P.D. Desai, J.
1. The assessee is a registered partnership firm. The concerned assessment years are 1966-67, 1968-69 and 1969-70, the corresponding previous years being Samvat years 2021, 2022, 2023 and 2024, respectively. The proceedings for the assessee's assessment to income-tax for the aforresiad years were reopened by the ITO under s. 147(b) of the I. T. Act, 1961 (hereinafter referred to as 'the Act'), and the question which arises for consideration is whether the reassessments made pursuant to such reopening are valid.
2. It appears that in the course of the original assessments, the ITO had allowed, as a permissible deduction under s. 40(b), certain amounts which were paid to three partners of the assessee-firm as and by way of interest. Those three partner were representatives of their respective HUFs, in the partnership firm. The claim for deduction of the interest credited to the respective joint family accounts was disallowed but interest credited to the respective joint family accounts was disallowed but interest credited to the individual accounts of the three partners was allowed as a permissible deduction in the course of the original assessments. The ITO then came across the decision of the Income-tax Appellate Tribunal Bombay Beach, in the case of another assessee wherein it was held that so long as interest was paid to a partner, whatever may be the capacity in which he receives the payment, whether as a partner representing the HUF or in his personal capacity, the claim for deduction would be inadmissible under s. 40(b). The ITO, in the light of the aforesaid exposition of law, was of the view that the interest credited to the individual accounts of the three partners could not have been allowed as a permissible deduction and he, therefore, issued a notice under s. 148 in respect of each year of assessment and called upon the assessee to show cause why the assessments should not be reopened with a view to adding back the amount of interest which was wrongly allowed as deduction. Ultimately, the assessments were reopened under s. 147(b) and the income of each assessment year was reassessed by adding back the amount of interest which was allowed as deduction in the course of the original assessment proceeding.
3. The assessee, felling aggrieved by the order of the ITO, carried the matters in appeal to the AAC. Two contentions were advanced at the hearing of the appeal : first, that no the facts and in the circumstances of the case, the ITO had no power, authority and jurisdiction to reopen the assessments under s. 147(b), since no 'information' could be said to have come into the possession of the ITO after completion of the original assessments and, secondly, that on a true and proper construction of s. 40(b), the additions made by the ITO were not justified. The AAC rejected both the said contentions and dismissed the appeals.
4. The assessee carried the matters in further appeal before the Income-tax Appellate Tribunal. At the hearing of the appeals before the Tribunal, it was stated on behalf of the assessee that the orders of reassessment were not proposed to be challenged on merits. The only submission urged for the consideration of the Tribunal was that the assessment proceedings could not have been reopened under s. 147(b) of the Act because there was no 'information' in the possession of the ITO on the basis of which he could have had reasons to believe that income chargeable to tax had escaped assessment for the concerned assessment years. This submission was substantiated on the ground that in the course of the original assessment proceedings, the provision of s. 40(b) were considered and applied and payment of interest to partners in their individual capacity was allowed as a permissible deduction after taking into account the relevant law and facts and that save and except the decision of the Income-tax Appellate Tribunal, Bombay Bench, given in the case of another assessee, there was no other material before the ITO for justifying the reassessments and that the said decision would not constitute 'information' from an external source within the meaning of s. 147(b). The Tribunal rejected the aforesaid contention holding : (i) that it was not in dispute that the decision of the Income-tax Appellate Tribunal, Bombay Bench, had come into the possession of the ITO after the completion of the original assessments; (ii) that it was indisputable that there was escapement of income in the original assessments inasmuch as interest paid to the partners in their individual accounts was not disallowed by the ITO, although, having regard to the true interpretation of s. 40(b), the deduction was not permissible; (iii) that the 'information : as to the correct state of law embodied in s. 40(b) came into the possession of the ITO from an external source and it was on the basis of the said information that the ITO had formed the belief as to the escapement of income; (iv) that the decision of the Income-tax Appellate Tribunal, Bombay Bench, on the question of law with regard to the true scope and effect of s. 40(b) was rendered by an authority competent and authorised to pronounce upon the law; (v) that, therefore, the ITO had acted on material which constituted 'information' within the meaning of s. 147(b) of the Act; and (vi) that this was, therefore, not a case of mere change of opinion by having a second look at the same facts. In this view of the matter, the appeals were dismissed.
5. At the instance of the assessee, the Tribunal has referred the following questions of law to this court for its opinion :
'(1) Whether, on the fats and in the circumstance of the case, the proceedings under section 147(b) of the Income-tax Act, 1961, were validly initiated and are tenable at la
(2) Whether the order of the Tribunal in the case of M/s. Nagindas Pranjivandas constituted 'information' for the purpose of section 147(b) of the Income-tax Act, 1961, or not and whether the test laid down by the High Court of Gujarat in the case of Kasturbhai Lalbhai : 80ITR188(Guj) was satisfied in the present case ?'
