Civil Rule No. 11265(W) to 11267 (W) of 1976

Decided on March 18, 1982

The Judgment of the Court was delivered by

M.N Roy, J.:— The petitioner, Century Enka Ltd. (hereinafter referred to as the “said company”), was incorporated for the object, inter alia, of “carrying on the business of manufacturers and processors of polymide, polyester, rayon or any other types of man-made fibres; of silk, wool, cotton or any other types of natural fibres; or in general or any fibres, filaments, yarns and fabrics (whether textile, felted, looped or otherwise) manufactured and/or processed from any base, whether organic or inorganic or compounds of mixtures thereof, by physical, chemical or any other process of treatment now prevalent or as may be devised in future, and of spinning, blending, combing, weaving, knitting, bleaching, processing, dyeing, printing, making or otherwise turning to account any other fabrics or finished articles thereof and of manufacturing the chemicals, dyestuffs, equipments, washing, bleaching and dyeing materials, raw materials, packing materials, and all other requisites needed for all or any of the above-purposes and of the by-products which can be conveniently produced therefrom and to buy, sell, import, export, distribute, trade, barter, exchange, pledge, make advances upon, speculate, enter into forward transactions or otherwise deal in all or any of the foregoing”, under the provisions of the Companies Act, 1956, and they carry on business, inter alia, of manufacture, process and sale of polymide, polyester, rayons or any other type of man-made fibres of silk, wool, cotton or any other types of natural fibres. It has been stated that on or about 1969, they established an industrial undertaking at Bhosai, Poona, for the manufacture and/or process of nylon yarn and other fibres and the nylon yarn as manufactured by them, at all material times, was known and still they are known as “Enkalon”. The said production, as mentioned above, had commenced in or about October, 1969.

2. Section 80J of the I.T Act, 1961 (hereinafter referred to as “the said Act”), lays down the provisions or deal with deduction in respect of profits and gains from newly established industrial undertakings or ships or hotel business in certain cases and it has been claimed by the said company, that their undertaking satisfied all the conditions laid down in sub-s. (4) of s. 80J of the said Act. The said company has stated that on or about 14th August, 1973, they filed the return under the said Act for the assessment year 1973-74, the relevant previous year for which was the year ended on 30th September, 1972, and thereafter, on or about 7th May, 1975, a revised return was filed. It has been claimed that in the said return and/or in the course of the assessment proceedings, the said company disclosed fully and truly all materials and primary facts necessary for the concerned assessment and in response to notices issued by the ITO, Central Circle XV, Calcutta, respondent No. 1, a representative of the said company appeared from time to time and produced all relevant papers, accounts and documents, which again were examined and discussed by the said officer and, on such, by an order of assessment dated 17th November, 1975, made under s. 143(3) of the said Act for the concerned year 1973-74, he assessed the total income of the said company at Rs. 1,74,01,933. It has been stated further that in making such assessment, the officer concerned rejected the contentions as raised by the said company and applied r. 19A of the I.T Rules, 1962 (hereinafter referred to as “the said Rules”), for the computation of the capital employed in the undertaking of the said company. It was stated that the officer concerned computed the capital employed as on 1st October, 1971, and determined the same at Rs. 5,72,19,430 and the amount of admissible deduction under s. 80J as aforesaid was determined at Rs. 34,33,166, viz., @ 6% on the said sum of Rs. 5,72,19,430. The said company has alleged that in making such determination, the amount of capital employed in the concerned under taking, the officer concerned, wrongfully and illegally took into consideration the value of assets only on the first day of the relevant previous year and further deducted the amount of borrowed capital.

3. From such order of assessment, the said company preferred an appeal before the AAC, Central, and it has been stated that such appeal was pending on the date of obtaining the Rule, which was on 31st August, 1976. It was also the case of the said company that by an application made under art. 226 of the Constitution of India, they challenged the legality and the validity of r. 19A of the said Rules and the concerned assessment order as also the computation of the capital employed by them.

