Muthukrishna Reddiar v. Cit

1. The Income-tax Appellate Tribunal, Cochin Bench, has made this reference and the question referred is:

"Whether on the f acts and in the circumstances of the case, the proceedings initiated under S.147 (b) of the Income-tax Act, 1961 are legal and valid."

2. The reference relates to assessment year 1963 64, the relevant previous year being 1137 M.E. The original assessment was completed on 16 31964. Income-tax Officer subsequently reopened the assessment under S.147 (b) of the Incoce-tax Act, 1961 (hereinafter to be referred to as the Act) on the ground that the capital gains arising to the assessee on account of the transfer of a property bad not been brought to tax. Following facts are relevant in this connection.

3. A property by name Machungal Purayidom belonged originally to the assessees wife Ratnamal. She died on 21 101954, leaving a will whereby the property was bequeathed to her 4 daughters, Nagammal, Maya Devi, Rajeswari and Visalakshi in equal shares. Nagammal and Maya Devi sold their interest in the property to the assessee on 3011958 for Rs. 10,000/-. Thus one-half of the entire property devolved on the assessee. He then sold this one-half interest in the property to his daughter Rajeswari on 5 91961 for Rs. 40,000/-. In the reassessment the capital gains sought to be assessed was the difference between the selling price of Rs. 40,000/-and the purchase price of Rs. 10,000/-namely, Rs. 30,000/-. At the time of the original assessment it was contended before the Income-tax Officer that in the estate duty proceedings following the death of assessees wife, the property had been valued at Rs. 42,680/-. So, the value of the one-half share which the assessee had purchased, was Rs. 21,340/-. On this basis the capital gains arising in the transaction was treated as Rs. 18,660/-(Rs. 40,000 21,340). It was also alleged that the assessee had put up a building worth Rs. 10,000/-in 1957 and from the amount of Rs. 18,660/-this amount of Rs. 10,000/-bad to be deducted. The Income-tax Officer accepted these contentions and brought to tax as capital gains, only the amount of Rs. 8,650/-. Daring the reassessment proceedings under S.147 (b) the Incometax Officer held that since the assessee had purchased the half-share in the property only in 1958, the cost of the building alleged to have been put up in 1957 could not be treated as an improvement within the meaning of S.48 and that the market value of the property as fixed in the estate duty proceeding could not be taken as the amount for which the property had been purchased by the assessee. Income-tax Officer therefore, came to the conclusion that the income chargeable to tax had escaped assessment. He accordingly brought to tax the amount of Rs. 30,000/- as capital gains.

4. S.147 of the Act is to the following effect: "If

(a) ncome tax Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under S.139 for any assessment year to the Income tax 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

(b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Income tax Officer has in consequence of information in bis possession reason to believe that income chargeable to tax has escaped assessment for any assessment year "

5. The point for consideration is what would constitute information within the meaning of S.147 (b) (34 (1) (b) of the old Act). This is a vexed question and to ass the words of Banerji J. in Commissioner of income-tax v. Kalyanji Mabji & Co. (74 I. T. R.107) still remains a rich germinating ground for forensic arguments. Even though there is no decision directly on the point, guidelines are supplied by some of the decisions of the Supreme Court and the various High Courts cited at the Bar. Decisions are however uniform on the points to be satisfied before a reassessment under S.147 can be resorted to and they are:

(1) Income-tax Officer should receive information after the original assessment; and

(2) In consequence of such information he should reasonably believe that the income chargeable to tax, has escaped assessment.

Information in the present case, is a communication from the audit party pointing out under the relevant provisions of the Act that it was wrong to have allowed the market value of the property namely, Rs. 21,340/-to be substituted for the consideration of Rs. 10,000/-paid and that the application of S.52 (2) was not justified as the assessee neither possessed the property before 1-1-1954 nor received it as a gift from one who possessed it before 111954. It was also pointed out that the property having been purchased by the assessee in 1958, cost of improvements, if any. effected thereafter, alone could be deducted and the alleged improvements had been effected in 1957 when the assessee had no rights over the property. It was on this information according to the revenue, that the Income-tax Officer entertained the plea that the income had escaped assessment.

6. Supreme Court has observed in Commissioner of Income-tax v. & A. Raman Co. (67 ITR. 11) [LQ/SC/1967/207] :

"that information in the context it occurs in S.147 (b) must 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. Mere change of opinion on the part of the Income tax Officer cannot constitute information so as to empower the Income-tax Officer to start proceedings under S.147 (b)."

7. Information maybe in respect of facts or. particulars or it may be as to the correct state of the law, but it must be from an extraneous source as distinguished from a mere change of opinion. The revenue favours the view that no limitation could justifiably be placed on the nature or character of the external source from which communication as to the state of the law be derived by the Income-tax Officer. Whether it be the Supreme Court or the High Court or the Tribunal or the Appellate Assistant Commissioner or for the matter of that any person or authority, the communication would be information derived from an external source. On behalf of the assessee on the other band, the view is sought to be projected that instruction or knowledge as to the state of the law must be received from some judicial authority such as the Supreme Court or the High Court which is competent to declare the law and whose decisions have the effect of binding precedents; if it is received from any other source it would not be information as to the state of the law within the meaning of S.147 (b) of the Act. This latter view gains support from the Gujarat High Court in Kastur Bai Lal Bai v. R. K. Malhotra (80 ITR. 188) [LQ/GujHC/1970/64] , and the former view is endorsed by the Delhi High Court in C. I. T. v. H. H. Smt. Chand Kanwar ji (84 ITR. 584) [LQ/DelHC/1971/228] .

