K.S Radhakrishnan, J.:— The Commissioner of Income-tax is aggrieved by the order of the Tribunal interfering with the reopening of the assessment under section 143(3) read with section 147 of the Income-tax Act, 1961. The questions of law raised by the Commissioner are consolidated, redrafted and stated as follows:

“(a) Whether, the assessee who is following the mercantile system of accounting was justified in claiming expenditure for liability which did not relate to the previous year relevant to the assessment year on the ground that the assessee was demanding a waiver from the Government and that the amount paid being disputed?

(b) Whether there was failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment justifying reopening of assessment and whether reopening of assessment was on the basis of mere change of opinion of the successor officer?

(c) Whether the Assessing Officer was justified in issuing notice under section 148 after the expiry of four years from the end of the assessment year?”

2. The assessee is a State Government undertaking. Original assessment for the assessment year 1984-85 was completed under section 143(3) on February 10, 1988, fixing the total income at Rs. 2,56,62,398. The assessee at that stage claimed deduction of penal interest levied by the Sales Tax Department for the belated payment of purchase tax amounting to Rs. 63,18,000. The claim was initially allowed by the Assessing Officer. Subsequently the Assessing Officer reopened the assessment by issuing notice dated January 13, 1994, under section 148 on the ground that the assessee was allowed deduction of Rs. 63,18,000 being interest for belated payment of tax even though the expenditure related to earlier years. Reassessment was completed on February 19, 1996, disallowing the claim of interest on belated payment of purchase-tax amounting to Rs. 63,18,000. The assessee took up the matter in appeal before the Commissioner of Income-tax (Appeals). The appeal was dismissed holding that there was failure on the part of the assessee to disclose the fact of liability to pay penal interest of Rs. 63,18,000 which arose not in the relevant previous year but in the earlier years. Consequently reopening of assessment was held justified holding that the assessee had failed to disclose fully and truly all material facts necessary for the assessment year. Dissatisfied with the order of the Commissioner, the assessee took up the matter in appeal before the Tribunal.

3. The Tribunal however took the view that the assessee had disclosed all the material facts at the time of initial assessment and that the assessee had approached the Government for waiver of penal interest and that the reopening of assessment, according to the Tribunal, was in fact done on the basis of change of opinion of the successor officer and not on the basis of fresh evidence obtained by the Department. It was also noticed that from the annual report and the accounts for the year 1983-84 at page 13 item 17 the Department was aware of the fact that there was a default in repayment of purchase-tax by the assessee. The Tribunal noticed that reopening was done by the successor officer on the basis of the same set of facts which were already available at the time of original assessment. Further, it was also held that the reopening was done not on the basis of any failure on the part of the assessee to disclose any material facts before the Assessing Officer. The Tribunal accordingly allowed the appeal and set aside the order. Aggrieved by the same, this appeal has been preferred by the Revenue. Sri P.K Ravindranatha Menon, senior standing counsel for the Revenue, submitted that since the assessee was maintaining its accounts on mercantile basis unless and until the liability to penal interest of Rs. 63,18,000 had crystallised during the previous year relevant to the assessment year 1984-85 the assessee would not be entitled to claim deduction. Counsel submitted that penal interest amounting to Rs. 63,18,000 was levied by the Sales Tax Department in view of the assessee's default in payment of purchase tax for the year 1978-79. Counsel submitted that the assessee was following the mercantile system of accounting wherein receipt being not the sole test of chargeability and profits and gains that have accrued or arisen or are deemed to have accrued or arisen being also liable to be charged for income-tax. The assessability of these profits which are thus credited in the books of account arises not because they are received but because they have accrued or arisen. Counsel also submitted that the endeavour made by the assessee to get out of the liability by preferring appeals to the statutory authorities cannot in any way detract from or retract the efficacy of the liability imposed upon him by the competent authority and in such a situation the assessee is bound to debit the amount as accrued liability. Counsel submitted, liability to pay the amount so far as this case is concerned was not crystallized during the previous year relevant to the assessment year; 19.84-85. Counsel, in support of his contention placed reliance on the decision in Keshav Mills Ltd., v. Commissioner Of Income Tax, Bombay, [1953] 23 ITR 230 (SC) and explained the features of the mercantile system of accounting. Reference, was also made to the decisions “of the'Supreme Court in Calcutta Company Ltd. v. Commissioner Of Income Tax, West Bengal, [1959] 37 ITR 1 and Kedarnath Jute Mfg. Co. Ltd. v. CIT, [1971] 82 ITR 363 (SC). Reference was also made to the decision of the Madras High Court in Pope the King Match Factory v. CIT, [1963] 50 ITR 495.

