1. This appeal by the department relates to the assessment year 1976-77, for which the accounting period ended on 16-8-1975.
2. The original assessment in the case was completed on 31-8-1979. It was reopened by the ITO under Section 147(b) of the Income-tax Act, 1961 ('the Act'). In the reassessment, various additions to the income were made. The Commissioner (Appeals) held that the reopening is not legally sustainable. He, therefore, annulled the reassessment. He did not go into or enter his finding on the merits of the additions.
Aggrieved by the same, the department has come up in appeal.
3. The grounds taken are that the Commissioner (Appeals) erred in holding that there was no new information justifying the reopening of the assessment by the ITO and that he failed to notice that the ITO had come into possession of certain obvious omissions pointed out by the internal audit party.
4. As already stated, the original assessment was completed on 31-8-1979. The internal audit raised four objections to the assessment.
The ITO reopened the assessment under Section 147(b) with reference to two of the objections. They were : 1. Outgoings from the unsold portion of the building Marthanda assessed is Rs. 39,051, whereas the correct figure as per the assessee's statement and balance sheet is Rs. 70,367.
2. Building maintenance disallowed in the adjustment statement is Rs. 21,172 as against the correct figure of Rs. 26,219 as per balance sheet, The reasons recorded by the ITO in the order sheet on 20-2-1981 for reopening the assessment are as follows : In the assessment, the outgoings added to ALV was less than the actual outgoings received by the assessee. Similarly, buildings maintenance disallowed is also not correct. Therefore, I have reason to believe that income chargeable to tax has escaped assessment.
Proceedings under Section 147(b) initiated. Issue notice under Section 148.
The two reasons recorded may conveniently be referred to as the outgoing factor and the maintenance factor. Both relate to the income from house property. The outgoing factor relates to a building known as Marthanda. The maintenance factor relates to all the buildings belonging to the assessee.
5. In the reassessment, the ITO held that the income in respect of Marthanda property had escaped assessment and made an addition in the income. No reference was made in the reassessment to the maintenance factor, apparently, because the ITO was satisfied that no income had escaped assessment under this factor.
6. In appeal by the assessee, the Commissioner (Appeals) held that the original assessment with regard to income from Marthanda property was correct and that there was no justification for making an addition. He also held that there was no new information to the ITO with regard to this factor. The department has accepted the finding of the Commissioner (Appeals) that no income had escaped assessment with regard to Marthanda property.
7. The ultimate result is that no income had escaped assessment under the two factors, on the basis of which the assessment was reopened. But in the reassessment, various other additions had been made on the basis of a revenue audit report received subsequently. The first question for consideration is, whether the reassessment can be sustained when it is ultimately found that the two reasons, relied upon for reopening the assessment, do not actually exist and when it is found that no income had escaped with regard to those matters.
8. The department relied upon the following decisions in support of the position that even if the materials, on which the original assessment was reopened subsequently, turned out to be non-existent, they will still be information if, at the time of the reopening, the ITO in good faith believed that there was information justifying the reopening of the assessment, viz., Family of V.A.M. Sankaralinga Nadar v. CIT  48 ITR 314 (Mad.), CIT v. Ahmedabad Manufacturing & Calico Printing Co.
Ltd.  106 ITR 159 (Guj.) and CIT v. Assam Oil Co. Ltd.  133 ITR 204 (Cal.). These decisions fully support the stand taken by the department. They lay down that if it is found that the reopening was not a mere pretence, but was based on bona fide belief that there was information and that income had escaped assessment, then the reopening would be perfectly valid and other items of escaped income can be brought to tax, even if it turns out that the reasons relied upon for the reopening are nonexistent.
9. On the other hand, the learned Counsel for the assessee relied upon the decisions in East Coast Commercial Co. Ltd. v. ITO  128 ITR 326 (Cal.), CIT v. Dinesh Chandra H. Shah  82 ITR 367 (SC), CIT v. A. Raman & Co.  67 ITR 11 (SC) and CIT v. Simon Carves Ltd.  105 ITR 212 (SC). These decisions only lay down that the reopening of the assessment should be based on information, and that it cannot be sustained where there has only been a change of opinion on the basis of the report of the audit or otherwise. They do not lay down that the reopening has to be annulled, the moment it is found that the reasons originally recorded for the reopening are, subsequently, found to be nonexistent.
