1. In this case, at the instance of the revenue, the following question has been referred to us for our opinion :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in upholding the Appellate Assistant Commissioner's order cancelling reassessment under
section 147(b) read with section 148 of the Income-tax Act, 1961 ?"
2. We are concerned in this case with the assessment year 1965-66, the relevant previous year being financial year ending on March 31, 1965. In respect of this assessment year the original assessment order was passed by the Income-tax Officer concerned on October 7, 1969. He assessed the income of the assessee which is a public limited company carrying on business of manufacture of textiles in Ahmedabad to be Rs. 1,58,18,442 and while computing that income, education cess of Rs. 68,882 was held to be an admissible expenditure. Later on, the Income-tax Officer thought that such education cess had been wrongly allowed. He, therefore, initiated reassessment proceedings under section 147(b) to withdraw the education cess allowance. These reassessment proceedings were initiated on March 31, 1970, by issuing the appropriate notice under section 148. In the reassessment order which was passed by the Income-tax Officer on March 25, 1971, he held that the education cess had been wrongly allowed as an item of admissible expenditure. He, therefore, brought that item back for the purpose of taxation. He further held that rebate under clause 1(b)(ii) of Paragraph F of Schedule I of Finance Act, 1965, had been wrongly allowed at the rate of 35 per cent. in the original assessment order but on merits he found that it should have been allowed at the rate of 30 per cent., that rebate being called depreciation. The orders of the Appellate Assistant Commissioner and the Appellate Tribunal proceeded on the footing that it was withdrawal of depreciation as ordinarily understood but in reality it was 5 per cent. of the rebate under clause 1(b)(ii) of Paragraph F of Schedule I of Finance Act, 1965, as stated above. It is an admitted position that proceedings under section 147(b) were initiated only on the ground that education cess amounting to Rs. 68,882 had been wrongly allowed in the original assessment proceedings as an item of admissible expenditure. Against the order in reassessment proceedings, the assessee-company appealed and the Appellate Assistant Commissioner held that in view of the decision of the Supreme Court in Jaipuria Samla Amalgamated Collieries Ltd. v. Commissioner of Income-tax [1971] 82 ITR 580 (SC), the item of education cess was an admissible expenditure. The Appellate Assistant Commissioner further held that since this cess was an item of admissible expenditure, there was no legal sanction behind the Income-tax Officer's action in reopening the assessment under section 147(b) of the Income-tax Act, 1961, because the cause of action for which the assessment proceedings were sought to be reopened was non-existent. The Appellate Assistant Commissioner, therefore, cancelled the order of reassessment passed by the Income-tax Officer under section 147(b).
3. Against the decision of the Appellate Assistant Commissioner the matter was carried in appeal to the Appellate Tribunal by the revenue. In its order the Tribunal observed that the point at issue was whether if the cause of action for which reassessment proceedings were initiated was found to be non-existent, some other aspects of the assessment which were also revised in such reassessment proceedings could be allowed to remain intact. The Tribunal relied upon the decision of this High Court in Kanji Ranchhod v. Commissioner of Income-tax [1966] 61 ITR 339 (Guj) and confirmed the order of the Appellate Assistant Commissioner. The Tribunal's view was that once it was found that the addition made by the Income-tax Officer in respect of education cess in reassessment proceedings was bad in law and that was the only reason adopted, the bottom was knocked out of the Income-tax Officer's jurisdiction for opening the assessment proceedings and that being the case, the reassessment proceedings had to go as a whole. In view of this conclusion the Tribunal held that the Appellate Assistant commissioner was right in law in cancelling the reassessment order passed in exercise of the jurisdiction under section 147(b) of the Act. Thereafter, at the instance of the revenue, the question set out hereinabove had been referred to us.
4. In order to appreciate the legal position, it must be pointed out that the decision to reopen the case was taken by the Income-tax Officer on March 31, 1970, and the decision in the reassessment proceedings was given by the Income-tax Officer on March 25, 1971. The decision of the Supreme Court in Jaipuria Samla Amalgamated Collieries Ltd. v. Commissioner of Income-tax [1971] 82 ITR 580 (SC), was delivered by the Supreme Court on August 31, 1971, and thus at the time when the Income-tax Officer decided to reopen the proceedings, that is, on March 31, 1970, he could not have had the benefit of the decision of the Supreme Court in Jaipuria Samla Amalgamated Collieries Ltd. v. Commissioner of Income-tax [1971] 82 ITR 580 (SC).
