ADDITIONAL COMMISSIONER OF INCOME TAX Vs. LAXMI AGENTS LIMITED

JUDGEMENT

(1.) THE short question which arises in this reference is as to what should be the information on the basis of which the Income -tax Officer can initiate proceedings under section 147 of the Income -tax Act, 1961. Shortly stated, the facts leading to this reference are as under : The original assessment for the assessment year 1964 -65 was completed on the total income of Rs. 5,42,583 including dividend income of Rs. 1,75,646. The Income -tax Officer found that the interest payment, which was allowed as a deduction in computing the business income, should have, in fact, been allowed as a deduction in computing income from dividend. He, therefore, reached the conclusion that an account of different rates of taxation for business income and dividend income, the income chargeable to tax had been under assessed or assessed at a low rate. He, therefore, initiated proceedings under section 147 of the Income -tax Act. The Income -tax Officer, since such expenses were allowed; in the view of the Income -tax Officer, since such expenses were not allowable, the income to that extent had escaped assessment. Therefore, he, accordingly, disallowed the amount of Rs. 19,024 on this count. Similarly, for the assessment year 1965 -66, the Income -tax Officer initiated proceedings under section 147 to allow interest of Rs. 2,05,651 against dividend income and correspondingly increased the business expenditure of Rs. 1,56,668 on account of entertainment expenses. The assessee, being aggrieved with this order of reassessment, went in appeal to the Appellate Assistant Commissioner, who was of the opinion that at the time of regular assessment, the Income -tax Officer had all the information in his possession on the basis of which he subsequently initiated reassessment proceedings. The particulars of dividends, interest, borrowings, investment, etc. were, according to the Appellate Assistant Commissioner, all before the Income -tax Officer and it was on the full appreciation of all theses facts that the Income -tax Officer had allowed the interest from the business income as claimed by the assessee. Similarly, the details of the guest house expenses were also available with the Income -tax Officer at that time to which the officer applied his mind and after careful comparison with the preceding assessment, he completed the original assessment for the aforesaid assessment year. There was no additional information whatsoever with the Income -tax Officer so as to make him to treat the guest house expenses entirely as entertainment expenses. The Appellate Assistant Commissioner, therefore, allowed the appeal of the assessee and held that this was a case of change of opinion on the part of the Income -tax Officer concerned. The revenue, therefore, took the matter in appeal before the Tribunal, which confirmed the order of the Appellate Assistant Commissioner. At the instance of the Commissioner therefore, the following question has been referred to us for our opinion : 'Whether, on the facts and in the circumstances of the case, the Income -tax Officer was justified in law in reopening the assessments for the years 1964 -65 and 1965 -66 under section 147 of the Income -tax Act, read with Explanation 1 thereto ?'

(2.) WHAT meaning should be ascribed to the expression, 'information in his possession', which could empower the Income -tax Officer to initiate reassessment proceedings under section 147 is a pertinent question, which has been raised by the learned advocate on behalf of the revenue. Should it be information received by the Income -tax Officer from an external source. or can it be information contained in the record of his case before him ? This question has often come for the consideration by courts on various occasions and there are two important schools of opinion in this respect. One trend is the the information which would enable the Income -tax Officer to initiate proceedings for reassessment under section 147 is the information which he could get from external source. In other words, that information must not be the information which is available to him from the record of the case, but it must have been received by him from some external source that is de hours the record of the case. Another trend is that that information need not be received from external source, but it may, in given case, be information while is available in the record of the case but which might not have come to the knowledge of the Income -tax Officer. The meaning of the expression, 'information' in the context in which it occurs in section 147(b) of the Income -tax Act, 1961, has been considered by the Supreme Court in Commissioner of Income -tax v. A. Raman and Co. That was an appeal arising from the decision of this court where this court exercising the jurisdiction under article 226 of the Constitution of India, set aside a notice under section 147(b) of the Income -tax Act. The facts in that case were that the assessee -firm which dealt in mill goods, etc., started business in 1942, and was supplying goods to, among others, two firms S and A, which were Hindu undivided family firms, the respective kartas whereof were the two partners of the assessee -firm. The two Hindu undecided family firms were started in the account year 1958 -59. For the assessment years 1959 -60 to 1961 -62, the assessee -firm, the two Hindu undivided family firms and the partners as individuals were assessed by different Income -tax Officers, but for the assessment year 1962 -63, one common officer took up the assessment for all of them and issued three notices on March 26,1964, to the assessee -firm to show cause why he should not reassess the assessee -firm on the ground that the firm had escaped assessment by resorting to evasion of tax by first selling highly profitable items to the Hindu undivided family firms or its partners, who could in turn sell them at very high profits. The assessee -firm challenged these notices by moving this court under article 226 of the Constitution. This court held that to infer from a solitary transaction in the assessment year 1962 -63, in which goods sold by the petitioner to the Hindu undivided family firm were sold for a much higher price, by the Hindu undivided family, that the sales in the previous years were also made with the object of diverting profits would amount to a mere surmise or conjecture. It also held that the information got by the Income -tax Officer that the assessee -firm had effected sales to the Hindu undivided family firms of imported goods at lower rates would not constitute new information or information of which the former Income -tax Officer was not aware, because the sales in the previous years had all been disclosed to the former Income -tax Officer before whom the entire books of the assessee -firm were produced. This court also found that as the Income -tax Officer issuing reassessment notices did not scrutinies the accounts of the earlier years, he could not to say that the former Income -tax Officer failed to see the result of the sales to the Hindu undivided family firms or that such sales were made fictional to divert profits. The notices for reassessment, thereof, were quashed and set aside. In appeal before the Supreme Court filed, on behalf of the revenue, Mr. Justice Shah, as he then was, speaking for the court, observed that there are two conditions which are to be satisfied before the Income -tax Officer could initiate proceedings under section 147. He set out those conditions as (1) that the Income -tax Officer has reason to believe that the income chargeable to tax has escaped assessment, and (2) that it is in consequence of the information which he has in his possession that he has reason to so believe. As to what is the meaning to be ascribed to the term, 'information', Mr. Justice Shah said as under. '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. If, as a result of information in his possession, the Income -tax Officer has reason to believe that income chargeable to tax had escaped assessment, the Income -tax Officer has jurisdiction to assess or reassess income under section 147(b) of the Income -tax Act, 1961. Information in his possession that income chargeable to tax has escaped assessment furnishes a starting point, for assessing or reassessing income. If he has that information, the Income -tax Officer may commence proceedings for assessment or reassessment. To commence the proceeding for reassessment it is not necessary that on the materials which came to the notice of the Income -tax Officer, the previous order of assessment was vitiated by some error of fact or law.'

(3.) THE Supreme Court, however, rejected the appeal of the Commissioner on the ground that the materials placed before the High Court suffered from a serious infirmity on the first condition of the jurisdictional fact.