1. These 14 writ petitions moved under articles 226 and 227 of the constitution of India, raise common questions of facts and law and are, thereforee, being taken together. As the narration of facts would hereinafter show, they arise out of the initial transaction of sale for Rs. 16 lakhs of property No. 12, Aurangzeb Road, New Delhi, on July 19, 1972, by its 13 co-owners in favor of the Claridges Hotel Pvt. Ltd. One of the writs is by Claridges Hotel Pvt. Ltd., and the other 13 are by each of the 13 co-owners. These co-owners had held different shares in that in that property as under :-
(i) Shri Triloki Nath ... 1/4th share(ii) Shri Bhola Nath ... 1/20th ,,(iii) Shri Mahadev Prasad ... 1/16th ,,(iv) Shri Santosh Kumar ... 1/12th ,,(v) Shrimati Shashi Prabha ... 1/16th ,,(vi) Smt. Krishna Khanna ... 1/12th ,,(vii) Smt. Raj Karni ... 1/12th ,,(viii) Shri Naresh Khanna ... 1/20th ,,(ix) Shri Rajesh Khanna ... 1/20th ,,(x) Shri Dinesh Khanna ... 1/20th ,,(xi) Shri Ramesh Khanna ... 1/16th ,,(xii) Shri Jagdish Khanna ... 1/16th ,,(xiii)Shri Arun Khanna ... 1/12th ,,
2. The background of the facts is that there is a spacious hotel building and some residential portion situated at No. 12, Aurangzeb Road, New Delhi. The entire complex was owned by the firm, Bhola Nath Brothers. Its partners, who were close relations, constituted another firm, named Claridges Hotel, in the year 1955. In this new firm those partners and some of their other relations joined as partners. This firm obtained lease of the hotel building from the firm, Bhola Nath Brothers, on December 21, 1955, on a monthly rent of Rs. 15,950. One of the clauses of the lease was that the lessees were at their own cost and expenses entitled to put in the demised premises all such office fittings as might be required from time to time for their use and business.
3. It may be mentioned here that the residential building in that property continued to remain in possession of the owners, viz., the firm Bhola Nath Brothers. This portion was not let out under that lease.
4. The partners of this lessee firm later converted the partnership into a limited company known as Claridges Hotel Pvt. Ltd. on November 1, 1959. Its shareholders were mostly those partners and their relations. This company continued to run the Claridges Hotel which its predecessor, the firm Claridges Hotel, was operating.
5. On October 26, 1966, a fresh lease deed was executed about the hotel building between the firm, Bhola Nath Brothers, and Claridges Hotel Pvt. Ltd. One of the clauses in this lease deed was as under :
'12. The lessees will not be entitled to remove any fixtures now existing in the demised premises or which may hereinafter be provided and affixed by the lessees in the demised premises and that will be deemed to be the property of the Lessers.'
6. This clause in the lease deed was modified by a subsequent agreement dated April 15, 1968, in the following term :-
'1. That the lessees are permitted to carry on additions or alterations and renovations to the demised premises as they may deem fit, according to their business requirements, and to spend any amount which they desire for the betterment and improvement of the demised premises.
2. That in case the lessees vacate the demised premises at will or are compelled to vacate the premises, the party of the FIRST PART shall compensate the party of the SECOND PART to the extent of the expenses incurred by the party of the SECOND PART on additions, alternations renovations, or improvements on the demised premises.
3. That the compensation shall be a reasonable amount and in case of any dispute regarding the fixation of or determination of the compensation, the case shall be referred to the arbitration under the Indian Arbitration Act.' assessed had concealed the particulars of its income and had assessed had concealed the particulars of its income and had assessed had concealed the particulars of its income and had
7. The firm, Bhola Nath Brothers, the owner of property No. 12, Aurangzeb Road, New Delhi, was dissolved on March 13, 1972, as a result of which the property fell to the share of 13 partners, whose names and shares have already been narrated above. These 13 co-owners by a sale deed dated July 19, 1972, sold the entire property situated at No. 12, Aurangzeb Road, New Delhi, to Claridges Hotel Pvt. Ltd., for a sum of Rs. 16 lakhs. From that day onwards, thus the Claridges Hotel Pvt. Ltd., which was earlier the lessee of the hotel building, became the owner of the entire property including the residential portion which had been previously retained by the owners for their residence.
8. According to the 13 co-owners who had sold the property, the sale resulted in capital gains of Rs. 9,26,423 as the original cost of the building was stated to be 6,64,677. They, thereforee, disclosed their respective shares in that capital gains in the separate returns which every one of them filed for the year 1973-74. However, when the assessments proceeded, the ITO was not satisfied that the sale price of Rs. 16 lakhs, as shown in the sale deed, represented the correct value of the property. He, thereforee, obtained a report from the Valuation Officer of the department. That Valuation Officer evaluated the property at Rs. 24,61,000. The co-owners on their part also obtained valuation of the property from an approved valuer who, after considering the nature of the property, the lease held by Claridges Hotel Pvt. Ltd., the terms and conditions of that lease and the circumstance that the land underneath (which measured 2.94 acres) was held on perpetual lease from the Governor-General from the year 1931, estimated the value at Rs. 15,71,224.