5. The point which has directly arisen before us on the question referred to us also came up before this court in Commissioner of Income-tax v. Maneklal Harilal Spg. & Mfg. Co. Ltd. [1977] 106 ITR 24 (Guj) (Income-tax Reference No. 77 of 1974, decided on November 24, 1975). There also the question was whether the reassessment proceedings could be said to be validly initiated when the ground on which the reassessment proceedings were initiated was subsequently found to be non-existent of the position of law as subsequently explained. In that particular case the facts were that the notice under section 147 was issued by the Income-tax Officer concerned on March 28, 1964. On April 24, 1964, the Supreme Court decided the question regarding the particular aspect on the basis of which the notice under section 148 for initiation of reassessment proceedings was issued. That decision was in Commissioner Of Income Tax, Madras v. Mir Mohammad Ali . [1964] 53 ITR 165 (SC). Hence, by the time the reassessment proceedings were heard, the question regarding which the notice under section 148 for initiating reassessment proceedings was issued, was no longer open so far as the revenue was concerned as by that time the question had already been decided against the revenue and in favour of the assessee. Hence, that particular point regarding which the notice of reassessment was issued had to be decided in favour of the assessee by the Income-tax Officer himself. But once the reassessment proceedings were opened, he considered other items also and passed orders regarding those other items which were not included in the notice under section 148 when initiating reassessment proceedings. Thus, so far as the facts of that particular case in Commissioner of Income-tax v. Maneklal Harilal Spg. & Mfg. Co. Ltd. [1977] 106 ITR 24 (Guj) were concerned, they were practically the same as in the instant case before us. After examining the legal provisions and the several decisions on the point, it was held by this court that it could not be said that the reason for the belief of the Income-tax Officer did not exist at all at the time when he initiated the proceedings though it may turn out subsequently that the view of law on which he initiated the reassessment proceedings was erroneous in the light of the decision of the Supreme Court in Mir Mohammad Ali's case [1964] 53 ITR 165 (SC). It was, therefore, held by this court that the Tribunal erred in law in holding that the foundation can which the reassessment proceeding were based having vanished, the Income-tax Officer could not bring in the reassessment more items of income or withdraw excessive relief allowed at the time of original assessment. It was also held that the reassessment proceedings were legally initiated and it could not be said that they were bad in law. In our opinion, the reasoning in Commissioner of Income-tax v. Maneklal Harilal Spg. & Mfg. Co. Ltd. [1977] 106 ITR 24 (Guj) would directly apply to the case before us.
6. However, Mr. B. R. Shah for the assessee, contended before us that there was no "information" before the Income-tax Officer when he initiated proceedings under section 147(b) read with section 148 and, therefore, the instant case on facts can be distinguished from the decision of this court in Commissioner of Income-tax v. Maneklal Harilal Spg. & Mfg. Co. Ltd. [1977] 106 ITR 24 (Guj).
7. It may be pointed out that the decision of this High Court in Kanji Ranchhod v. Commissioner of Income-tax [1966] 61 ITR 339 (Guj.), which was relied upon by the Tribunal, has been subsequently dissented from so far as the particular aspect applicable to this line of cases was concerned by a Full Bench of this court in Poonjabhai Vanmalidas and sons v. Commissioner of Income-tax [1974] 95 ITR 251 (Guj) [FB], where all the case up to the date of delivery of the judgment were considered and the legal position was summarized by the Full Bench as follows :
"...... the correct legal position is that if there are some reasonably grounds for the Income-tax Officer to believe that there had been non-disclosure of material facts, that would be sufficient to give him jurisdiction to issue the notice under section 34. The action of the Income-tax Officer in starting proceedings under section 34 is open to challenge in a court of law only to a limited extent, viz. : (1) whether the Income-tax Officer held the belief that there had been such non-disclosure; and (2) the belief must be held in good faith; it cannot be merely a pretence; and it is open to the court to examine the question whether the reasons for the belief have a rational connection or a relevant bearing upon the formation of the belief and are not extraneous or irrelevant for the purpose of the section. Therefore, if there are in fact reasonable grounds for the Income-tax Officer to believe that there was any non-disclosure of material facts, it is open to him to issue a notice and the issuance of the notice is open to challenge in a court of law to the limited extent indicated above, viz., (1) that such belief was not at all held; or (2) that the belief was not held in good faith and was merely a pretence."
8. Therefore, the question that had to be considered is whether in the instant case the Income-tax Officer at the time when he issued the notice had the "information" contemplated by section 147(b) and on the basis of that "information" reasonably believed that income chargeable to tax had escaped assessment for any assessment year. The observations of the Full Beach in connection with section 147(a) would equally apply so far as this case is concerned to "information" in section 147(b) as well.
