V.S. Deshpande, J.
(1) General OBSERVATIONS. The immediate context of the consideration of this writ petition is the issue of notice to the petitioner assessed by its Income-tax Officer under section 148(1) of the Income-tax Act, 1961 (the Act), because he had 'reason to believe' within the meaning of section 147 of the said Act that the income of the assessed had escaped assessment. The petitioner challenges the validity of this notice on the ground that no material existed on which the Income-tax Officer could have reason to believe that its income had escaped assessment and consequently the notice was issued without jurisdiction. The Income-tax authorities have raised the preliminary objection that the writ petition is not maintainable because appeals would lie under section 246 against the order of reassessment made under section 147 and as this remedy is provided for by the Income-tax Act the present writ petition for the redress of any injury or alleged injury suffered by the petitioner by the issue of the notice, which may subsequently lead to orders of reassessment, cannot be entertained in view of the existing clause (3) of Article 226. But clause (3) of Article 226 of the Constitution has been deleted and Article 226 has been restored to its position as it was before the constitution (Forty-second Amendment) Act, 1976 by the Constitution (Forty-Fifth Amendment) Act, 1978, just assented to by the President after ratification of it by the States was completed.
(2) We are, thereforee, considering this preliminary question in a wider and permanent context. The question is whether and when the High Court should exercise its discretionary jurisdiction under Article 226 of the Constitution to entertain a writ petition for a relief based on grounds other than the unconstitutional or ultra virus nature of any legal provision when the grounds for such relief can be considered by statutory authorities and adequate relief also can be granted by them under the relevant statutory provisions. The usual ground on which such writ petitions are presented is that the action taken by the administrative or quasi-judicial authorities is without jurisdiction.
(3) The decision as to the maintainability of the writ petition depends on the reconciliation of two basic principles. On the one hand, the judicial and legal system of India is based on a division of functions between the High Courts acting under Article 226 of the Constitution and the income-tax authorities acting under the income-tax Act. 1961 and the other statutory authorities acting under the respective statutes. The normal rule is that mistakes committed by the Income-tax authorities within their jurisdiction are liable to be corrected by those authorities themselves or by their superiors in appeals and revisions filed against the mistake and orders. Even if the errors are committed beyond the jurisdiction of these authorities they and their superiors acting under the statutes have the power to correct themselves. In the leading decision by the Constitution Bench of the Supreme Court in Lalji Haridas v. R. H. Bhatt and another, 60 I.T.R. 415, it was observed as follows :
'THE jurisdiction conferred on the High Court under article 226 is not intended to supersede the jurisdiction and authority of the Income-tax Officers to deal with the merits of all the contentions that the assesseds may raise before them, and so it would be entirely inappropriate to permit an assessed to move the High Court under article 226 and contend that a notice issued against him is barred by time. That is a matter which the income-tax authorities must consider on the merits in the light of the relevant evidence.'
This follows a similar decision of the Supreme Court in Lalji Haridas v. Income-tax Officer and another : 43ITR387(SC) , also by the Constitution Bench.
(4) On the other hand, a. rigid adherence to the above rule would mean that an assessed who complains of action against him by the Income-tax authorities without jurisdiction would be restricted to pursue only the statutory remedies such as an appeal to the App
'WHERE such action of an executive authority acting without jurisdiction subjects or is likely to subject a person to lengthy proceedings and unnecessary harrassment, the High Courts, it is well settled, will issue appropriate orders or directions to prevent such consequences........ The existence of alternative remedy is not however always a sufficient reason for refusing a party quick relief by a writ or order prohibiting an authority acting without jurisdiction from continuing such action.......... When the Constitution confers on the High Courts the power to give relief it becomes the duty of the courts to give such relief in fit cases and the courts would be failing to perform their duty if relief is refused without adequate reasons.'
(5) A general tendency to extend the scope of judicial review of administrative action to meet the interests of justice, particularly in hard cases, as seen in the decision of the House of Lords in Anisminic Ltd. v. Foreign Compensation Tribunal, (1969) 2 A.C. 147, which has received approval from subsequent decisions of the Supreme Court, has persuaded the High Courts to entertain writ petitions in fit cases even though statutory remedies exist and have not been availed of by the petitioners filing the writ petitions under Article 226. In Gee Vec Enterprise v. Additional Commissioner of Income-tax, (1975) 1 Delhi 53, after an exhaustive review of the case law on the question of the entertainability of writ petitions under Article 226 of the Constitution, a Division Bench of this court listed various grounds on which writ petition under Article 226 were presented by the petitioners without availing those of the statutory remedies. In an appropriate case any of these grounds may constitute an exception to the rule that statutory remedies must be first availed of by the petitioner before he Can come to this court under Article 226. The Division Bench then concluded at page 67 as follows :
'THE above enumeration of the circumstances which may constitute an exception to the rule is not obviously exhaustive. It is not possible to envisage a priori all the categories of circumstances which may constitute such exceptions. It is entirely in the discretion of this court to determine in the circumstances and on the facts of each particular case whether there is sufficient reason to entertain a particular writ petition on the ground that its circumstances constitute valid exception to the rule.'
