above; (B) receipts taxable under section 10(6), i. e., items II and III above, Rs. 25,658; and (C) receipts falling under section 12, items IV and V above, Rs. 20,217. The Appellate Assistant Commissioner thus treated income from cabin licence fees and powernama lavajam as income falling under the head of business. As regards expenses, he considered the figure of five per cent, as a reasonable one as deductible expenses in respect of receipts falling under the head of “other sources” under section 12 allowed as aforesaid by the Income-tax Officer. He also held that the entire balance of expenses was not allowable as against receipts falling under head (B) above and further held that the expenses should be allocated between exempted and non-exempted receipts. Pursuant to the order of the Appellate Assistant Commissioner, the Income-tax Officer passed a consequential order and assessed the petitioner-company to a total income of Rs. 14,124 instead of the total income of Rs. 22,511 as done by him. Aggrieved by the said order, the petitioner-company filed an appeal before the Tribunal. That appeal is still pending. No such appeal however was filed by the department against the order of the Appellate Assistant Commissioner. For the assessment year 1962-63, the relevant year of account of which was 1961, the petitioner company filed a return showing a loss of Rs. 27,741 and in which it claimed Rs. 44,131 as exempted receipts. The Income-tax Officer, however, treated the receipts from cabin licence fees and electricity charges as income from other sources falling under section 12, though the Appellate Assistant Commissioner had treated those receipts for the assessment year 1961-62, as income from business under section 10. This he did relying upon a report of his ward inspector dated July 8, 1964, wherein that inspector had given details regarding the various categories of the cabins, their respective licence fees, the rent payable by the petitioner-company and electricity and other charges collected by the petitioner company. The Income-tax Officer allowed a limited amount of expenses as against income from cabin licence fees and electricity charges and allowed five per cent, of the taxable items of income in respect of other sources and assessed the petitioner-company to a total income of Rs. 28,244. It appears from the order passed by him that out of the total receipts of Rs. 89,853 he treated Rs. 44,131 as exempted income. He also treated a sum of Rs. 3,332 as income derived from business and held that the rest, that is, Rs. 42,390, was the amount of cabin fees and electricity charges, though the Appellate Assistant Commissioner had treated for the earlier year this income as income under the head of business under section 10(6) of the 1922 Act. The reason given by him for this departure from the order of the Appellate Assistant Commissioner for the assessment year 1961-62 was that the said report indicated that the cabins in respect of which the petitioner-company was collecting licence fees were temporary structures erected within the rented building near about the ring and that the petitioner-company was actually charging rent which it euphemistically called licence fees presumably to avoid a claim of tenancy rights by the members in respect of those cabins. He observed that the entire building was rented out by the petitioner-company at a rent of Rs. 16,452 and that what the petitioner-company was doing was to sublet part of the said premises to its members. Similarly, the electricity charges collected from members formed part of the rent collected from the members and therefore treated both these items as falling under the head “other sources” under section 56 of the Act of 1961. As in the case of earlier year, the Income-tax Officer allocated expenses towards exempted receipts and non-exempted receipts relying upon the fact that these expenses were incurred by the petitioner-company for earning both exempted as well as non-exempted income. On the basis of the report of his inspector, he also came to the conclusion that the said clerk, Kalyanji Haribhai Shah, attended to the work relating to cabin licence fees, lagas, subscriptions, etc., for which he was paid an annual salary of Rs. 2,160 during the calendar year 1961. He further found that the said clerk was working two hours daily in regard to non-taxable items of income and as his daily working hours were eight hours a day, one-fourth of his said salary, i.e, Rs. 540, would not be deductible expenses as they related to non-taxable items. Accordingly he assessed as aforesaid the petitioner-company at the total assessable income of Rs. 28,244.
4. On July 18, 1964, the Income-tax Officer issued the notice under section 148 read with section 147(b) for the assessment year 1960-61, on the ground that excessive loss was computed in the assessments for the assessment year 1960-61. In the aforesaid notice it was stated that expenses relating to exempted items of income were wrongly not disallowed and the attention of the petitioner-company was drawn to the said report dated July 8, 1964. It is this notice the validity of which has been challenged in this petition.
5. Attacking the aforesaid notice Mr. Kaji, who appears for the petitioner-company, contended (1) that the Income-tax Officer had no information on the basis of which he could have reason to believe that excessive loss was computed in respect of the assessment year 1960-61. He argued that all the facts necessary for the assessment were disclosed and that it was after considering these facts that the assessment was made on the footing that all the expenses were allowable and that all the receipts fell under section 10. He contended therefore that the action of the respondent-Income-tax Officer amounted to a mere change of opinion and that there were no materials or information justifying the issue of the notice as contemplated by section 147(b); (2) that the aforesaid notice was issued on the Income-tax Officer taking a different view as regards the bifurcation of expenses between the different activities of the petitioner-company but which would not entitle him to reopen the assessment of the earlier year; (3) that the aforesaid report dated July 8, 1964, regarding the particulars of the cabins, etc., was not relevant in connection with the state of affairs existing during the assessment year 1960-61 and the loss computed in the assessment relating to that year; (4) that the notice was issued mala fide with the ulterior object of enabling himself to adopt for the earlier years the new basis of allocation of expenses attempted by him for the assessment year 1961-62 and approved by the Appellate Assistant Commissioner.
