1. The petitioner-company challenges in this petition under art. 226 of the Constitution of India, a notice issued by the respondent-ITO, under s. 147(b) of the I.T. Act, 1961, hereinafter referred to as 'the Act', seeking to reopen the assessment proceedings for the assessment year 1975-76 corresponding to the accounting year 1974-75.
2. A few facts leading to this petition are required to be stated at this juncture.
3. The petitioner is a public limited company, viz., the Anil Starch Products Ltd., at Ahmedabad. It is being assessed to income-tax under the Act. During the accounting year 1974-75, the petitioner-company made an actual payment of gratuity of Rs. 71,045 to its retiring employees in accordance with the provisions of the Gratuity Act, 1972, and the scheme formulated by it and claimed the same as a deductible expenditure from its income. The ITO passed his assessment order for the relevant assessment year on January 21, 1977. The said order is at annex. A to the petition.
4. Thereafter, it appears that the ITO addressed under s. 154 a notice dated January 20, 1978, to the petitioner-company stating that an apparent error had crept in the original assessment in so far as he had allowed the amount of Rs. 71,045 and he proposed to rectify the said error by withdrawing the said deduction. The petitioner-company gave a reply to the above notice objecting to the proposed rectification. It was pointed out by the petitioner-company that there was no error in the assessment which would justify the ITO to have recourse to the (said) process under the Act. The ITO also issued a notice under s. 148 dated December 13, 1977, which is at Ex. C to the petition, stating that he had reason to believe that the petitioner's income for the above year had escaped assessment under s. 147 and asking the petitioner to submit a return. The petitioner- company in order to avoid the legal consequences under s. 271(1)(a) of the Act for the late filing of a return, submitted the return by its letter dated December 22, 1977, requesting the ITO to intimate the reason for the notice. Thereafter, the ITO fixed a date for hearing the petitioner's objection to the reassessment proceedings and it is at that stage that the present petition is filed.
5. The contention of the petitioner-company is that the ITO had no jurisdiction to reopen the assessment proceedings under s. 147(b); that he seeks to reassess the proceedings on a change of opinion and for that purpose he is placing reliance on the audit objection on a point of law. The contention of the petitioner-company is that the ITO had no jurisdiction to reopen the assessment proceedings on the ground that on an earlier occasion he had wrongly allowed a deduction of the gratuity amount of Rs. 71,045 and that he had no information except the information of the audit dept. on the construction of s. 40A(7) of the Act and such an information could not authorise the issuance of the impugned notice under s. 147(b).
6. The ITO filed an affidavit-in-reply contesting the petition. In para. 5 of his affidavit-in-reply it has been pointed out by the respondent that he has issued the impugned notice on two grounds. In order to appreciate this stand of the respondent it is necessary to reproduce verbatim the relevant averments made by the respondent in para. 5 of the affidavit-in-reply where he states:
'5. I submit that the reopening of the assessment is in pursuance of information of audit on facts. The list of special audit party's audit objection is as under:
'The following fees paid in connection with the hearing before the M.R.T.P. Commission and Company Law Board are inadmissible: To Dr. Sanghavi Rs. 52,800To Shri Dadachanji Rs. 26,888-------Total Rs. 79,688-------
7. From para. 6-B of the director's report, it is seen that the assessee had made application for establishment of a new undertaking for manufacturing of 12,000 m. tons per annum of special starch products in collaboration with National Starch & Chemical Corporation, U.S.A., which was referred to the M.R.T.P. Commission. As the legal expenses relate to a proposed new undertaking, they were not admissible as revenue expenditure. The same is required to be disallowed. The tax effect works out to Rs. 46,019.'
8. The revenue audit also informed on facts that the payment of the cash amount of gratuity was not an allowable deduction. As per the provisions of s. 40A(7), the petitioner could not have been allowed the benefit of both provision and cash payment and thus the deduction of the gratuity of Rs. 71,045, which was actually paid during the accounting period in question, requires to be withdrawn. The action taken is perfectly valid, legal and binding to the petitioner. The decision of the Supreme Court in the case of Indian and Eastern Newspaper Society : 119ITR996(SC) , is no bar to the proceedings being initiated in the instant case.'
9. Thus, it is obvious that the ITO has sought reliance on the so-called information which he received from the audit objection pertaining to two items: (1) about fees paid in connection with appearance before the M.R.T.P. Commission, and (2) about the deduction of a gratuity of Rs. 71,045 actually paid to the employees of the petitioner-company during the relevant assessment year as per the provisions of s. 40A(7). So far as the question regarding the deduction of gratuity amount of Rs. 71,045 as allowable under section s. 40A(7) of the Act is concerned, it is clear that the ITO had, on the previous occasion, having considered the relevant provisions, granted the said deduction. But on receipt of the audit objection in retrospect he found that this earlier view on the said section was not correct. That certainly cannot be called information within the meaning of s. 147(b) of the Act which can entitle him to invoke his jurisdiction under the said provision for reopening the assessment for the relevant assessment year. In fact, the question which is posed for our consideration is fully covered by our judgment in Special Civil Appl. No. 3640 of 1979, decided by us today (since reported as Atul Products Ltd. v. ITO : 125ITR452(Guj) ). It has been held in the aforesaid decision by Divan C.J., speaking for the Division Bench, that the ITO had no jurisdiction to reopen an assessment proceeding under s. 147(b) of the Act, relying on the so-called information received by him from the audit dept. to the effect that the ITO's prior interpretation of s. 40A(7), when he allowed the deduction of gratuity amount paid by the assessee to its retiring employees during the relevant year as deductible expenditure from the assessee's income, was not justified. It has been held further that such an audit objection cannot be termed as 'information' within the meaning of s. 147(b) of the Act so as to clothe the ITO with the requisite jurisdiction to reopen the assessment. This court arrived at the aforesaid conclusion by placing reliance on the Supreme Court judgment in Indian and Eastern Newspaper Society v. CIT : 119ITR996(SC) . In the present case, it is obvious that the respondent-ITO sought to reopen the proceedings for the relevant year under s. 147(b) on an identical and similar so-called information supplied to him by the audit party on the interpretation of s. 40A(7) and he felt that the income had escaped assessment. Such a type of changed opinion cannot give him any jurisdiction to take recourse to s. 40A(7) of the Act, inasmuch as the audit objection pointed out to him that his interpretation of s. 40A(7) on the previous occasion was not correct, which can never amount to any information within the meaning of s. 147(b) of the Act so as to entitle the ITO to reopen the assessment proceedings de novo. It is, therefore, clear that the second ground which has been put forward by the ITO in his affidavit-in-reply, namely, that the correct interpretation of s. 40A(7) was pointed out to him by the audit objection is obviously untenable and is quashed and the impugned notice so far as that ground is concerned would be clearly without jurisdiction, as being devoid of any effective condition precedent to back the same.
