R.C.MANKAD,J. - (1.)WHETHER , the ITO, Companies Circle -V, Ahmedabad, respondent herein, could have entertained a reasonable belief that there was escarpment of income from assessment on account of the failure on the part of the petitioner to disclose full and truly material facts necessary for its assessment for the assessment year 1970 -71 and 1974 -75, justifying the initiation of action for reopening the assessment for the said assessment year ? So far as the assessment year 1974 -75 is concerned, there is a further question, namely, whether the respondent could have entertained a reasonable belief that there was escarpment of income from assessment in consequence of information in his possession. These are the questions which we are called upon to answer in this petitioner filed under art 226 of the Constitution of Indian.
(2.)PETITIONER is a company registered under e Indian Companies Act, 1913, and it is engaged in the business if manufacturing textiles for the last several year. The respondent is the ITo having jurisdiction to assess the petitioner. The relevant assessment year with which this petitioner is concerned are assessment years 1970 -71 and 1974 -75, corresponding year of account being financial year 1969 -70 and 1973 -74, respectively. Petitioner was following the cost method for the purposes of valuing its opening and closing stock's of cloth and yarn for the purpose of income -tax assessment for the last several years. Common method was followed for the purpose of valuing the stocks of cloth and yarn bother for the purpose of income -tax and balance -sheet and profits and loss account up to the assessment year 1965 -6 6. Departure was, however, made in the assessment year 1966 -67, that is, financial year 1965 -66. In that year, the petitioner changes the method of valuation of stocks of yarn in process and cloth for the purpose of the Companies Act. Balance -sheet and profits and loss account required to be prepared under the provisions of the Companies Acts were prepared on the basis of the new method and while the old method was continued to the followed for the purpose of income -tax. It is not necessary to set out the methods which the petitioner followed in valuing its stocks of clothe and yarn which was not in process, since the controversy in this petitioner arises only on account of the valuation of the stock of yarn in process. So far as the yarn in process was concerned, the petitioner followed a uniform method of valuing the stock at 12 paise per kg or 6 per 1b. for the purpose of income -tax/. Cost of yarn in process for the purpose of balance -sheet was worked out by adding 25% weaving charges to the cost of ready yarn. Along with its return of income submitted for the assessment year 1966 -67, the petitioner filed a statement in which difference between the valuation of the closing stock shown in the balance -sheet and its valuation for the propose of income -tax assessment and the necessary adjustment to be made in its valuation for the purpose of income -tax assessment were stated. It appears that standard queries were issued by the ITo for the purpose of assessing the petitioner to income -tax for the year 1966 -67, which as pointed out above, was e firms year in which the petitioner changed the basis or method for valuation of the stock for the purpose of balance -sheet and profits and loss account. In reply to query No. 21, regarding stock valuation, the petitioner, stated as follows :
'21. Stocks of cotton and yarn are valued at cost as in the past. Stocks of yarn in process and cloth are valued at cost on a slightly different method for the purpose of balance -sheet. Rs. 1,55,127 is the amount of over -valuation on e basis of the valuation at cost on e basis of method followed for the purpose of income -tax. Valuation of stocks at cost is given in a statement with the return of income.'

In the statement showing valuation for he purpose of income -tax filed along with the return, cost of yarn in process was shown at 12 p per kg. In anther statement working of valuation according to the method followed in balance -sheet was shown. The final working was shown as follows :

'Cost of Stock on old method up to 31 -3 -1966 : Rs.Yarn in process 8,74,025Cloth 60,20,038 Rs. - - - - - - - - - -69,94,063Cost of stock on new methodYarn in process 9,79,564Cloth 60,69,620 - - - - - - - - - -Difference = 1,56,121' 70,49,184

(3.)IN the course of assessment proceedings for the assessment year 1966 -67, the petitioner also submitted the following note showing difference in valuation :
'Note : Over -valuation in e closing stock of yarn in process as on 31 -3 -1966 on the basis of method followed for income -tax purpose till not is as follows : Rs. ' (1) Over -valuation in weaving process due to change in method of adding 6 p. per 1b. to cost of ready yarn and that method followed for balance -sheet on 31 -3 -1966, by adding 25% of weaving charges to cost of ready yarn. 90,565 (2) Over -valuation in stock of ready yarn, spinning process, weaving process and cloth on 31 -3 -1966, due to change in method of valuing cotton on basis of loss percentage to that of valuing cotton on the basis of yarn manufactured. 63,349 - - - - - - -1,53,914 - - - - - - -