1. The two questions which have been referred to this court under s. 256(1) of the I.T. Act at the instance of the Revenue are as follows:
'(1) Whether, on the facts and in the circumstances of the case, the belief of the ITO that the income of the assessee-trust had escaped assessment of the assessee-trust for 1962-63 was in consequence of any 'information' in his possession received after the date of the original assessment made on October 12, 1962 ?
(2) Whether, on the facts and in the circumstances of the case, the ITO acted without jurisdiction in initiating proceedings under section 147(b) of the I.T. Act, 1961, for the assessment year 1962-63 ?'
2. Strictly speaking, on the finding recorded by the Tribunal that the ITO, when he made the original assessment for the assessment year 1962-63 in the case of the respondent-trust, had already knowledge that the construction of the terms of the trust placed by the Appellate Asst. Commissioner of Income-tax was contrary to the view which he had taken in the earlier proceedings the assessment of the individual who was a beneficiary under the trust, both the question have to be answered against the Revenue.
3. In view of the finding recorded by the Tribunal, we will only briefly refer to the facts in this reference. The trust deed in question is dated April 6, 1944, which is executed by one Bhagubhai Mafatlal and the assessee in the reference is an association of persons represented by the trustees of the said trust. The beneficiary of the trust is Hemant Bhagubhai. On a construction of the trust deed in the assessment proceedings under the W.T. Act in the case of the beneficiary, Hemant Bhagubhai, for the assessment year 1957-58 it was held that the trustees were the owners of the trust fund. It was held that there was absolute discretion to the trustees for the application of the income and the only condition that had been put with regard to the manner of application of the income was that Hemant should be able to live as far as possible with the same comforts and to enjoy life in the same manner as he had been accustomed to do in the lifetime of the settlor. Consequently, it was held for the purposes of proceedings under the W.T. Act, that Hemant, the beneficiary, had no life interest in the income of the trust and the WTO was not justified in including in the assessment the present value of the future benefits in the trust.
4. In the assessment for the assessment year 1958-59 in the case of Hemant Bhagubbai, the ITO took the view that the entire trust income was receivable by the trustees on behalf of Hemant as the sole beneficiary and, therefore, the provision of s. 41 (2) of the Indian I.T. Act, 1922, clearly applied to the entire income. The ITO rejected the plea that the whole income of the trust had to be assessed in the hands of the trustees under the first proviso to beneficiary cannot be taxed in respect of the entire income from the s. 41(1). The assessment was made on 12th January, 1959.
5. In the assessment proceedings of the assessee-trust for the same year 1958-59, having regard to the finding recorded in the case of Hemant, the beneficiary, the ITO took the view that no assessment could be made on the trust and the proceedings were dropped. Both these proceedings were before the ITO (Company Circle I(2)). Following his earlier view for the assessment year 1958-59, the same ITO in the assessment year 1962-63 held that the trust was not liable to assessment on the total income of Rs. 3,84,225 which was returned by the trust. The ITO held that Hemant was the sole beneficiary of the trust and the entire income of Rs. 3,84,225 should be assessed in his hands. Consequently, the entire income was taxed in the hands of the beneficiary, Hemant.
6. An appeal was filed by the beneficiary, Hemant, in respect of the assessment year 1962-63, which came to be disposed of by the AAC on September 17, 1966. The AAC referred to his order of the same dated in respect of the assessment of Hemant for the assessment year 1958-59 and took the view that the beneficiary cannot be taxed in respect of the entire income from the trust and that the beneficiary should be taxed only in respect of the actual receipt from the trust. He made a further observations as regards the balance that the trust should be assessed at the rate applicable to an association of persons.
7. Prior to this, on 26th September, 1964, the Commissioner in exercise of his powers under s. 263 of the I.T. Act, 1961, had issued a notice to the assessee-trust for the assessment year 1962-63 stating that he was contemplating to direct the ITO to raise a demand on the total income of the trust. Theses proceedings were dropped on October 5, 1964. Later, a notice under s. 148 read with s. 147(b) of the I.T. Act, 1961, was issued on March 4, 1965, by the ITO to the assessee-trust for the assessment year 1962-63 that he proposed to reassess the income of the trust which was taken by the ITO as 'nil'. But this action was also dropped on 15th May, 1965.