9. The ITO, after considering the two reports, determined the value of the property at Rs. 24,61,000, as estimated by the departmental valuers.
10. In appeals, the AAC reduced the valuation to Rs. 19,67,810. However, in further appeals before the Tribunal, the actual sale consideration of Rs. 16 lakhs was accepted and capital gain was directed to be computed in the case of each co-owner in terms of that sale price. The order of the Tribunal was made on July 28, 1977.
11. Thereafter, the revenue sought reference of certain questions for the opinion of this court under s. 256(1) of the I.T. Act, 1961. The Appellate Tribunal, however, rejected those petitions on February 18, 1972, on the ground that no question of law arose. The revenue's attempt to obtain references under s. 256(2) of the Act by moving the High Court, also failed on October 9, 1978.
12. In the meanwhile the ITO issued notices under s. 148 read with s. 147 of the I.T. Act, 1961, on March 30, 1978, to each of the 13 co-owners proposing to reopen the assessments effected for the year 1973-74. It was mentioned that he had reason to believe that income chargeable to tax had escaped assessment within the meaning of s. 147 of the Act. The co-owners were required to file revised returns within 30 days from the date of service of the notices.
13. The co-owners on their part contested the propriety of the reopening of the assessment and, inter alia, submitted as under :
'(i) That the conditions precedent to the proceedings initiated by you under sections 147/148 of the Income-tax Act are non-existent.
(ii) The proceedings had been initiated to revise the assessment previously made validly merely owning to the change of opinion without possessing any such material as would reasonably lead to the formation of belief that income had escaped assessment on the previous occasion.
(iii) In any event the basis for the formation of the belief could not by by reason of omission or failure on my part of disclose any material fact necessary for my assessment on the previous occasion.
(iv) That in any similar event whatever material or information could be assumed to be in your possession it had no rational bearing on the formation of the belief that my income had escaped assessment.'
14. The revised returns were, thereforee, filed under protest and without prejudice to their rights.
15. In the case of Claridges Hotel Pvt. Ltd., the assessment for the year 1973-74 was completed on May 14, 1974. Its business income from the operation of that hotel was assessed. However, in its case also a notice under s. 148 read with s. 147 of the Act was issued on March 29, 1978, proposing to effect reassessment. The assessed also raised various objections to the propriety of these reassessment proceedings.
16. Since the ITO, it is stated, was not agreeable on these objections to drop the assessment proceedings initiated under ss. 147/148 of the Act, the present writ petitions were moved before this court. The writ petition by Claridges Hotel was filed on December 8, 1978, and the others by the co-owners on February 16, 1979. It has been prayed that writs of certiorari or any other writs be issued quashing the impugned notices issued by the ITO under s. 148 of the Act. The respondents imp leaded have been the ITO and the CIT. Prayers for writs of prohibition have also been made for restraining the respondents from proceeding with the reassessment proceedings.
17. One of the grounds taken in these petitions was that the respondents had not disclosed the basis and the reasons which prevailed in the issue of notices under s. 148 and the commencement of the reassessment proceedings. These reasons were later filed from the side of the respondents in this court. Briefly stated, they are to the effect that during the period 1955 to 1972, Claridges Hotel incurred expenditure amounting to Rs. 56,94,475 for effecting additions, alternations, renovations and improvements in the leased premises. Part of this expenditure had been capitalised by the hotel management and depreciation claimed thereon. The written down value of amount capitalised as per the balance-sheet of the hotel as on October 30, 1971, was Rs. 14,18,564. The balance expenses were charged to revenue in different years. It was next stated that the revenue audit had further found that in terms of the lease agreement dated April 15, 1968, those additions made by the lessee were the deemed property of the Lessers, and in any case at least the written down value of the capitalised additions to the extent of Rs. 14,18,564 had to be treated as the deemed property of the Lessers. In this way, it was considered that the total value of the property No. 12, Aurangzeb Road, New Delhi, including the deemed property, worked out to Rs. 79,60,714 as against the sale price shown at Rs. 16 lakhs. Thus, substantial amount of capital gains was considered to have escaped assessment. The sale price, it was stated, did not include any consideration payable in respect of the deemed property belonging to the Lessers. The lessee, it was further mentioned, had legal right under the lease to claim Rs. 56,94,475 as reimbursement of the cost incurred on the additions, alterations, renovations and improvements from the Lessers at the time of sale. Since the lessee had not pressed for payment of the claim and the Lessers had not charged any consideration for relinquishing their rights over that deemed property, huge income assessable in the hands of the co-owners had escaped assessment.