4. Thereafter, on or about 23rd June, 1976, the said company received a notice of that date from respondent No. 1 as mentioned above, under s. 148 of the said Act, for the assessment year 1973-74, wherein it was alleged that the said officer, who was one Shri K.C Mukherjee, had reason to believe that the said company's income chargeable to tax for the concerned assessment year, had escaped assessment within the meaning of s. 147 of the said Act and, therefore, he proposed to reassess the same and thus required the said company to file a return for the assessment year as mentioned above. The present application is directed against such initiation. The said company has also stated that by a letter of 20th July, 1976, they requested the officer concerned to extend the time to file the return under the notice in question, apart from denying and disputing by the letter of 16th August, 1976, all and every allegations as made in the concerned notice and contending further that the ITO concerned had no materials whatsoever to form the requisite belief and the conditions necessary and precedent for assumption of jurisdiction to issue the notice as impeached had not been fulfilled and satisfied and the notice in question was wrongful, illegal and without jurisdiction. On such grounds the said company requested the officer concerned to disclose the reason and belief for the issuance of the concerned notice. However, on 17th August, 1976, the said company filed a return for the asssssment year in question and that too under protest, pursuant to the directions in the said notice and thereafter on 18th August, 1976, they again requested the officer concerned to disclose the alleged reasons for the notice in question and to act according to law. It has been stated by the said company that even in spite of the above, the officer concerned has not disclosed the reasons and was determined to proceed in the matter wrongfully and illegally.

5. In this proceeding, it was claimed by or on behalf of the said company, that the conditions precedent and necessary to confer jurisdiction upon the ITO concerned to issue the notice as impeached under s. 148 of the said Act did not exist and were not fulfilled or satisfied. It has been claimed that there was no existence of the alleged belief and the said belief was merely a pretence and was not held in good faith. That apart, it has been claimed that the notice in question was issued with an ulterior motive to make a fishing and roving enquiry and investigation. The said company has denied each and every allegation in the concerned notice, apart from denying and disputing the fact that any income chargeable to tax for the assessment year in question had or has escaped assessment and have stated that there could be no reason or material whatsoever before the ITO concerned, on the basis whereof he could bona fide or reasonably form the requisite belief that any income has escaped assessment for the concerned year.

6. It was claimed by the said company that they had disclosed fully and truly all materials and primary facts necessary for the assessment under the said Act for the assessment year in question, in the course of the original assessment proceedings and there was no omission or failure whatsoever on their part to disclose fully and truly all materials and primary facts. On such, it was alleged as mentioned above, that there could be no reasons and materials whatsoever, before the assessing officer, on the basis whereof, he could believe or form any belief bona fide or reasonably that there had been any omission or failure on the part of the said company to disclose fully and truly all materials and primary facts. It was also claimed that escapement, if any, which was denied and disputed, was not due to or caused by any omission or failure on the part of the said company to disclose fully and truly the relevant facts and materials. Apart from the above, the said company also claimed that there was no new information or material as to any new fact or law which came into the possession of the ITO concerned which was not known to him at the time of the original assessment and no information within the meaning of s. 147(b) of the said Act had come to his possession, subsequent to the original assessment in question, in consequence whereof, the said officer Could have any reason to form the belief to the effect as mentioned above. It was also alleged by the said company that the reassessment proceeding in the instant case was initiated for collateral purposes and with ulterior motive. It was further alleged that the ITO concerned was proceeding in the matter on a mere change of opinion on the same facts or law and the proceedings as initiated was intended to reconsider and review or revise matters already decided or concluded at the time of the original assessment. In short, it has been claimed that by such act or action, the ITO concerned was seeking to sit in appeal over the earlier decision.

7. It was also, and categorically, stated that the alleged reasons, materials and informations, if any, had no rational connection and nexus or live link with and are not relevant to the formation of the requisite belief and are irrelevant and extraneous to the purpose of s. 147 of the said Act. Apart from all the above submissions, it was also claimed and contended that the ITO concerned was not acting on his own but had initiated the proceeding at the behest and dictates of his superior. In fact, it has been stated that the said officer did not apply his mind personally in the matter or exercise his independent judgment.

