1. We are concerned in this reference with a notice issued under section 34(I)(b) of the Indian Income-tax Act whereby the department sought to bring to tax an amount of Rs. 5,10,788 paid as interest in the assessment year 1947-48. The circumstances in which the notice came to be issued may be briefly stated as follows :
2. The assessee is a partnership consisting of four partners (the four Daga brothers) who were referred to in the arguments before us as the Kamptee firm. They had also admitted to the benefits of the partnership three minor members of their family. This firm was known as 'R. B. Bansilal Abirchand Firm, Kamptee'. We shall refer to it hereafter as the assessee or the 'Kamptee firm.' There was also another firm known as the 'Bisesar House Firm' in which the four Daga brothers, the major partners of the Kamptee Firm, were partners along with a fifth partner, the late Sir Manekji Dadabhoy, who owned an eight annas' share, while the Daga Brothers owned the remaining eight annas' share.
3. The assessee made a return of income-tax for the assessment year 1947-48, wherein they showed a total net loss of business of Rs. 1,09,311. This figure was worked out after showing certain receipts and payments on account of interest. The total receipts of interest shown were Rs. 4,87,129 from which were deducted certain payments on account of interest to the extent of Rs. 22,398 leaving a net income from interest of Rs. 4,64,731. Adjusting this income against the profit and loss account statement of that year the assessee showed a net loss of Rs. 1,09,311 as stated above. In the return the assessee firm had undoubtedly shown the amount of Rs. 5,10,788 paid as interest by the Bisesar House firm but it appears that they had excluded it form assessment upon certain grounds. The Income-tax Officer accepted the return and excluded the amount of Rs. 5,10,788 from the tax.
4. In the meanwhile, proceedings for the assessment of the Bisesar House firm had been taken and the Bisesar House firm had claimed that this amount of Rs. 5,10,788 should be legitimately allowed to them in the assessment for the year 1947-48. The Income-tax Officer had disallowed it on the ground that the self-same partners of the Kamptee firm were also the partners in the Bisesar House firm and, therefore, whatever advances the Kamptee firm had made to the Bisesar House firm were advances from the partners in the Bisesar House firm itself and so could not be allowed to the firm as legitimate expenses of business. This view of the Income-tax Officer ultimately came to be challenged before the Income-tax Appellate Tribunal, Bombay Bench, and by an order passed on February 23, 1950, the Tribunal reversed the decision of the Income-tax Officer. The Tribunal held that the constitution of the Kamptee firm was quite different from that of the Bisesar House firm and that the advances to the Bisesar House firm were made by the Kamptee firm as such and not be the several partners of the Kamptee firm who also happened to be partners in the assessee firm. They also found that the advances brought into the Bisesar House firm were not credited to the accounts of the individual partners of the Kamptee firm but were credited to the account of the Kamptee firm itself. Therefore, the Tribunal held that the income-tax authorities were wrong in disallowing Rs. 5,10,788 in the assessment of the Bisesar House firm for the assessment year 1947-48.
5. It may be noticed here that the very finding given in the assessment of the Bisesar House firm by the Tribunal to which we have just referred showed that the Kamptee firm itself received the amount of Rs. 5,10,788 and that the amount was not paid to its partners. To that extent undoubtedly the finding would affect the finding reached by the Income-tax Officer in the assessment of the Kamptee firm to which we have already adverted. The result therefore was inevitable. A notice was issued under section 34(I)(b) of the Income-tax Act and the department sought to bring to assessment the item of Rs. 5,10,788 and it is the validity of that notice that is questioned in the present reference. The question referred is : 'Whether, under the facts and circumstances of the case, there was any information before the Income-tax Officer seeking to re-open the assessment so as to invest him with jurisdiction to issue notice under section 34(I)(b) of the Income-tax Act ?'
6. Now, it is not in dispute in the present case that the amount is liable to tax. The only contention that has been taken before the Tribunal and as appears from the reference made was that the action taken by the Income-tax Officer was bad in law in so far as it was not in compliance with the requirements of section 34(I)(b). The point as it is adumbrated in the question referred is that the mere fact that the Tribunal sitting in judgment over the assessment of the Bisesar House firm altered the order of the income-tax authorities below and held that the amount of Rs. 5,10,788 was paid not to the partners but to the Kamptee firm, did not amount to 'information in his possession' so far as the Income-tax Officer was concerned nor could it be said that in consequence he had 'reason to believe' and that, therefore, there was no jurisdiction in him to proceed under section 34(I)(b). It is not in dispute that the relevant provision of law which is attracted in the present case is section 34(I)(b) as it stood before the amendment in 1956, but after the amendments of 1948. The relevant provision reads thus :
'34. Income escaping assessment. - (i) if -
(a) the Income tax Officer has reason to believe that by reason of the ommission or failure on the part of an assessee to make a return of his income under section 22 for any year or to disclose fully and truly all material facts necessary for his assessment for that year, income, profits or gains chargeable to income-tax have escaped assessment for that year, or have been under-assessed, or assessed at too low a rate, or have been made the subject of excessive relief under the Act, or excessive loss or depreciation allowance has been computed, 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 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 within eight years 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 :
Provided that -
(i) the Income-tax Officer shall not issue a notice under this sub-section, unless he has recorded his reasons for doing so and the Commissioner is satisfied on such reasons recorded that it is a fit case for the issue of such notice;
(ii) the tax shall be chargeable at the rate at which it would have been charged had the income, profits or gains not escaped assessment or full assessment, as the case may be; and
(iii) where the assessment made or to be made is an assessment made or to be made on a person deemed to be the agent of a non-resident person of Rs. 5,107 on 43, this sub-section shall have effect as if for the periods of the 1947-48 four years a period of one year was substituted.'