18. The above reasons were enumerated in the case of each of the co-owners. In the case of Claridges Hotel, the reasons elaborated were almost similar. It was stated that after taking into account the written down value of the assets at Rs. 14,18,564, and deleting that from the total cost of expenditure of Rs. 56,94,475, a deemed income of Rs. 42,13,911 had accrued to Claridges Hotel on termination of the lease agreement. This amount, it was stated, could have been got reimbursed by the hotel from the Lessers.
19. Although in the original notice issued under s. 148 read with s. 147 of the Act, there was no mention whether they were issued under s. 147(a) or 147(b), in the reasons which were field during the present writ petitions, it was clarified that the reopening of the assessments were being effected under s. 147(b) of the Act.
20. The sum and substance of the petitioners' cases before us in these writs had been that there was absolutely no basis for reopening of the assessments, that all the material and primary facts necessary for purposes of assessments had been fully and truly disclosed at the original assessment stages and no change of opinion was permissible by way of reassessments. The entire matter relating to the nature and extent of capital gains was open before the ITO at the original assessment stages and the controversy was agitated up to the Appellate Tribunal. The terms and conditions of the lease deeds were also stated to be before the ITO and the approved valuer after the co-owners had specifically made reference to the compensation which the co-owners were liable to pay to the lessee for the additions, improvements, etc., which the latter had effected in the property. Any different appraisement of those primary facts, it has been pleaded, is beyond the purview of reassessment proceedings. At the stage of argument it has also been sought to be asserted on the authority of the recent decision of the Supreme Court in the case of Indian and Eastern Newspaper Society v. CIT : 119ITR996(SC) , that the audit report cannot be treated as information obtained subsequent to assessment to justify start of reassessment proceedings.
21. Particular reference has been made to the following observations of the Supreme Court in the case of Parashuram Pottery Works Co. Ltd. v. ITO : 106ITR1(SC) :
'It has been said that the taxes are the price that we pay for civilization. If so, it is essential that those who are entrusted with the task of calculating and Realizing that price should familiarise themselves with the relevant provisions and become well-versed with the law on the subject. Any remissness on their part can only be at the cost of the national exchequer and must necessarily result in loss of revenue. At the some time, we have to bear in ming that the policy of law is that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity.'
22. From the side of the revenue, on the other hand, the maintainability of these writs has been strongly challenged and it has been pleaded that all the pleas now sought to be raised could have as well efficaciously been raised in the reassessment proceedings before the ITO. That officer could have been satisfied about the probative force of these contentions and he could have as well dropped the proceedings. In case, however, he held otherwise, adequate alternative remedy of challenging his decisions before the hierarchy of appellate authorities under the I.T. Act was available. In any case, on merits it has been pointed out that at the original assessment stage the controversy entirely was confined to the real value of the property transferred, and the matter relating to the deemed transfer of additions and affixtures, etc., was never to issue. In fact this aspect of the matter was entirely overlooked by the ITO at that stage. It has further been pointed out that the lease deeds, about which reference has been made by the audit and in the reasons recorded before the issue of notices under ss. 147/148 of the Act, were not produced at all by the assessed nor were before the ITO at the original assessment stage. The mere fact that they were filed in earlier years in the assessment of the different assessed, it has been urged, could not be treated as material already taken note of by the ITO at the original assessment stage of the present year. The position in this respect, it is pointed out, is well settled that even where certain material could be taken note of by deeper probe into the record of the assessed or otherwise and was not taken, the same cannot preclude commencement of reassessment proceedings when the existence and implication of that material are realised for the first time after the completion of the assessment. Particular reference in this regard was made to the following Explanationn in existence in s. 147 of the Act :
'Explanation 2. - Production before the Income-tax Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Income-tax Officer will not necessarily amount to disclosure within the meaning of this section.'
23. The ambit of the controversy in the earlier years, it is contended, was entirely confined to the propriety and extent of depreciation and developments rebates allowable to the Claridges Hotel. The assessability of the additions, etc., in the hands of the owners in the form of capital gains could not arise then. This controversy, it is asserted, has for the first time, arisen in the present year when the transfer of the entire property took place in favor of the hotel.
24. All these matters, it is pleaded, are such over which the ITO is fully competent to adjudicate at the reassessment stage and, thereforee, he cannot be held to lack in jurisdiction or that the assessed will have no alternative remedy in case the ITO does not decide in their favor.
25. So far as the information supplied by the audit is concerned, it is pleaded, that the same cannot, in any manner, be treated as exposition of law, to be ignored in terms of the decision of the Supreme Court in the case of Indian and Eastern Newspaper Society : 119ITR996(SC) . The audit, instead, has brought to the notice of the ITO the term and conditions of the lease deeds under which the additions, affixtures, etc., belonged to the owners when the lease happened to be surrendered. Such audit report, it is, thereforee pleaded, can legitimately be treated as information acquired after the effecting of the original assessments.
