1. This is a reference under s. 66(2) of the Indian I.T. Act, 1922 (hereinafter referred to as 'the Act'), and the question that falls for our consideration is whether the action initiated by the ITO under s. 34(1)(b) of the Act for reassessment of the income was competent.
2. The assessee is a company and the assessment year is 1957-58. The assessee purchased a building by name 'Recluse'. A part of the said building was used by the assessee for its business purposes and was occupied by its mining department, and the rest of the building was in the occupation of tenants ever since its purchase. The rental income from the said building amounting to Rs. 10,271 was credited by the assessee to the profit and loss account of its business. Having treated the said income as its business income, the assessee claimed deductions of certain expenses in the computation of the said income, which deductions were disallowed and added back by the ITO for reasons given in his original assessment order dated May 25, 1958. Since the income from the said building was treated and assessed to tax as business income under s. 10 of the Act, the ITO also allowed depreciation on the cost of the building.
3. Thereafter, by his notice dated May 2, 1962, issued under s. 23(2) of the Act, the ITO required the assessee to state its objections for the computation of income from the said building under s. 9 instead of s. 10 of the Act as was done in the original assessment. By its reply dated May 17, 1962, the assessee claimed computation of the said income under s. 10 of the Act. However, without prejudice to its said contention, the assessee sent its memo dated July 26, 1962, for computation of income under s. 9 of the Act. Thereafter, the ITO by his notice dated March 25, 1962, issued under s. 34(1)(b) of the Act, reopened the original assessment by giving the following reasons :
'Reassessment proceedings in this case were started to assess the property income from Recluse building partly let out u/s. 9. At the time of original assessment, this was not offered under the correct head in the return with the result that an under-assessment took place.'
4. After thus reopening the assessment, the ITO recomputed the income from the said building under s. 9 of the Act.
5. Aggrieved by this reassessment, the assessee filed an appeal to the AAC. Before the Asst. Commissioner, the assessee raised two objections. The first objection was that even at the time of filing the original return, the rent received from the property was shown as such, and the assessment was completed after the facts of the case were fully gone into by the ITO. There was no fresh information which came into the possession of the ITO thereafter to warrant reopening of the assessment under s. 34(1)(b) of the Act. Whatever information was necessary for the proper completion of the assessment was already before the ITO and the reopening of the assessment was done merely on account of the change of opinion on the part of the ITO, there being no change in the facts or material before him. The second objection was on merits, whereby the assessee challenged the correctness of the computation of the income under s. 9 of the Act. The AAC found that the assessee had, along with the return of the income, filed the concerned profit and loss account, and Item No. 5 shown in the balance-sheet mentioned 'Recluse building rent receivable-Rs.10, 271-4-0'. He also noticed that in reply to the ITO's letter dated February 11, 1958, the details furnished by the assessee by its letter dated February 25, 1958, in respect of repairs to the building, were as follows :
Rs.12,029-2-3 spent on repairs to rented once premises.287-0-0 spent on repairs to Lindenwold House Flat used forthe company's staff (rented).3,000-0-0 spent on repairs to Kismet Bungalow, Pali Hill, usedfor the company's staff (rented).26,242-2-0 spent on repairs to the company's Recluse buildingoccupied by its mining department.41,558-4-3
6. However, according to the AAC, the aforesaid information furnished by the assessee was not sufficient for coming to any conclusion. He, therefore, observed that the assessee had given the least amount of information with regard to the correct facts. According to him, in the statement made in the return, viz., 'Recluse building rent receivable, there was nothing to indicate that the said building was owned by the assessee and that the rent was received from the tenants occupying the same during the previous year. He further observed that' it was conceivable for persons to think that the rent in question was in respect of sub-letting a portion of the leased premises or that it related to an earlier accounting period'. According to him further, the information furnished by the assessee under its letter dated February 25, 1958, in respect of the details for repairs of the building was incomplete, if not misleading. From the details given, it was reasonable to infer that the entire building was occupied by the mining department of the assessee throughout the previous years, and hence it could not be said that all the relevant facts were available to the ITO at the time of the original assessment to come to a correct finding with regard to the income from the rent received from the said building. He further opined that it was long after the completion of the original assessment that enquiries were instituted by the ITO and the assessee gave full details in such enquiry under its letter dated May 17, 1962. He also held that the ITO came to know that a part of the said building was let out, only during the course of the assessment proceedings of one of the subsidiary companies of the assessee occupying a portion of the premises and paying rent to the assessee-company. Since information that part of the premises was let out during the relevant accounting year came into the possession of the ITO long after the completion of the original assessment, according to him, the assessment had been rightly reopened under the said s. 34(1)(b). In this view of the matter the AAC rejected the first objection raised on behalf of the assessee.