7. The contention that has been raised on behalf of the assessee is that the Bisesar House circumstances established do not warrant the conclusion that had made to the Bisesar had 'information in his possession' that income, Bisesar House firm itself escaped assessment for any year or have been under mate expenses of business.
8. In the first place, the present section makes a considerable departure from the law as it stood prior to its amendment in 1948. Prior to that the amendment the section ran as follows :
'34. (1) If in consequence of definite information which has come into possession of the Income-tax Officer discovers that income profits or gains chargeable to income-tax have escaped assessment in any year, or have been under-assessed or have been assessed at too low a rate, or have been the subject of excessive relief under this Act, the Income-tax Office may, in any case in which he has reason to believe that the assessee has concealed the particulars of his income or deliberately furnished inaccurate particulars there of at any time within eight years, and in any other case at any time within four years of the end of that year, serve on the person liable to pay tax..... a notice.....'
9. It will be noticed that the amendments made a radical departure in two respects : firstly, that the amendments omitted the word 'discovers' from the body of the section, and, secondly, instead of the words 'in consequence of information in his possession reason to believe.' The difference brought about in the section after the amendment would in the first place render somewhat otiose the view previously taken as to the effect of the word 'discovers' and all the learning that has gathered round that word, particularly as to whether it must be something new that the Income-tax Officer finds before he can act. At present, the requirement s of the law are that he must have information in his possession and on the basis of that information he must have reason to believe; and the question is whether on the facts and in the circumstances of the present case he had such information and he had reason to believe.
10. Mr. Thakar urged that there was no information in the possession of the Income-tax Officer when he issued the notice under section 34(1) on January 9, 1952. He has pointed out that the items of Rs. 5,10,788 which is now sought to be brought to tax was already shown in the return initially filed by the assessee firm. He pointed out that all that the firm there stated was that since that income had already been taxed in the hands of the Bisesar House firm, it could not be the subject of double taxation and, therefore, though the assessee firm had shown it in its return it had claimed that it could not be taxed. On that view, he submitted that not a single fact was hidden from the Income-tax Officer and therefore when he sought to serve a notice under section 34(I)(b) he could not be said to have any information in his possession at all which was unknown to him previously.
11. It seems to us, however, that the case is not as simple as that. No doubt, the amount of Rs. 5,10,718 was shown in the initial return filed by the assessee firm, but at the time that income was dealt with by the Income-tax Officer, the assessment of the Bisesar House firm had already been made and the view taken was that the Kamptee firm was a partner in the Bisesar House firm and, therefore, the amount of Rs. 5,10,788 could not be claimed by the Bisesar House firm as a legitimate expense for the simple reason that the payment of interest to partners could not be an expense made by the firm to which the partners belong. Upon this view, undoubtedly the Income-tax Officer who decided the assessee firm's assessment could not have any 'information', because the facts as they were already known were indicated in the return of the assessee firm,. But it was later on when the Bisesar House firm filed its appeal before the Income-tax Appellate Tribunal that the legal position was completely altered. According to the Tribunal, R. B. Bansilal Abirchand firm was completely different legal entity from the Bisesar House firm, therefore, what was originally not allowed as a legitimate expense could thereafter be allowed as a legitimate expense. In that event, and upon that view inevitably the payment of Rs. 5,10,788 became an income of the Kamptee firm because that firm was not a part and parcel of the Bisesar House firm but was a different legal entity. Now, it was these facts and this legal position which for the first time were brought to light by the order of the Tribunal on February 23, 1950, . We have no doubt that this complete alteration in the relative position of the two firms adjudged by the Tribunal constituted 'information' within the meaning of section 34(1)(b) and that consequent upon that information any officer of the department would have reason to believe that the item of Rs. 5,10,788 was either not brought to tax or under-assessed.