What are the circumstances which can be said to constitute an exception to the general rule that the petitioner must first avail himself of the remedies available to it or him under the Act?
(6) The first ground is that a mere issue of notice under section 148(1) is not appealable or revisable under the Income-tax Act at all. One answer to this ground is that it is only an order which can furnish the cause of action for a writ petition. But the petitioner contends that a provisional decision has been made by the Income-tax Officer when he has held that he has reason to believe that the income of the assessed has escaped assessment. The notice under section 148(1) is thus not a mere notice to show cause. The argument that the very purpose of the show cause notice is to enable the notice to urge all that he has to say against the notice is thus not applicable to a notice under section 148(1). Had it been a mere show cause notice, the assessed would not have been justified in coming to this High Court because the very purpose of a show cause notice is to invite objections against the proposed action.
(7) The second is the averment by the assessed on affidavit that no material exists on which the Income-tax Officer could have 'reason to believe' within the meaning of section 147 that the income of the assessed has escaped assessment. Such averment by the assessed cannot be based on his personal knowledge. For, under section 148(2) the Income-tax Officer has only to record his reasons on the file before issuing notice under section 148(1). But, as pointed out by the Supreme Court in S. Narayanappa & Others v. Commissioner of Income-tax. Bangalore, : 63ITR219(SC) , 'There is no requirement in any of the provisions of the Act or any section laying down as a condition for the initiation of the proceedings that the reasons which induced the Commissioner to accord sanction to proceed under section of the Income-tax Act, 1922 (corresponding to section 147 of the Act of 1961) must also be communicated to the assessed.' We understand this decision to mean that the reasons need not be communicated to the assessed when the notice under section 148(1) is issued. That is why the impugned notice merely refers to the escaped assessment within the meaning of section 147 without specifying under which particular part of section 147 the income has escaped assessment. The reason cannot thereforee be gathered from the notice.
(8) Can such a notice be challenged on the ground that it is without jurisdiction merely because the assessed avers in the writ petition that no material existed on which the Income-tax Officer could have 'reason to believe' that the income of the assessed had escaped assessment In our view the assessed cannot merely on the receipt of the notice invite this court to call upon the Income-tax Officer to produce the reasons recorded by him under section 148(2) before this court so that this court may determine whether any material existed on which the Income-tax Officer could have 'reason to believe' that the assessed's income had escaped assessment. As observed by the Supreme Court in Commissioner of Income-tax v. A. Raman & Company : 67ITR11(SC)
'THE High Court exercising jurisdiction under Art. 226 of the Constitution has power to set aside a notice issued under s. 147 of the Income-tax Act, 1961, if the condition precedent to the exercise of the jurisdiction does not exist. The Court may, in exercise of its powers, ascertain whether the Income-tax Officer had in his possession any information; the Court may also determine whether from that information the Income-tax Officer may have reason to believe that income chargeable to tax had escaped assessment. But the jurisdiction of the Court extends no further. Whether on the information in his possession he should commence a proceeding, for assessment or reassessment, must be decided by the Income-tax Officer and not by the High Court. The Income-tax Officer alone is entrusted with the power administer the Act : if he has information from which it may be said, prima facie that he had reason to believe that income chargeable to tax had escaped assessment, it is open to the High Court, exercising powers under Article 226 of the Constitution to set aside or vacate the notice for reassessment on a re-appraisal of the evidence. ..........But in a petition under Art. 226 of the Constitution' the taxpayer may challenge the validity of a notice under s. 147 of the Income-tax Act, 1961, on the ground that either branch of the condition precedent does not exist, but an investigation whether the inferences raised by the Income-tax Officer from the information are 'correct or proper' cannot be made. Counsel for the Commissioner is, thereforee, right in contending that the High Court entered upon the investigation of matters which were not within their competence.'