6. At the hearing of the reference, counsel for the assessee stated that he did not press for an answer to the second question set out above. The sole question which now survives for consideration, therefore, is : Whether, when the ITO reopened the assessments in question under s. 147(b) on the strength of the belief entertained by him with regard to the escapement of income of the basis of the decision of the Income-tax Appellate Tribunal, Bombay bench, on a point of law, he could be said to have acted in consequence of 'information' within the meaning of s. 147(b) of the Ac
7. This is a well-worn subject on which the decisions are galore. The difficulty in each case arises, however, in the application of the principles laid down in those decisions. The leading decision is in CIT v. A. Raman & Co. : 67ITR11(SC) which declared the law in the following words (pp. 15,16) :
'The expression 'information' in the context in which it occurs must, in our judgment, means instruction or knowledge derived from an external source concerning facts or particulars, or as to law relating to a matter bearing on the assessment.... That information, must, it is true, have come into the possession of the Income-tax Officer after the previous assessment, but even if the information be such that it could have been obtained during the previous assessment from and investigation of the materials on the 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 Income-tax Officer is not affected.'
8. In Kasturbhai Lalbhai v. R. K. Malhotra, ITO : 80ITR188(Guj) , this court explained the ratio of the decision in A. Raman & Co.'s case : 67ITR11(SC) and considered more particularly the question as to what would constitute 'information' derived from 'an external source'. Bhagwati C.J., as he then was, speaking for the court, observed (pp. 192, 193) :
'Now, if information is as to any fact, it may be received from any person who knows the fact. The external source in case of information as to fact cannot be limited to any particular person, body or authority, since such fact may be within the knowledge or in the possession of anyone and it may be received by the Income-tax Officer from any source. But so far as information as to the correct state of the law is concerned, the external source from which it may be received must necessarily be of a limited character,..... If the opinion of any person as to the state of the law were to be regarded as 'information' irrespective of the fact whether such person has competence or authority to pronounce upon the law, it would be easy to disguise mere change of opinion on the part of the Income-tax Officer under the cover of opinion of some other person.... obviously such instruction or knowledge must be from a person, body or authority competent and authorised to give it. It must have an element of authority behind it. It cannot be mere opinion of some one who has no authority to pronounce upon the law.... It must be, as already stated by us, a statement or expression of the correct state of the law by a person, body or authority competent and authorised to pronounce upon the law, so that it is invested with some definiteness and authority.'
9. The decision in Kasturbhai Lalbhai's case : 80ITR188(Guj) was reversed on appeal in R. K. Malhotra, ITO v. Kastrubhai Lalbhai : 1975CriLJ1545 in so far as it held that the audit dept, was not an authority competent and authorised to declare the correct state of the law or to pronounce upon it and that, therefore, the ITO could not have reopened the assessment in that case on the basis of an audit report expressing an opinion on the correct state of law. The parties appearing before us are agreed, however, that so far as the test laid down by this court on the question as to what would constitute 'information' derived from an external source on the correct state of law is concerned, it was not upset by the Supreme Court in appeal.
10. In between came the decision of the Supreme Court in Kalyanji Mavji & Co. v. CIT : 102ITR287(SC) . The language of s. 34 (1) (b) of the Indian I. T. Act, 1922, which is in pari materia with the language of s. 147(b) of the present Act, as also a cetena of decisions including the decision in A. Raman and Co.'s case : 67ITR11(SC) were considered. On a review of the statutory language and authorities, the following tests and principles were held relevant for the applicability of s. 34 (1) (b) (headnote) :
'(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;
(3) where the information is derived from an external source of any kind; such external source would include discovery of new and important matters or knowledge of fresh facts which were not present at the time of original assessment; and
(4) where the information may be obtained even from the record of the original assessment from an investigation of the materials on the record or the facts disclosed thereby or from other enquiry or research into facts or law.'
