K.C. Agrawal, J.
1. This is a petition under Article 226 of the Constitution of India for quashing the notice dated March 12, 1976, issued under Section 148 of the I.T. Act, 1961 (hereinafter referred to as 'the Act'), and for a writ of mandamus directing the ITO, 'A' Ward, Circle I, Varanasi, not to proceed with the reassessment of the petitioner-company in pursuance of the said notice.
2. The petitioner is a registered company incorporated under the Indian Companies Act, 1956, having its registered office at Renukoot, District Mirzapur. It is a subsidiary company of Messrs. Hindustan Aluminium Corporation Ltd., Renukoot, District Mirzapur. The petitioner is engaged in the business of generation and supply of power. The petitioner filed three income-tax returns for the assessment year 1968-69, the corresponding financial year of which was 1st January, 1967, to 31st December, 1967. The first return was filed on 19th July, 1968, disclosing a loss of Rs. 6,36,43,978. The second return was filed on August 14, 1969, disclosing a loss of Rs. 6,25,43,001. This was, however, revised by the petitioner-company by filing a third return on 10th January, 1972. In this third return the figure of loss was enhanced to Rs. 7,37,95.020. By the assessment order dated 5th January, 1973, the ITO 'A' Ward, Circle I, Varanasi, substantially accepted the return filed by the petitioner-company and made the assessment order. By the said order, the ITO assessed the petitioner's loss, depreciation, development rebate, and tax holiday benefit under Section 80J of the Act as under :
Tax holiday benefit
3. The assessment order dated 5th January, 1973, was, however, subsequently rectified by the order made on March 16, 1974.
4. On March 12, 1976, the ITO issued a notice under Section 148 of the Act in respect of the assessment year in question on the allegations that, as certain income chargeable to tax had escaped assessment within the meaning of Section 147 of the Act, the petitioner was called upon to file a fresh return in respect of the said assessment year within 30 days. On receipt of the aforesaid notice, the petitioner sent a reply on April 15, 1976, to the ITO, respondent No. 1, claiming that there was no material before the ITO on the basis of which reassessment proceedings could be started. The ITO did not send a reply to the letter sent by the petitioner and called upon the petitioner to appear before him on the 20th September for furnishing clarification to the original return submitted by the petitioner-company for the assessment year in dispute. It was thereupon that the petitioner filed the present writ petition in this court challenging the validity of the notice issued under Section 148 of the Act.
5. The petitioner claimed that the proceedings for reassessment started by the ITO were without jurisdiction inasmuch as there was no material before him which could honestly lead him to believe that any income of the petitioner-company had escaped assessment due to the omission or failure of the petitioner-company to produce the materials. The petitioner further alleged that without disclosing as to whether the proceedings had been initiated under Section 147(a) or under Section 147(b) of the Act, the impugned proceedings were absolutely illegal and without jurisdiction.
6. The writ petition was contested by the respondents and a counter-affidavit of K. K. Rai, ITO, 'A' Ward, Circle I, Varanasi, was filed disclosing his satisfaction about the grounds on which he proceeded under Section 147(a) of the Act for reassessment of the petitioner-company. He stated that after having received information from the audit note dated 10th February, 1976, he scrutinised the record and found that the petitioner's income chargeable to tax for the said assessment year had escaped assessment by reason of the omission or failure of the petitioner to disclose fully and truly the material facts necessary for its assessment for that year. He further stated that thereafter he prepared a report recording reasons and submitted the same to the CIT for obtaining the latter's sanction under Sub-section (2) of Section 151 of the Act, as more than four years had elapsed since the assessment order was made. The CIT examined the matter and on being satisfied that all the requirements of Section 147(a) of the Act existed in the instant case, recorded his satisfaction on the report submitted by the ITO and granted the requisite sanction. The ITO denied that the petitioner-company had furnished all the requisite details, statements and books of accounts relevant for the purposes of the assessment of its income in respect of the said assessment year 1968-69.
7. The petitioner-company filed a rejoinder-affidavit to the counter-affidavit of respondent No. 1. It reiterated the stand taken by it in the main writ petition.