6. As against these contentions, the learned Advocate-General on behalf of the revenue argued that the Income-tax Officer had, since the making of the assessment order for the assessment year 1960-61, received further information in the shape of (i) the report of his ward inspector who after making detailed enquiries into the working of the petitioner-company made the aforesaid report and (ii) the order of the Appellate Assistant Commissioner dated April 22, 1964, in the appeal against the assessment order for the assessment year 1961-62, which established that a part of the income of the petitioner-company was assessable under section 10 and another part was assessable under section 12 and that all the expenses incurred by the petitioner-company were not allowable while computing the total income of the company. These findings, he argued, provided the basis for a reasonable belief on the part of the Income-tax Officer that in respect of the assessment year 1960-61, the then Income-tax Officer had committed an error of law in allowing all the expenses including the expenses incurred in the case of exempted items of income and that such an error could be validly corrected under section 147(b) of the 1961 Act. According to the learned Advocate-General, these were two pieces of information which were received since the making of the assessment order and which gave the Income-tax Officer reason to believe that income chargeble to tax for that year had escaped assessment.
7. It will be noticed that the assessment for the first two assessment years 1959-60 and 1960-61 seems to have proceeded on the footing that the entire receipts excluding the exempted receipts were receipts from business and fell under section 10 of the Act of 1922, that the membership subscriptions and laga receipts were exempted items of income on the ground of mutuality and the entire expenses incurred in respect of the receipts, including the expenses incurred in relation to exempted income also were allowed. It was only for the first time during the assessment proceedings for the assessment year 1961-62 that the Income-tax Officer made an enquiry why income earned by the petitioner-company should not be bifurcated into receipts falling under section 10 and receipts falling under section 12 and why expenses should not be allocated between exempted income and non-exempted income. This bifurcation was made by the Income-tax Officer both in regard to receipts as also the expenses and, as we have already referred to, in the appeal from that order, though the Appellate Assistant Commissioner modified the order of the Income-tax Officer, the principle of bifurcation both of receipts and expenses was accepted by him. Mr. Kaji's contention was that during these assessment proceedings for the assessment year 1961-62, the petitioner-company in reply to a query raised by the Income-tax Officer had furnished a statement of the work done by each member of the staff relating to the exempted items of income and the work done by each of them in relation to non-exempted income and it was also shown that in connection with the work relating to the exempted items of income, the work done by the said clerk would amount to two hours a day for the whole year. He argued that this information was received by the Income-tax Officer during those proceedings and it was on the basis of that information that he adopted the principle of bifurcation of income and expenses and, therefore, it would not be possible for him to contend that he had any new information on which he could have reason to believe that, income had escaped assessment. Mr. Kaji's contention was that having adopted the principle of bifurcation for the assessment year 1961-62, and as that principle was approved by the Appellate Assistant Commissioner in his order dated April 22, 1964, the Income-tax Officer now wanted to reopen the earlier assessment and apply the principle of bifurcation to it also and that such an attempt was nothing else than a mere change of opinion. In paragraph 6 of the affidavit in reply, however, the Income-tax Officer while conceding that an enquiry was made as to why receipts and expenses should not be bifurcated and also conceding that in the course of that enquiry a statement was furnished by one of the employees of the petitioner-company as to the work done by the members of the staff relating to exempted and non-exempted incomes respectively, denied the correctness of the statement that it was shown at that time that one clerk was attending daily to the work in connection with the exempted income. According to this part of the affidavit, a statement in Gujarati was furnished by one of the employees. But the fact that as much as two hours a day were devoted towards the work in connection with the exempted items of income was not shown in that statement. Further, no such noting was also made by the Income-tax Officer then as he would have done if this position was clarified before him at that time. It is also stated that if that position was clarified, the Income-tax Officer would not have allowed expenses incurred for earning exempted income.
8. Looking to the report dated July 8, 1964, there can be no doubt that the Inspector had gone into the details of the working of the petitioner-company and the income derived from cabins which the petitioner-company called the licence fees. As regards the first, the Inspector noted that the work of collection of members' subscription was done during the last three months of each year, i.e, from January to March, and that this was clear from the fact that entries in the register and the receipt book maintained for this purpose showed that they were mostly made during those three months. From this fact he was able to conclude that out of the total hours of work during the year, the said clerk, Kalyanji Shah, was putting in two hours' work every day and that, therefore, one-fourth of his salary, namely, Rs. 540, out of Rs. 2,160 would be expenses incurred for earning the exempted items of income. As regards the cabins, the Inspector reported that, though the petitioner-company called the income as licence fees, it was actually sub-letting these cabins and, therefore, only the proportionate rent payable by the petitioner-company for the premises occupied by it and the charges for electricity consumed by those who occupied the cabins should be allowed as deductible expenses incurred for earning that part of the income.