10. We, therefore, accept the contention of the department on this aspect and hold that the reopening can be sustained if, at the time of the reassessment, the ITO bona fide thought that he had information, on the basis of which it could be said that income had escaped assessment.
11. The question for consideration, therefore, is whether at the time when he reopened the assessment, the ITO had information on the two factors mentioned earlier as a result of which the ITO bona fide thought that income had escaped assessment. In this context, three decisions, relied upon by the assessee, are relevant and important. It has been held by the Supreme Court in Indian & Eastern Newspaper Society v. CIT  119 ITR 996 that, in every case, the ITO must determine for himself what is the effect and consequence of the law mentioned in the audit note and whether in consequence of the law which has now come to his notice, he can reasonably believe that income had escaped assessment, that the basis of his belief must be the law of which he has now become aware and that the true evaluation of the law in its bearing on the assessment must be made directly and solely by the ITO--Surat District Co-operative Purchase & Sale Union Ltd. v. ITO  129 ITR 718 (Guj.) is to the same effect. It was held in Aryodaya Spg. & Wvg. Co. Ltd. v. ITO  144 ITR 817 (Guj.) that if the factual information supplied by the audit objection was already considered by the ITO when he framed the assessment, the error, if any, which was discovered on the basis of the audit objection, will be a case of reappraisal of the same material on record and of a mere change of opinion and that it cannot support a reopening of the assessment.
The ratio of the decisions mentioned above will apply with more force, when what is pointed out by the audit party is not a provision of law which has a bearing on the assessment but a factor relating to the computation of the income. In that case, the ITO cannot merely accept what is pointed out by the audit and held that there is an escapement of income. The ITO has to determine for himself the effect and consequence of what is pointed out by the audit and to form an opinion as to whether an error has been committed, which has resulted in income escaping assessment. The reopening of the assessment cannot be upheld merely because the audit has said something in the matter. This is all the more relevant in the present case, where it is subsequently found that actually there was no mistake and that no income had escaped assessment. In such a case, the burden is all the more on the department to show that at the time of the reopening of the assessment, the ITO, on an appraisal of the matter in the light of the audit objection, bona fide came to the conclusion that an error had been committed and that, consequently, income had escaped assessment.
Keeping this in mind, it has to be ascertained whether in the present case, the ITO had bona fide believed that an error has been committed which resulted in income escaping assessment. In this context, there is also merit in the submission made by the assessee that arithmetical or other mistakes, which are amenable for correction under Section 154 of the Act, should not be made use of for the purpose of reopening the assessment and including in the income various other items which had escaped assessment earlier. Such a case may amount to the ITO resorting to a pretence for the purpose of reopening the assessment.
12. The first factor, relied upon by the ITO for reopening the assessment was the wrong computation of income from the Marthanda property. The Marthanda buildings in Bombay consist of a number of flats. A good number of them had been sold away by the assessee to tenants in occupation, who had also paid the full sale consideration.
The title could not be transferred to them as in the conditions obtaining in Bombay, the transfer could be effected only to a co-operative society formed by the tenants. The assessee continued to collect the rent with regard to the remaining flats. The assessee was maintaining the common services like lift, etc., and was also paying the electricity charges, water charges, municipal tax, etc. The assessee was collecting the proportionate amount of the expenses from the persons, to whom the assessee had sold away the flats. The method of computation employed by the assessee in working out the income from this building was to treat as income the rent from the flats which still belonged to the assessee and also the amounts collected from the persons to which the flats have been sold away. From the total amount, the outgoings are deducted and the net amount was being treated as the actual income to the assessee from the buildings. The apportionment of the outgoings was being determined with reference to the gross receipt of Rs. 58,716 at the time when all the flats had belonged to the assessee. At that time, the net income after the outgoings was Rs. 30,407. This ratio was being applied in determining the net income even after the sale of the flats. The actual rent received by the assessee from the flats still belonging to the assessee and the amounts received from the owners of the flats sold away, will be treated as the gross income and the net income will be determined by multiplying the same by Rs. 30,407 The 58,716 >gross income for the assessment year under appeal was Rs. 75,408 and on the ratio mentioned above, the net income was determined at Rs. 39,051. The gross income of Rs. 75,408 consisted of Rs. 4,641 received as rent from flats still belonging to the assessee and Rs. 70,767 received from persons to whom flats had been sold away. This was clear from the computation statement filed by the assessee before the ITO at the time of the original assessment. The same has been extracted by the Commissioner (Appeals) in his order.