8. As mentioned above, the original assessment order was made by one Shri K.C Mukherjee, ITO, Central Circle XV, Calcutta, and it has been stated that the notice as impeached and as disclosed in annex. B to the petition, was also issued by him. The said officer has himself affirmed the affidavit-in-opposition on 30th January, 1978. He has stated that subsequent to the completion of the original assessment for the year 1973-74, information came to his possession and in consequence thereof he had reasons to believe that the income of the assessee chargeable to tax had escaped assessment for that year and, as such, the impugned notice dated 23rd June, 1976, was issued by him for the assessment year 1973-74 in question. It was his case that conditions precedent and necessary to confer jurisdiction upon him, in the matter of issuing the notice in question, did exist and were fulfilled and he, on being satisfied, had issued the notice which was legal, valid and proper. He categorically denied that the belief in the instant case was a pretence or the same was not held in good faith, apart from denying the fact that the notice in question was issued with any ulterior motive or for making a fishing or roving investigation.

9. To establish the circumstances for which the said officer had formed his belief, he has stated that the said company started production of nylon yarn during the year ended on 30th September, 1970, corresponding to the assessment year 1971-72 and the original assessment of them for the assessment year 1973-74 was completed on 17th November, 1975. It was his case that subsequent to the completion of the said original assessment he received information from the D.I (Investigation), New Delhi, through the Commissioner of Income-tax, Central-I, to the effect that the manufacturers of synthetic yarn collect security deposits for cops and spools from purchasers of yarn and that if the supply of the cops and spools was an integral part of the sale transaction, then the security deposits for the cops and spools collected by the manufacturer of synthetic yarn from the purchasers of yarn were trading receipts liable to tax in view of the Supreme Court decisions in the cases of Punjab Distilling Industries Ltd. v. CIT, [1959] 35 ITR 519 and in the case of CIT v. Punjab Distilling Industries Ltd., [1964] 53 ITR 75. It was the case of the deponent that having received such information from the authorities as mentioned above, he examined the assessment records of the said company for the assessment year 1973-74 and from such records it was found that the said company was a manufacturer of synthetic yarn called “Enkalon” in commercial parlance and the said yarn is wound around cops and the yarn and is sold to the purchasers, who apart from paying the price have also to make deposits in respect of the value of the cops. Such deposits, according to the said deponent, had not been included in the sale proceeds and had been separately shown under the head “Sundry creditors”. He has stated that at the end of the assessment year 1973-74, the said company had security deposit for cops amounting to Rs. 3,88,544 plus cops deposit forfeited for Rs. 46,076, aggregating to Rs. 4;30,620, from purchasers of yarn. He has stated that such security deposits were trading receipts in accordance with the principles as laid down by the above-mentioned two Supreme Court judgments and were taxable in the hands of the assessee. It was his case that the security deposit was not taken into consideration by the assessee, in determining its income as returned, for the assessment year 1973-74 and the original assessment was also completed accordingly, excluding the said amount, as the legal implication of the said security deposit as established by the Supreme Court judgments had not been realised by him. In view of such facts and in consequence of the information in his possession as mentioned above, the deponent has stated that he had reasons to believe that the income of the said company which was chargeable to tax had escaped assessment for the assessment year 1973-74 and, as such, he duly issued the concerned notice to the petitioner under s. 148 of the said Act read with s. 147(b) for the concerned assessment year. It was also stated by the deponent that the correct legal position as to the taxability of the said deposit, received by the said company, was brought to his knowledge after the completion of the original assessment as mentioned above.

10. Since arguments were advanced at the Bar that the ITO concerned had not acted in the matter of his own but had acted on the dictates or directions of his superiors, the records were looked into and it appeared that initially a telex message dated 30th March, 1976, was received in the office of the Commissioner, Calcutta (Central-I) from the D.I (Investigation), stating that: “Manufacturers of synthetic yarn collect security deposits for cops and spools from purchasers of yarn. Such deposits would be chargeable to business income in accordance with the ratio of the Supreme Court decisions in Punjab Distilling Industries Ltd. v. CIT, [1959] 35 ITR 519 and CIT v. Punjab Distilling Industries Ltd., [1964] 53 ITR 75, if the supply of cops or spools is an integral part of the sale transaction and the deposits are not held as a trustee or custodian and there is neither any time-limit nor obligation for the return thereof to the supplier and there is merely an undertaking to make refund on their return. Stock position of cops and spools had also to be considered in trading account. Please have the case of Century Enka Ltd., Calcutta, reviewed immediately for appropriate action under s. 147(a) or (b) in respect of years where such actions would get time-barred after 31st March. Letter follows.” The letter as referred to at the above telex message was also produced and the same was dated 24th May, 1976. The same was addressed to the Commissioner, Calcutta (Central-I), by one Shri Harihar Lal, Director of Inspection (Inv.) and the same is quoted hereunder:

“A copy of my telex message dated 27-3-1976 regarding the subject mentioned above is enclosed. Enquiry made in respect of two companies which manufacture synthetic yarn, namely, M/s. J.K Synthetics Ltd. and M/s. Modipon Ltd., disclosed the following position:

(a) Finished yarn is sold on cops and spools and for these cops and spools security deposits are collected from the purchasers of yarn. These deposits are, however, not shown in the profit and loss account as revenue receipts. The terms and conditions relating to these deposits provide for refund thereof by the company to the customer if the cops/spools are returned and found on inspection to be in perfect condition, without, however, making it obligatory on the customer to return them and also without specifying any time-limit for the return thereof.

(b) While the expenditure incurred on the purchase or manufacture of cops and spools is debited to the trading or profit and loss account, the stock of these cops and spools held at the end of the accounting year will give a full and true picture of the profits made during the year.

2. The main decisions of the various High Courts and the Supreme Court regarding tax treatment of security deposit obtained from customers for the containers or attachments provided to hold the goods supplied are contained in the judgment in the following cases:

(i) CIT v. Punjab Distilling Industries Ltd., [1964] 53 ITR 75 (SC), (ii) Punjab Distilling Industries Ltd. v. CIT, [1959] 35 ITR 519 (SC), (iii) K.M.S Lakshmanier & Sons v. CIT, [1953] 23 ITR 202 (SC), (iv) CIT v. Sandersons and Morgans, [1970] 75 ITR 433 (Cal), (v) Punjab Steel Scrap Merchants Association Ltd. v. CIT, [1961] 43 ITR 164 (Punj).

These decisions appear to lay down that what are labelled as security deposits could partake the character of trading receipts in the following circumstances:

(a) Where the sale of container is an integral part of the sale transaction so that the price charged really includes an extra price for the container.

(b) Where the security deposits are not received by the seller in the character of trustee or custodian.

(c) Where there is no obligation on the customer to return the containers or attachments and there is no time-limit for such return.

(d) Where there is neither any contract for the return of such containers, etc., nor the refund is conditioned by any other collateral contract, that is, where there is merely an undertaking to make a refund on their return.

3. You are requested to direct the Income-tax Officer assessing M/s. Century Enka Ltd., to examine the assessability of the security deposits of the type referred to above in the light of the ratio of the decisions of the courts as explained before and to initiate action u/s. 147(a)/(b) of the Income-tax Act if it is found on the facts of the case that the security deposits are assessable as income and have escaped assessment. It is presumed that in respect of pending assessments necessary action would have been taken on receipt of my telex message.

4. It is requested that a report on the results of this enquiry may please be sent to the Directorate by the end of June, 1976.”