8. Eventually on 27th March, 1967, a second notice under s. 148 read with s. 147(b) was issued to the assessee-trust for the assessment year 1962-63 on the ground that the assessment was liable to the reopened in consequence of information received by the ITO that the income of the trust had escaped assessment. Incidentally this noticed was also issued by the ITO (Company Circle I(2)). The information relied upon was the order of the AAC dated September 17, 1966, in the case of Hemant Bhagubhai for the assessment year 1962-63. The ITO rejected the objection of the assessee that the reassessment was a result of a change of opinion on the same facts and the proceedings were, therefore, invalid and proceeded to make an order of reassessment subjecting the trust to assessment on an income of Rs. 3,84,225.
9. This order was upheld by the AAC who took the view that where an appellate authority given its decision regarding the persons in whose hands an income is properly assessable, it constitutes information, which the meaning of s. 147(b) of the I.T. Act. The assessment having been confirmed by the AAC, the assessee-trust went up in appeal before the Tribunal. The Tribunal has positively taken the view that when the ITO (Company Circle I(2)) proceeded to make the assessment order on October 12, 1962, he was already in possession of information with regard to the construction of the trust deed placed in the AAC's order June 24, 1959, in the case of Hemant Bhagubhai (individual) in respect of his wealth-tax assessment for 1957-58 and that the information that the income of the trust was not specifically receivable on behalf of any one persons or on behalf of more than one beneficiary in determinate or defined shares was with the ITO (Company Circle I(2)) right from the dated of the order dated June 24, 1959. The Tribunal found that the view taken by the AAC in his order dated September 17, 1966, was the same as that taken on June 24, 1959. Therefore, according to the Tribunal, the reopening of the assessment of the trust for 1962-63 was not in consequence of any information received by him but was the result of merely a change of opinion on his part on the same facts. The Tribunal further found that as far back as on January 16, 1959, the ITO had studied the trust deed dated April 6, 1944, and taken one view of the matter. The Tribunal also found that on June 24, 1959, he knew that the AAC had taken a different view and yet he chose to reject the assessee-trust's return on October 12, 1962. The proceedings, were, therefore, held to be invalid. This is how the two question reproduced earlier have arisen for consideration.
10. The learned counsel appearing on behalf of the Revenue has tried to urge that the order dated June 24, 1959, was made in proceedings relating to the assessment under the W.T. Act and there was, therefore, good justification for the ITO to rely on the order dated September 17, 1966, which arose out of the proceedings for assessment to income-tax in the case of Hemant, the individual.
11. It is difficult to appreciate how the Revenue can get over the fact that all the proceedings referred to above, namely, the assessment proceedings of Hemant, the individual, for the year 1958-59, as well as the proceedings for 1962-63, both the in respect of Hemant and in respect of the trust were dealt with by the same ITO (Company Circle I(2)) who is also the officer who has issued the noticed under s. 148 read with s. 147(b) of the I.T. Act. That officer must, therefore, be presumed to have knowledge of the manner in which the AAC had construed the terms of the trust deed on June 24, 1959. It would not, therefore, be permissible for the Revenue to rely on the construction on the trust deed by the order dated September 17, 1966, which does nothing more but follow the view taken in respect of the trust deed by the order dated June 24, 1959. Once we hold that the ITO (Company Circle I(2)) must be presumed to have know the order date June 24, 1959, the attempt to reopen the assessment of the trust for the assessment year 1962-63 cannot be said to be based on any information obtained from the order dated September 17, 1966. The view taken by the Tribunal, therefore, appears to be more than justified by the facts of the case. Consequently, both the questions have to be answered against the Revenue.
12. Accordingly, question No. 1 is answered in the negative and against the Revenue. Question No. 2 is answered in the affirmative and against the Revenue. Revenue to pay costs of this reference.