7. Aggrieved by the order of the AAC rejecting its contention, the assessee preferred an appeal to the Appellate Tribunal. The assessee repeated its contentions before the Appellate Tribunal that the reopening of the assessment was bad in law. The Tribunal on the basis of the record took the view that it was obvious that the assessee had disclosed to the ITO, (1) that it owned the said Recluse building, (2) that part of it was under the occupation of its mining department, and (3) that it received rental income in respect of a part of the building. According to the Tribunal, these facts constituted 'primary facts' required for considering the question as to whether the rental income was assessable under s. 9 or 10 of the Act. The Tribunal, therefore, took the view that when the assessee had disclosed all the said primary facts, its duty or obligation under the law to disclose fully and truly all the facts, was at an end. It was for the ITO to infer the correct position in law and not for the assessee to advise him about the same. The Tribunal, therefore, held that the ITO knew all the facts at the time of the original assessment, and knowing all the said facts he had made the assessment under s. 10 of the Act. There was no fresh information gained by the ITO subsequent to the original assessment on the basis of which he could draw a reasonable inference that there was an error on his part in assessing the rental income under s. 10 of the Act. The Tribunal in this connection referred to a Supreme Court decision in the case of Calcutta Discount Co. : 41ITR191(SC) and also to a decision of this court in Malegaon Electricity Co.'s case : 62ITR789(Bom) and held that the reopening of the assessment on the facts and circumstances of the case was not justified. The Tribunal accordingly cancelled the reopening by its order dated August 20, 1966.
8. The revenue's application for reference under s. 66(1) of the Act was rejected by the Tribunal for the same reasons holding that no question of law requiring the opinion of this court arose in the circumstances. However, thereafter, as stated earlier, the ease has been stated by the Tribunal at the direction of this court under s. 66(2) of the Act and the question that has been referred is as follows :
'Whether, on the facts and in the circumstances of the case, the action initiated by the Income-tax Officer under section 34(1)(b) was competent ?'
9. We may at the outset quote the provisions of s. 34(1)(b) of the Act, which are as follows :
'34. Income escaping assessment. - (1) If -......
(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 his possession reason to believe that income, profits or gains chargeable to income-tax have escaped assessment for any year, or have been under assessed, or assessed at too low a rate, or have been made the subject of excessive relief under this Act, or that excessive loss or depreciation allowance has been computed,
he may in cases falling under clause (a) at any time and in cases falling under clause (b) at any time within four years of the end of that year, serve on the assessee, or, if the assessee is a company, on the principal officer thereof, a notice containing all or any of the requirements which may be included in a notice under sub-section (2) of section 22 and may proceed to assess or reassess such income, profits or gains or recompute the loss or depreciation allowance; and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section :.....'
10. It is obvious from the aforesaid provisions that for initiating an action for reassessment, two conditions which are cumulative have to be satisfied. The first is that the ITO must have reason to believe that the income has escaped assessment or is under-assessed, etc., and, secondly, the belief of the officer must be in consequence of 'some information' in his possession. What constitutes 'information' has been the subject-matter of decisions of various High Courts and also of the Supreme Court. It is not necessary for us to refer to all the said decisions in detail since the position in law on the point as obtaining then was, with respect, succinctly summarised in a decision of this court in CIT v. H. Holck Laysen : 85ITR467(Bom) . We may quote with profit the relevant summary which is; follows (at p. 479) :
'The two decisions of the Supreme Court must be deemed to have set this conflict at rest and those cases which take the view that information cannot be obtained by the Income-tax Officer from his own record must be deemed to have been overruled. But, it is still true to say that a mere change of opinion would not justify the reopening of an assessment under' section 34(1)(b) of the Act. It does not matter whether the Income-tax Officer obtains information from his own record or whether he receives information from an outside source. What is obligatory in order to apply section 34(1)(b) is that he must have 'information' in his possession in consequence of which he has reason to believe that the income has escaped assessment or is under-assessed, etc. The distinction really consists in a change of opinion unsupported by subsequent information on the one hand and a change of opinion based on information subsequently obtained, on the other. In the former class of cases, the assessment proceedings are attempted to be reopened without the discovery of an error and without receiving any information as to fact or law. The Income-tax Officer has a fresh look at the earlier assessment order and he decides to adopt a different approach to the matter. Such a reopening is based on a 'mere' change of opinion and is without jurisdiction. The Income-tax Officer cannot reopen an assessment at his 'sweet will and pleasure'. In the latter class of cases, the reopening is based on information leading to the requisite belief and is therefore within the jurisdiction of the officer. It is then not for the High Court to determine whether the assessment should be reopened, for it is for the Income-tax Officer to administer the Act.'