8. In elucidation of the point the Gujarat High Court in the aforesaid decision would point out that information or knowledge derived from an external source must be from a person, body or authority competent and authorised to give it. It must have an element of authority behind it. It must not be a mere information of some one who has no authority to pronounce upon the law. The Audit Department is not an authority competent and authorised to declare the correct state of the law or to pronounce upon it. In the above cited case, the facts relevant for our purpose are:

9. The petitioner (assessee) owned two items of immovable property, one in Ahmedabad and the other in Bombay. During the year of account (1965-66) both the properties were occupied by the petitioner (self-occupied properties), Petitioner claimed Rs. 4052/- to be deducted towards municipal tax in determining the annual value of the properties under S.23(2) for computing the income of the properties under income from bouse property. Assessment was made in March 1966. In July 1969 Income-tax Officer addressed a letter calling upon the petitioner to show cause why the amount of municipal tax allowed as deduction should not be added back on the ground that it was wrongly allowed. The assessee questioned the competency of the Officer to reopen the assessment under S.147. The Income tax Officer pointed out that Income-tax assessment are subjected to audit by the Office of the Comptroller and Auditor General of India, and while auditing the assessment of the petitioner for assessment year 1965 65, the Audit Department had pointed out that on a true interpretation of S.23 (2) the deduction of municipal tax in respect of self-occupied properties was not admissible. This information according to him, constituted information under S.147(b). The Court held that opinion as to the state of the law by any and every person cannot constitute information, so as to entitle the Incometax Officer to reopen assessment.

10. The opposite view seems to have found favour with the Delhi High Court as seen from its decision in C.I T. v. H. H. Smt. Chand Kunwar ji (84 ITR. 584) [LQ/DelHC/1971/228] mentioned already. There, the original assessment of the assessees for 1960 61 were made by the Income-tax Officer, treating the assessees income from bank deposits as carried income and accepting her claim for deduction of salary paid to her daughter-in-law as expenditure. Thereafter the Revenue Audit staff working under the Comptroller and Auditor-General of India, while scrutinising the assessments, brought to the notice of the Department that the Income-tax Officer had wrongly treated the interest-income as business-income, and bad wrongly allowed the assessees claim with regard to the salary paid to her daughter-in-law. Acting upon the scrutiny note of the Revenue Audit, the Inspecting Assistant Commissioner wrote to the Income-tax Officer to rectify the defects by reopening the assessment under S.147(b) of the Act. Thereupon the Income-tax Officer issued notices under the section and made reassessments. The Court held:

(1) The scrutiny note, the Revenue Audit and the letter of the Inspecting Assistant Commissioner constituted "information" within the meaning of S.147(b) from an external source" and the assessments were therefore, valid;

(2) The expression "external source" used by the Supreme Court in Commissioner of Income-tax v. A. Raman & Co. (67 ITR.11) could not be restricted to opinions expressed or findings given by courts of law or the tribunal or other authorities under the Income-tax Act;

(3) Though the re-assessment might be the result of a change of opinion on the part of the Income-tax Officer, the change of opinion was notion his own initiative or on bis own reconsideration of the available material; it was one brought about as a result of information from an external source which came into his possession subsequent to the original assessments; and

(4) The Comptroller and Auditor-General of India has the statutory right to scrutinise the proceedings of all departments of the Government including the Income-tax Department and to point out any defects or mistakes in such proceedings which adversely affect the revenues of the State. It is in the exercise of this statutory power that the Controller and Auditor-General of India, acting through bis Revenue Audit staff pointed out what he considered to be the errors committed by the Income-tax Officer in the original assessments.

11. We think that this decision reflects the correct view and has to be accepted in preference to the other view expressed by the Gujarat High Court referred to above. The Supreme Court, it must be remembered, did not pinpoint or limit "external source" in A. Raman & Co.s case to judgments of a particular court or authority. On the other hand, the Supreme Court has widened the scope and ambit of "external source" as is evident from the following observation in the judgment.

"Jurisdiction of the Income tax Officer to reassess income arises if he has in consequence of information in his possession reason to believe that income chargeable to tax, has escaped assessment. That information must, it is true have come into the possession of the Income tax Officer after the previous assessment, but even if the information is 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 inquiry or research into facts or law, but was not in fact obtained, jurisdiction of the Income-tax Officer is not affected.

12. The point on which attention is to be focused is as to whether the Income-tax Officer had acted on his own initiative or on the basis of the fact that the correct position was brought to his notice by some other authority within the scope of the section. No decision was brought to our notice which would in so many terms restrict the scope of "external source" to judgments or orders of courts and tribunals under the Act. On the other hand, the courts have gone even to the extent of holding that mistakes pointed out by a subordinate or superior officer or an assessee would constitute information disclosed to the Income-tax Officer.