11. After placing the pleadings as mentioned above, Dr. Debi Prosad Pal, who continued the arguments on behalf of the said company after Mr. Murarka, in short claimed and contended that the stand taken by the ITO concerned, viz., the said deponent, who also initiated the concerned proceedings, has left no other way but to hold that the said officer was not really acting on his own or on an application of his mind, but he in fact was acting or has acted in the matter on the basis of the dictates of the superiors or on the advice by the D.I (Investigation), New Delhi, and, as such, the action as impeached, must be held to be one taken or initiated, merely on a change of opinion. The determinations in the case of Punjab Distilling Industries Ltd. v. CIT, [1959] 35 ITR 519 (SC) were dated 24th November, 1958, and on the facts, that the assessee carried on business as a distiller of country liquor and sold the produce of its distillery to licensed wholesalers. After the war started difficulty was felt in finding bottles in which the liquor was to be sold and to relieve the scarcity the Government devised a scheme whereby the distiller was entitled to charge the wholesaler a price for the bottles in which the liquor was supplied, at rates fixed by the Government, which he was bound to repay when the bottles were returned. In addition to the price fixed under the Government scheme, the assessee took from the wholesalers certain further amounts, described as security deposits, without the Government's sanction and entirely as a condition imposed by the assessee itself for the sale of its liquor. The moneys described as security deposits were also returned as and when the bottles were returned but in this case the entire sum taken in one transaction was refunded when 90 per cent. of the bottles covered by it were returned. The price of the bottles received by the assessee was entered by it in its general trading account while the additional sum was entered in the general ledger under the heading “empty bottles return security deposit account”. A question arose as to whether the assessee could be assessed to tax on the balance of the amounts of the addititional sums left after the refunds were made and it was held that (i) in realising the additional amount described as security deposit the assessee was really charging an extra price for the bottles, and the additional amount was actually a part of the consideration for the sale of the liquor and was part of the price of what was sold; it did not make any difference that the additional amount was entered in a separate ledger termed “empty bottles return deposit account”, for what was a consideration for the sale did not. cease to be so by being written up in the books in a particular manner; nor did the fact that the price of the bottles were repaid as and when the bottles were returned whereas the additional sums were repaid in full when 90 per cent. of the bottles were returned affect the question; (ii) as the wholesalers were clearly under no obligation to return the bottles the additional sums taken were not security deposits and the fact that they were described as such all along was not sufficient to create an obligation to return the bottles; there could be no security given for the return of the bottles unless there was a right to their return; and (iii) as the additional amounts taken were an integral part of the commercial transaction of the sale of liquor in bottles and when they were paid they were the moneys of the assessee and remained thereafter the moneys of the assessee, they were the assessee's trading receipts; and, therefore, the balance of these additional sums left after the refunds made thereout were assessable to tax. The above decision was explained and applied in the case of CIT v. Punjab Distilling Industries Ltd., [1964] 53 ITR 75 (SC). The relevant facts of the case were that the assessee-company, a distiller of country liquor, in selling its liquor in bottles, collected from the wholesalers, in addition to the price of bottles fixed under the buy-back scheme, certain amounts at varying rates per bottle, known as “empty bottles return security deposit”. These amounts were to be refunded in full when 90 per cent. of the bottles covered by them were returned. By an amendment which came into effect from April 1, 1948, the Punjab Excise Rules made it compulsory for the wholesaler to return at least 90 per cent. of the bottles issued to him by the distiller and also recognised that the distiller might demand security at certain rates “up to 10 per cent. of the bottles issued by the distiller and confiscate the security to the extent falling short of the 90 per cent. limit”. The question was whether the collections by way of “empty bottles return security deposit” were income assessable under s. 10 of the Indian I.T Act, 1922, and on such facts it was held that the amounts collected by the assessee-company by way of “empty bottles return security deposit”, both before and after the amendment of the Punjab Excise Rules, were trade receipts. The Rules did not create a right in the distiller to the return of the bottles. Further, all that the Rules did was to empower the distiller to take a deposit, but the deposit had to be taken under a. contract. The amounts deposited by the wholesaler were actually taken under a trading contract and constituted trading receipts of the assessee. This determination was made on 24th March, 1964. The telex communication and the letter which were treated by the ITO concerned as the source of his information were dated 30th March, 1976, and 4th June, 1976, respectively. As such, on a reference, to the date as mentioned above, Dr. Pal claimed that when the decisions as mentioned above laid down the law, viz., what are marked as security deposits could partake the character of trading receipts in the circumstances as disclosed in the above quoted letter dated 4th June, 1976, firstly, on 24th November, 1958, in the case reperted in [1959] 35 ITR 519 (SC) (Punjab Distilling Industries Ltd. v. CIT), which again was clarified and applied later, in the case reported in [1964] 53 ITR 75 (CIT v. Punjab Distilling Industries Ltd.) and such determination was dated 24th March, 1964, so the law on the point was settled and declared as the law of the land under art. 141 of the Constitution of India, if not on 24th November, 1958, at least on 24th March, J 964, and, as such, that the statement of the deponent of the affidavit-in-opposition, who incidentally was the ITO concerned, was not either well aware of the taxability of the concerned security deposits received by the said company or such fact of taxability was brought to his knowledge after the original assessment for the assessment year, would not hold good and such explanation was not a bona fide one and so it must be held and observed that even though the officer concerned was acting on such information as received from the D.I (Investigation), New Delhi, through the Commissioner of Income-tax, Central-I, it was really a case of acting or initiation of proceeding on change of opinion. It should also be noted that by the subsequent determination, the Supreme Court had applied and restated the law as disclosed by or in the earlier judgment and had not expressed any contrary view and, as such, also, Dr. Pal claimed and contended that such subsequent determination could not also be treated as furnishing any subsequent knowledge to the officer concerned of information to him under s. 147(b) of the said Act. In support of such submissions, reliance was placed on the observations in the case of L. Madan-lal (Aluminium) P. Ltd. v. ITO, [1978] 115 ITR 293 (Cal), wherein it has been observed that mere affirmation or reiteration of the same principle of law by the Supreme Court cannot furnish any subsequent knowledge or information within the meaning of s. 147(b) of the Act. In that case, it has further been observed that it is true that sufficiency of the ground in reopening an assessment cannot be questioned but if there is no existence of the ground or if the ground is not at all reasonable or is absurd on the face of it, the court is competent to strike down the notice issued on the basis of such a ground. If the Supreme Court, in the two determinations had expressed views contrary to each other, perhaps the explanation as given by the officer concerned could have been accepted as good, substantial and bona fide, but such not having been the position, the determinations in the Calcutta case ([1978] 115 ITR 293), as referred to hereinbefore, can, in my view, be safely applied in this case and to hold that when the law was declared long prior to the information as received, and the relevant facts and materials were disclosed and were available in the original assessment proceedings, the initiation was done on a mere change of opinion and such initiation would not be protected under s. 147 of the said Act. It should be noted that Dr. Pal initially claimed and contended that the initiation was done by the ITO concerned, not of his own, but at the dictates and directions of the superiors, but after going through the telex message and the letter that followed, the particulars whereof have been indicated hereinbefore, he did not press such point.