26. We have heard the parties and given our utmost consideration to all the circumstances.
27. Section 147 of the I.T. Act, 1961, under which reassessments are proposed to be effected by the ITO, is to the following effect :
'147. If -
(a) the Income-tax Officer has reason to believe that, by reason of the omission or failure on the part of an assessed 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
(b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessed, the Income-tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year, 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 (hereafter in sections 148 to 153 referred to as the relevant assessment year).
Explanationn 1. - For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely :
(a) where income chargeable to tax has been under-assessed; or
(b) where such income has been assessed at too low a rate; or
(c) where such income has been made the subject of excessive relief under this Act or under the Indian Income-tax Act, 1922 (11 of 1922); or
(d) where excessive loss or depreciation allowance has been computed.
Explanationn 2. - Production before the Income-tax Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Income-tax Officer will not necessarily amount to disclosure within the meaning of this section.'
28. Section 148 on its requires the issue of notice by the ITO before he proceeds to make assessment or reassessment or recomputation under s. 147. Section 151 next provides that if the proposed action is sought to be taken after the expiry of 4 years from the end of the relevant assessment year, the Commissioner must be satisfied on the reasons recorded by the ITO that the case is a fit one for the issue of such notice.
29. In the present case there is no dispute that the Commissioner has recorded his satisfaction in terms of these provisions of s. 151. The petitioners, however, challenge the same on the ground that the satisfaction was exercised mechanically without application of mind to the facts of the case.
30. The nature and scope of reassessment proceedings under ss. 147/148 of the Act have been the subject matter or decisions in a number of judicial pronouncements. While dealing with the analogous provisions contained in s. 34(1)(b) of the Indian I.T. Act, 1922, the Supreme Court in the case of Kalyanji Mavji v. CIT : 102ITR287(SC) , categorised conditions under which reassessment could be invoked, as followed :
'(1) where the information is as to the true and correct state of the law 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. This is obviously based on the principle that the taxpayer would not be allowed to take advantage of an oversight or mistake committed by the taxing authority;
(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 the original assessment;
(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.
If these conditions are satisfied then the Income-tax Officer would have complete jurisdiction to reopen the original assessment. It is obvious that where 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.'
31. In R. K. Malhotra, ITO v. Kasturbhai Lalbhai : 1975CriLJ1545 , the Supreme Court emphasised that for invoking s. 147(b) the ITO should have received information after the original assessment, and such information may be of fact or law. The words 'external source', it was observed, cannot be construed as implying that the source must be outside the record. The information may be gathered from the assessment record itself which the ITO had failed for lack of diligence or proper investigation to collect at the previous assessment stage. In this case the report of the audit department on the interpretation of s. 23 of the Act, 1961, was considered as information to justify the reopening of assessment.
32. Both these decisions of Kalyanji Mavji : 102ITR287(SC) and R. K. Malhotra's : 1975CriLJ1545 came up for review in the recent decision of the Supreme Court in the case of Indian and Eastern Newspaper Society : 119ITR996(SC) . It has been held that in so far as the earlier decision in the case of Kalyanji Mavji : 102ITR287(SC) , purported to hold in category two as reproduced above that even a mistake committed by the ITO could justify reassessment, the same was too wide a proposition and travelled farther than the statute warranted. It was held that an error discovered on a reconsideration of the same material (no more) does not give the ITO the power to start reassessment proceedings. To this limited extent, thereforee, the decision in the case of Kalyanji Mavaji : 102ITR287(SC) was overruled by this larger Bench of the Supreme Court. No exception was, however, taken to the other categories enumerated in that decision justifying reassessment. There is, thereforee, little doubt now that at the reassessment stage, the ITO cannot proceed to correct an error committed by him at the original assessment stage on the same material,
33. The decision of the Supreme Court in the case of Indian and Eastern Newspaper Society : 119ITR996(SC) , further elaborated the scope of audit report which can constitute an information with the ITO for starting re. In this regard, it was noted that the earlier decision of the Supreme Court in the case of R. K. Malhotra : 1975CriLJ1545 , had included in such information the communication by the audit about the position of law. In this respect it was observed that when we speak of law, we ordinarily speak of norms or guiding principles having legal effect and legal consequences. Law may be statutory law or what is popularly described as judge made law. In the former case it proceeds from enactment having its source in competent legislative authority. Judge made law emanates from a declaration or exposition of the content of a legal principle or the interpretation of a a statute, the declaration being rendered by a competent judicial or quasi-judicial authority empowered to decide questions of law between contending parties. The declaration or exposition is ordinarily set forth in the judgment of a court or the order of a Tribunal, and bears the character of law. In every case, thereforee, to be law it must be a creation by a formal source, either legislative or judicial authority. A statement by a person or body, not competent to create or define law, cannot be regarded as law. In that view, thereforee, when s. 147(b) of the Act is read as referring to 'information' as to law, what is contemplated is information as to the law created by a formal source.