8. Dr. Pal, learned counsel appearing for the petitioner-company, submitted that as the requirements of Section 147(a) of the Act are not satisfied in the present case, the ITO had no jurisdiction to issue a notice under Section 148 of the Act against the petitioner and to initiate proceedings for reassessment. He also contended that the material on the basis of which the ITO initiated these proceedings for reopening the assessment did not have a rational connection with the formation of the belief that the assessee had not made a true disclosure of the facts at the time of the original assessment.
9. In order to deal with the submission made by the learned counsel for the petitioner-company it appears appropriate to extract the material portion of Section 147 of the Act :
'147. Income escaping assessment.--If-
(a) The Income-tax Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under Section 139 for any assessment year to the Income-tax Officer, or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, or .....
he may, subject to the provisions of Sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereinafter in Sections 148 to 153 referred to as the relevant assessment year).....'
10. A reading of Section 147 along with Sections 149 and 151 of the Act would indicate that two conditions are necessary to be satisfied for initiating proceedings under Section 147(a) in respect of assessments beyond the period of four years but within a period of 8 years from the end of the relevant year. The first condition is that the ITO must have 'reason' to believe 'that some income chargeable to tax had escaped assessment. The second condition is that the escapement occurred due to either :
(i) omission or failure on the part of the assessee to make a return under Section 139 for any assessment year, or
(ii) to disclose fully and truly all material facts necessary for its assessment.
11. As said by the Supreme Court in Calcutta Discount Co. Ltd. v. ITO : 41ITR191(SC) an ITO would have jurisdiction to issue a notice under Section 148 only when both the conditions co-exist. These are conditions precedent for the putting into force of the machinery of reassessment. In the absence of these conditions, the ITO would have no jurisdiction to embark upon an inquiry. The scope of this section has been considered by the Supreme Court in a number of other cases as well. Reference may be made to some of these cases to understand the principles in the light of which the present writ petition has to be decided.
12. In Chhugamal Rajpal v. S. P. Chaliha : 79ITR603(SC) , the Supreme Court had an occasion to consider the said controversy. It ruled that before an ITO can be said to have had reason to believe that some income had escaped assessment, he should have relevant material before him from which he could have drawn the inference that the income had escaped assessment. His vague feeling that there might have been some escapement of income from assessment is not sufficient. The same view was taken by the Supreme Court in Sheo Nath Singh v. AAC : 82ITR147(SC) . Another important decision, which may be mentioned in this connection is in ITO v. Lakhmani Mewal Das : 103ITR437(SC) . In this case, the Supreme Court held (pp. 445, 448) :
'The grounds or reasons which lead to the formation of the belief contemplated by Section 147(a) of the Act must have a material bearing on the question of escapement of income of the assessee from assessment because of its failure or omission to disclose fully and truly all material facts. Once there exists reasonable grounds for the Income-tax Officer to form the above belief, that would be sufficient to clothe him with jurisdiction to issue notice. Whether the grounds are adequate or not is not a matter for the court to investigate. The sufficiency of the grounds which induce the Income-tax Officer to act is, therefore, not a justiciable issue..... The existence of thebelief can be challenged by the assessee but not the sufficiency of the reasons for the belief..... The powers of the Income-tax Officer to reopen assessment, though wide, are not plenary. The words of the statute are 'reason to believe' and not 'reasons to suspect'.'
13. Keeping in view the above principles enunciated by the Supreme Court we may now consider the facts of the present case. The grounds on which the reasons for initiating proceedings of reassessment are justified, are to be found from annexure 'A' to the counter-affidavit, which is a copy of the reasons required to be mentioned by Section 148 of the Act. The last paragraph of this annexure is material for our purposes. The same is extracted below:
'Deferred Guarantee Commission.--This Commission is payable to the United Commercial Bank, Calcutta, because it stands as guarantor regarding the purchase of the machinery from abroad. This being in the nature of capital expenditure has been erroneously claimed by the assessee as revenue expenditure and allowed. Similarly, transformer break-down expenses being in the nature of capital expenditure has been erroneously claimed by the assessee as revenue expenditure, though it is capital in nature. The assessee is entitled for development rebate @ 20% only but the same has been claimed @ 35%. Since the assessee's industry does not fall within the Fifth Schedule, hence the excess claim of Rs. 1,94,14,166 has been erroneously claimed. Thus, I have reason to believe that by not furnishing the accurate particulars of income, the assessee's income to the tune of Rs. 2,10,31,115 has escaped assessment.'
