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Petitioner: A.LA. FIRM VS Respondent: COMMISSIONER OF INCOME-TAX
Court Name: Supreme Court of India Judge(s): S. Ranganathan, N. M. Kasliwal, S. C. Agarwal Title: A.LA. FIRM vs COMMISSIONER OF INCOME-TAX Case No.: Civil Appeal No,570 of 1976 Date of Judgment:1991-02-21 Reported As: 1992 PTD 357 Result: Appeal dismissed
JUDGMENT
JUDGMENT ' RANGANATHAN, J.---This is the assessee's appeal from a judgment of the Madras High Court, dated January 10, 1975, answering three questions referred to it by the Income-tax Appellate Tribunal in favour of the Revenue and against the assessee. The reference related to the assessm ent year 1961-62, the previous year in respect of which commenced on April 13, .1960. The judgment of the High Court is reported as A.LA. Firm v. C.I.T. (1976) 102 ITR 622. ' The appellant-assessee is a partnership firm. Since 1949, it was carrying on in Malaya a money- lending business and, as part of an incidental to the said business, a business in the purchase and sale of house properties, gardens and estates. It had been reconstituted under a deed, dated March 26, 1960. The firm's accounts for the year 1960-61, which commenced on April 13, 1960, would normally have come to a close on or about April 13, 1961. However, the firm closed its accounts as on March 13, 1961, with effect from which date it was dissolved. Alongwith its income-tax return for the assessm ent year 1961-62 filed on April 10,1962, the assessee filed a profit and loss account and certain other statements. In the profit and loss account, a sum of $ 101,248 was shown as "difference on revaluation of estates, gardens and house properties" on the dissolution of the firm on March 13, 1961, such difference being $ 70,500 in respect of "house properties" and $ 30,748 in respect of estates and gardens. In the memo. Of adjustment for income-tax purposes, however, the above sum was deducted on the ground that it was not assessable either as revenue or capital. A 'statement was also made before the officer that partner Ramanathan Chettiar forming one group and the other partners forming another group were carrying on business separately with the assets and liabilities that fell to their shares on the dissolution of the firm.
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' The Income-tax Officer issued a notice under section 23(2) on the same day April 10, 1962, posting the hearing for the same day and completed the assessment also on the same day, after making a petty addition of Rs,2,083 paid as property tax in Malaya, and recording the following note: "Audit assistant---Lakshmanan appears---Return filed---I.T. 1986 acknowledged in list of books--- Scrutinised---Order dictated." ' For the subsequent assessm ent year 1962-63, the assessee filed a return showing nil income alongwith a letter pointing out that the firm had been dissolved on March 13, 1961. Thereafter, on September 3, 1963, the Income-tax Officer wrote a letter to the assessee to the effect that the revaluation difference of $ 101,248 should have been brought to tax in the assessment year 1961-62 in view of the decision of the Madras High Court in G.R.Ramachari & Co. v. C.I.T. (1961) 41 ITR 142. He called for the basis for the valuation and also for the assessee's objections. The assessee sent a reply stating that no profit or loss could be assessed on revaluation of assets. Relying on a circular of the Central Board of Revenue, dated June 21, 1956, it was urged that the assessee was gradually winding up its business in Malaya and that, therefore, the surplus would only be capital gains. It was urged that the revaluation had been at the market price prevalent since January 1, 1954 and that, therefore, no capital gains were chargeable to tax. The Income-tax Officer followed up his letter by a notice under section 148 read with section 147(b). The assessee objected to the reassessm ent on two .Grounds: (1) that the circumstances did not justify the initiation of proceedings under section 147(b); and (2) that no assessable profits arose to the firm on the revaluation of assets on the eve of the dissolution of the firm. Overruling these objections, the Income-tax Officer completed a reassessment on the firm after adding back the sum of Rs,1,58,057 (the equivalent of $ 101,248) to the previously assessed income. The assessee's successive appeals to the Appellate Assistant Commissioner and the Appellate Tribunal and a reference, at its instance, to the High Court having failed, the assessee is before us. ' Three questions of law were referred to the High Court by the Tribunal. These were (see (1976) 102 ITR 622, 626): "(1) Whether, on the facts and circumstances of the case, the reassessment made on the assessee-firm for the assessm ent year 1961-62 under section 147 of the Income-tax Act is valid in law? (2) Whether, on the facts and circumstances of the case, the assessment of the sum of $ 101,248 as revenue profit of the assessee firm chargeable to tax for the assessment year 1961-62 is justified in law? (3) Whether, on the facts and circumstances of the case, the Appellate Tribunal is right in law in sustaining the assessm ent of the sum of $. 