12. It was also contended by Dr. Pal, on a reference to the determinations of the Supreme Court in the case of Indian and Eastern Newspaper Society v. CIT, [1979] 119 ITR 996, which has disapproved and overruled the earlier determination on the point by the Supreme Court in the case of Kalyanji Mavji & Co. v. Cit, West Bengal-Ii , [1976] 102 ITR 287, this case would not come under or be covered by the provisions of s. 147 of the said Act, as oversight, inadvertence or mistake of the ITO concerned, would not fall within or come under the said section. A contrary view, in the case of Kalyanji Mavji & Co. v. Cit, West Bengal-Ii , [1976] 102 ITR 287 (SC), which was a case under s. 34(1)(b) of the Indian I.T Act, 1922, was expressed and, overruling such view, it has now been observed by the Supreme Court in the case of Indian and Eastern Newspaper Society v. CIT, [1979] 119 ITR 996, that such view in the case of Kalyanji Mavji was stated too widely and travelled further than the requirements of the statute in so far as it be said to lay down that if, on reappraising the material considered by him during the original assessment, the ITO concerned discovered that he has committed an error in consequence of which income has escaped assessment, it is open to him to reopen the assessment. An error discovered on a reconsideration of the same material (and no more) does not give him that power. In the case reported in [1979] 119 ITR 996, it was urged that the expression “information” in s. 147(b) refers to the realisation by the ITO that he has committed an error when making the original assessment. It is said that, when upon receipt of the audit note the ITO discovers or realizes that, a mistake has been committed in the original assessment, the discovery of the mistake would be “information” within the meaning of s. 147(b) and such submissions appeared inconsistent with the terms of s. 147(b). Plainly, the statutory provision envisages that the ITO must first have information in his possession, and then in consequence of such information he must have reason to believe that income has escaped assessment. The realisation that income has escaped assessment is covered by the words “reason to believe” and it follows from the “information” received by the ITO. The information is not the realisation, the information gives birth to the realisation. In the case under consideration,. the Supreme Court has also disapproved. (at p. 1005 of 119 ITR) the decision in the case of A.K Malhotra, ITO v. Kasturbhai Lalbhai, [1977] 109 ITR 537: “While making an assessment on an HUF, the ITO allowed a deduction of municipal taxes in determining the annual value of two house properties occupied by the assessee. Subsequently, the ITO reopened the assessment on receipt of a report from the office of the Comptroller and Auditor-General of India that on a true interpretation of s. 23(2) of the I.T Act, 1961, the deduction of municipal taxes was not admissible in the computation of the annual value of self-occupied house properties. The assessee contended that the report did not constitute ‘information’ within the meaning of s. 147(b) of the Act, and the Gujarat High Court accepted the plea in the view that information as to law would consist of a statement by a person, body or authority competent and authorised to pronounce upon the law and invested with the authority to do so, and that the audit department was not such competent or authorised authority. On appeal by the Revenue, a Bench of two learned judges of this court, although endorsing the principle enunciated by the High Court, said that the audit department was the proper machinery to scrutinise the assessments made by the ITO and to point out errors of law contained therein, and the High Court had erred in taking the strict view which it did. The court rested its decision on Asst. CED v. Nawab Sir Mir Osman All Khan Bahadur, [1969] 72 ITR 376 (SC), CIT v. H.H Smt. Chand Kanwarji, [1972] 84 ITR 584 (Delhi), CIT v. Kelukutty, [1972] 85 ITR 102 (Ker) and Shri Vashist Bhargava…Petitioner v. Income-Tax Officer, Salary Circle…, [1975] 99 ITR 148 (Delhi).