(9) In Kantamani Venkata Narayana & Sons v. First Additional Income-tax Officer, Rajahmundry, : 63ITR638(SC) , the same view was expressed by the Supreme Court in the following words :
'THE High Court in appeal after referring to the judgment in Calcutta Discount Company's case observed : '...without the enquiry being held by the concerned Income-tax Officer it is not possible, on the material on record, to decide whether or not the assessed omitted to or failed to disclose fully and truly all material facts necessary for his assessment for the respective year. The High Court has pointed out that no final decision about failure to disclose fully and truly all material facts bearing on the assessment of income and consequent escarpment of 'income from assessment and tax could be recorded in the proceedings before them. It certainly was not within the province of the High Court to finally determine that question. The High Court was only concerned to decide whether the conditions which invested the Income-tax Officer with power to re-open the assessment did exist, and there is nothing in the judgment of the High Court which indicates that they disagreed with the view of the Trial Court that the conditions did exist.'
(10) A distinction has, thereforee, to be drawn between the two distinct jurisdictions to be exercised by the Income-tax Officer under sections 147 and 148. Firstly, there is the initial jurisdiction to consider the material on which he may have 'reason to believe' that the income of the assessed has escaped assessment. This jurisdiction must be exercised by the Income-tax Officer alone. It cannot be exercised by the High Court. How then can a petitioner allege successfully under Article 226 of the Constitution that the material for the exercise of such jurisdiction by the Income-tax Officer did not exist and, there fore, the notice issued by him was without jurisdiction? The assessed invokes in support the well known principle that 'it is a general rule that no court of limited jurisdiction can give itself jurisdiction by a long decision on a point collateral to the merits of the case upon which the limit to its jurisdiction depends' (Bunbury v. Fuller, (1853) 9 Ex. 111. But as observed by Professor H. W. R. Wade, 'the real difficulty is to tell where the limit to the jurisdiction lies.' (Administrative Law, 1st Edition page 71). In a well known judgment, Lord Esher added the necessary correction; 'but there is another state of things which may exist. The legislature may in trust the Tribunal or body with a jurisdiction, which includes the jurisdiction to determine whether the preliminary state of facts exists as well as the jurisdiction, on finding that it does exist, to proceed further or do something more'. (Queen v. Commissioner for special purposes of the Income-tax (1888)21 Qbd 313.
(11) It has been generally believed that where the opinion or satisfaction or reason to believe is to be formed by the administrative authority, then it is the opinion, satisfaction or belief of such authority which determines the jurisdiction of the authority. Such a Tribunal, thereforee, falls into that class of Tribunals which according to Lord Esher have been entrusted by the legislature the jurisdiction to determine the jurisdictional conditions for the exercise of their own jurisdiction. Since section 147 of the Income-tax Act is such a provision the jurisdiction to take the provisional decision that there is 'reason to believe' has to be exclusively of the Income-tax Officer who has the exclusive jurisdiction to do so. In spite of the intention of the legislature to give such exclusive jurisdiction to the Income-tax Officer, cases have arisen and will arise when such provisional decisions were mace by the particular Income-tax Officer without the existence of material on which such opinion could be formed. This is why the compromise suggested in the Calcutta Discount Company's case had to be arrived at by the Supreme Court between the amplitude of Article 226, on the one hand, and the particular application of section 147, on the other. The guidelines for the understanding of this compromise are these :
(1)If an assesses would be put to lengthy proceedings and unnecessary harassment, the High Court would intervene; (2) This would be so particularly if the remedy to be given by the High Court would be a quick remedy as contrasted to the dilatoriness of the statutory remedy ; (3) While normally the statutory remedy would have to be availed of this is not always a sufficient reason to refuse a quick relief to the parties in flagrant cases.
(12) Following these guidelines we have to work out the procedure which should be followed by the assessed who wishes to challenge the validity of notices issued under section 148(1). Since the exclusive jurisdiction to form an opinion initially on the ground recorded under section 148(2) is the Income-tax Officer under section 147, the issue of notice under section 148(1) by itself cannot be challenged by the assessed. The reason is that at that stage the alleged lack of jurisdiction of the Income-tax Officer cannot be apparent specially because reasons recorded under section 148(2) are not to be communicated to the assessed at that stage.
(13) The notice under section 148(1) is equivalent to a notice under section 139(2) of the Act. Under section 139(1) a person whose total income exceeds the minimum amount which is not chargeable to income-tax has to furnish a return of his income. If the Income-tax Officer is of the opinion that the income of a person is assessable under the Act then the said Income-tax Officer issues him a notice there under. Just as a person who believes that his income is not assessable to tax under the Income-tax Act cannot merely ignore the notice under section 139(2), a person who believes that his income has not escaped assessment cannot simply ignore the notice under section 148(1). Just as the reply to the notice under section 139(2) has to be by a declaration of the income by way of a return in the prescribed form showing that it is not assessable to tax the reply to the notice under section 148(1) has to be by way of return declaring the income to show that it has not escaped assessment. It would be rare if a person who has never been assessed to tax before and who receives a notice under section 139(2) were to come to this court under Article 226 of the Constitution to prevent the Income-tax Officer from asking him to file a return. The reason is that such a writ petition would be rejected on the ground that whatever the petitioner has to say must be said before the Income-tax Officer and not before this court. In our view, to a large extent the same reasoning applies to the petitioners before us. He must file a return in reply to the notice for the same reason.