14. Apart from the above paragraph, another ground which is to be found from this annexure is that start-up expenditure claimed as revenue expenditure was also not liable to be allowed to the petitioner-company.
15. Dr. Pal, counsel appearing for the petitioner, contended that none of the grounds mentioned in annexure 'A' to the counter-affidavit could be a basis for reopening the assessment. He urged that as the entire material had been placed before the ITO and he had dealt with these items in the assessment order dated 5th January, 1973, even if the decision of the ITO on these items was erroneous or incorrect, that could not entitle the successor ITO to reopen the proceedings merely because he thought that the view taken by his predecessor was erroneous. In this connection, the learned counsel also emphasised that the duty cast upon the petitioner-company was only to disclose primary facts and that it was not required to indicate what factual and legal inferences had to be drawn therefrom. He submitted that as all the materials had been placed before the ITO and he drew inferences which appeared to be erroneous subsequently, it would not justify initiation of proceedings under Section 147 of the Act.
16. After having considered the submissions made by the learned counsel for the petitioner as well as of Sri Ashok Gupta, learned counsel appearing for the department, and perusing the record, we are unable to hold that the notice issued under Section 148 of the Act can be quashed in this case on the basis of the submissions advanced by the learned counsel for the petitioner. There is no quarrel with the proposition of law advanced by the learned counsel. The whole controversy, however, is whether these principles applied to the facts of the instant case. As noted above, the proceedings for reassessment were started by the ITO on the basis of the audit note dated 10th February, 1976. After scrutinising the said audit note, the ITO found that income chargeable to tax had escaped assessment due to the omission and failure of the petitioner to produce the material facts before the ITO dealing with the original assessment. The audit was the proper machinery to scrutinise the assessments made by the ITO and to point out the errors. The audit party consists of experts and it was in a position to throw light on the subject. If, therefore, after perusing and considering the audit report, the ITO prima facie was of the opinion that the income of the petitioner chargeable to income-tax had escaped assessment and that the escapement was due to the omission or failure of the petitioner to produce the relevant materials, the issuance of the notice under Section 148 of the Act could not be said to be without jurisdiction. In our opinion, there was direct nexus and live link between the material coming to the notice of the ITO and the formation of the belief that there had been escapement of the income of the petitioner from assessment in the year in question because of the assessee's failure to disclose fully and truly all material facts.
17. The next submission made by the learned counsel appearing for the petitioner was that when the primary facts necessary for assessment had been fully and truly disclosed to the ITO, he was not entitled, on change of opinion, to commence proceedings for reassessment under Section 147(a) of the Act. In support of his submission, the learned counsel placed reliance on a decision of the Supreme Court in ITO v. Nawab Mir Barkat Ali Khan Bahadur : 97ITR239(SC) . In this case the Supreme Court observed, inter alia, that having second thoughts on the same material did not warrant the initiation of proceedings under Section 147. Reliance was also placed on the case of Gemini leather Stores v. ITO : 100ITR1(SC) . In this case, the appellant did not disclose certain transactions evidenced by certain drafts. The ITO himself discovered the fact relating thereto but by oversight did not bring the amounts represented by the drafts to tax. Subsequently, the ITO issued a notice under Section 147(a) of the I.T. Act, 1961, to reassess the amounts. On a writ petition filed by the appellant the High Court held that the ITO did not apply his mind to the question whether the amounts could be treated as part of the total income of the appellant. As the appellant did not disclose the source of those amounts which were not recorded in the account books, all the conditions for invoking the jurisdiction under Section 147(a) were present. This view of the High Court was reversed by the Supreme Court. It held that it was plainly a case of oversight and could not be said that the income chargeable to tax had escaped assessment by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts. It pointed out (p. 4):
'In the case before us the assessee did not disclose the transactionsevidenced by the drafts which the Income-tax Officer discovered. Afterthis discovery the Income-tax Officer had in his possession all the primaryfacts, and it was for him to make necessary enquiries and draw properinference as to whether the amounts invested in the purchase of the draftscould be treated as part of the total income of the assessee during the relevant year. This the Income-tax Officer did not do. It was plainly a case of oversight, and it cannot be said that the income chargeable to tax for the relevant assessment year had escaped assessment by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts. The Income-tax Officer had all the material facts before him when he made the original assessment. He cannot now take recourse to Section 147(a) to remedy the error resulting from his own oversight.'