13. In Asst. CED v. Nawab Sir Mir Osman Alt Khan Bahadur, [1969] 72 ITR 376 (SC), this court held the opinion of the Central Board of Revenue as regards the correct valuation of securities for the purpose of estate duty to be ‘information’ within the meaning of s. 59 of the E.D Act, 1953, on the basis of which the CED was held entitled to entertain a reasonable belief that property assessed to estate duty had been undervalued. The circumstances that the opinion of the Board was rendered in an appeal filed before it under the E.D Act against the assessment made by the Asst. CED was apparently not brought to the notice of this court when it heard R.K Malhotra, ITO v. Kasturbhai Lalbhai, [1977] 109 ITR 537 (SC). The opinion of the Board represented its view as a quasi-judicial authority possessing jurisdiction to lay down the law. Although the Board did not enhance the valuation of the securities in the appellate proceeding because of the argument advanced by the appellant, none the less its observations amounted to information as to the law. It was not a case where the Board was functioning as an extra-judicial authority, performing administrative or executive functions, and not competent or authorised to pronounce upon the law. The Delhi High Court in CIT v. H.H Smt. Chand Kanwarji, [1972] 84 ITR 584, held that the scrutiny note of revenue audit constituted ‘information’ within the meaning of s. 147(b) of the I.T Act because the Comptroller and Auditor-General of India was empowered by statute to scrutinise the proceedings of the Income-tax Department and to point out defects and mistakes which adversely affected the Revenue. The High Court considered that the view that information as to law could be gathered only from the decisions of judicial or quasi-judicial authorities was unduly restrictive. In CIT v. Kelukutty, [1972] 85 ITR 102, the Kerala High Court also regarded the note put up by audit as ‘information’ within the meaning of s. 147(b) of the Act, but it appears to have assumed, without anything more, that an audit note would fall within that expression. As regards Shri Vashist Bhargava…Petitioner v. Income-Tax Officer, Salary Circle…, [1975] 99 ITR 148 (Delhi), the ‘information’ consisted in a note of the revenue audit and the Ministry of Law that the payment of interest by the assessee was in fact made to his own account in the provident fund and, therefore, in law the money paid did not vest in the Government and, consequently, the original assessment was erroneous in so far as it allowed the deduction of the interest as expenditure made by the assessee. The Delhi High Court upheld the reassessment on the finding that the note of the revenue audit and the Ministry of law had to be taken into account by the ITO because in his executive capacity he had to be guided by the advice rendered by the Ministry of Law and he had to pay due regard to the note of the revenue audit because the officers of the audit department were experts empowered to examine and check upon the work of the ITO. It seems to us that the considerations on which the Delhi High Court rested its judgment are not correct. But the decision of the case can be supported on the ground that the basic information warranting the reopening of the assessment was the fact that the payment of interest was made to the provident fund account of the assessee himself. That the money so paid did not vest in the Government was a conclusion which followed automatically upon that fact, and no. controversy in law could possibly arise on that point.”