(14) All that the petitioner can insist is that the reasons for the issue of the notice under section 148(1) must be disclosed by the Income-tax Officer to the assessed after the latter files the return and before the former makes the assessment. It is then only that the petitioner can contend that the said material could not form the basis of 'reason to believe' within the meaning of section 147. These reasons or materials can then be placed by the assessed before the court in a writ petition under Article 226 to invite the decision of the court whether such material can form the basis of exercise of the jurisdiction of having 'reason to believe' by the Income-tax Officer under section 147. It would not be proper for the assessed without filing the return to ask this court to call for the reasons recorded by the Income-tax Officer. If the Supreme Court has held that reasons need not be furnished with the notice, the decision of the Supreme Court would be stultified if this court were nevertheless to call for the reasons recorded by the Income-tax Officer for the benefit of the assessed without the latter submitting the return. This would be virtually compelling the Income-tax Officer to disclose his reasons along with the notice issued under section 148(1), though, according to the Supreme Court, this was not obligatory for the Income-tax Officer to do.
(15) We hold, thereforee, that after the receipt of the notice under section 148(1) the assessed must file a return of his income as per the requirements of section 139(2). The assessed then may call upon the Income-tax Officer to disclose the reasons recorded under section 148(2). The Income-tax Officer may do any of the following things thereafter:
(1)He may disclose the reasons; (2) He may unduly delay the disclosure of the reasons; and (3) He may refuse to disclose the reasons. If the reasons are disclosed and the assessed contends that they cannot form the basis of the 'reason to believe' under section 147 or if the Income-tax Officer unduly delays the disclosure of the reasons and proceeds to assets the income in the meanwhile or if he refuses to disclose the reasons altogether, then in any of these eventualities the assessed can solicit the decision of this court as to whether reasons existed for the 'reason to believe' under section 147 by way of a writ petition under Article 226.
(16) A caution must be sounded at this stage. The distinction between the functions of the Income-tax Officer under section 147 referred to above becomes now relevant. The court under Article 226 can simply judge whether the material for 'reason to believe' existed or not. It cannot go further. The subsequent jurisdiction to decide the sufficiency of the material and the merits thereof is not possessed by the Court but only by the Income-tax Officer. The sufficiency of the material and the reasons will be adjudicated upon only by the statutory authorities including the Income-tax Appellate Tribunal until a question of law can be referred to this court under section 256 of the Act. The line of demarcation between the existence of the material and the sufficiency thereof is often very thin and when the reasons recorded under section 148(2) or the material for the formation of
'REASON to believe' under section 147 are placed before the court in a writ petition under Article 226 the Court has to perform the very difficult task of judging the existence but not judging the sufficiency of the material. The distinction between the existence and the sufficiency is similar to the distinction between the existence of the facts on which the opinion is formed and the justifiability of the opinion so formed. In considering this distinction different strands are discoverable in the opinions of learned Judges which deserve a careful study in the following decisions -Barium Chemicals Limited and another v. Company Law Board and others, : 1SCR898 , Rohtas Industries Limited v. S. D. Agarwal and another, : 3SCR108 and Rampur Distillery and Chemical Company Limited v. Company Law Board : 2SCR177 .
(17) One general distinction may be made When the error or law is apparent on the face of the record this court under Article 226 of the Constitution is more likely to entertain the writ petition because following the guidelines laid down in Calcutta Discount Company, a quick remedy would be given to the petitioner by deciding the obvious question of law and avoiding lengthy proceedings and harassment of the petitioner before the statutory authorities. For instance, when on the face of the record the time limit for reassessment fixed by section 153(2) or for the issue of section 148 notice laid down by section 151 are apparently not complied with this court may like to entertain the writ petition to avoid unnecessary proceedings before the departmental authorities, since the court can decide a question of law on undisputed facts quickly. On the other hand, whenever the questions of facts are involved this court would be slow to consider them with a view to opine whether or not the facts amount to the existence of material for 'reason to believe' under section 147. The difficulty of knowing whether the court is stopping with consideration of the existence of the facts or in really going into the sufficiency of the facts is illustrated by the facts which were considered by the Supreme Court in Income-tax Officer v. Lakshmani Mewal Das, : 103ITR437(SC) . According to the Income-tax Officer he had reason to believe that the income of the assessed had escaped assessment because (i) a person who was shown to be one of the creditors of the assessed had subsequently confessed that he was doing only money lending, and (ii) that certain others who were mentioned in the list of creditors of the assessed were subsequently known as having been known money lenders. On the one hand it could be contended that these facts were much that the Income-tax Officer should have reason to believe that these creditors had not really given loans to the assessed and that he had reason to believe that the income of the assessed had escaped assessment. Here the expression 'reason to believe' would not mean that the Income-tax Officer had sufficient reason to decide the case, but only that the material existed for him to reason to believe and, thereforee, start the reassessment proceedings. On the other hand, it could be argued that the Income-tax Officer himself even at that stage must decide that the material was such which if believed, could sustain 'reason to believe'. If the confession did not relate to the alleged loan given to the assessed and if the persons who were known money lenders were not so during the period of the original assessment, then it could be argued that there was no prospect of it being proved on merits that the material was sufficient and by reasoning backwards it may be said that the material did not exist at all for the formation of the opinion.