4. Senior counsel for the Revenue submitted that the assessee had failed to disclose the fact that liability to pay penal interest of Rs. 63,18,000 was not in the relevant assessment year but in the earlier assessment years, which, according to the counsel, is a crucial fact which he ought to have disclosed. Counsel submitted that the assessee had failed to disclose fully and truly all material facts for assessment. Counsel submitted, since this crucial fact was not disclosed the Assessing Officer was justified in issuing notice under section 148 even after the expiry of four years from the end of the assessment, year. In support of this contention, counsel placed reliance on the decision of the Supreme Court in Phool Chand Bajrang Lal v. ITO, [1993] 203 ITR 456. Reference was also made to the decision of this court in N. Sundareswaran v. CIT, [1972] 84 ITR 173, the decision of the apex court in Sowdagar Ahmed Khan v. ITO, [1968] 70 ITR 79, the decision of the Madras High Court in Salem Provident Fund Society Ltd. v. CIT, [1961] 42 ITR 547 and also the decision of this court in United Mercantile Co. Ltd. v. Commissioner Of Income-Tax, Kerala*, [1967] 64 ITR 218. Counsel also explained the meaning of the words “reason to believe” and reference was made to the decision of the Patna High Court in Bhimraj Panna Lal v. CIT, [1957] 32 ITR 289.

5. Counsel appearing for the assessee on the other hand, contended that the Assessing Officer was not justified in reopening the assessment by issuing notice under section 148 of the Income-tax Act. Counsel submitted, admissibility of the expenditure of Rs. 63,18,000 was already disclosed and there was no failure on the part of the assessee in disclosing truly and fully all material facts relating to the assessment for the year 1984-85. Counsel submitted, the assessment was reopened on a change of opinion of the officer concerned and hence reopening was invalid. Counsel further submitted, the liability to pay penal interest of Rs. 63,18,000 got crystallised during the previous year relating to the assessment year 1983-84 and hence the Assessing Officer had committed an error in treating the same as relating to the earlier assessment years. Counsel referred to the letter dated October 23, 1990, issued by the Deputy Commissioner of Income-tax (Assessment) to the assessee which would indicate, according to counsel; the assessee had disclosed all the relevant facts. Reference was also made to the ahnual report and accounts for the year 1983-84. Counsel submitted, all these materials would show that the-assessee had disclosed all the relevant facts.;Resultantly counsel'submitted, the assessing authority was not justified in reopening the assessment and that no question of law has been raised by the Revenue so as to unsettle the order passed by the Tribunal. Counsel placed reliance on the decision of a Division Bench of this court in Commissioner Of Income-Tax v. A.M Zainalabdeen Musaliar, [2001] 250 ITR 534 and also the decision of the Delhi High Court in Bhagat Construction Co. (P) Ltd.… v. Commissioner Of Income-Tax, Delhi-Ii…., [2001] 250 ITR 291. Counsel also made reference to the decision of this court in Dy. Commissioner Of Income-Tax v. Pala Marketing Co-Operative Society Ltd., [2000] 243 ITR 499 and contended that the principle laid down by this court would squarely apply to the facts of this case and there was no failure on the part of the assessee in disclosing material facts necessary for assessment.

6. The assessee admittedly was following the mercantile system of accounting and hence the expenditure should have been claimed in the relevant previous year. The Supreme Court in Keshav Mills' case, [1953] 23 ITR 230, has explained the features of the mercantile system of accounting and held as follows (page 239):

“The mercantile system of accounting or what is otherwise known as the double entry system is opposed to the cash system of bookkeeping under which a record is kept of actual cash receipts and actual cash payments, entries being made only when money is actually collected or disbursed. That system brings into credit what is due, immediately it becomes legally due and before it is actually received and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed. The profits or gains of the business which are thus credited are not realised but having been earned are treated as received though in fact there is nothing more than an accrual, or arising of the profits at that stage. They are book profits. Receipt being not the sole test of charge-ability and profits and gains that have accrued or arisen or are deemed to have accrued or arisen being also liable to be charged for income-tax, the assessability of these profits which are thus credited in the books of account arises not because they are received but because they have accrued or arisen.”

