J.M. Tandon, J.
1. This order will dispose of three Civil Writ Petitions, Nos. 387 (Yamuna Syndicate Ltd. v. Surtax Officer], 819 of 1976 Yamuna Syndicate Ltd. v. Surtax Officer] and 821 of 1976 Yamuna Syndicate Ltd. v. Surtax Officer] wherein a common question is involved.
2. The petitioner in all the three writ petitions is a limited company liable to assessment under the Companies (Profits) Surtax Act, 1964 (hereinafter 'the Act'). The petitioner filed returns for the assessment years 1971-72, 1972-73 and 1973-74, within the prescribed period. The said returns were accompanied by annexures relating to the details of reserves, moneys borrowed and other funds and reserves and calculation of income-tax deductible under Schedule 1, Rule 2 of the Act. The ITO passed the order of assessment for the year 1971-72 on November 12, 1971, for the assessment year 1972-73 on October 12, 1972, and for the assessment year 1973-74 on February 1, 1974. On December 6, 4975, the ITO issued three notices under Section 8(b) of the Act for the assessment years 1971-72, 1972-73 and 1973-74, proposing to reassess the income of the petitioner for these assessment years, as he had reason to believe that the petitioner's chargeable profit chargeable to tax had escaped assessment within the meaning of Section 147 of the I.T. Act, 1961. The petitioners have challenged these notices at P-8, P-9 and P-10, in the three writ petitions detailed above, respectively.
3. Section 8 of the Act deals with the profits escaping assessment and it reads:
' 8. Profits escaping assessment.--If-
(a) the Income-tax Officer has reason to believe that by reason of the omission or failure on the part of the assessee to make a return under Section 5 for any assessment year or to disclose fully and truly all material facts necessary for his assessment for any assessment year, chargeable profits for that year have escaped assessment 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
(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 chargeable profits assessable for any assessment year have escaped assessment or have been under-assessed or assessed at too low a rate or have been the subject of excessive relief under this Act,
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 assessment year, serve on the assessee a notice containing all or any of the requirements which may be included in a notice under Section 5, and may proceed to assess or reassess the amount chargeable to surtax, and the provisions of this Act shall, so far as may be, apply as if the notice were a notice issued under that section.'
4. The case of the revenue is that the audit, after scrutiny of the assessment files of the petitioner for the relevant years, passed on the information to the ITO on the basis of which the ITO has issued valid notices under Section 8(b) of the Act which have been impugned in the three writ petitions. According to the petitioner, the report of the audit does not constitute a valid 'information' to the ITO in terms of Section 8(b) of the Act with the result that the ITO has no jurisdiction to reassess the petitioner on the basis thereof. The notices issued by the ITO are, therefore, liable to be quashed.
5. Section 2 (5) and (8) define the terms 'chargeable profits' and 'statutory deduction'. The First Schedule to the Act contains the rules for computing the chargeable profits and the Second Schedule the rules for computing the capital of a company for the purpose of surtax. Rule 2 of the Second Schedule reads :
'2. Where a company owns any assets the income from which in accordance with Clause (iii) or Clause (vi) or Clause (viii) of Rule 1 of the First Schedule is required to be excluded from its total income in computing its chargeable profits, the amount of its capital as computed under Rule 1 of this Schedule shall be diminished by the cost to it of the said assets as on the first day of the previous year relevant to the assessment year in so far as such cost exceeds the aggregate of-
(i) any moneys borrowed (other than the debentures referred to in Clause (iv) or moneys referred to in Clause (v) of Rule 1) and remaining outstanding as on the first day of the said previous year; and
(ii) the amount of any fund, any surplus and any such reserve as is not to be taken into account in computing the capital under Rule 1......'
6. The relevant part of the audit report for the disputed assessment years, a copy of which was allowed to be placed on the file on the request of Mr. Awasthy, learned counsel for the revenue, reads:
'Under Rule 2 of the Second Schedule to the Surtax Act, the capital computed in accordance with Rule 1 of the Second Schedule to the Surtax Act was diminished by the cost of assets the income from which is excluded under Clauses (iii), (vi) and (viii) of Rule 1 of the First Schedule.