11. Thus, the law on the point as summarised in the aforesaid decision lays down that it is permissible for the ITO to gather information from his own record. However, the investigation which he carries on or the inquiries which he makes or the research that he undertakes must yield information on the basis of which alone he can initiate reassessment proceedings under the said provisions. A mere internal change of opinion on the same facts or material will not give him jurisdiction to reopen the assessment.
12. Subsequent to this decision, the Supreme Court delivered two decisions of some significance touching the very same question, viz., what constituted 'information', and they are, Kalyanji Mavji or Co. v. CIT : 102ITR287(SC) and in demand Eastern Newspaper Society v. CIT : 119ITR996(SC) . It is, therefore, necessary to refer to the said decisions to state the law on the point up-to-date. It will also be noticed from these two decisions that the wide proposition of law laid down by the Supreme Court in its decision in Kalyanji Mavji & Co. v. CIT : 102ITR287(SC) , has not been approved of in its later decision in Indian and Eastern Newspaper Society v. CIT : 119ITR996(SC) .
13. In Kalyanji Mavji & Co. v. CIT : 102ITR287(SC) , the Supreme Court laid down as follows (sec headnote) :
'The word 'information' in section 34(1)(b) is of the widest amplitude and comprehends a variety of factors. Nevertheless, the power under section 34(1)(b), however wide it may be, is not plenary because the discretion of the Income-tax Officer is controlled by the words 'reason to believe'. Information may come from external sources or even from the materials already on record or may be derived from the discovery of new and important matter or fresh facts.
Section 34(1)(b) would apply 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 assessment the income liable to tax has escaped assessment due to oversight, inadvertence or a mistake committed by the Income-tax Officer;
(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 original assessment; and
(4) where the information may be obtained even from the record of the original 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.
Where, however, the Income-tax Officer gets no subsequent information, but merely proceeds to reopen the original assessment without any fresh facts or materials or without any enquiry into the materials which form part of the original assessment, section 34(1)(b) would have no application.'
14. In its later decision in Indian and Eastern Newspaper Society v. CIT : 119ITR996(SC) , the Supreme Court did not accept the aforesaid wide proposition of law as laying down the correct law on the point and has in terms held that the aforesaid proposition to the effect (headnote), 'that a case where income had escaped assessment due to 'oversight, inadvertence or mistake' of the ITO must fall within s. 34(1)(b) of the Indian I.T. Act, 1922, is stated too widely and travels farther than the statute warrants in so far as it can be said to lay down that if, on reappraising the material considered by him during the original assessment, the ITO discovers that he has committed an error in consequence of which income has escaped assessment, it is open to him to reopen the assessment. An error discovered on a reconsideration of the same material (and no more) does not give him that power'.
15. It may be mentioned in this connection that the direct question which fell for consideration before the Supreme Court in this decision was whether the report or note received from the internal audit party of the income-tax department could be said to constitute 'information' within the meaning of s. 147(b) of the I.T. Act, 1961, corresponding to s. 34(1)(b) of the Act. However, the court discussed all the decisions on the point and, after dealing with the relevant controversies with regard to what actually constituted 'information', finally set at rest all the said controversies and reiterated that a mere internal change of opinion does not authorise the ITO to reopen the assessment under the said s. 34(1)(b) or the corresponding s. 147(b) of the I.T. Act, 1961, although it is open to the ITO to gain such information from the facts and circumstances which are already in the records at the time of the original assessment. The investigation or the inquiry or the research which he may make on the facts which are already on record must, however. yield some information which was not available to him at the time of the original assessment and it is this new information thus obtained which alone will justify the reopening of the assessment under the said provision. The opinion of the audit party on a point of law could not be regarded as such 'information'. Any different view taken by the officer afterwards on the application of the provisions of the Act would amount to a change of opinion on material already considered by him.
