H. N. Seth, J. - For the asst. yrs. 1968-69 to 1971-72, the original assessments were completed u/s 143(3) of the Act on different dates between September 1970 and December, 1971. Subsequently, the internal audit party of Kanpur, made a report dated 23-5-1972, for the asst. yrs. 1969-70 to 1971-72 taking objection to the treatment of certain incomes of the assessee as capital receipts and expressing the opinion that they were revenue receipts liable to assessment to tax. On receipt of this information, the AAC looked into the records of the asst. yrs. 1968-69 as well and felt that audit objection would equally apply to the receipts of Rs. 16,554/- for the year 1968-69. He felt that this sum has escaped assessment in the year 1968-69. On or about 9-8-1972, he addressed a letter to the IAC for opinion whether in view of the fact that the audit report was only for the three years 1969-70 to 1971-72, should the same be applied to the previous asst. yrs. 1968-69, and on that basis, the sum of Rs. 16,554/- be treated as revenue receipts.
2. In reply, the IAC, on 22-9-1972, wrote back;
'The Corporation is charging premium to cover the cost of acquisition of land, development charges and other expenses relevant to its business activity consisting of sale of plots after development. It seems that these payments by the allottees are forfeited if the allotment is not accepted or lease deed not executed or for any other failure. The land, thereafter, is reallotted to new who are charged the same premium development charges etc. This reduces neither the cost of land to the assessee nor the new allottees get it at reduced price. The forfeited amounts therefore, are clearly profits incidental to the business activities. They are liable to be taxed as revenue receipts in the year of forfeiture.
In the asst. yrs. 1968-69 to 1971-72 I find that the following amounts were forfeited but not credited to profit and loss account :-
The assessee has shown these payments as reduction in cost of land in the Balance Sheet. The amounts are income in the years of forfeiture. Thus, there is clear escapement of tax. You should proceed to assess this amount as possible.' Accordingly in November 1972 the ITO reopened the assessment for the aforesaid four years u/s 147(b) of the IT Act. The assessee appeared and filed objections. They were repelled and the following additions were made in the years in question :-
These amounts represent the earnest money and premiums received by the assessee in these years for defaults committed by the allottees of the land. They were added on the finding that they had escaped assessment in the original assessments.
3. Feeling aggrieved, the assessee went up in appeal. The AAC held that it was not correct to say that the ITO reopened the assessments on information received from the IAC because on receipt of the audit objections he applied his own mind and then sought the IAC views in support of his own views. It is hence not correct that the IAC was responsible for conveying information to the ITO. Hence the views of IAC could not constitute information within the meaning of cl. (b) of S. 147. All the facts were already on the record. It was actually the ITOs own change of opinion on the admitted facts that led him to reopen the assessments. According to him, the change of opinion was on a question of law on a debatable point. He accordingly held that it cannot be said that income escaped assessment within meaning of cl. (b) of S. 147. The appeals were allowed.
4. The department went up in appeal to the Tribunal. The Tribunal held that the reopening of the assessment was caused by the information conveyed by the audit objection report. There was no administrative direction by the IAC. The audit report could constitute information within meaning of Cl. (b) of s. 147. The ITO had jurisdiction to reopen the assessments. Since the question whether the receipts in question were capital or revenue in their true nature and Character, was not decided by the AAC, the matter was sent back for fresh disposal.
5. At the instance of the assessee, the Tribunal has referred the following question of law for our opinion :-
'whether, on the facts and in the circumstances of the case, the initiation of the proceedings by the ITO u/s 147(b) of the IT Act, 1961 for the asst. yrs. 1969-70 to 1971-72 on the basis of the information contained in the audit objection of the internal audit party and for the asst. yrs. 1968-69 on the basis of the information collected by him after the receipt of the aforesaid audit objection from the income tax record for that year was legal and valid ?'
The facts are not in dispute. The findings are equally clear. The internal audit party of the IAC made a report for two years. It was of the opinion that on the facts of the present case the receipts were not capital in nature but were revenue, liable to tax. It was this information conveyed to the ITO by the audit report that constituted the basis for the reopening of the assessments. It has been clearly held both by the AAC as well as by the Tribunal that the letter of the IAC was in reply to the query made by the ITO. It was not an administrative direction to the ITO. It did not constitute the basis for the reopening of the assessment by the ITO.
6. In this situation, the Supreme Court decision in Indian and Eastern Newspaper Society v. CIT, New Delhi is applicable on all fours. There also an assessment was reopened u/cl (b) of S. 147 on the basis of an information furnished by the internal audit party in its report. The Supreme court held that information on a point of law has to be - information gathered from a formal source like legislation or a competent judicial authority. Information gathered from text books or other journals was not information as to law created by any formal source. They observed that when S. 147(b) of the IT Act is read as referring the information as to law what is contemplated is information as to the law created by a formal source. It is law, we must remember, which, because it issues from a competent legislature or a competent judicial or quasi-judicial authority, influences the course of the assessment and decides any one or more of those matters which determine the assessees tax liability. The court went on to examine the status of an internal audit report and held that neither statute supports the conclusion that an audit party can pronounce on the law, and that such pronouncement amounts to information within the meaning of S. 147(b) of the IT Act 1961. It was observed that there is no harm if the audit report communicates any matter to the ITO, but communication of a view of the law is different than pronouncing upon the correct law. The true evaluation of the law in its bearing on the assessment must be made directly solely by the ITO.
Reserring to Kalyani & Co. v. CIT a decision of the Supreme Court, the Court observed that the proposition that a case where income had escaped assessment due to the oversight, inadvertence or mistake of the ITO should fall within S. 34(1)(b) of the Act of 1972, appears to be a proposition stated too widely and travels further than the statute warrants in so far as it can be said to lay down that if on reappraising the matter considered by him during the original assessment, the ITO discovers that he has committed an error in consequence of which income as escaped assessment, it is open to him to reopen the assessment.
The court held, in our opinion, the error discovered on a reconsideration of the same material (and no more) does not give him that power.
7. In the present case all the material facts were within the knowledge of the ITO when he passed the original assessment order. It was on reading the information expressed in the internal audit report that correctly speaking the receipts were not capital but revenue in nature that the ITO changed his opinion and we agree with the AAC that the change of opinion was on a highly debatable point. On either court, the ITO had no jurisdiction to reopen the assessments.
8. In the result, we answer the question referred to us in the negative in favour of the assessee and against the department. The assessee will be entitled to costs which are assessed at Rs. 200/-.