The cost of assets so diminishable was not to exceed the aggregate of-
(i) any money borrowed ; and
(ii) the amount of any surplus fund and such reserve as is not to be taken in, computing capital under Rule 1 of the Second Schedule.
It will be found from item (i) and (ii) above that exclusion for diminishable capital was for borrowing funds, surplus and reserves. Any amount which could not classify as borrowing funds, surplus or reserve would not reduce the diminishable capital in the instant case. The exclusion from diminishable capital was made on the following accounts which did not constitute 'borrowings' funds, surplus or 'reserve'......
(From the printed accounts for A.Y. 1971-72, it appeared that other liabilities previously shown separately were grouped up with sundry creditors in subsequent accounts).
Due to the capital base having not been diminished by the above amounts out of the cost of assets, the income from which was excluded, there had been excess statutory deduction of 10% of above amounts with resultant short demand.
@31% of Rs. 3,53,135 in A.Y. 1973-74
@ 25% ofRs.1,94,425inA.Y.1972-73
@ 25% of Rs.1,73,986in A.Y.1971-72
@ 25% ofRs.1,70,222inA.Y.1970-71
@ 25% of Rs.1,17,183inA.Y.1969-70
In reply to the audit memo the Income-tax Officer stated that he would look into it on receipt of audit note.'
7. It is evident that the audit detected the mistake in the disputed assessments in the context of Rule 2 of the Second Schedule to the Act. The ITO had also issued notice on February 1, 1975, to the petitioner under Section 13(1) of the Act which was later on not pursued. This notice (p. 5 in Civil Writ No. 387 of 1976) is based on the audit report reproduced above and it reads:
'Subject:--Notice under section 13(1) of the Companies (Profits) Surtax Act, 1964 : Assessment years 1969-70 to 1973-74
For the purposes of Rule 2(ii) of the Second Schedule of the Companies (Profits) Surtax Act, 1964, following items as per chart enclosed were considered for restricting the reduction in capital under Rule 2 of the said Second Schedule. However, these items are not covered by the wording of Sub-rule (2) of Rule 2 of the said Schedule as those cannot be considered any fund, surplus or reserve. It is proposed to exclude these items for the calculation of reduction in capital relating to shares held by the company in other companies.
2. You are requested to please file your objections if any by 8-2-1975.'
8. The audit report, which even otherwise is clear, has been correctly reflected in the notice (P-5). The audit report as also the notice (P-5) reiterate that the items detailed in both were wrongly taken into account for restricting reduction in capital under Rule 2 of the Second Schedule. It is clear from the copies of the disputed assessment orders that the ITO had taken into account the items detailed in the audit report for restricting the reduction in capital under Rule 2 of the Second Schedule. The audit authorities found that it had been done wrongly. It is to rectify this mistake that the ITO first issued a notice under Section 13(1) of the Act and thereafter issued the impugned notice under Section 8(b) thereof.
9. The ITO can reopen an assessment under Section 8(b) of the Act if he has reason to believe, that the chargeable profits assessable for any assessment year have escaped assessment, in consequence of information in his possession. The vital point for consideration is, whether the audit report on the basis of which the ITO has issued the impugned notices under Section 8(b) of the Act constitutes 'information' within the meaning thereof.
10. In Kasturbhai Lalbhai v. R.K. Malhotra, ITO : 80ITR188(Guj) , the term 'information' in the context in which it occurs in Section 147(b) of the I.T. Act, 1961 (analogous to Section 8(b) of the Act), was held to mean 'instruction or knowledge derived from an external source concerning facts or particulars, or as to law relating to a matter bearing on the assessment'. It was further held that the audit dept. which audits the work of the I.T. dept. is not an authority competent and authorised to declare the correct state of the law or to pronounce upon it. Therefore, its opinion of the correct state of the law is not 'information' which can warrant the initiation of proceedings under Section 147(b) of the I.T. Act, 1961.