(18) If is such borderline cases which make the task difficult. To avoid encroachment on the jurisdiction of the Income-tax authorities and to prevent the abuse of legal process under Article 226 in Lalji Haridas's case the Supreme Court held that writ petitions should not be entertained even if objections to limitation were being raised thereby to show that the Income-tax Officer had no jurisdiction to issue the notice of reassessment. For, it is necessary that the comity between the courts acting under article 226 of the Constitution and the departmental authorities acting under the statutory provisions should be maintained. In another context in the Delhi Development Authority v. Smt. Lila D. Bhagat and others, : AIR1975SC495 the Supreme Court in paragraph 10 of the judgment held that this court should not entertain a writ petition under Article 226 even when the alleged lack of jurisdiction could be decided by the interpretation of the Master Plan in the light of the facts and circumstances of the case. The court observed:
'IT was neither expedient nor possible for the High Court or this court to arrive at a definite conclusion one way or the other on the reading and interpretation of the Master Plan alone. It was primarily and essentially within the domain of the criminal court where the prosecutions were pending to arrive at its own conclusion on appreciation of the entire evidence placed before it.'
(19) The learned counsel for the petitioner argued that in some cases the Supreme Court had considered the question whether material existed for reason to believe under section 147 and. thereforee, this court should do so without considering the preliminary question whether the petitioner should be first asked to avail himself of the statutory remedies. It is unnecessary to cite these decisions of the Supreme Court because the preliminary question whether the writ petition should not be entertained unless statutory remedies are availed of was neither considered nor decided in them. The actual examination of the existence of the facts constituting jurisdiction by the Supreme Court does not mean that the Supreme Court impliedly decided that statutory remedies need not be availed of before a petitioner comes to this court under Article 226. The same remarks apply to even more numerous cases in which the various High Courts have entertained the writ petitions without considering this preliminary question. They also do not constitute precedent for the view that the preliminary question should not be considered at all.
(20) In passing it may be mentioned that the expression 'alternative remedy' is not appropriate for the statutory remedies provided by the Income-tax Act. In American Administrative Law this preliminary question is considered under the following headings, namely, 'Timing of Judicial Review', 'Exhaustion of Administrative Remedy', 'Ripeness for Review' and 'Primary Jurisdiction'. These expressions emphasise that primarily is for the statutory authorities to consider the existence of the material for the 'reason to believe' under section 147 and that they have the primary jurisdiction to do so. For the same reason the time for judicial review for this court does not arise unless the administrative remedies have been exhausted. It is only then that the case becomes ripe for judicial review. If the expression 'alternative remedy' is to mean a second alternative to the remedy under Article 226, then such a use of the expression is wrong. The statutory remedy is not the second but it is the first or primary, and the remedy under Article 226 is only the last resort and that too discretionary.
(21) Alternative Remedy: The reason why the writ petition was admitted and the petitioner was not referred to pursue the remedy of appeal after a fresh order of assessment was passed after reopening the previous assessment for the year 1973-74 under section 147 is that the reasons recorded by the Income-tax Officer under section 148 for reopening the assessment under section 147 show that he was following the general instructions issued by the Central Board of Direct Taxes apparently under section 119 of the Act. Since these directions are binding on the Income-tax officers and also on the Assistant Appellate Commissioners, it would have been futile for the assessed to file an appeal against the assessment order under the Act. The reasons recorded under section 148 for reopening the assessment under section 147 are as follows :
'COPY of letter No. CIT/D. l/B-2/(103)j77-78, dated 31st March, 1978 from Commissioner of Income Tax . Delhi-11, New Delhi, received today from the I.A.C. Range-IIA, New Delhi, personally. As directed the case is reopened under section 147(b) for the assessment year 1973-74 in view of the opinion of the Ministry of Law regarding taxation on interest credited to Suspense Account in the Bank's case, their accounts being maintained on mercantile basis. In view of the information received from the Commissioner of Income Tax . I have reason to believe that the income has been underassessed. Issue notice under section 148.'