101,248 after having found that the departmental officers are bound by the circular of the Central Board of Revenue?" We may deal at the outset with the third question. Though the High Court has dealt with this question at some length, we do not think any answer to this question can or need be furnished by us for the following reasons. First, the assessee has not been able to place before us the circular of the Board on which reliance is placed. It is not clear whether it is a circular or a communication of some other nature. Second, the circular, to judge from its purport set out in the High Court's judgment, seems to have been to the effect that the surplus arising from the sale of properties acquired by a money-lender in the course of his business would be in the nature of capital gains and not of income. Obviously, such a proposition could not have been intended as a broad or general proposition of law, for the nature of the surplus on sale of assets would depend on the nature of the asset sold and this, in turn, would depend on the facts and circumstances of each case. In this case, no material was placed at any stage to show that the assets in question constituted the capital assets of the firm and not its stock-in-trade. Third, the plea of the assessee which was in issue all through was that there was no sale of assets by the firm when its assets are
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distributed among its partners and that no profits---whether capital or revenue---could be said to arise to the firm merely because, at the time of the dissolution, the firm revalued its assets on the basis of the market value or any other basis, for adjusting the mutual rights and liabilities of the partners on the dissolution of the firm. The terms of the circular as set out in the order of the High Court cannot, therefore, be of any assistance to the assessee in answering the issues in this case. We, therefore, do not answer the third question posed by the Tribunal. ' Turning now to the first question, the relevant facts have already been noticed. The following relevant and material facts, viz., (i) the dissolution of the firm, (ii) the revaluation of its assets, (iii) the distribution thereof among two groups of its partners, and (iv) the division and crediting of the surplus on revaluation to the partner's accounts were not only reflected in the balance- B sheet, the profit and loss account and the profit and loss adjustment account but were also mentioned in the statement filed before the Income-tax Officer alongwith the return. Clearly, action under section 148 read with clause (a) of section 147 could not be initiated in these circumstances but is action under clause (b) of that section also impermissible? That is the question. ' We may now set out the provisions of clause (b) of section 147 for purposes of easy reference. This clause---which corresponds to section 34(1)(b) of the Indian Income-tax Act, 1922 ("the 1922 Act"), permits---initiation of reassessm ent proceedings, "notwithstanding that there has been no omission or failure as mentioned in clause- (a) on the part of the assessee" provided "the Income- tax Officer has, in consequence of information in his possession, reason to believe that income chargeable to tax has escaped assessment". ' In the present case, on the information already on record and in view of the decision in G.R. Ramachari & Co. v. C.I.T. (1961) 41 ITR 142 (Mad.), C there can be no doubt that the Income-tax Officer could reasonably come to the conclusion that income, profits and gains assessable for the assessm ent year 1961-62 had escaped assessment. But, is that belief reached "in consequence of information in his possession"? The assessee's counsel says "no", for, says he, it is settled law that the "information" referred to in clause (b) above, should be "information" received by the Income- tax Officer after he had completed the original assessment. Here, it is pointed out that all the relevant facts as well as the decision in G.R. Ramachari & Co. v. C.I.T. (1961) 41 ITR 142 (Mad.), had been available when the original assessment was completed on April 10, 1962. Action cannot be taken under this clause merely because the Income-tax Officer, who originally considered the surplus to be not assessable, has, on the same facts and the same case-law which had been available to him when he completed the assessment originally, changed his opinion and now thinks that the surplus should have been charged to tax. ' The validity of the assessee's argument has to be tested in the light of the decisions of this Court which have interpreted section 147(b) of the 1961 Act or its predecessor section 34(1)(b) of the 1922 Act and expounded its parameters. We may start with the decision in Maharaj Kumar Kamal Singh v. C.I.T. (1959) 35 ITR 1 (SC). In this case, it was held that the word "information" would include information as to the true and correct state of the law and would also cover information as to relevant judicial decisions. In that case, the Income-tax Officer had reopened the assessment on the basis of a subsequent decision of the Privy Council and this was upheld. Referring to the use of the word "escape" in the section, the Court observed (at p.8): "In our opinion, even in a case where a return has been submitted, if the Income-tax Officer erroneously fails to tax a part of assessable income. It is a case where the said part of the income has escaped assessm ent. The appellant's attempt to put a very narrow and artificial limitation on the meaning of the word 'escape' in section 34(1)(b) cannot, therefore, succeed." (Underlining is ours). ' The meaning of the word "information" was again explained thus in C.I.T. v. A. Raman & Co. (1968) 67 ITR 11, 15, 16 (SC):
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"The expression 'information' in the context in which it occurs must, in our judgment, mean instruction or knowledge derived from an external source concerning facts or particulars or as to law relating to a matter bearing on the assessment... ' Jurisdiction of the Income-tax Officer to reassess income arises if he has inconsequence of information in his possession reason to believe that income chargeable to tax has escaped assessm ent. That information, must, it is true have come into the possession of the Income-tax Officer after the previous assessm ent. But even if the information be such that it could have been obtained during the previous assessment from an investigation of the materials on the record, or the facts disclosed thereby or from other enquiry or research into facts or law, but was not in fact obtained, the jurisdiction of the Income-tax Officer is not affected." (Underlining is ours). ' We may next refer to Kalyanji Mavji & Co. v. C.I.T. (1976) 102 ITR 287 (SC). It is unnecessary to set out the facts of this case. It is sufficient to refer to the enunciation of the law regarding the scope of section 34(1)(b) as culled out from the earlier decisions of this Court on the subject. At page 296, the Court observed: "On a combined review of the decisions of this Court the following tests and principles would apply to determine the applicability of section 34(1)(b) to the following categories of cases: (1) where the information is as to the true and correct state of the law derived from relevant judicial decisions; (2) where in the original assessm ent the income liable to tax has escaped assessment due to oversight, inadvertence or a mistake committed by the Income-tax Officer. This is obviously based on the principle that the tax-payer would not be allowed to take advantage of an oversight or mistake committed by the taxing authority; (3) where the information is derived from an external source of any kind. Such external source would include discovery of new and important matters or knowledge of fresh facts which were not present at the time of the original assessment; (4) where the information may be obtained even from the record of the original assessment from the investigation of the materials on the record, or the facts disclosed thereby or from other enquiry or research into facts or law." ' Before applying the above principles to the facts of the present case, we may refer to two earlier decisions of the Madras High Court which have been followed in the judgment under appeal. In Salem Provident Fund Society Ltd. v. C.I.T. (1961) 42 ITR 547 (Mad.) the Income-tax Officer, in calculating the annual profits of an insurance company, had, under the statute, to work out the difference between the deficiencies as shown in the actuarial valuation of the company in respect of two successive valuation periods. At the time of original assessment, the Income-tax Officer, by mistake, added the two deficiencies instead of subtracting one from the other. This mistake he committed not in one assessm ent year but in two assessment years. Subsequently, he discovered his mistake and initiated proceedings under section 34(1)(b). The contention urged on behalf of the assessee was that all the statements on the basis of which the reassessment proceedings were taken were already on record and that, in such a case, there was no "information" which would justify the reassessm ent. An argument was also raised that she rectification, if any, could have been carried out only under section 35 and not under section 34. These contentions were repelled. In regard to the former objection, the High Court pointed out (p. 564): "We are unable to accept the extreme proposition, that nothing that can be found in the record of the assessm ent, which itself would show escape of assessment or underassessment, can be viewed as information which led to the belief that there has been escape from assessment or underassessm ent. Suppose a mistake in the original order of assessment is not discovered by the Income-tax Officer himself on further scrutiny but it is brought to his notice by another assessee or even by a subordinate or a superior officer, that would appear to be information disclosed to the