34. The opinion of the audit department as to what should be the interpretation of law cannot constitute an information as such department is not otherwise competent to pronounce upon law. However there is distinction between the source of law and the communication of law. The audit department, though not competent to expound, is fully within its power to communicate to the ITO that on a particular law point, a pronouncement by a competent court or Tribunal has already been given which the ITO has failed to take note of or abide. Such communication has been treated as valid information to justify reassessment. The following observations in the case of Indian and Eastern Newspaper Society : 119ITR996(SC) in this regard are significant (at page 1003) :
'But although an audit party does not possess the power to so pronounce on the law, it nevertheless may drawn 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 communicator of the law is carefully maintained, the confusion which often results in applying s. 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.'
35. The word 'information' in s. 34(1)(b) is of the widest amplitude and comprehends a variety of factors. Nevertheless, the power under s. 34(1)(b), however wide it may be, is not plenary because the discretion of the ITO is controlled by the words 'reason to believe'. Information may come from external source or even from the materials already on record or may be derived from the discovery of new and important matter or fresh facts.
36. As observed by the Supreme Court is the case of CIT v. A. Raman & Co. : 67ITR11(SC) , information must it is true, have come into the possession of the ITO after the previous assessment but even if the information be such that it could have been obtained during the previous assessment from an investigation of the material on record, or the facts disclosed thereby, or from other enquiry or research into facts or law, but was not in fact obtained, the jurisdiction of the ITO is not affected.
37. Similarly, the Supreme Court in the case of R. K. Malhotra : 1975CriLJ1545 , observed that the words 'external source' cannot be construed as implying that the source must be outside the record. The information may be gathered from the assessment records itself. The Madras High Court has also in A.L.A. Firm v. CIT : 102ITR622(Mad) observed that where the ITO had in the original assessment proceedings not at all applied his mind to the question as to whether the surplus on revaluation was assessable or not, the reassessment proceedings were valid.
38. The Kerala High Court has also in two decisions in United Mercantile Co. Ltd. v. CIT : 64ITR218(Ker) , and Muthukrishna Reddiar v. CIT : 90ITR503(Ker) , observed :
'To inform' means 'to impart knowledge' and a detail available to the Income-tax Officer in the papers filed before him does not by its mere availability become an item of information. It is transmuted into an item of information in his possession only if, and only when, its existence is realised and its implications are recognised.'
39. With this background of the position of law, we now proceed to consider the facts the facts and circumstances of the present case whether the ITO was justified to invoke s. 147(b) /148 of the Act, and commence the reassessment proceedings. By this proposed action, the ITO has attempted to take into account the terms and conditions in the lease deeds whereunder the additions, affixtures, alterations, etc., effected by the hotel management were deemed to be the property of the co-owners and who on their transfer have purported to enjoy considerable capital gains. This part of the controversy and the possible accrual of the income to the co-owners was not considered at the original assessment stage. There is no mention at all those assessment orders of the impact of those terms and conditions in the lease deeds and whether they did create valuable rights in favor of the co-owners. Similarly, in the assessment of the Claridges Hotel Pvt. Ltd. it was not taken note that under those terms and conditions, this company was entitled to receive substantial compensation for the additions, alterations, affixtures, etc., effected in the hotel building.
40. It could not, thereforee, be said that at the original assessment stage all these matters were considered by the ITO. He had, thereforee, no occasion to form any opinion on this aspect of the matter. It need hardly be said that change of opinion pre-supposes that there was a prior formation of opinion. Where such formation never took place in the past, it is meaningless to plead that a change in its information is sought to be made.
41. As regards the contention of the petitioners that the ITO should be deemed to have considered all the terms and conditions of the original lease deeds and their implications, we are afraid that there is nothing to import in this direction from the original assessment orders. The safest and surest guide in this regard is to look to the assessment order itself. When it, of its own, does not reveal that the matters and controversies, now sought to be raised by way of reassessment, were at all before the ITO, or considered by him, it would not be advisable to still import their existence and consideration. This can be permissible only where the assessment record of that stage overwhelmingly brings out that that matter did come up for active consideration and was in fact considered.
42. Mere silence on a matter or absence of discussion in the original assessment order does not imply that the ITO adjudicated upon the same one way or the other. Such silence or absence of discussion can possibly be the result of two circumstances. One may be that the ITO, though considered the matter, was of the opinion that it was too insignificant and frivolous as to require specific mention in the assessment order. The other circumstances which appears to be the correct position could be that the matter relating to the deemed property and the possible capital gains and income which the petitioners would have enjoyed was entirely overlooked by the ITO and escaped his scrutiny. In other words, he failed to exercise due diligence to investigate this part of the controversy.