What the audit pointed out was, that the income from the building should have been taken as Rs. 70,767 as against Rs. 30,407. This was clearly wrong. It may also be stated at this stage that the mode of computation by the assessee had been accepted by this Tribunal also in its order dated 25-10-1980 in IT Appeal Nos. 113 and 114 (Coch.) of 1977-78 relating to the assessment years 1972-73 and 1974-75. In the original assessment, the ITO had shown the income correctly as Rs. 30,407 on the basis of the computation statement examined and accepted by the ITO. As such the ITO could not have accepted what was pointed out by the audit. If he had examined the matter himself on the basis of what was pointed out by the audit, it would have been clear to him that there was no mistake and that the original assessment was correct. The reopening cannot, therefore, be sustained on this factor.
13. The second factor, on which the reopening was made, was that the amount for the maintenance of the building, which belonged to the assessee, disallowed in the adjustment statement, is Rs. 21,072 as against the correct figure of Rs. 26,219 shown in the profit and loss statement. The factor on the expenditure side of the profit and loss account with regard to building maintenance was as follows : Rs. To this, the assessee added Rs. 250 being the fire insurance premium and showed the total amount as Rs. 30,874.30 in the recasting of the profit and loss account submitted along with the return. To this was added municipal tax of Rs. 69,261.57 and repairs of Rs. 9,855.27. Out of the total of Rs. 1,10,031.14, the recoveries made by the assessee, namely, Rs. 88,958.28, >was deducted and the balance amount of Rs. 21,072.86 was shown on the expenditure side of the statement recasting the profit and loss account. This amount was also shown in the adjustment statement filed by the assessee for the purpose of working out the business income. All these papers were before the ITO at the time of the original assessment. The department has no case that there is any mistake in the computation. The audit report says that as against Rs. 21,072 shown in the adjustment statement, the correct figure is Rs. 26,219. This appears to be the total of the figures relating to the first three buildings, namely, Shiela Mahal, Marthanda and Setalmond Palace, shown in the printed balance sheet. There is absolutely no explanation why the audit totalled up the figures relating to three buildings while the printed balance sheet showed figures relating to six buildings, the total of which was Rs. 30,624.30. It was a case of the audit picking out some figures from somewhere and saying that there was some mistake. As already stated, all the statements were before the ITO at the time of the original assessment. It is, therefore, clear that in this case also if the ITO had. applied his mind to the audit objection, he would have found that the computation in the original assessment was correct. It is not, therefore, possible to believe that the ITO bona fide believed that there was an error and income had escaped assessment on receipt of the audit objection.
14. The case of the department with regard to this factor is worse because in the reassessment order, the ITO had not even chosen to deal with the matter. There was not only no discussion of the matter but there was no addition also. We find no reason to reject the submission made by the learned representative for the assessee that at the time of the reassessment, the assessee was not even required to explain any alleged discrepancy in the matter. The ITO had himself given the go-by to the audit objection. In such a case, there is no merit in the contention of the department that the ITO had bona fide thought on the basis of the audit objection that there was an error in the computation. In the absence of anything in the assessment order to show that the ITO had bona fide thought that there was escapement of assessment and that he realised that there was no mistake in the computation only when the matter was explained by the assessee over again, there is no scope for contending that the ITO had, on the basis of the audit objection, bona fide thought that there was an error in the computation of the income and that as a result of the same, income had escaped the same.
15. There is also no merit in the ground taken by the department that the order of the Commissioner (Appeals) is bad for the reason that he had not taken into consideration the second factor. He cannot be blamed when the reassessment order was totally silent about the matter.
16. In view of what is stated above, we agree with the Commissioner (Appeals) that the reopening of the assessment cannot be sustained.