The letter is not reproduced fully, but Shri B. N. Kirpal, learned counsel for the respondents, has filed a copy of the letter from the Central Board of Direct. Taxes to the Commissioners of Income-tax at Delhi. It is this instruction which has been communicated by them to the Income-tax Officers
'F.No. 201/7/78-IIAII Please Review Cases Of All Banks Where Interest Credited To Suspense Account Has Not Been Taxed And Get 1973-74 Assessments Reopened U/S 147(b) By 31-3-78. As Per Opinion Of Ministry Of Law Such Interest Is Taxable If Accounts Maintained On Mercantile BASIS. Please Inform All Other Commissioners At Your STATION.'
(22) 'INFORMATION' Within The Meaning Of S. 147(b): Information within the meaning of section 147(b) may be one of fact or one of law. In the case before us the facts before the action taken under section 147(b) continue to be the same thereafter. The change consists in the law. Hence the information is one of law. The petitioner has filed copies of the circulars issued by the Central Board of Direct Taxes in 1973 and in 1952 at annexures I and H, which conveyed the following view of the Board to the Income-tax Officers : Interest accruing to a money-lender on loans entered in a suspense account because of the extreme unlikelihood of their being recovered need not be included in the assessed's taxable income if the Income-tax Officer is satisfied that there is really little possibility of the loans being repaid and the assessed followed a systematic method of accounting in respect of such doubtful debtors subject to checks and counter checks. This direction of the Board was apparently necessary because the assesseds maintaining their accounts according to mercantile system would have been otherwise taxable in respect of interest accruing even of had debts inasmuch as their system of accounting was based on the accruing of the income as contrasted with the cash system which is based on the actual receipt of the income. Apparently, the maintaining of the suspense account for interest on had debts was not regarded as a separate method of maintaining accounts on the cash basis. For, had the Board been of the view that the assessed was following two different methods of accounting in maintaining two different parts of his accounts, the assessed's method of maintaining might have been regarded as a mixed or hybrid system and the interest might have been regarded as non-taxable due to suspense account being kept according to the cash system. This observation is not, however, to be regarded as a finding by us, inasmuch as we arc not concerned with the question whether or not the assessed was keeping its account according to the mercantile system or according to the hybrid system.
(23) On 1st April, 1975 in State Bank of Travancore, v. Commissioner of Income-tax, Kerala, (1977) 110 I.T.R. 33606, a Division Bench of the High Court held following its more fully reasoned previous decision that the assessed, which also was the banking company in that case who credited interest on had debts in its separate suspense account, could not escape the levy of income-tax on the said interest as the accounts were maintained by it on an accrual basis, that is to say according to the mercantile system. This view was correct in the opinion of the Law Ministry. The Central Board of Direct Taxes, thereforee, reversed the view of law which apparently formed the basis of its previous circulars directing the Income-tax Officers not to levy income-tax on interest shown as accruing in the suspense accounts of money-lenders on what they regarded as had debts. The view of the Board now was that if such money-lenders follow the mercantile system of accounting then even the interest credited to suspense account was chargeable to income-tax even though the reason for opening the suspense account was that the debts were regarded as bad debts by the money-lenders.
(24) The question is whether this direction by the Board conveyed to the Income-tax Officers by the respective Commissioners of Income-tax is information consequent to the receipt of which the Income-tax Officer can be said to have 'reason to believe' that income of the assessed had escaped assessment because the interest on had debts credited to suspense account in 1973-1974 had not been taxed. Shri G. C. Sharma for the writ petitioner could not dispute that in the year 1973-74 the return filed by the assessed itself showed that the accounts were kept by the assessed according to the mercantile system. The view expressed by the Kerala High Court and regarded as right by the Ministry of Law whose opinion was accepted by the Central Board of Direct Taxes is quite plain and easy to understand. The very basis of the mercantile system of accounting is that the income has to be taxed on the basis of the accrual and not on the basis of the receipts. It cannot be denied that income on had debts accrues. According to the mercantile system, thereforee, it has to be taxed. It is, of course, open to the assessed to show before the taxing authorities that the assessed was keeping its accounts by Following two systems, namely the mercantile system and also the cash system. But that is for the Income-tax Officer to consider and decide. The opinion expressed by the Kerala High Court and accepted as correct by the Ministry of Law is based on the mercantile system being followed by the assessed and the suspense accounts being opened for interest on bad debts but not resulting in the assesses following a hybrid system of accounting.