43. It is noteworthy to mention here that in para. 2 of the writ petitions, at page 8, the co-owners have made mention that in earlier years the questions relating to the additions, renovations, affixtures and alterations effected by the Claridges Hotel Pvt. Ltd. in the property came up for consideration for determining depreciation and development rebate. It has not been mentioned that the lease deeds in question were also filed during the original assessment proceedings of the present year of these co-owners or the Claridges Hotel Pvt. Ltd. From the side of the revenue it has been categorically stated that those lease deeds were not filed in these original assessment proceedings. In the circumstances, the ITO had no occasion to look into the terms and conditions of the lease deeds and their full import. In any case he did not at all apply his mind to these new aspects which have been highlighted in the reasons recorded before the issue of notices under s. 147(b). Thus, the existence and implications of the terms and conditions of the lease deeds in the context of the transfer of the property and the accrual of the capital gains did not, at any time, come for consideration before the ITO at the original assessment stage, not were in his conscious knowledge.
44. Rather, the controversy relating to accrual of capital gains or income by virtue of the sale effected of the property has arisen in the present year only when the sale took place. It was not an issue at any time in earlier years.
45. As regards the audit report, we are of opinion that in the present case, the same cannot be taken as exposition of law simplicities by that department. It rather brought to the notice of the ITO those particular terms and conditions in the lease deeds and that their implications can result in certain consequences. The audit reports of this nature, thereforee, could justifiably be taken by the ITO as information justifying commencement of reassessment proceedings.
46. As regards the reference by the petitioners to the decision of the Supreme Court in the case of Parashuram Pottery Works Co. Ltd. : 106ITR1(SC) , we find that the reassessment proceedings have been commenced within the limitation prescribed under the Act and after obtaining the requisite approval of the Commissioner. We do not find that this approval suffered from any infirmity because of any application of mechanical mind.
47. In the totality of these circumstances we are unable to hold that the ITO, in any manner, lacked jurisdiction to issue notices under s. 147/148 of the Act, or that any basic invalidity was involved in the issue of those notices. Moreover, the objections now raised in these writ petitions could as well have been agitated before the ITO in response to the notices issued. The petitioners could show that there was no grounds for reopening of the assessment and, thereforee, the reassessment proceedings should be dropped. In case the ITO held a different view and effected reassessments an hierarchy of appellate authorities was available under the Act, and the petitioners as well could obtain references before the High Court, if not successful before those authorities. It, thereforee, could not be said that efficacious remedy was not available with the present petitioners.
48. The extraordinary remedy by way of writ should not generally be invoked where proceedings under ss. 147/148 of the I.T. Act, 1961, are initiated. The court should be extremely slow to entertain such petitions as, ordinarily, it can well be said that an efficacious remedy is adequately provided under the Act. It is within the powers of the ITO and the appellate authorities created under the Act to adjudicate whether the facts and circumstances exist which warrant initiation of of proceedings under ss. 147/148 of the Act. An assessed cannot be readily allowed to circumvent the provision contained in the Act and seek adjudication of the propriety and competency of the initiation of reassessment proceedings from the court straightaway. That would amount to usurping the powers of the ITO and the appellate authorities for determining the propriety and validity of those proceedings. Considerable time is taken in the decisions of the writs which result in the reassessment proceedings remaining in abeyance for long.
49. It is only in exceptional circumstances that remedy by way of writs can be invoked. Where it is found that on the face of it or palpably the initiation of reassessment proceedings is wholly unwarranted and the reasons which have prevailed in their initiation are entirely imaginary, fanciful or baseless and that the reassessment will not be sustainable at all, that the extraordinary remedy by way of writ may become permissible. In other words, it should be shown that the overwhelming circumstances of the case bring out that the entire course of reassessment proceedings will be an exercise in futility.
50. We, thereforee, now proceed to consider whether, in the present cases, there were circumstances which did not warrant at all the commencement of reassessment proceedings and that it will be entirely an exercise in futility. The parties have addressed arguments in this regard. From the side of the revenue specific reference has been made to the definition of the term 'transfer' as given in s. 2(47) of the Act. The same is to the following effect :
'2(47) 'transfer', in relation to a capital asset, includes the sale, exchange, or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law'.
51. It has been pleaded that relinquishment of the asset or extinguishment of any rights therein, have been included in the term 'transfer' and, thereforee, when the co-owners did not claim any compensation for the deemed ownership of additions, affixtures, etc., from the vendee while effecting sale, they should be treated to have relinquished their rights over them and thus transferred them. The value of those additions, affixtures, etc., it has been pleaded, should be deemed to have been received by the co-owners for the purpose of computation of capital gains. Similarly, the Claridges Hotel, it is pointed out, stood to considerable gain when it did not press for recommendation for those additions, affixtures, etc., from the co-owners when the lease was dreamingly surrendered to them at the time of the sale. It has been asserted that what was not paid should be deemed to be received and vice versa.
52. In our considered opinion it is here that the revenue's case suffers from basic infirmities and cannot, in any manner, be sustained on facts and law.