13. In Salem Provident Fund Society Ltd. v. Commissioner of Income-tax (42 ITR 547) [LQ/MadHC/1960/352] a Division Bench of the Madras High Court interpreting the scope of the word "information which has come into his possession" under the Section has observed:

"We are unable to accept the extreme position that nothing that can be found in the record of the assessment which itself would show escape of assessment or under-assessment, can be viewed as information which led to the belief that there has been escape from assessment or underassessment. Suppose a mistake in the original order of the assess-meot is not discovered by the Income tax Officer himself on further scrutiny but it is brought to bis notice by another assessee or even by a subordinate or a superior officer, that would appear to be information disclosed to the Income tax Officer. If the mistake itself is not extraneous to the records 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 notinformation to him. In the latter case, he just informs himself. It would be information in his possession within the meaning of S.34. In such cases of obvious mistakes apparent on the face of record of assessment that record itself can be a source of information, if that information leads to discovery or belief that there has been an escape of assessment or under-assessment."

14. The meaning of the word "information" came up again for consideration before a Division Bench of this Court to which one of us was a party, in United Mercantile Co. Ltd v. Commissioner of Income-tax, Kerala (64 ITR. 218) [LQ/KerHC/1966/250] where in it was held that to "inform" means to impart knowledge and a detail available to the Income-tax Officer in the papers filed before him does not by its mere availability become an item of "information". It is transmuted into an item of information in his possession only if and when its existence is realised and its implications recognised. Applying that test to the case before them, the Court held that the awareness of the Income-tax Officer for the first time after the assessment order of November 1957 that the bonus shares were issued not out of premiums received in cash and the consequent result in the light of the Finance Act, 1957, was information within the meaning that expression is used in S.34 (1) of the Income-tax Act of 1922 and consequently, the reopening of the assessment under that provision was not illegal. These two decisions (42 I. T. R.547 and 64 I. T. R.218) are quoted with approval by the Supreme Court in Anand ji Haridas & Co. v. S. P. Kasture (A.I.R.1968 S. C. 547). On the same lines more or less, is the decision of this Court in a later case Commissioner of income-tax v. Kelukutty (1971 K. L. J. 654). There the assessment was in respect of a firm. Previously there was another firm, the partners of which were one Kelukutty and his three major and minor sons. That firm carried on business from 111959 to 8 71959 when Kelukutty died. After that the new firm was constituted on 15 71959. There was no deed dissolving the old partnership. The Income-tax Officer originally treated these two firms as separate entities and passed two separate assessment orders. He assessed the old firm from 111959 to 8 71959 and the new one from 15 71959 to 3112 1959. Subsequently, the Income-tax Officer issued a notice under S.148 and initiated proceedings under S.147 (b). That was on the basis of the information gathered from the Auditors inspection notes that the old firm was not dissolved but only reconstituted and so the income of the two firms should have been aggregated and only one assessment made. The assessee contended that on the death of Kelukutty the firm stood dissolved and that the business carried on by that firm ceased to exist and a new firm was constituted on 15-7-1959 and so, the Income-tax Officer was not justified in clubbing together the income of the two periods. The contention was rejected, and reassessment was made. But finally, the tribunal upholding the contention held that the Income-tax Officer was not justified in opening the assessments under S.147(b), as he had no information within the meaning of the sub-section. This Court reversing the decision of the tribunal observed:

"The Income-tax Officer cannot take any action under this Section merely because he happens to change his opinion or to hold an opinion from that of his predecessor, on the same set of fact. But the word information does not necessarily imply factual mateerial in contra distinction to the legal aspect of the case. Information may be either actual, but the word also includes, some cases of information as to the state of the law. The decision of an appellate authority for an instance under the Income tax Act on the question as to which assessable entry is chargeable in respect of a particular income, is an information on the strength of which the Income tax Officer can act. The note put up by the audit to the effect that the assessment ought to have been made on the reconstituted firm for the entire income of the two periods and therefore; the Incometax Officer committed an error, was instruction or knowledge derived from an external source and so, it would constitute information within the meaning of the term in S.147(b). The Incometax Officer was therefore, perfectly competent to initiate proceedings under S.147(b)."

15. To sum up the position is that information whether factual or as regards the state of the law, should be extraneous; extraneous in the sense that it should suggest itself to the Income-tax Officer otherwise than by his own subsequent re-thinking. A change of opinion on his own reappraisal of the facts already before him cannot constitute "information" for the purpose of the Section. But a mistake apparent on the face of the order of assessment would constitute "information" whether someone else supplied that information to the Incometax Officer or whether he informed himself. An item of information available in the papers filed before the Income-tax Officer will become "information" only when its existence is realised and its implications are understood.

16. We are, therefore, of the view that the proceedings initiated in the present case under S.147(b) on the basis of the audit note are legal and valid. Question answered in the affirmative.

17. copy of this judgment will be sent under the seal of the Court, and the signature of the Registrar to the Income tax Appellate Tribunal, Cochin Bench.