(25) Shri Sharma, however, urged the following contentions to show that no information within the meaning of section 147(b) of the Act was received by the Income-tax Officer.
(26) Firstly, he said that the Income-tax Officer was supposed to know the law prior to the receipt of the letter, dated 31st March, 1978 from the Commissioner of Income-tax, Delhi-11. Since the view of the law expressed by the Kerala High Court and the Ministry of Law was the same as the law which existed before the said letter. there was no change in the view of the law and hence there was no information in consequence of which the Income-tax Officer would have reason to believe that the income of the assessed had escaped assessment. We are unable to agree with this contention. The Income-tax Officer before the receipt of the letter of 31st March, 1978 was bound by the circulars issued by the Board directing that interest on had debts credited to suspense accounts was not to be charged to income-tax. The direction was binding on the Income-tax Officers and for them it constituted law in view of section 119 of the Income-tax Act. A definite change in the view of law occurred when the Board informed the Commissioners of Income-tax and they in turn informed the Income-tax Officers that henceforth such interest credited to suspense account is to be charged to income-tax, provided that the accounts were maintained by the assesses on mercantile basis.
(27) Secondly, it was argued that the Income-tax Officer merely accepted the direction of the Commissioner of Income-tax and did not apply his mind to the direction and hence the Income-tax Officer did not have the reason to believe that the income of the assessed had escaped assessment. If the direction of the Board conveyed through the Commissioners of Income-tax is binding on the Income-tax Officers under section 119 of the Act, the Income-tax Officers cannot be expected to independently apply their mind to the direction of the Board as to whether the direction is correct or not. The application of mind by them is rather to understand what exactly the direction is and whether it applies to the case of the assesseds before them. It cannot be disputed that the Income-tax Officer has understood the direction and has also applied it to the case of the assessed.
(28) Thirdly, it was said that the information was too vague and it could not be applied to the facts of the present case except mechanically by obeying the directive of the Board. Reliance was placed on the observation of Shah J. in Calcutta. Discount Company's case (supra) that the expression 'reason to believe' means the reasons for the formation of the belief and not the existence of a belief that reasons probably exist. While the information itself must account to reasons which could lead to the formation of the belief, it must be made clear that the information constitutes the Income-tax Officer's reason to believe. This is not to be confused with the reasons which operated in the mind of the authority which expressed the view which constitutive the information which led to the Income-tax Officer's reason to believe. When Shri Sharma argued that the information received by the Income-tax Officer did not contain the reasons for the opinion expressed by the Ministry of Law, he was, with respect, confusing the reasons which were responsible for the view of the Ministry of Law with the view of the Ministry of Law which constituted the reason to believe on the part of the Income-tax Officer.
(29) Our conclusion, thereforee, is that the information received by the Income-tax Officer must be such as to constitute a reason for the Income-tax Officer to believe that income of the assessed has escaped assessment. If this information is sufficient to constitute such a reason, it is immaterial whether the reasons which led to the expression of the opinion of the Ministry of Law which became the information of the Income-tax Officer were themselves communicated along with the information or not.
(30) Shri Sharma then argued that a mere internal change of information would not justify the reopening of an assessment. We agree with him that the change of opinion must be based on information received from an external source. The information in this case was received from an external source.
(31) It was finally argued by Shri Sharma that information regard ing the change of law must be from an authority whose opinion was binding on the Income-tax Officer. He said that if the opinion were of the Supreme Court or of the High Court having territorial jurisdiction over the Income-tax Officer, then it would be the information within the meaning of section 147(b). On the contrary, he argued that opinions expressed by other High Courts or by the Ministry of Law or by some other authorities which are not binding on the Income-tax Officer cannot be regarded as information under section 147(b). We need not go into this question because the law is again well settled that 'the decision of a higher authority under this Act may also constitute information', (Controller of state Duty v. Mir Osman Ali : 72ITR376(SC) and other decisions cited in Kanga and Palkhivala The Law and Practice of Income-tax, Vol. 1, 7th Edn. page 902, foot-note 4). If so, it cannot be disputed that the Board was the higher authority whose direction was binding on the Income-tax Officer under section 119 of the Act. This is sufficient to dispose of the question in the present case. But it will also be observed that even the Ministry of Law is a higher authority whose opinion is binding on the Board itself and, thereforee, on the Income-tax Officer also. As pointed by this court in Shri Vashist Bhargava v. Income-tax Officer, Salary Circle, 2nd (1975) 1 Delhi 634
'UNDER Article 74 of the Constitution the President exercises his functions on the aid and advice of the Council of Ministers. Under Article 77(3) the President has made rules for the more convenient transaction of the business of the Government of India and for the allocation among Ministers of the said business. Under the said rule the function of advising the Government on all questions of law is given to the Ministry of Law. In his executive capacity, an Income-tax Officer is a part of the Government. The Ministry of Law has, thereforee, the power and/or duty to give advice on questions of law for the guidance of the Income-tax department. The opinion of the Ministry of Law becomes the opinion of the Government in view of these rules of business. The Income-tax Officer has, thereforee, to pay due regard to the said opinion.'