11. This court in CIT v. Ratanlal Lallubhai : 112ITR985(Guj) , upon an examination of all the decisions rendered up to the date of that decision, observed that the view which finally prevailed as to the legal position governing the applicability of s. 147(b) was as follows (p. 993) :
'(1) that 'information' means instructive knowledge concerning a matter bearing on the assessment received after the completion of the original assessment;
(2) that the 'information' may be as to the correct state of facts for of law relating to the taxable income;
(3) that such 'information' must be capable of arousing or suggesting ideas or notions not before existent in the mind of the Income-tax Officer;
(4) that it must be of such a nature as to acquaint, enlighten or instruct the mind of the Income-tax Officer for the first time concerning a matter pertaining to the taxable income so that he could form a reasonable belief that there has been an escapement of assessment of tax which requires to be set right by taking steps for reopening the assessment;
(5) that mere change of opinion on the part of opinion on the part of the Income-tax Officer would not be sufficient and it would not constitute 'information';
(6) that 'information' as to any fact bearing on the assessment may be received from any external source, that is to say, from any person who knows the fact or it may be obtained even from the record of the original assessment proceedings; and
(7) that 'information' not amounting to change of opinion as to the correct state of law may be received from research of law made by the Income-tax Officer or it may be received from an external source; if, however, 'information' as to the correct state of law is received from an external source, it must be derived from the judicial decision of a person body or authority competent and authorised to pronounce upon the law.'
12. The last word on the subject is now to be found in the latest decision in Indian and Eastern Newspaper Society v. CIT : 119ITR996(SC) . The question there fell for consideration in the context of facts similar to those in R. K. Malhotra v. Kasturbhai Lalbhai : 1975CriLJ1545 , but the Supreme Court was persuaded to take a fresh look at the question having regard to the dimensions of the controversy and the importance of the question. The following are the pertinent observations bearing on the true meaning and content of the word 'information' in the context under consideration (p. 1001) :
'In so far as the word 'information' means instruction or knowledge concerning facts or particulars, there is little difficulty. By its inherent nature, a fact has concrete existence. It influences the determination of an issue by the mere circumstance of its relevance. It requires no further authority to make it significant. Its quintessential value lies in its definitive vitality.
But when 'information' is regarded as meaning instruction or knowledge as to law the position is more complex... 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 statute, and may in particular cases extend to a definition of the status of a party or the legal relationship between parties, 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. Such declaration or exposition in itself bears the character of law. In every case, therefore, 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 the law cannot be regarded as law.....
In that view, therefore, when s. 147(b) of the I. T. Act is read as referring to 'information' as to law, what is contemplated is information as to the law created by a formal source. It is law, we must remember, which because it issues from a competent legislature or a competent judicial or quasi-judicial authority, influences the course of the assessment and decides any one or more of those matters which determine the assessee's tax liability.'
13. The Supreme Court then considered the question as to whether an audit report of the internal audit organisation of the I. T. Dept. or that of an audit party of the Comptroller and Auditor-General could pronounce on the law and whether such pronouncement, if any, would amount to 'information' within the meaning of s. 147(b) and came to the conclusion that since those authorities 'perform essentially administrative or executive functions and cannot be attributed the powers of judicial supervision over the quasi-judicial acts of income-tax authorities', such audit reports could not be treated as pronouncements upon a question of law, which could be allowed to influence the course of the assessment and decision of any one or more of the questions which determine the assessee's tax liability, and that, therefore, they cannot amount to information within the meaning of s. 147(b).
14. Having accordingly declared the law on the subject, the Supreme Court proceeded to observe (p. 1003) :
'But although an audit party does not possess the power to so pronounce on the law, it nevertheless may draw the attention of the ITO to it. Law is one thing, and its communication another. If the distinction between the source of the law and the 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.'
15. The Supreme Court next considered the question whether the report of the internal audit party in that case which had expressed the view that the receipts from the occupation of the conference hall and rooms did not attract s. 10 of the Act and that the assessment should have been made under s. 9, constituted 'information' and, if so, whether the whole or any part of it, and observed in that context as follows (p. 1004) :
'While ss. 9 and 10 can be described as law, the opinion of the audit party in regard to their application is not law. It is not a declaration by a body authorised to declare the law. That part alone of the note of an audit party which mentions the law which escaped the notice of the ITO constitutes 'information' within the meaning of s. 147(b); the part which embodies the opinion of the audit party in regard to the application or interpretation of the law cannot be taken into account by the ITO. In every case, the ITO must determine for himself what is the effect and consequence of the law mentioned in the audit note and whether in consequence of the law which has not come to his not come to his notice he can reasonably believe that income has escaped assessment. The basis of his belief must be the law of which he has now become aware. The opinion rendered by the audit party in regard to the law cannot, for the purpose of such belief, add to or colour the significance of such law. In short, the true evaluation of the-law in its bearing on the assessment must be made directly and solely by the ITO.'
16. The Supreme Court then pointed out that in the case before it the ITO had, when he made the original assessment, considered the provisions of ss. 9 and 10 and any different view taken by him afterwards on the application of those provisions would amount to a change of opinion on material already considered by him. Therefore, such reappraisal of the material considered by him during the original assessment and the consequential discovery of an error as a result whereof income had escaped assessment, would not empower him to reopen the assessment.