12. Mr. Thakar referred to some cases upon this point to show that even under these circumstances the alteration in the findings as to the legal relationship between the Kamptee firm and the Bisesar House firm would not constitute 'information'. According to him it was nothing except reiteration of the true legal position and therefore could not be held to be information which had come into the hands of the Income-tax Officer. The two cases cited were Income-tax Appellate Tribunal v. B. P. Byramji & Co and New Victoria Mills Co. Ltd. v. Commissioner of Income-tax. These are unfortunately both cases under the provisions of section 34 before its amendments and the deletion of the word 'definite' before 'information' in the section. It will be noticed that in both cases emphasis has been laid upon the words 'definite information' as they occurred in the amended section. But, apart from that, the two cases were decided upon facts which were wholly different. In Income-tax Appellate Tribunal v. B. P. Byramji & Co. the assessee had been assessed under the Finance Act of 1938, whereas in the proceedings commenced by the notice under section 34 subsequently the same assessee was sought to be reassessed on the short ground that he should have been assessed not under the Finance Act, 1938, but under the Finance Act of 1939, and as stated in the judgment itself it was admitted 'that the 'indefinite information' consisted only of his (Income-tax Officer's) view of the law as to whether the rates of the Finance Act of 1938 or 1939 were applicable and that, in his view, the rates in the latter Act should have been applied.'It was in these circumstances that the Nagpur High Court held that the Nagpur High Court held that the view of the successor of the Income-tax Officer even though it was correct was not based on any definite information coming into his possession but he only corrected a mistaken view of the law applicable setting his own opinion against that of his predecessor, and that was not a sufficient ground for re-opening the assessment under section 34 as amended in 1939. The circumstances here are wholly different. In the present case, what has been found is based on the facts and circumstances of the assessment of the Bisesar House firm and upon the facts it was found that the Kamptee firm was not a partner of the Bisesar House firm, and the circumstances therefore upon which that findings was reached would constitute information.
13. Similarly, in the case of New Victoria Mills Co Ltd. v. Commissioner of Income-tax the department had sought to bring to tax an item which had previously been adjudicated upon by the Tribunal and it was held that since the Tribunal had held that the sum was an allowable expenditure of the company that alone would not be said to be definite information which led to the discovery that the assesee's income had escaped assessment and therefore the revision of the assessment under section 34 was not justified. It may incidentally be mentioned also that the words which fell for interpretation in that case were the words of the amended section 'definite information.'
14. Reliance was next placed on a recent decision of this court in K. T. Kubal & Co. Pvt. Ltd. v. Commissioner of Income-tax. The facts in that case were peculiar. The assessee company had paid certain amounts by way of commission to one of its employees and the department had taken the view that those amounts were not paid as legitimate expenses but for certain secret commissions in the nature of illegal gratification and, therefore, it disallowed certain portions of those items but allowed lesser amounts under four heads. When appeals were preferred by the assessee regarding the portions disallowed, the Tribunal made a casual remark in its judgment that even the portions which have been allowed ought not to have allowed and that the deduction should have been wholly disallowed. Consequent upon that remark, a notice under section 34 came to be issued and this court ultimately held that the notice was bad. This court had occasion to observe in that case that a mere change amounts as business expenditure would not constitute 'information' within the meaning of section 34(1)(b).
15. It may be mentioned here that the High Court stressed two facts namely, that the items regarding which the observation was made by the Tribunal were not the subject-matter of the appeal before the Tribunal; in other words, those items being allowed by the Income-tax Officer, the department had not come up in appeal before the Tribunal and, therefore, the Tribunal's remarks were completely obiter so far as those items were concerned. Secondly all that the Tribunal did in that case was that upon the same facts and information it changed its view. That, therefore, was held not to be, 'information' within the meaning of section 34(1)(b). In the present case, the distinguishing feature is that when the Tribunal, dealing with the Bisesar House's assessment, remarked that the Kamptee firm was a different legal entity from the Bisesar House firm, that very question was up before it for adjudication and, therefore, it came to a legal determination upon that question and it did not as in Kubal's case make any obiter remarks unconnected with the case. The order passed in the present case by the Tribunal in the Bisesar House assessment would be an effective or operative order and to that extent alter the rights of the parties. Therefore, that order showing that alteration would constitute 'information' within the meaning of section 34(1)(b).
16. It seems to us that upon the facts stated here there is not the slightest doubt that the altered situation as indicated in the order of the Tribunal dated February 23, 1950, showing the true relationship between the assessee firm and the Bisesar House firm affected the assessment of the assessee firm and gave information to the Income-tax Officer upon which he could have reason to believe that the assessee firm had not been assessed on this item or had been under-assessed. In our opinion an alteration of the legal position of an assessee firm in consequence of an order passed in an ancillary proceeding of another firm having common partners would itself constitute 'information', within the meaning of section 34(1)(b). In a recent decision of their Lordships of the Supreme Court of India in Maharaj Kumar Kamal Singh v. Commissioner of Income-tax, it has been held that the word 'information' in section 34(1)(b) included information as to the true and correct state of the law, and so would cover information as to relevant judicial decisions. Of course, it is not necessary in the present case to go as far as that. But we have cited this decision to show that even an unconnected judicial decision giving information as to the state of the law would itself amount to 'information' within the meaning of section 34(1)(b); much more so then would a judicial decision in a connected case and between assessee who have common partners be 'information'. If it amounted to information, there was no dispute raised that the officer would be 'reason to believe.'
17. In the result, therefore, we answer the question posed in the affirmative. The assessee shall pay the costs of the Commissioner.
18. Question answered in the affirmative.