18. In CIT v. Burlop Dealers Ltd. : 79ITR609(SC) , Shah C.J., delivering the judgment of the Supreme Court, observed (p. 613) :
'The assessee had disclosed his books of account and evidence fromwhich material facts could be discovered ; it was under no obligation toinform the Income-tax Officer about the possible inferences which may beraised against him. It was for the Income-tax Officer to raise such aninference and if he did not do so the income which has escaped assessmentcannot be brought to tax under Section 34(1)(a).'
19. The next case on which reliance was placed by the learned counsel for the petitioner is in Parashuram Pottery Works Co. Ltd. v. ITO : 106ITR1(SC) . The Supreme Court in this case observed (p. 9):
'When an Income-tax Officer relies upon his own records for determining the amount of depreciation and makes a mistake in doing so, we fail to understand as to how the responsibility for that mistake can be ascribed to an omission or failure on the part of the assessee...It seems that the Income-tax Officer in working the figures of depreciation for certain items of capital assets lost sight of the fact that the aggregate of the depreciation, including the initial depreciation, allowed under different heads could not exceed the original cost to the assessee of those items of capital assets. The appellant cannot be held liable because of this remissness on the part of the Income-tax Officer in not applying the law contained in Clause (c) of the proviso to Section 10(2)(vi) of the Act of 1922.'
20. The cases cited above would indicate that an ITO would not be entitl-ed to initiate an assessment proceeding afresh if the assessee had fully and truly disclosed the evidence. But, where, as here, the case of the ITO is that the entire evidence had not been disclosed, it will not be possible to hold that the reassessment proceedings started by the ITO are without jurisdiction, inasmuch as this will not be a case of change of opinion. The question of change of opinion arises only when the same had already been expressed on the materials on the record. If the materials were not before the ITO the question of changing the opinion does not arise. If, therefore, an ITO on relevant materials has reason to believe that the income chargeable to tax escaped assessment due to the omission or failure of-the petitioner to produce materials and he proceeds to reassess on that ground, the action of the ITO would be justified under Section 147(a) of the Act. It also appears to us that an ITO would have ample jurisdiction to proceed with the reassessment proceedings in a case where his opinion was that the income had escaped assessment due to the untrue disclosure of the facts inasmuch as this would not be a case where the assessee having made a full disclosure of true facts, the two ITOs are arriving at two different conclusions taking two different views of law or facts.
21. In Gemini Leather Stores' case : 100ITR1(SC) , relied on by the petitioner's counsel, the ITO had knowledge and information about the entire materials at the time of making the original assessment but still he wanted to reopen the assessment proceeding on the ground that the same had not been considered by him when he made the assessment order. In this case, the reassessment proceedings were not started on the basis that the materials had not been fully and truly disclosed initially. As a matter of fact, the ITO wanted to. make a different assessment order by changing his opinion.
22. Similarly, the case of Parashuram Pottery Works : 106ITR1(SC) , relied on by the learned counsel for the petitioner, is also distinguishable. In that case also the ITO relied upon his own records and committed a mistake in determining the amount of depreciation. In such a case, the mistake could not be ascribed to an omission or failure on the part of the assessee. Similarly, other cases relied upon by the learned counsel for the petitioner are distinguishable and are of no avail to the petitioner.