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Income-tax Officer. If the mistake itself is not extraneous to the record and the informant gathered the information from the record, the immediate source of information to the Income-tax Officer in such circumstances is in one sense extraneous to the record. It is difficult to accept the position that while what is seen by another in the record is 'information' what is seen by the Income-tax Officer himself is not information to him. In the latter case he just informs himself. It will be information in his possession within the meaning of section 34. In such cases of obvious mistake apparent on the face of the record of assessment, that record itself can be a source of information, if that information leads to a discovery or belief that there has been an escape of assessment or underassessm ent." ' A similar question arose in C.I.T. v. Rathinasabapathy Mudaliar (1964) 51 ITR 204 (Mad.). In that case, the assessee who was a partner in a firm did not include in his return the income of his minor son admitted to the benefits of the partnership as required by section 16(3) of the 1922 Act. The minor son submitted a separate return and was assessed on this income. Subsequently, the Income-tax Officer "discovered" his error in not assessing the father thereon and started reassessm ent proceedings. The reassessment was upheld by the Madras High Court on the same logic as had been applied in Salem Provident Fund Society Ltd.'s case (1961) 42 ITR 547 (Mad.). The above line of thinking has not only held the field for about thirty years now but has also received approval in Anandji Haridas & Co. (P.) Ltd. v. S.P. Kushare, STO (1968) 21 STC 326 (SC). ' This issue has further been considered in the decision of this Court in the case of Indian and Eastern Newspaper Society v. C.I.T. (1979) 119 ITR 996. In this case, the income of the assessee derived by letting out certain portions of the building owned by it to its members as well as to outsiders was being assessed as business income. In the course of audit, an internal audit party expressed the view that the money realised by the assessee on account of any occupation of its conference ball and rooms should have been assessed under the head "Income from property" and not as business income. The Income-tax Officer, thereupon, initiated reassessment proceedings and this was upheld by the Tribunal. On a direct reference under section 257 of the Act, this Court held that the opinion of the audit party on a point of law could not be regarded as "information" and that the initiation of the reassessment proceedings was not justified. It was contended for the Revenue, that the reassessment proceedings would be valid even on this premise. Dealing with this argument, the Court observed (p.1004): "Now, in the case before us, the Income-tax Officer had, when he made the original assessment, considered the provisions of sections 9 and 10. Any different view taken by him afterwards on the application of those provisions would amount to a change of opinion on material already considered by him. The Revenue contends that it is open to him to do so and on that basis to reopen the assessm ent under section 147(b). Reliance is placed on Kalyanji Mavji & Co. v. C.I.T. (1976) 102 ITR 287 (SC), where a Bench of two learned Judges of this Court observed that a case where income had escaped assessment due to the `oversight, inadvertence or mistake' of the Income-tax Officer must fall within section 34(1)(b) of the Indian Income-tax Act, 1922. It appears to us , with respect, that the proposition is stated too widely and travels further than the statute warrants in so far as it can be said to lay d that if on reappearing 1ot,o,..,Lie...LaeiL:ialsoisleed12.LIirhim during the original assessment the Income-tax Officer discovers that he has committed an error in consequence of which income has escaped assessment. It is open to him to reopen the assessm ent. In our opinion, an error discovered on a reconsideration of the same material (and no more) does not give him that power. That was the view taken by this Court in Maharaj Kumar Kamal Singh v. C.I.T. (1959) 35 ITR 1 (SC), C.I.T. v. A. Raman & Co. (1968) 67 ITR 11 (SC) and Bankipur Club Ltd. v. C.I.T. (1971) 82 ITR 831 (SC) and we do not believe that the law has since taken a difference course. Any observations in Kalyanji Mavji & Co. v. C.I.T. (1976) 102 ITR