16. Judged on the criteria thus laid down, we may now examine the facts in the present case. As stated earlier, in the return filed by the assessee at the time of his original assessment, admittedly the assessee had shown Rs.10,271 as income received as rent from the said building 'Recluse'. Secondly, the assessee had claimed deductions of certain expenses which related to the said building and the deductions claimed and the reasons given by the ITO for disallowing the said expenses were as follows :
'14. Miscellaneous Expenses : Rs. Rs.(1) Expenses in connection with purchase ofRecluse Building. 50(2) Rs. 303 were spent in connection withsome proceedings against old tenant of RecluseBldg. This expenditure is also in connectionwith acquisition of vacant possession of the Bldg. 303 36415. Repairs.(1).....(2) Rs. 26,242 have been spent forrepairs of Recluse Bldg. The amount is obviouslytoo heavy for current repairs. Moreover, considerable expenditure has already been incurredin the preceding year on repairs. Therefore,there can be no scope for further heavy expenseon repairs. It is noticed that the company hasbeen effecting alterations in a part of the build-ing for improving its utility for its miningdepartment. Such an expenditure is estimated atRs. 12,000 and is disallowed because it is notcovered by section 10(2)(v). 12,000'
17. Furthermore, before completion of the original assessment, the ITO by his letter dated February 11,1958, had called upon the assessee to furnish details in respect of all items of repairs to the building shown in its balance-sheet, and the assessee by its letter dated February 25, 1958, had furnished the said details in which an amount of Rs. 26,242-2-0 was shown as spent on repairs to the company's 'Recluse' building occupied by its mining department. It is on the basis of these facts that the ITO had made the assessment of the said income under s. 10 of the Act. There is nothing on record to show as to what further 'information' came into his possession subsequently, after the said original assessment order was made. On the other hand, it appears that the ITO in order to show that he had made some further enquiries or investigation, issued a notice on May 2, 1962, under s. 23(2) of the Act calling upon the assessee to file a copy of the agreement with M/s. Killick Nixon & Co. Ltd., for letting out the said building and to produce all the relevant municipal bills for the year ending March 31, 1957. He also called upon the assessee to certify whether they had undertaken to pay the cost of repairs, and to give details of the municipal taxes paid by the assessee in the year ending March 31, 1957, and all repairs/expenses incurred by the assessee and the amount of depreciation claimed on the said building. By the very same notice, he also called upon the assessee to state their objections for the computation of the income from the said building under s. 9 instead of s. 10 of the Act. To this notice, the assessee replied by its letter dated May 17, 1962, pointing out that M/s. Killick Nixon & Co. Ltd. in respect of which the lease agreement was called for from the assessee, were not occupying any part of the said building during the previous year relevant to be assessment year 1957-58, and they had shifted some of their departments to the said building only in August, 1957. The assessee further stated that the income from the said building which was purchased for its own purpose and not for renting out, should be assessed under s. 10 instead of under s. 9 as was proposed. Thus, it would be clear that there was no further information which had come to light for the ITO. On the other hand, in spite of the said alleged further investigation in the matter, the material and the information with the officer remained the same. What is more, the order for reassessment nowhere stated that any 'information' as such had come to light for the ITO, pursuant to which he was taking action under the said s. 34(1)(b). On the other hand, as is apparent from the order which has been reproduced verbatim earlier, it is clear that the only ground on which the ITO sought to initiate the reassessment proceedings was that, at the time of the original assessment, the income from the said building was 'not offered' by the assessee under the correct head in the return, with the result that an under-assessment had taken place.
18. Far from there being, therefore, any 'information' as such coming into the possession of the ITO subsequent to the original assessment either from an internal source or material which was already on record or otherwise, it was the internal change of opinion on the part of the ITO, on the same facts and material which prompted him to order the reassessment. This is, therefore, a case which is clearly outside the purview of the provisions of s. 34(1)(b). On the facts and circumstances of the case, there is not even a pretence that any information had come to light for the ITO which necessitated a resort to the reassessment proceedings.
19. Shri Joshi, the learned counsel for the revenue, however tried to urge that this was a case where the ITO had not originally applied his mind to the relevant entry, and it was only after the subsequent application of mind and co-relation of the relevant material that he 'obtained information' which showed him that certain income had escaped assessment at the time of the original assessment. We are far from satisfied that this is the case in the present proceedings. As has been already pointed out, the ITO has not even stated that any subsequent material had come to light or even that originally he had not applied his mind. As has been pointed out earlier, his only case is that the assessee had not offered the said income in the return under the correct head and, therefore, the reassessment proceedings were started. The argument advanced by Shri Joshi is, therefore, only to be stated to be rejected. Thus, we are more than satisfied for the reasons stated above that the ITO was not competent to initiate reassessment proceedings under s. 34(1)(b) of the Act.
20. In the circumstances, our answer to the question referred to us is in the negative and in favour of the assessee. The assessee will get the costs of this reference.