17. The Supreme Court, in this context, considered its earlier decision in Kalyanji Mavji & Co. : 102ITR287(SC) and the second test laid down in the said decision for the applicability of s. 34 (1) (b), namely, where in the original assessment the income liable to tax had escaped assessment due to 'oversight, inadvertence or a mistake' committed by the ITO. The following are the material observations on the point (p. 1004) :
'It appears to us, with respect, that the proposition is stated too widely and travels farther than the statue warrants in so far as it can be said by lay down that if, on reappraising the material considered by him during the original assessment, the ITO discovers that he has committed an error in consequence of which income has escaped assessment, it is open to him to reopen the assessment. In our opinion, an error discovered on a reconsideration of the same material (and no more) does not give him that power... Any observations in Kalyanji Mavji & Co. v. CIT : 102ITR287(SC) suggesting the contrary do not, we say with respect, lay down the correct law.'
18. On the basis of the considerations which prevailed with them on are consideration of the question, the Supreme Court observed (p. 1007) :
'...... We must, with great respect, hold that this court was in error in the conclusion reached by it in R. K. Malhotra, ITO v. Kastrubhai Lalbhai : 1975CriLJ1545 '.
19. This decision clarifies the legal position on the question as to when instruction or knowledge as to facts of the correct state of law constitute 'information' within the meaning of s. 147(b). Instruction or knowledge concerning any fact relating to the assessment, which has a concrete existence and definitive vitality and which is capable of influencing the determination of an issue arising in the course of an assessment but has escaped notice of the ITO, would constitute 'information', if it is derived from any external source after the completion of the assessment. However, instruction or knowledge as to law, in order to constitute 'information', must be relatable to statutory or judge-made law and traceable to a formal source competent to enact or declare law. A statement of law by a person or body not competent to create or define law, such as a competent legislative judicial or quasi-judicial authority, cannot be regarded as providing instruction or knowledge as to law. But attention as to the existence of such law may be drawn by any person or authority and thereupon only that part of the communication, which mentions the law and which has escaped the notice of the ITO at the time of the original assessment, would constitute 'information'. It would not be open to the ITO, however, to reopen a completed assessment upon reappraisal of the material considered by him during the original assessment. An error discovered on a reappraisal of the same material, without anything more, does not give him the power to reopen the assessment.
20. Now, in the instant case, the ITO, when he made the original assessment, considered the provisions of s. 40(b) and on his own understanding of the said statutory provision, disallowed the claim for deduction of interest credited to the respective joint family accounts but he allowed interest credited to the individual accounts of the three partners as a permissible deduction. After the completion of the assessments, his attention was drawn to the decision of the Income-tax Appellate Tribunal, Bombay Bench, in the case of another assessee where, on an interpretation of the relevant statutory provision, the view was taken that so long as any amount was paid as and by way of interest to a partner, whatever may be the capacity in which he receives the amount, the payment of the amount was inadmissible as deduction under s. 40(b). This view of the Income-tax Appellate Tribunal, Bombay Bench, which proceeded upon an interpretation of s. 40(b), had a direct bearing on the assessee's tax liability which had been determined in the course of the original assessments. It is not disputed on behalf of the assessee, and in our opinion rightly, that the Income-tax Appellate Tribunal is the competent quasi-juridical authority constituted under the Act to interpret and apply the law. It is also not in dispute that at the stage of the original assessments, this decision was not known to the ITO and that for the first time he became aware of this interpretation placed upon the relevant statutory provision by a competent quasi-judicial authority after the assessments were completed. In other words, as a result of the instruction or knowledge derived for the first time from that external competent source on a question of law, he entertained the belief that in consequence of an error, income had escaped assessment. In our opinion, under such circumstances, the conclusion is inevitable that the ITO had, in consequence of information in his possession, reason to believe that income chargeable to tax had escaped assessment in the assessment years in question and that, therefore, he was entitled to commence reassessment proceedings. This, in our opinion, is not a case where an error was discovered by him on reconsideration of the same material (and no more); the error was, in fact, discovered as a result of instruction or knowledge derived for the first time from the pronouncement of the Income-tax Appellate Tribunal, Bombay Bench, on the question of the true meaning and content of s. 40(b).
21. As a result of the foregoing discussion, we come to the conclusion that the proceedings under s. 147(b) of the Act were validly initiated in the instant case. Accordingly, We answer the first question referred to us in the affirmative. So far as the second question is concerned, as earlier stated, the assessee has not pressed the same and it is, therefore, not required to be answered. The assessee shall pay the costs of this reference to the Commissioner.