P.D. Desai, J.
1. The petitioner is a limited company incorporated under the Companies Act, 1956. The petitioner is assessed to income-tax since past many years. The respondent is the ITO who has jurisdiction over the petitioner for the purposes of assessment to income-tax.
2. For the assessment year 1966-67, the assessee was assessed to income-tax by the ITO, Ward-A, Circle II, Surat who then exercised jurisdiction over the petitioner for the purposes of such assessment. The assessment order for the relevant assessment year (Ex.A) was passed on February 28, 1971. It is the case of the petitioner that at the time of the assessment, it had produced the profit and loss account of the relevant previous year and particulars of all expenses incurred and allowances claimed were also given to the assessing authority. One of the items in respect of which allowance was claimed related to the sum of Rs. 29,770 and the claim was based on s. 80-I of the I.T. Act, 1961 (hereinafter referred to as 'the Act'), in view of the fact that the assessee was a priority industry. The assessee had also claimed deduction in the sum of Rs. 2,775, the said amount being expenses incurred by it in earlier years. The relief under s. 80-I was granted but the deduction on account of previous years' expenses was disallowed by the assessing authority.
3. On February 17, 1973, a notice under ss. 154 and 155, Ex. B, was issued to the petitioner intimating that the assessment for the assessment year 1966-67 was required to be amended as there was a mistake apparent from the record and the petitioner was asked to show cause. The mistake which, according to the notice, was required to be rectified, related to the grant of relief under s. 80-I. The assessee showed cause by its reply dated March 8, 1973. It is not necessary to go into the details of this aspect of the case inasmuch as the rectification proceedings were not prosecuted and they appear to have been dropped.
4. On March 31, 1975, the respondent issued a notice, Ex. D, stating that he had reasons to believe that the income of the petitioner in respect of which it was assessable to tax for the assessment year 1966-67 had escaped assessment and that he, therefore, proposed to reassess the income for the said assessment year. The notice stated that it was issued after obtaining the necessary satisfaction of the Commissioner of Income-tax, Gujarat-IV, Ahmedabad. The petitioner was called upon to file a return in the prescribed form for the said assessment year within thirty days of the date of the service of the notice. On April 8, 1975, the petitioner addressed a letter to the respondent acknowledging receipt of the notice aforesaid. In the course of the said reply, the petitioner pointed out that the notice was apparently issued under s. 148 read with s. 147(1)(a) and requested the respondent to acquaint it with the particulars said to have been omitted to be disclosed by the petitioner and the alleged income which was said to have consequently escaped assessment within the meaning of s. 147. It is not in dispute that no such information was furnished by the respondent to the petitioner.
5. The petitioner thereupon presented this petition on April 28, 1975, praying, inter alia, that the impugned notice, Ex. D, issued under s. 148 be quashed and set aside and that the respondent be restrained from taking further action against the petitioner by way of reassessment or otherwise in pursuance of the said notice. Rule was issued on this petition on July 7, 1975, and interim relief was granted restraining the respondent from proceeding further with the reassessment of the petitioner in pursuance of the impugned notice.
6. On behalf of the respondent, A. S. Manohar, ITO, Circle I, Additional A (Companies), Baroda, has filed an affidavit-in-reply. The case of the respondent as disclosed in the said affidavit is :
'(1) That, at the relevant time, the petitioner manufactured starboard of various types and that the said industry was not included in the list of 'priority industries' shown in Sch. VI to the I.T. Act and that, therefore, no allowance under s. 80-I could have been granted;
(2) that the profit and loss account contained an item of Rs. 4,05,000 being surplus in excise duty and since excess of excise duty was not relatable to the profits earned by the company, the company was not entitled to the relief under s. 80-I of the Act inasmuch as if the amount of excise duty was excluded the net result would be a loss;
(3) that the petitioner had not disclosed all material facts truly and fully at the time of original assessment proceeding inasmuch as,
(a) in the profit and loss account the company had debited an amount of Rs. 16,006 on account of expenditure incurred for construction of an earthen dam at river Kaveri, and since that expenditure was in the nature of capital expenditure, it was not allowable as revenue expenditure.