7. Keshav Mills' case, [1953] 23 ITR 230 (SC) was later followed in Calcutta Co.'s case, [1959] 37 ITR 1 (SC). The. Madras High Court in Pope the King Match Factory's case, [1963] 50 ITR 495 examined: the question as to when the liability, accrues. In that case a demand: for excise duty amounting to Rs. 21,373.70 was served on the assessee by the Collector of Excise on December 9, 1954, and though the assessee objected.to the demand and was seeking to get the order reversed, he debited the amount; in his accounts on April 12, 1955, the last day of his accounting year, and claimed the amount as a deductible allowance in computing his income for the assessment year 1955-56 on the ground that he was keeping his accounts on the mercantile basis and a legal liability to pay the amount had accrued in the accounting year 1954-55 when he received the demand. The claim was disallowed by the income-tax authorities on the ground that the assessee did not actually pay the amount and he disputed his liability to pay the amount and preferred appeals before the statutory authorities. Allowing the appeal, the Madras High Court held as follows (page 499):

“The liability to pay excise duty on the part of the assessee arose out of the levy of the duty and the demand made against him for payment of such duty. Any dissatisfaction on his part regarding the quantum or propriety of the assessment and levy of the duty cannot minimise the liability or impair its effectiveness. He may raise a dispute over it and strain every nerve to avoid that liability. He may file appeals to the proper authorities questioning the imposition of the liability and praying for relief by way of cancellation of the duty. These are only constitutional modes in which a subject reacts to the levy of taxes and, indeed, there is nothing improper in them. A protest or opposition by a subject to the levy of tax or other duties payable to the Government cannot carry with it the implication that there is no proper levy legally recoverable till such protest or opposition ceases or is silenced…. There was nothing uncertain, tentative, provisional, or contingent, in the matter of the assessee's liability to pay the excise duty. It was a clear-cut unqualified liability which was imposed upon the assessee who became bound in law to discharge it whatever hopes he might have entertained of escaping from that liability by preferring appeals to the hierarchy of authorities under the Excise Act.”

8. The apex court in Kedarnath Jute Mfg. Co. Ltd.'s case, [1971] 82 ITR 363 held that the assessee who is following the mercantile system of accounting was entitled to deduct from the profits and gains of its business liability to sales tax which arose on sales made by it during the relevant previous year and that liability did not cease to be a liability because the assessee had taken proceedings before the higher authorities for getting it reduced or wiped out so long as the contention of the assessee did not prevail. Further the court held, the fact that the assessee had failed to debit the liability in its books of account did not debar it from claiming the sum as a deduction either under section 10(1) or under section-10(2)(xv).

9. The abovementioned decisions would clearly show that since the assessee was following the mercantile system of accounting, expenditure should have been claimed in the relevant previous year. The claim of penal interest amounting to Rs. 63,18,000 was made by the Sales Tax Department in view of the assessee's default in payment of purchase-tax of the year 1978-79. The facts would indicate that the Sales Tax Department had demanded penal interest of Rs. 63,18,000 much before 1983 and therefore the assessee was not right in stating that the liability to pay that amount crystallised during the previous year relating to the assessment year 1984-85. The abovementioned factual position is undisputed. We are, therefore, of the view, the assessee is not entitled to get the deduction for the abovementioned amount since it had not accrued during the previous year relating to the assessment year 1984-85 benefit of which should not have been claimed by the assessee and got approved when the assessment was completed under section 143(3) on February 10, 1988.

10. We are of the view, the assessee which is otherwise not entitled to claim deduction, claimed it and got it approved and has committed a gross illegality by projecting incorrect facts and that the assessee was not disclosing fully and truly all relevant facts. The assessee should not have claimed the benefit to which the assessee is not otherwise entitled since the assessee is following the mercantile system of accounting. The very purpose and object of section 147 and also a proviso to section 147 as amended would be defeated if such a plea is accepted. We may in this connection refer to section 147(a) which is extracted below for easy reference:

“147. Income escaping assessment.—If—

(a) If the Assessing 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 assessment year to the Assessing Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, or.”