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287 (SC) suggesting the contrary do not, we say with respect, lay down the correct law." (Underlining is ours). ' The Court proceeded further to observe (p.1005): "A further submission raised by the Revenue on section 147(b) of the Act may be considered at this stage. It is urged that the expression "information" in section 147(b) refers to the realisation by the Income-tax Officer that he has committed an error when making the original assessment. It is said that, when upon receipt of the audit note the Income-tax Officer discovers or realises that a mistake has been committed in the original assessment, the discovery of the mistake would be 'information' within the meaning of section 147(b). The submission appears to us inconsistent with the terms of section 147(b). Plainly, the statutory provision envisages that the Income-tax Officer 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 assessm ent is covered by the words 'reason to believe' and it follows from the 'information' received by the Income-tax Officer. The information is not the realisation, the information gives birth to the realisation." ' Sri Ramachandran submits that these decisions support his contention that reassessment proceedings can be validly initiated only if there is some information received by the Income-tax Officer from an external source after the completion of the original assessment but not in a case like the present where there is nothing more before the Income-tax Officer than what was available to him when the original assessm ent was completed. He also submits that the observations in Indian and Eastern Newspaper Society's case (1979) 119 ITR 996 (SC), have cast doubts on the propositions enunciated in Kalyanji Mavji & Co. v. C.I.T. (1976) 102 ITR 287 (SC) and reiterates the proposition that reassessm ent proceedings cannot be availed of to revise, on the same material, the opinion formed or conclusion arrived at earlier in favour of the assessee. ' On the other hand, Dr. Gauri Shankar, appearing for the Revenue, mentioned that the decision in Indian and Eastern Newspaper Society's case (1979) 119 ITR 996 (SC) holding that the opinion of an audit party would not constitute "information" and qualifying the principles enunciated in Kalyanji Mavji & Co. v. C.I.T. (1976) 102 ITR 287 (SC) is pending consideration by a larger Bench of this Court. He, however, submitted that the reassessment in this case would be valid even on the strength of the observations in Indian and Eastern Newspaper Society's case (1979) 119 ITR 996 (SC). We shall proceed to consider the correctness of this submission. We have pointed out earlier that Kalyanji Mavji's case (1976) 102 ITR 287 (SC) outlines four situations in which action under section 34(1)(b) can be validly initiated. Indian and Eastern Newspaper Society's case (1979) 119 ITR 996 (SC) has only indicated that proposition (2) outlined in this case and extracted earlier may have been somewhat widely stated; it has not cast any doubt on the other three propositions set out in Kalyanji Mavji's case (1976) 102 ITR 287 (SC). The facts of the present case squarely fall within the scope of propositions (2) and (4) enunciated in Kalyanji Mavji's case (1976) 102 ITR 287 (SC). Proposition (2) may be briefly summarised as permitting action even on a "mere change of opinion". This is what has been doubted in Indian and Eastern Newspaper Society's case (1979) 119 ITR 996 (SC) and we shall discuss its application to this case a little later. But, even leaving this out of consideration, there can be no doubt that the present case is squarely covered by proposition (4) set out in Kalyanji Mavji & Co. v. C.I.T. (1976) 102 ITR 287 (SC). This proposition clearly envisages a formation of opinion by the Income-tax Officer. On the basis of material already on record provided the formation of such opinion is consequent on "information" in the shape of some light thrown on aspects of facts or law which the Income-tax Officer had not earlier been conscious of. To give a couple of illustrations; suppose an Income-tax Officer, in the original assessm ent which is a voluminous one involving several contentions accepts a plea of the assessee in regard to one of the items that the profits realised on the sale of a house is a capital
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realisation not chargeable to tax. Subsequently, he finds, in the forest of papers filed in connection with the assessm ent, several instances of earlier sales of house property by the assessee. That would be a case where the Income-tax Officer derives information from the record on an investigation or enquiry into facts not originally undertaken. Again, suppose an Income-tax Officer accepts the plea of an assessee that a particular receipt is not income liable to tax. But, on further research into law, he fmds that there was a direct decision holding that category of receipt to be an income receipt. He would be entitled to reopen the assessment under section 147(b) by virtue of proposition (4) of Kalyanji Mavji's case (1976) 102 ITR 287 (SC). The fact that the details of sales of house properties were already in the file or that the decision subsequently come across by him was already there, would not affect the position because the information that such…
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