9. The order of the Income-tax Officer in reassessment proceedings shows that after the original assessment order was passed on October 7, 1969, determining the total income of Rs. 1,58,18,442 the Income-tax Officer had received "information" that all business concerns were levied an education cess in respect of the land in which the business premises of the assessee concerned were situated. "Information" was also received about the nature of education cess levied by the State Government and from this "information" it was clear that the education cess could not be allowed as a deduction. On account of these reasons it was clear that income had escaped assessment and the assessment was hence reopened under section 147(b) on March 31, 1970. The assessee submitted its return of income under protest on April 30, 1970. He has further pointed out in there assessment order that the full implications of the Gujarat Education Cess Act were not within the knowledge of the Income-tax Officer when a claim was made for municipal taxes which also included the education cess. It was considered that this would be an allowable deduction under section 30 of the Act of 1961. The knowledge that education cess was a State levy was not apparent to the Income-tax Officer. Moreover, the nature of the education cess was also not know to the Income-tax Officer while completing the original assessment and it was only after receipt of the information as to the nature of the levy, that the Income-tax Officer became aware that it would not be an allowable deduction and the assessment was, therefore, reopened.
10. Mr. Shah for the assessee has drawn our attention to a letter dated April 14, 1970, addressed by the Income-tax Officer to the assessee before us and in that letter it was pointed out that in view of the decision of the Allahabad High Court in Dehra Dun Tea Co. Ltd. v. Commissioner of Income-tax [1969] 74 ITR 139 (All) education cess could not be held to be an item of deductible expenditure under the provisions of the Act. This letter of April 14, 1970, thus shown the belief which was entertained by the Income-tax Officer at the time when he decided to issue the notice for reassessment proceedings on March 31, 1970. A similar question regarding a similar notice issued to another limited company carrying on textile manufacturing business in Ahmedabad came up before a Division Beach of this court in Special Civil Application No. 646 of 1970, decided on November 22, 1973. There also the assessee had received a notice similar to this letter of April 14, 1970. In that case the letter was dated April 22, 1970, and in that letter also the Income-tax Officer had relied upon the decision of the Allahabad High Court in Dehra Dun Tea Co. Ltd. v. Commissioner of Income-tax [1969] 74 ITR 139 (All). After considering all the decisions it was held by the Division Bench that the judgment of the Allahabad High Court in Dehra Dun Tea Company Ltd. v. Commissioner of Income-tax [1969] 74 ITR 139 (All) gave requisite information to the Income-tax Officer as contemplated by section 147. The Allahabad High Court considered the case of deduction on account of U. P. Large Land Holdings Tax Act, 1957. It was a tax on holdings and was payable irrespective of the question whether the holding in question was put under cultivation. The Allahabad High Court held that the amount of such a tax was not allowable as deduction in computing the business income of the assessee as there was no nexus between the tax and the business of manufacturing tea which was carried on by the assessee in that case. Thus, this decision supplied a ratio to the effect that if a tax on land had no nexus with the business carried on by an assessee and became leviable irrespective of the fact whether the land was taken into use or not, then no deduction on account of such tax could be given under section 37 of the Act. This decision of the Allahabad High Court had been brought to the notice of the Income-tax Officer in the instant case also and it is thus obvious that the decision furnished to the Income-tax Officer "information" that the deduction given in the relevant assessment year under reference on account of education cess would be improper if the payment of the cess had not nexus with the business of the assessee concerned. For the reasons set out in the judgment in Special Civil Application No. 646 of 1970, in the instant case also, it must be held that the decision of the Allahabad High Court in Dehra Dun Tea Company Ltd. v. Commissioner of Income-tax [1969] 74 ITR 139 (All) supplied sufficient "information" to the Income-tax Officer to entertain a reasonable belief that income chargeable to tax had escaped assessment for the assessment year under reference.