(b) on a close scrutiny of the accounts for the accounting year, it was found that an amount of Rs. 2,774 was debited to the profit and loss account as expenses of earlier years and this expenditure was not allowable during the accounting year in question,
(c) the company had paid a sum of Rs. 8,888 to the Government of Gujarat and it was not clear as to whether it was in the nature of donation or capital expenditure and this fact was not fully disclosed in the original assessment and as a result thereof it was wrongly allowed, and,
(d) the petitioner had claimed relief in the sum of Rs. 29,224 under s. 80-I claiming that it was running a priority industry whereas, in fact, the industry was not a priority industry since it manufactured only strawboards and not paper or pulp, it is the case of the respondent that proceedings for reassessment under s. 147(a) were initiated on the grounds aforesaid after obtaining the sanction of the Commissioner of Income-tax who was satisfied on the reasons recorded that it was a fit case for the issuance of the notice under s. 148'
7. Now, it is well settled that two conditions have to be satisfied before the ITO acquires jurisdiction to issue notice s. 148 in respect of an assessment beyond the period of four years but within a period of eight years from the end of the relevant year, namely, (i) that the ITO must have reason to believe that the income chargeable to tax has escaped assessment and, (ii) that he must have reason to believe that such income has escaped assessment by reason of the omission or failure on the part of the assessee, (a) to make a return under s. 139 for the assessment year to the ITO, or (b) to disclose fully and truly material facts necessary for the assessment for that year. Both these conditions must co-exist to confer jurisdiction on the ITO. It is also imperative for the ITO to record his reasons before initiating proceedings as required by s. 148(2). Another requirement is that before notice is issued after the expiry of four years from the end of the relevant assessment years, the Commissioner should be satisfied on the reasons recorded by the ITO that it is a fit case for the issue of such notice. In the present case, this last condition is satisfied and there is no dispute on that count. The only question which requires considerations is whether the first two conditions set out above are satisfied so that it could be said that the respondent validly acquired jurisdiction to initiate proceedings for reassessment.
8. In the present case, reassessment is not resorted to on the ground that there was omission or failure on the part of the assessee to make a return under s. 139 for the assessment year in question. The only ground on which the proceeding was initiated was that there was failure on the part of the petitioner to disclose fully and truly material facts necessary for its assessment for the year in question. Even on this aspect of the law the position is well settled. The duty which is cast upon the assessee is to make a true and full disclosure of the primary facts at the time of the original assessment. Once he has done that, his duty ends. It is for the ITO to draw correct inferences from those primary facts. It is for the ITO to draw correct inferences from those primary facts. It is no responsibility of the assessee to advise the ITO with regard to the inference which he should draw from the primary facts, if the ITO draws an inference which appears subsequently to be erroneous, mere change of opinion with regard to that inference would not justify initiation of action for reopening assessments. What facts are material and necessary for assessment will differ from case to case. But once those primary facts are disclosed, and all the facts which would help the ITO in coming to the correct conclusion are brought to his notice, the assessee's duty ends. From these primary facts and the further facts inferred from them, the taxing authority has to draw has to draw the proper legal inferences and ascertain on a correct interpretation of the taxing enactment the proper tax leviable [See Parashuram Pottery Works Co. Ltd. v. ITO : 106ITR1(SC) ].
9. One more thing also requires to be noted. There is necessarily an element of error in cases of income escaping assessment mentioned in s. 147. However, for the applicability of s. 147, what is necessary to be shown is that the escapement of income from assessment had resulted by reason of the omission or failure on the part of the assessee to make a return under s. 139 or on account of his failure to disclose truly and fully all material facts necessary for his assessment. Unless this condition is satisfied, the escapement of income cannot give cause for reassessment. The ITO ordering reassessment does not sit as a court of appeal over the ITO making the original assessment nor is it open to the ITO ordering reassessment to substitute his own opinion.
10. Bearing in mind this settled legal position, let us proceed to consider the question whether in this case there was material on the basis of which the respondent could have entertained a reasonable belief that there was escapement of income from assessment on account of failure on the part of the petitioner to disclose fully and truly material facts necessary for its assessment for the year in question. We have summarised above the grounds on which, according to the respondent, proceedings for reassessment were proposed to be initiated. The question posed above must be answered by examining those grounds.
11. The main ground appears to be that the petitioner-company manufactured strawboards of various types and that as such it was not running a priority industry as shown in Sch. VI of the Act. For that reasons, according to the respondent, the petitioner was not entitled to the relief under s. 80-I which was allowed to it by the ITO in the course of the original assessment. Now, the fact that the petitioner's manufacturing activity consisted of production of strawboards of various types was very much before the ITO who completed the original assessment. This is apparent from the opening words of the assessment order made in the course of the original proceedings, a copy of which is produced at Ex. A. The primary facts having been thus placed before the ITO, it was for him to draw the correct inference and arrive at the right decision as to whether the petitioner qualified for the priority industry allowance under s. 80-I. It could not, therefore, be said that there was omission on the part of the petitioner to disclose fully and truly all material facts which resulted in the escapement of income. All that seems to have happened is that the respondent has, upon review of the material on record, arrived at a different conclusion on this aspect of the case. This is, therefore, merely a case of change of opinion and it would not give jurisdiction to the respondent to reopen the assessment.