and on a consideration of the conditions prevailing before them, the Supreme Court observed that the views taken by the Delhi High Court and the Kerala High Court were wrong and as such the decisions arrived at or conclusions reached in the case R.K Malhotra, ITO v. Kasturbhai Lalbhai, [1977] 109 ITR 537 (SC) were erroneous. Dr. Pal further claimed that the views, as expressed through the telex message and the following letter, were, at best, the opinion of the D.I (Investigation), New Delhi, and such views, not being the views of the ITO concerned, acting on the basis of them by him, was also improper. It was his specific submission on the basis of the cases as cited above that such views either of the Board or of the Bureau of Investigation or the Director of the same, could not constitute the information of the ITO concerned, for the purposes of s. 147 of the said Act.

14. Mr. Sengupta, appearing for the Revenue, claimed, after placing the telex message and the following letter, that there was really no direction to the ITO concerned. In view of the fact that the point relevant for such answer was not ultimately pressed by Dr. Pal, I am of the view that no determination is required to be made on that aspect.

15. It was further claimed and contended by Mr. Sengupta that if the conditions as laid down by the two judgments of the Supreme Court, Punjab Distilling Industries Ltd. v. CIT, [1959] 35 ITR 519 and CIT v. Punjab Distilling Industries Ltd., [1964] 53 ITR 75, have been fulfilled or are required to be fulfilled, they would be questions of fact and such fact, having been made known to the officer concerned by the D.I (Investigation), New Delhi, he initiated the proceeding and such initiation cannot be stated to be without the due satisfaction of the officer concerned and, as such, no interference in this case, at this stage, should be made and, furthermore, when by the two records as indicated above, the ITO concerned was informed about the applicability of the law as laid down in certain circumstances and on certain facts and that too on the ultimate satisfaction of the said officer. He claimed that when on such facts as mentioned above, the ITO has initiated the concerned proceedings, the same cannot be said to be initiated on a mere change, of opinion. Mr. Sengupta further claimed that the determinations in Indian and Eastern Newspaper Society v. CIT, [1979] 119 ITR 996 (SC), and the action as initiated, was not really on the basis of the report or observations of the D.I (Investigation), New Delhi. He also sought to distinguish the case L. Madanlal (Aluminium) P. Ltd. v. ITO, [1978] 115 ITR 293 (Cal), on the facts of this case.

16. In this case, when the materials or facts relevant were admittedly and already available in the concerned original assessment proceedings and they were not new facts, which came to the possession of the assessing ITO and the said officer cannot be heard to say in the facts and background as mentioned hereinbefore that the legal position was not known to him even though the relevant facts and materials were available. Thus, the initiation as made, cannot be upheld and such initiation must be observed and held to have been made on a mere change of opinion and to be not covered by or under the circumstances as envisaged in s. 147 of the said Act. The ignorance of law, as laid down by the Supreme Court, would be no ground or any excuse for the ITO concerned under the provisions of the said Act.

17. As such, the impugned notice and the proceedings as initiated must be set aside and the rule is thus made absolute. There will be no order as to costs.

18. Let the telex message and the letter that followed, the copies whereof were produced, be kept in the record. The above order, as proposed by me, should also be made in Civil Rule Nos. 11266-67(W) of 1976 (Century Enka Ltd. v. ITO) as the facts and points involved in these cases, excepting the assessment years, were the same. It should be noted that the assessment year 1972-73 was involved in Civil Rule No. 11266(W) of 1976 and in Civil Rule No. 11267(W) of 1976, the assessment year involved was 1971-72. The above rules are also made absolute on the same reasoning and findings as in Civil Rule No. 11265(W) of 1976. There will be no order as to costs.

19. The prayer for stay of operation of the order is refused.