11. In CIT v. H. H. Smt. Chand Kanwarji : 84ITR584(Delhi) a different view was taken and it was held that the scrutiny note of the revenue audit and the letter of the IAC constituted 'information' within the meaning of Section 147(b) of the I.T. Act, 1961, from an 'external source' and the assessments were, therefore, valid.
12. In Kalyanji Mavji & Co. v. CIT : 102ITR287(SC) , while dealing with an analogous provision contained in Section 34(1)(b) of the Indian I.T.Act, 1922, the Supreme Court categorised conditions, under which a reassessment could be invoked as under (headnote):
'(1) where the information is as to the true and correct state of thelaw 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.'
13. Kalyanji Mavji & Co.'s case : 102ITR287(SC) was considered in a recent decision of the Supreme Court in Indian and Eastern Newspaper Society v. CIT : 119ITR996(SC) . It has been held that according to the ratio of Kalyanji Mavji & Co.'s case : 102ITR287(SC) , a mistake committed by the ITO could justify a reassessment and that it was too wide a proposition and travelled further than the statute warranted. It was further held that an error discovered on a reconsideration of the same material does not authorise the ITO to initiate reassessment proceedings. To this limited extent the decision in Kalyanji Mavji & Co.'s case : 102ITR287(SC) was overruled by a larger Bench of the Supreme Court in Indian and Eastern Newspaper Society v. CIT : 119ITR996(SC) . In the latter Supreme Court decision, their Lordships made the following observations (p. 1003):
'But although an audit party does not possess the power to so pronounce on the law, it nevertheless may draw the attention of the ITO to it. Law is one thing, and its communication another. If the distinction between the source of the law and the communication of the law is carefully maintained, the confusion which often results in applying Section 147(b) may be avoided. While the law may be enacted- or laid down only by a person or body with authority in that behalf, the knowledge or awareness of the law may be communicated by anyone. No authority is required for the purpose.'
14. The learned counsel for the petitioner as also the learned counsel for the revenue have placed reliance on the observations of the Supreme Court reproduced above. The learned counsel for the revenue has argued that the ITO while passing the assessment orders did not take notice of Rule 2 of the Second Schedule and bypassed it completely. The audit having detected this omission on the part of the ITO has merely brought this particular provision to his notice. The audit has neither interpreted the law nor has expressed any opinion thereof. It has thus acted as a communicator of law and not as a source of law. The audit report, therefore, constitutes valid 'information' in terms of Section 8(b) of the Act. The learned counsel for the petitioner has argued to the contrary. He has contended that the ITO while making the disputed assessment orders did take note of Rule 2 of the Second Schedule. He treated the items detailed in the audit report as 'borrowings' in terms of Rule 2 of the Second Schedule, The audit has opined that he did so wrongly and it is for rectifying his alleged mistake that the ITO has issued the impugned notices under Section 8(b) of the Act. The audit has expressed its opinion in the audit report and has not acted as a mere communicator of law.
15. In our opinion, the contention of the learned counsel for the petitioner must prevail. It has already been held above that the items detailed in the audit report were treated by the ITO as 'borrowings' in terms of Rule 2 of the Second Schedule while passing the disputed assessment orders. The audit has opined that those items could not be so treated and the ITO. erred to that extent. The opinion expressed by the audit on a point; already adjudicated upon by the ITO while making the disputed assessment orders cannot be taken as a valid 'information' in view of the clear observations (reproduced above) made by the Supreme Court in Indian and Eastern Newspaper Society v. CIT : 119ITR996(SC) . It is further obvious that the ITO had issued the impugned notices for a reconsideration of the decision already taken by him. He is not competent to do so.
16. In view of the discussion above, we hold that in the absence of a valid 'information' under Section 8(b) of the Act, the ITO has no jurisdiction to reopen the assessments of the petitioner for the assessment years 1971-72, 1972-73 and 1973-74. The notices issued by the ITO to the petitioner for that purpose are liable to be quashed.
17. In the result, all the three writ petitions detailed above are accepted and the notices, P-8, P-9 and P-10 in Writ Petitions Nos. 387, 821 and 819 of 1976, respectively, are quashed. No order as to costs.
Prem Chand Jain, J.
18. I agree.