12. The next ground which appears to have weighed with the respondent is that the profit and loss account contained an item of Rs. 4,05,000 which amount was refunded to the petitioner an account of excess recovery of excise duty and was added to the business income of the company, which, according to the respondent, was not permissible. If the said amount was excluded, the result would be loss for the year in question with the further consequence that no relief under s. 80-I could have been claimed and allowed, in terms, the respondent has stated in the affidavit-in-reply that under those circumstances the relief was 'wrongly allowed' and that 'the same was liable to be withdrawn'. On this aspect also, there was no failure on the part of the petitioner to disclose fully and truly the material facts at the stage of the original assessment. The amount of excess duty refunded was reflected as such in the profit and loss account which was produced before the ITO. It was for the ITO to consider at that stage whether this amount could have been validly treated as business income during the course of the relevant year and whether it could have been taken into account for adjudging the claim for allowance under s. 80-I. Merely because the relief was 'wrongly allowed' in the opinion of the respondent, he would not get jurisdiction under s. 147(a) to reassess the escaped income.
13. As regards failure to disclose material facts fully and truly at the time of the original assessment proceedings, the respondent has specifically relied upon four instances. Let us now consider that aspect of the case.
14. It is stated that in the accounting year in question, the petitioner had debited to its profits and loss account an amount of Rs. 16,006 being the expenditure incurred on the construction of an earthen dam for better supply of water for the manufacturing process. The respondent was of the view that the expenditure was it nature of capital expenditure since it resulted in the company getting an advantage of enduring nature and that it was, therefore, not allowable as revenue expenditure. Here again, we fail to see how there is failure on the part of the petitioner to disclose fully and truly all the primary facts necessary for the purpose of assessment. Once this item of expenditure found place in the profit and loss account, which was produced before the ITO, the duty of the petitioner ended. It was for the ITO then to decide whether the expenditure was allowable as capital expenditure or revenue expenditure. It was no part of the duty of the petitioner to advise or enlighten the ITO on that point, whether the decision of the ITO on this point at the stage of original assessment was right or wrong is not relevant. Even assuming that the decision was erroneous, mere change of opinion would not justify the conclusion that there was omission on the part of the petitioner to disclose truly and fully material facts.
15. The next item on which reliance has been placed is the sum of Rs. 2,774 which was debited to the profit and loss account as expenses incurred in the course of the years which preceded the relevant previous year. The respondent appears to have carried an impression that this expenditure was allowed and he appears to have entertained a belief that such expenditure could not have been allowed during the accounting year in question. So far as this item is concerned, apart from the fact that this again discloses a mere change of opinion, there is a still greater infirmity disclosing total non-application of mind. From the assessment order made in the course of the original assessment proceedings, it appears that the item of expenditure in question was actually disallowed by the ITO. It would thus appear that one of the grounds on which the satisfaction of the respondent is based is totally non-existent.
16. The third item on which reliance has been placed relates to a sum of Rs. 8,888 paid by the assessee to the Government of Gujarat. It appears that in the course of the original assessment proceedings this item of expenditure was allowed as revenue expenditure. It appears to have been the view of the respondent that the nature of expenditure, that is to says whether it was in the nature of donation or capital expenditure, was not 'fully disclosed' in the original assessment and that as a result thereof it was 'wrongly allowed'. Now, here again there is no dispute that this item of expenditure was disclosed by the petitioner during the course of the original assessment and that it was claimed and allowed as business expenditure. All the primary facts were, therefore, before the ITO who completed the original assessment. It was for him to have made further or detailed inquired, if any, before allowing the item of expenditure as revenue expenditure. Merely because the respondent thinks that the item of expenditure was 'wrongly allowed', he cannot assume jurisdiction to reassess the petitioner. The last item upon which reliance has been placed is the item relating to allowance under s. 80-I by treating the petitioner's manufacturing activity as falling within the specification of 'priority industry'. This aspect of the case has been discussed earlier and nothing more needs to be said in regard thereto save and except that even in this regard there was no omission or failure on the part of the petitioner to disclose fully and truly all the material facts.
17. It would appear from the foregoing discussion that there was no material before the respondent on the basis of which he could have reasonably come to the conclusion that there was omission or failure on the part of the petitioner to disclose fully and truly all material facts in the course of the original assessment. This is a case in which all the primary facts were disclosed by the petitioner in the course of its original assessment proceedings. On the basis of those facts, the ITO who completed those proceedings arrived at certain decisions. The respondent appears to have initiated reassessment proceedings principally because he thinks that certain items of expenditure were 'wrongly allowed'. This, therefore, is a case in which reassessment has been undertaken merely on a change of opinion. Besides, the affidavit-in-reply filed by the respondent discloses complete non-application of mind in relation to an item upon which he has relied. The respondent, therefore, does not appear to have carefully looked into the record of the original assessment proceedings before he satisfied himself that there was escapement of income on account of failure on the part of the petitioner to fully and truly disclose material facts during the course of the original assessment proceedings. Under these circumstances, in our opinion, no conclusion is possible other than that the reassessment proceedings have been initiated without the very conditions precedent for the exercise of power having been in existence.
18. In the result, the writ petition succeeds and is allowed. The impugned notice, Ex. D, issued by the respondent is quashed and set aside and the respondent is restrained from initiating proceedings for reassessment against the petitioner in pursuance of the said notice. Rule made absolute accordingly. The respondent shall pay the cost of the petition to the petitioner.