53. A perusal of the terms and conditions of the lease deed dated October 26, 1966, shows that the additions, affixtures, renovations, etc., effected by the lessee in the demised premises were deemed to be the property of the Lessers. There was no clause that the Lessers were to recompensed the lessee for the money expended in their execution. Had the matters stood like that, it could be said that the revenue's case had some legs to stand on. However, the complexion entirely changed under the agreement dated April 15, 1968, by which the terms and conditions of the lease with respect to those additions, affixtures, etc., were modified. It was then mutually agreed that if the lessee vacated the demised premises at will or was compelled to do so, the Lessers would compensate the lessee to the extent of expenses incurred on additions, alternations, renovations or improvements in the demised premises. Thus, this deemed property of the Lessers in those additions, affixtures, etc., was made subject to the Lessers paying compensation on their score to the lessee.
54. With these modified terms and conditions of the lease being in operation in the year 1972, when the sale took place, it becomes obvious that there was little scope for accrual of capital gains in the hands of co-owners on account of those additions and affixtures. Those co-owners would have first paid compensation to the lessee for these additions, affixtures, etc. The cost of the property would have thus correspondingly increased. At the time of the sale again if they got back any price for transfer of those additions, affixtures, etc., the same would have only gone to equalise and balance up what they had earlier paid. The payments and receipts would square up and there can remain little further scope for accrual of capital gains. Looked at from this angle, the case of the revenue that capital gains accrued to the co-owners is entirely fanciful and baseless.
55. Moreover, the occasion for the vesting or passing over of the ownership of the additions, affixtures, etc., in the co-owners would have arisen only if the lease was surrendered or terminated. No such occasion arose in the present case. Instead, the lessee itself purchased the entire property. There was no interregnum during which it could be said that the lease stood surrendered. The lessee's rights instead merged with the ownership rights on the acquisition of ownership under that sale. At no occasion the additions, affixtures, etc., became transferred to the co-owners. And, thereforee, the question of their relinquishing them in favor of the lessee or the that matter transferring them did not at all arise.
56. Similarly, even with respect to the Claridges Hotel, no gain or income arose. Had it charged any compensation for those additions, affixtures, etc., from the co-owners, it would have again paid back the same while effecting their purchase from them at the time of the transfer of the entire property. By no stretch of imagination, thereforee, any real income accrued in its favor.
57. In view of this discussion, we have little hesitation in holding that it will be entirely an exercise in futility to allow the reassessment proceedings to proceed further. We, thereforee, allow these writ petitions to the extent that the notices issued under ss. 147/148 of the 1961 Act shall stand quashed and the respondents are prohibited from proceeding or making reassessment in pursuance thereof. Each of the petitioners will be entitled to costs which are assessed at Rs. 200.
58. I agree with the order proposed by my Lord that the writ petitions should be allowed and the notices issued under ss. 147/148 of the Act should be quashed for the reason that in the circumstances of the case no income can at all be said to have escaped assessment and that proposed reassessment would only be an exercise in futility. Khanna J., however, has held that, in the present case, there was information in the possession of the ITO within the meaning of s. 147(b) inasmuch as the issue, in its present aspect, had not been considered by the ITO at the time of original assessment. It is on this point that I would like to reserve my views as it is not necessary to decide it for the disposal of the present case. I shall briefly outline my reasons for my reservation without repeating the facts which have already been set out in the judgment of my learned brother.
59. It is true that in the original assessment orders of the co-owners the ITO does not refer specifically to the term of the lease deed or discuss its implications. But at the time of original assessment, the ITO referred the issue of determination of capital gains on the sale of the property to the Valuation Officer. It is common ground that, before the Valuation Officer, the assessed had placed the lease deeds as well as the sale deed. It is also found that the Valuation Officer in his report has made a reference to the relevant clauses of the lease deeds. The Valuation Officer has referred to clause 12 of the lease deed and also the fact that the company had spent Rs. 56,94,475 during the period from 1955 to 1972, in putting up additions and structures for which compensation would be payable to the company in the event of termination of the lease agreement. There was also a valuer's report furnished by the assessed which referred to the details. It is after considering the two valuation reports that the ITO completed the original assessment. While it is true that the value determined for the property in question by the Valuation Officer was binding on the ITO who could not go behind the same (s. 55A of the I.T. Act read with s. 16A(6) of the W.T. Act) the same cannot be said of the ITO's right to determine the nature and extent of the property which had passed under the sale deed read with the lease deeds. Despite these facts, my learned brother has held that the ITO had not applied his ming to the material aspects involved in this case and that, thereforee, he could be entitled to reconsider it by initiating proceedings under s. 147.