11. Mr. Shah, for the assessee, urged before us that much prior to the decision of the Allahabad High Court in Dehra Dun Tea Company Ltd. v. Commissioner of Income-tax [1969] 74 ITR 139 (All), the Privy Council in Commissioner of Income-tax v. Gurupada Dutta [1946] 14 ITR 100 (PC) had dealt with the question whether a rate imposed under similar circumstances could be held to be a deductible expenditure for purposes of business. The Privy Council in the case had considered the provisions of section 10(4) of the Indian Income-tax Act, 1922, comparable to section 40(a)(ii) of the Act of 1961. The Privy Council had held that the rate imposed under the provisions of the Bengal Village Self-Government Act, 1919, on a person occupying a building within the Union, and using the same for the purpose of business is an allowable deduction in computing the profits of the business under section 10 of the Indian Income-tax Act and the Privy Council held that the assessee, on establishing the portion of the rate which was so referable, would be entitled to deduct such portion under section 10(2)(ix) of the Act of 1961. Mr. Shah contended that in view of this decision of the Privy Council it could not be said that even in the light of the Allahabad High Court decision in Dehra Dun Tea Company Ltd. v. Commissioner of Income-tax [1969] 74 ITR 139 (All) the Income-tax Officer could have entertained the reasonable belief that education cess had been wrongly allowed as a deductible expenditure in the original assessment proceedings. We find, however, that in Travancore Titanium Products Ltd. v. Commissioner of Income-tax [1966] 60 ITR 277 (SC), the Supreme Court had made a distinction about the capacity in which the tax is paid, that is, whether it is paid by the assessee in his capacity as the owner of the particular asset or in his capacity as a trader or manufacturer. In delivering the judgment in Dehra Dun Tea Company Limited v. Commissioner of Income-tax [1969] 74 ITR 139 (All), the Allahabad High Court had followed the decision of the Supreme Court in Travancore Titanium Products Ltd. v. Commissioner of Income-tax [1966] 60 ITR 277 (SC). It was only after the decision of the Supreme Court in India Aluminium Co. Ltd. v. Commissioner of the Income-tax [1972] 84 ITR 735 (SC) that the observations of the Supreme Court in Travancore Titanium Products Ltd. v. Commissioner of Income-tax [1966] 60 ITR 277 (SC) were to some extent modified and it was stated in Indian Aluminium Co. Ltd. v. Commissioner of Income-tax [1972] 84 ITR 735 (SC) that if the expenditure is laid out be the assessee as owner-cum-trader, and the expenditure is really incidental to the carrying on of his business, it must be treated to have been laid out by him as a trader and as incidental to his business. It must also be pointed out that, subsequently, following its own earlier decision in Indian Aluminium Co. Ltd. v. Commissioner of Income-tax [1972] 84 ITR 735 (SC), the Supreme Court has in its decision in Dehra Dun Tea Co. Ltd. v. Commissioner of Income-tax [1973] 88 ITR 197 (SC) reversed the decision of the Allahabad High Court.
12. In view of this expression of opinion of the Allahabad High Court in Dehra Dun Tea Co. Ltd. v. Commissioner of Income-tax [1969] 74 ITR 139 (All), which decision was based on the observations of the Supreme Court in Travancore Titanium Products Ltd. v. Commissioner of Income-tax [1966] 60 ITR 277 (SC), it cannot be said that the entertainment of the belief by the Income-tax Officer that the education cess levied under the provisions of the Gujarat Education Cess Act was not admissible as a deductible expenditure was unreasonable. It cannot be said that there was no basis whatsoever for the Income-tax Officer to entertain this belief. We must point out that the conclusion that we are reaching on this particular aspect is because of the decisions in Travancore Titanium Products Ltd. v. Commissioner of Income-tax [1966] 60 ITR 277 (SC) and Dehra Dun Tea Co. Ltd. v. Commissioner of Income-tax [1969] 74 ITR 139 (All) which intervened between the decision of the Privy Council in Commissioner of Income-tax v. Gurupada Dutta [1946] 14 ITR 100 (PC) and the formation of the belief by the Income-tax Officer when he issued the notice on March 31, 1970.
13. The bona fides of the Income-tax Officer in entertaining the belief regarding non-admissibility of education cess as an item of business expenditure has not been challenged before us and hence in the light of the tests which were culled out by this High Court in the Full Bench decision in Poonjabhai Vanmalidas & Sons v. Commissioner of Income-tax [1974] 95 ITR 251 (Guj) [FB] it must be held that the belief was in fact held by the Income-tax Officer when he initiated the proceedings and the belief was held in good faith and was not merely a pretence.
14. We must point out that the merits of the case regarding the withdrawal of 5 per cent. of the rebate under clause 1(b)(ii) of Paragraph F of Schedule I of Finance Act, 1965, has not been examined either by the Appellate Assistant Commissioner or by the Tribunal and whether that withdrawal was justified in law or not on merits will have be examined by the authorities concerned. At the present stage we are merely considering whether the initiation of the reassessment proceedings under section 147(b) of the Income-tax Act, 1961, was valid or not and, secondly, whether the only ground on which the reassessment proceedings were initiated having subsequently been found in favour of the assessee, the reassessment proceedings in respect of other items held against the assessee in reassessment proceedings in respect of other items held against the assessee in reassessment proceedings would be valid. In view of the decision of this court in Commissioner of Income-tax v. Maneklal Harilal Spg. & Mfg. Co. Ltd. [1977] 106 ITR 24 (Guj), it must be held that the initiation of the reassessment proceedings having been found to be valid and proper, it must be held that the Income-tax Officer had the power to include in reassessment proceedings this item of withdrawal of 5 per cent. of the rate under clause 1(b)(ii) of Paragraph F of Schedule I of Finance Act, 1965.
15. We, therefore, hold that the Tribunal was not justified in law in upholding the Appellate Assistant Commissioner's Order by which the reassessment under section 147(b) read with section 148 of the Income-tax Act, 1961 was cancelled. We, therefore, answer the question referred to us in the negative, that is, in favour of the revenue and against the assessee. The assessee will pay the costs of this reference to the Commissioner.
16. Question answered in the negative.