9. The question is whether information in this report constituted information received by the Income-tax Officer since the making of the assessment for the assessment year 1960-61. Mr. Kaji put forward two contentions against the revenue's view that it was: (1) that all this information was before the Income-tax Officer long before the impugned notice was issued and (2) that, in any event, the report dealt with the conditions prevailing at the time when the inspector visited the premises and, therefore, it could not be applied on the footing that the same conditions prevailed during the assessment year 1960-61. As regards the first contention it is true that the association had produced before the Income-tax Officer the profit and loss account and a statement of accounts and claimed that certain receipts were exempted income. From that fact, the Income-tax Officer must have thought that some expenditure must have been incurred for earning these exempted receipts and yet had allowed the entire expenses. It is possible, however, that in the absence of details of expenses which admittedly were not furnished to him, the Income-tax Officer might have thought that expenses incurred for earning exempted income might be negligible or were not capable of fair allocation and might, therefore, have allowed the entire expenses. Had he, however, known that a fair part of the salary paid to the clerk, Kalyanji, i.e, one-fourth of it, went towards the work in connection with the collection of membership subscriptions and lagas, he would surely have exempted the net and not the whole of the exempted receipts. As regards the licence fees of the cabins, the position according to the report was that out of the total area of five thousand square feet hired by the petitioner-company, only one thousand two hundred square feet were utilised in erecting the sixty-five cabins for the use of its members. Part of the electricity expenses went towards the power consumed by the members occupying the cabins and the rest for electricity consumed in the ring and the rest of the premises. If the rent obtained by the petitioner-company from the members constituted income from other sources, the expenses incurred for consuming electricity would be legitimately allocated as expenses incurred for earning income from other sources under section 12. These details were admittedly not known to the Income-tax Officer during the assessment proceedings for the year 1960-61. Had they been before him at that time, it is not unreasonable to think that they might have made a difference. It is, therefore, not possible to refute the contention urged on behalf of the revenue that these details formed information obtained by the Income-tax Officer after the assessment for the assessment year 1960-61 was made or to say that the case is one of a mere change of opinion on the part of the Income-tax Officer as a result of the order passed by the Appellate Assistant Commissioner on April 22, 1962, under which the principle of bifurcation adopted by the Income-tax Officer for the year 1961-62 was approved. If we are correct in this regard, it cannot also be legitimately argued that the initiation of the proceedings under section 148 read with section 147(b) was mala fide, based on an extraneous circumstance, namely, the desire to apply the principle of bifurcation to the assessment for the assessment year 1960-61, and which was approved by the Appellate Assistant Commissioner.
10. Regarding the second contention of Mr. Kaji, it is not possible to say that since the report was made in July, 1964, the details therein contained were relevant only to the conditions prevailing then and not to the conditions prevailing in the year of account relevant to the assessment year 1960-61. The first part of the report dealing with the working of the petitioner-company is obviously general in character and it is not even the case of the petitioner-company that its method of working was any the different in the assessment year 1960-61 than what it was in July, 1964. The same might also be said with regard to the system of maintaining the cabins and collecting licence fees or rent, as the case may be, and the expenditure incurred for electricity, etc. It may be that the number of cabins might perhaps vary, but if that be so it would be possible for the petitioner-company to establish such variations. But the fact that such details might show some variation would not mean that the report did not constitute information which could be the basis for a reason to believe as contemplated by section 147(b).
11. We are, therefore, of the view that the report of the Inspector dated July 8, 1964, constituted information obtained by the Income-tax Officer after the original assessment order was made for the assessment year 1960-61 and since the details contained therein were not furnished at the time of the original assessment, the Income-tax Officer was entitled to initiate proceedings under section 147(b). In this connection, it is well to remember that the Income-tax Officer received the report on July 8, 1964, and acted on it after seven days after considering the position and then issued the notice dated July 15, 1964. The order of the Appellate Assistant Commissioner approving the principle of bifurcation of receipts and expenses was made, on the other hand, on April 22, 1964. The fact that the Income-tax Officer did not issue the notice immediately on receipt of that order or soon thereafter shows at least prima facie that he did not act under section 147(b) because the principle of bifurcation adopted by him was accepted by the Appellate Assistant Commissioner or because of a mere change of opinion approved of by the Appellate Assistant Commissioner. On the other hand, the fact that he moved in the matter some days after he received the report dated July 8, 1964, is an indication that it was the details contained in the report that caused him to initiate the reassessment proceedings and that he considered that information as justifying his belief that expenses were wrongly allowed and that in consequence income had escaped assessment. As regards the question raised by the learned Advocate-General that, besides the report, the order passed by the Appellate Assistant Commissioner dated April 22, 1964, would also constitute information, both he and Mr. Kaji were agreed that it would not be necessary for us to go into that question on which there is a considerable amount of divergence of judicial opinion amongst various High Courts, if we were with the revenue on the question that the report constituted information which would justify the respondent to act under section 147(b). As already held by us, we are of the view that that report did form such information and, therefore, we have decided not to go into the second contention raised by the learned Advocate-General.
12. For the reasons aforesaid, it is not possible for us to accept the contention urged on behalf of the petitioner-company that the notice was invalid and, therefore, the petition will have to be rejected. Order accordingly. The petitioner-company will pay to the respondent the costs of this petition.