60. I am not quite sure that the above inference would be justified. It is not always that the records are clear as to what was and what was not considered by the ITO at the time of original assessment and, in many cases like the present, one has to consider all the facts and draw a reasonable inference as to what can be said to have been considered by the ITO at the time of original assessment. On the one hand it cannot be assumed that merely because some information can be found in some part of the record, past or present, the ITO must have considered, all such material on record before he completed the assessment. Thus, merely because there may have been a reference to the lease deeds in the past assessments of the firm in which the co-owners were partners, it cannot be inferred that the ITO must have considered these at the time of the original assessment of the co-owners for the year. On the other hand, can it be assumed that the ITO would not have been considered facts and aspects which were brought to his notice at the time of original assessment I think the petitioners can legitimately contend that the ITO must be held to have read the valuation reports and to have looked into the facts and also the terms of the lease deeds mentioned therein. In these circumstances, I think there is an arguable case for the assessed for saying that even at the time of original assessment the aspects now brought to the notice of the ITO by the audit party had been brought to his notice by the valuation reports. It may perhaps be said that, while the Valuation Officer, no doubt, referred to the clause in the lease deed and the extent of expenditure incurred by the company, he did not specifically draw the attention of the ITO to the proper interpretation and effect of those clauses and that the impact of these clauses on the assessment was not considered by the ITO at the time of the original assessment. There are two difficulties in accepting this suggestion. In the first place, the proper interpretation of the terms of the lease deed is a matter of law and the view of the audit party on this cannot amount to 'information' justifying reopening of the assessment. Secondly, in all cases where a reassessment is sought to be reopened under s. 147(b), there will always be an aspect which had not been considered by the ITO at the original assessment, for without some oversight of, or inadvertence to, a particular aspect, there would be no escapement of income from assessment at all. In fact, even where the ITO has discussed and arrived at a particular conclusion, it could always be said that he had overlooked some aspect which he should have considered. It appears to me that the extent to which a reassessment can be justified on the basis that though the ITO had considered an issue at the time of the original assessment he had failed to consider an aspect which someone else considers important is a question that calls for more careful and detailed consideration in an appropriate case. Prima facie, it seems to me this is so wide and general an argument that hardly any case of s. 147(b) will fall outside its ambit. I have, thereforee, some hesitation in accepting the please put forward on behalf of the revenue on this aspect of the case.
61. In the case of Claridges Hotel, the difficulty in supporting the action under s. 147(b) arises in another way also. The assessed has pointed out, and this has not been denied, that the question as to how far the company was the owner of improvements effected to the property under the lease deed had come up for specific consideration in the context of the issue of depreciation for the assessment years 1968-69 and 1969-70. The company has been granted depreciation in respect of the additions put up by it after calling for the assessed's Explanationn. Here it is said that this question had no doubt been considered in the earlier assessment but that there is nothing to show that it was considered by the ITO at the time of the original assessment for this year. Here again it is a moot question as to how far, in considering the validity of action under s. 147 for a particular assessment year, one should confine only to the record to that assessment year, that sort of restriction might in several cases prove to be totally unreal and also too much of a burden on the assessed. Income-tax is a recurring annual affair. There are question which, once raised and decided, will have repercussions for several subsequent years. In such cases it is very difficult to say that the rights of parties should be determined only with regard to the facts on record in one particular assessment year. It is quite possible to urge that in regard to certain types of question (as the one which arises in the present case) of a recurring nature, the ITO can reasonably be held to have acquainted himself with the details of the earlier proceedings in the case. It will be appreciated that while completing the original assessment, the ITO had to consider the question of depreciation to which the assessed was entitled and it could hardly have escaped his attention that, in respect of a part of the building, depreciation was being granted from earlier years. Can it not be legitimately inferred that the ITO would have looked into the past record to the extent necessary and would have aware of the fact that in the past the property by way of additions put up by the company had been accepted to belong to the assessed-company If he had, would the reopening of the assessment based on an interpretation of the lease deed and sale deed now suggested by the audit party be justified after the recent Supreme Court decision in the Newspaper Society's case : 119ITR996(SC)
62. Having regard to these consideration, I think that there is something to be said for the contention of the assessed that both in the case of individual co-owners of the property as well as the limited company, the basic fact (the realisation of which is said to have led to the impugned action), namely, that a certain part of the premises belonged not to the co-owners but to the company, was present before the ITO even at the time of original assessment. The lease deeds and sale deeds were within the knowledge of the ITO, in the case of the co-owners, from the valuation reports and in the case of the company from the past history also. The audit part had not added anything to the facts within the knowledge of the ITO; it has only suggested an interpretation of law which, may be, did not occur to the ITO at the time of the original assessment. As the Supreme Court has pointed out, the information of the audit party as to the effect of the various clauses of the lease deed cannot constitute information within the meaning of s. 147(b). I, thereforee, think that on this aspect the writ petitioners have an arguable case which requires more detailed consideration.
63. Since, however, I am agreeing with my learned brother that the writ petitions have to be allowed on the ground that even if the interpretation sought to be put on the lease deed by the audit party can be acted upon, it is not a correct interpretation of the documents in question and that there has been no escapement of income at all, I am not expressing any opinion in regard to the question whether there was information in the possession of the ITO justifying action under s. 147(b) on the basis of the report of the audit party. Subject to the above reservation, I agree with my learned brother that the writ petitions have to be allowed for the other reason mentioned above.