23. However, the present was not a case where any dispute relating to the inferences which had to be drawn from the evidence on a question of fact or law was involved. It is true that it is no part of the duty of an assessee to instruct the ITO on a question of law or about the inferences which had to be drawn from the evidence produced. Had the controversy been confined to that aspect of the matter, there was no difficulty in quashing the notices issued under Section 148 of the Act in the instant case. The basis for reopening of assessment proceedings is different. The same was that, as the petitioner-company did not make a true and full disclosure, the assessment order made was liable to be recalled. We may point out that the duty cast upon an assessee is not only to disclose the material facts fully but also truly. The word 'truly' indicates that the disclosure made must conform to the actual state of things. A statement cannot be said to be true if it does not express things exactly as they are. The disclosure should, therefore, be honest, sincere and not fraudulent. There is no doubt, as observed by the Supreme Court in Calcutta Discount Co. v. ITO : 41ITR191(SC) , that once the assessee has disclosed essential primary facts, it is for the ITO to arrive at the necessary inference flowing from those facts; that it is not for the assessee to advise him as to what inference to draw. We, however, did not find anything either in this case or in any other case of the Supreme Court to justify the contention that even if the facts disclosed by the assessee may not be consistent with the true factual position in the case, the assessee can be said to have discharged his obligation under the law. A representation as to the facts not true cannot be pressed into service by an assessee who seeks to get the proceedings of reassessment under Section 147(a) quashed. [See Ice and General Mills v. ITO  83 ITR 34 (All)].
24. After having discussed the legal position, we would how proceed to consider the grounds on which the notice under Section 148 of the Act was issued to the petitioner-company. As already observed, there were four items of escapement mentioned in the said notice. These were :
Transformer break-down expenses
Deferred guarantee commission
Start-up and commencingexpenses
Excess development rebateallowed to the company.
25. Taking the various grounds in the order mentioned above, we find that the case of the revenue with respect to the transformer break-down expenses was that the same being in the nature of capital expenditure was wrongly claimed by the assessee as revenue expenses. A perusal of the original assessment order shows that the claim of the company as revenue expenditure had not been accepted. The ITO disallowed the claim of the petitioner-company and found that the expenditure was of capital nature. It is not alleged by the department that any material relevant to this item had been kept back by the assessee at that stage. Hence, there is no question of non-disclosure of primary fact by the assessee in respect of this item so as to attract Section 147(a) of the Act.
26. With respect to the second item, the case of the department was that the commission paid by the petitioner company to the United Commercial Bank as the latter stood as guarantor for the purchase of the machinery from abroad was of capital nature and had been erroneously claimed by the assessee as revenue expenditure. It is not in dispute that the expenditure was claimed by the petitioner-company as a revenue expenditure and has been allowed as such. It was contended on behalf of the revenue before us that the commission having been paid for the purpose of making provision for purchasing a plant or machinery, the amount so paid would be charged to capital as part of the cost of the installation of the plant or machinery. This proposition of law was disputed by the learned counsel appearing for the petitioner-company. It is, however, not necessary for us to go into the merits of the matter, as, in our opinion, the claim of the revenue for reopening assessment on the basis of this item is not acceptable. It has not been claimed by the revenue that any material relevant to this item had not been disclosed by the petitioner-company and that the said non-disclosure had led to the escapement. It appears to us that escapement of income in respect of this item cannot be attributed to the non-disclosure. It was due to the failure of the ITO to draw proper inference from the basic facts placed before him. It would amount to a change of opinion and thus Section 147(a) cannot be invoked in respect of this item.
27. The third ground is about the development rebate. The claim of development rebate was made by the company at the rate of 35 per cent. According to Dr. Pal, the claim made was justified. In the alternative, he suggested that even if the petitioner wrongly claimed development rebate at 35 per cent., no case for exercising the power of the ITO under Section 147 was made out, since power to reassess cannot be exercised merely because, on the same evidence, another ITO entertains a different opinion. In reply to the above submission Sri Ashok Gupta, learned counsel for the department, produced before us a statement showing that the petitioner claimed development rebate at the rate of 35 per cent, on the assertion that the industry in which the petitioner-company was engaged was a priority industry. He also submitted that the petitioner-company knew that it was not manufacturing any of the articles of the list of the Fifth Schedule but still made a wrong representation and obtained the benefit of Section 33(1)(b)(B). According to him, but for the failure of the company to make a full and true disclosure, the rebate would not have been granted.