Indeed, the Ministry of Law is not a mere external adviser to the Government of India. It is a part of the Government of India. Under the rules of business it is the exclusive function of the Ministry of Law. Such opinion amounts to a decision of the Government. If such decision is conveyed to the Board and to the Income-tax Officer, it is the decision of the Government which is binding on the subordinate authorities.
(32) It is a little puzzling to read on page 902 of Kanga and Palkhivala referred to above to somewhat contradictory observations. On the one hand, it is said that the decision of a higher authority under the Act is information to the Income-tax Officer under section 147(b). On the other hand, it is said that 'to hold that any assessment can be reopened on the opinion of the revenue audit of the Ministry of Law or the Central Board of Direct Taxes is virtually to empower the establishment at its pleasure to rob assessments of their finality or to introduce a dangerous element of uncertainty in the administration of this Act.' The reason for this apparent inconsistency is that for the latter observation reliance was placed on the decision in Kasturbhai Lalbhai v. Malhotra : 80ITR188(Guj) . This decision has, however, been reversed by the Supreme Court in R. K. Malhotra v. Kasturbhai Lalbhai. : 1975CriLJ1545 . The decision of the Supreme Court was not available to the learned commentators.
(33) For the above reasons, we are satisfied that the Income-tax Officer had reason to believe before he issued notice under section 148 of the Act to the assessed proposing that the assessed's income had escaped assessment.
(34) Limitation : The notice was issued on 31st March, 1978 in respect of the assessment for the year 1973-74. It was obviously served after 31st March, 1978. Shri Sharma argued that on a proper construction of section 149(1)(b) of the Act. the notice issued under section 148 has to be served and not only issued within four years from the end of the relevant assessment year. He relied on Commissioner of Wealth-tax U.P. v. Kundan Lal Behari Lal : 99ITR581(SC) for the proposition that the word 'issued' in section 149(1) means 'served'. The decision in that case was given under section 18(2A) of the Wealthier-tax Act. The observation that the word 'issued' in section 34(1) of the Income-tax Act, 1922 was interpreted by the courts to mean 'served' is to be understood in the light of the legislative history which has been explained by the Full Bench of the Punjab High Court speaking through O. Chinnappa Reddy J. in Jai Hanuman Trading Co. Pvt. Ltd. v. Commissioner of Income-tax, Patiala-II. . Briefly, because section 34(1) of the Income-tax Act, 1922 laid down the limitation for the notice being 'served', the word 'issued' used in section 4 of the Income-tax (Amendment) Act was construed to mean 'served'. But this did not mean that everywhere the word 'issued' would mean 'served'. As contrasted with section 34 (1) of the Income-tax Act, 1922, section 149 of the Income-tax Act, 1961 uses the word 'issued' in relation to limitation. In section 148 reference is made to notice which is to be served on the assessed, but this reference is not in relation to limitation. We have, thereforee, to conclude that notice to be issued under section 149 within the prescribed period of limitation of four years has to be served under section 148 after such issue. No limitation is prescribed for the service of the notice. There is no illegality, thereforee, in the issue of the notice on the 31st March, 1978 and its service beyond that date.
(35) Policy Considerations In paragraph 22 of the writ petition the following pleas were made:
'IF the whole position of commercial banks and financial institutions regarding assessability of large amounts taken by them to 'interest suspense account' from year to year is violently disturbed, as is sought to be done retrospectively from about 20 years, there will be complete chaos amongst banks and financial institutions and consequently in the trade, industry, and agriculture as a whole, adversely affecting entire national economy. As Judges we are concerned only with the questions of law and not with questions of policy. It is for the Government, to one hand, and the banks on the other hand. to settle the policy as to whether the interest credited to suspense account should be. liable to payment of income-tax. Apparently, the policy of the Government from 1924 to 1978 was that it should not be subjected to tax. The policy seems to have now changed with the effect that law has to prevail. But this does not preclude a reversion to the former policy if the banks are able to persuade the Government to do so.
(36) For the above reasons, the writ petition is dismissed with no order as to costs.