11. Section 147 deals with income escaping assessment. Section 147 would indicate that the assessee is bound to disclose fully and truly all material facts necessary for the assessment. The assessee who is getting a benefit to which he is otherwise not entitled, is not disclosing fully and truly all material facts. If the assessee is not entitled to get.that benefit the assessee should not have claimed it and if the assessee claims and gets it, it will be based on untrue materials which the assessee should not have placed before the assessing authority since those materials are unnecessary for the assessment of that year. Further, in our view, the information furnished by the assessee should be information relevant and necessary for completing the assessment. Information gathered by the assessing authority need not be external information. On the available materials themselves, he can get himself informed of a patent error committed by the officer concerned which would also fall under clause (b) of section 147. Belief of the Income-tax Officer that income had escaped assessment would be sufficient for invoking section 147(a) of the Act. We may point out that the proviso to section 147 was amended with effect from April 1, 1989, which stipulates that where assessment under section 143 has been made for the relevant assessment year, no action shall be taken under section 147 after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or to disclose fully and truly all material facts necessary for the assessment year. The relevant assessment year in this case is 1984-85 and notice under section 148 was issued only in 1994 and hence we may refer to section 147 as amended by the Direct Tax Laws (Amendment) Act, 1987 with effect from April 1, 1989. Unamended section 147, we have already extracted in the earlier part of the judgment. Section 147, as amended is extracted below for easy reference.

“147. If the Assessing Officer has reason to believe that any 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 and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year):

Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under subsection (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year.

Explanation 1.—Production before the Assessing Officer of account books or other evidence from which material evidence could, with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso.

Explanation 2.—For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely:—

(a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax;

(b) where a return of income has been furnished by the assessee but, no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return;

(c) where an assessment has been made, but—

(i) income chargeable to tax has been underassessed; or

(ii) such income has been assessed at too low a rate; or

(iii) such income has been made the subject of excessive relief under this Act; or

(iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed.”

12. Notice in this case was issued under section 148 in the year 1994 when section 147 as amended was in force. There was no failure on the part of the assessee to file return. However, the assessee did not disclose the fact that liability to pay penal interest arose not in the relevant assessment year but in the earlier assessment years. Consequently the assessee did not disclose a material fact necessary for assessment of the assessee for the assessment year 1984-85. In other words, the assessee had failed to disclose this material fact. Consequently, the Assessing Officer was justified in issuing notice under section 148 after the expiry of four years from the end of the assessment year. The above being the factual and legal position, the contention raised by the assessee placing reliance on the letter dated October 23, 1989, and the letter dated October 25, 1990, issued by the Deputy Commissioner of Income-tax (Assessment), Trivandrum, and the reply filed by the assessee are of no relevance or consequence.

13. The assessee, in our view, had claimed a benefit which he should not have claimed, a fact which was well within the knowledge of the assessee. The assessee who was following the mercantile system of accounting should not have claimed deduction of penal interest which had accrued not in the previous year relevant to the assessment year but in the earlier years. Non-disclosure of the fact of liability to pay penal interest under the Kerala General Sales tax Act was not in the relevant previous assessment year but in the earlier assessment years. This the assessee had not disclosed. Silence on the part of the assessee may at times lead to the impression of nondisclosure of full and true facts. We may in this connection refer to the decision of the apex court in Phool Chand Bajrang Lal's case, [1993] 203 ITR 456 wherein the court held as follows (page 478):

“We are not persuaded to accept the argument of Mr. Sharma that the question regarding the truthfulness or falsehood of the transactions reflected in the return can only be examined during the original assessment proceedings and not at any stage subsequent thereto. The argument is too broad and general in nature and does violence to the plain phraseology of sections 147(a) and 148 of the Act and is against the settled law laid down by this court. We have to look to the purpose and intent of the provisions. One of the purposes of section 147 appears to us to be to ensure that a party cannot get away by wilfully making a false or untrue statement at the time of original assessment and when that falsity comes to notice, to turn around and say ‘you accepted my lie, now your hands are tied and you can do nothing’. It would be a traversity of justice to allow the assessee that latitude.”

14. We are of the view, the above decision would squarely apply to the facts of this case. This is a case where the assessee has got an undue benefit which it should not have got since it was following the mercantile system of accounting. The assessee had disclosed certain materials and on the basis of the same the assessee got some benefit which it should not have got.

15. We are, therefore, inclined to allow this appeal and set aside the order of the Tribunal. The contention of the assessee that no substantial question of law arises for consideration is rejected. The questions of law raised are substantial questions of law. The questions referred to us are answered in favour of the Revenue and against the assessee.