28. The development rebate was claimed under Section 33(1)(b)(B). This permitted the rebate of 35 per cent. of the actual cost of the machinery or plant installed by an assessee for the purposes of business of construction, manufacture or production of any one or more of the articles or things specified in the list in the Fifth Schedule. Admittedly, the petitioner-company was not engaged in the business of construction, manufacture or production of any one of the articles mentioned in the Schedule. Hence, the allowance of development rebate at 35 per cent. was prima facie not justified.
29. The submission of Dr. Pal, learned counsel for the petitioner, however, was that the omission of the ITO in not applying the correct rate while allowing the development rebate, was due to wrong appreciation of law and not by reason of non-disclosure of primary facts by the assessee. He urged that the reasons set out for reopening the assessments of the assessee on the basis of this ground would amount to change of opinion. We are unable to accept the submission made by the learned counsel. On a correct interpretation of Section 147(a), we find that even though an inquiry had been, made by the ITO at the time of the original assessment, still Section 147 could be invoked if materials coming subsequently to the possession of the revenue show that the disclosure made by the petitioner-company was neither full nor true. In ITO v. Bachu Lal Kapoor  60 ITR 74, the Supreme Court held that the acceptance of a return or the completion of the assessment does not take away the jurisdiction of the ITO to issue a notice of reassessment on the ground that the information supplied by the return was not correct. Dealing with the scope of the power conferred by Section 34(l)(a) of the Indian I.T. Act, 1922, in Kantamani Venkata Narayana and Sons v. First. Addl. ITO [ : 63ITR638(SC) , the Supreme Court laid down that the assessee does not discharge his duty to disclose fully and truly material facts necessary for the assessment by merely producing the books of account or other evidence. He has to bring further to the notice of the ITO all items in the accounts or other documents which are relevant. In this case, the Supreme Court further observed that even in cases where the ITO, if he had been circumspect, could have found out the truth, from the books and other documents produced, he is not precluded from exercising the power to assess the income which had escaped assessment. Hence, if it is found that the development rebate was allowed due to the non-disclosure of the material facts fully and truly, that will ultimately attract Section 147(a). In respect of this item, therefore, we are not prepared to hold that the non-disclosure of primary facts by the petitioner-company was not responsible for allowance of the rebate.
30. The last item that remains to be considered is about a sum of Rs. 12,20,872 claimed as revenue expenditure. The basis of this claim of the petitioner-company was that as the first generator of the power plant was commissioned in the beginning of August, 1967, the company was entitled to the expenses incurred after August, 1967, as revenue expenditure. On this basis, the aforesaid amount was debited to the profit and loss account of the company. The same is proved from the balance-sheet of the year 1968-69, ending on the 31st December, 1967. The case of the revenue, however, is that since the commercial production of electricity commenced on September 16, 1967, the claim made by the petitioner-company as revenue expenditure was not admissible. It was really capital expenditure. The revenue further pleaded that the date on which commercial production started was in the knowledge of the assessee but the assessee did not disclose the real date and got the advantage of the expenditure being revenue on the basis of misrepresentation or concealment of correct facts. If the basis that the material in respect of this item had been concealed by the petitioner-company at the stage of original assessment is established, there is no doubt that the escapement of income in respect of this item can be attributed to the non-disclosure by the assessee. The learned counsel for the assessee, however, contended that whether the peti-tioner-company was entitled to the expenses as revenue expenditure or capital was one of pure law and if the ITO took a wrong view of the law, the revenue cannot be permitted to change its opinion and to reopen the assessment on the basis of Clause (a) of Section 147. We are not satisfied that the argument of the learned counsel for the petitioner-company can be accepted in respect of this item. It was not a pure question of law on which a different view has now been taken or that the reassessment proceedings are being taken by the revenue on the basis of change of opinion. The basis for reopening the assessment in respect of this item was that the petitioner-company had not disclosed fully and truly all the material facts. If this conclusion was established, Section 147(a) would clearly apply. We can only say that prima facie the ITO was not seeking to reassess on the mere change of opinion.
31. For the reasons given above, the writ petition succeeds in part and is allowed. The ITO, 'A' Ward, Varanasi, is restrained from proceeding with the reassessment of the petitioner-company in respect of the assessment year 1968-69, on the grounds relating to (i) transformer break-down expenses, and (ii) deferred guarantee commission. Under the circumstances of the case, the parties shall bear their own costs.