10. That takes us to the consideration of the first ground which has been put forward by the ITO in para. 5. Mr. Desai, learned Govt. pleader, appearing for the respondent, has placed before us the relevant audit objection. So far as the first ground made out by the ITO in his affidavit-in-reply regarding the legal fees is concerned, the extract of the audit note has already been seen above. A mere look at the aforesaid audit note shows that according to the audit dept. the ITO was not justified in granting legal expenses pertaining to the items mentioned therein. The legal expenses are in connection with the appearance before the M.R.T.P. Commission and the Company Law Board. In the view of the audit, as the expenses were not incurred for a business already in existence, the income of which was being computed and taxed, the same should not have been allowed as a deduction from such income. This is certainly an opinion of the audit dept. on a question of law. It is obvious that the audit dept. has not pointed out any binding judgment of a High Court or the Supreme Court on this aspect nor has it pointed out any statutory provision enacted by the Legislature which may have been missed by the ITO on the earlier occasion. The fact remains that at the time of original assessment all the relevant facts including the directors' report, which was part and parcel of the balance-sheet, was duly submitted to the ITO by the petitioner-company at the time of the assessment proceedings. Having considered all the materials at the time of the original assessment and having considered all the pros and cons the ITO took the view that out of the legal expenses only Rs. 110 were not allowable as mentioned in para. 14 of the assessment order at annex. A to the petition. Therefore, it necessarily follows that the rest of the legal expenses were granted by the ITO. If it is found by the audit dept. in retrospect that the ITO was not justified in granting legal expenses incurred by the assessee-company, it would be at the highest an opinion of the audit dept. on a question of law and it could never be binding on the ITO and it can never amount to an information within the meaning of s. 147(b) of the Act. This point has been squarely covered by the decision of the Supreme Court in the case of Indian and Eastern Newspaper Society v. CIT : 119ITR996(SC) , wherein it has been in terms laid down thus (headnote):
'The opinion of the internal audit party of the income-tax dept. on a point of law cannot be regarded as 'information' within the meaning of s. 147(b) of the I.T. Act, 1961, for the purpose of reopening an assessment. But although an audit party does not possess the power to pronounce on the law, it nevertheless may draw the attention of the ITO to it. Law is one thing, and its communication another. If the distinction between the source of the law and the communication of the law is carefully maintained, the confusion which often results in applying 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. 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.'
11. It has been further held in the aforesaid decision (headnote):
'That the opinion of the audit party on a point of law could not be regarded as 'information' enabling the ITO to initiate reassessment proceedings under s. 147(b). The ITO had, when he made the original assessment, considered the provisions of ss. 9 and 10 of the Indian I.T. Act, 1922. 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.'
12. Now, on the facts of the present case, the situation is almost identical. It is contended on behalf of the respondent that the audit department pointed out to the ITO that originally when he granted these legal expenses, the directors' report may not have been seen by the ITO. It is difficult to appreciate this contention. As stated earlier, the director report, as part and parcel of the balance-sheet, was duly supplied to the ITO. It is not as if some new material or some new fact was pointed out by the audit dept. subsequent to the decision of the ITO. All relevant facts were already present before him at the time of the original assessment. The only thing that has happened is that, according to the audit dept. the earlier view of the ITO to the effect that these legal expenses can be allowed was not correct. Thus, there appears a change of opinion. It is the audit's own interpretation of the provisions of law and it is not having any binding force on the ITO. Consequently it can never amount to 'information' on a point of law within the meaning of s. 147(b) of the Act as laid down in the latest decision of the Supreme Court mentioned above. Mr. Desai, however, drew our attention to the discussion on the aforesaid judgment of the Supreme Court about the earlier decision of the Delhi High Court in the case of Vashist Bhargava v. ITO : 99ITR148(Delhi) . While referring to that case the Supreme Court has observed in the case of Indian and Eastern Newspaper Society's case : 119ITR996(SC) as under (p. 1006):
'As regards Vashist Bhargava v. ITO : 99ITR148(Delhi) , the 'information' consisted in a note of the revenue audit and the Ministry of Law that the payment of interest by the assessee was in fact made to his own account in the provident fund and, therefore, in law, the money paid did not vest in the Government and, consequently, the original assessment was erroneous in so far as it allowed the deduction of the interest as expenditure made by the assessee. The Delhi High Court upheld the reassessment on the finding that the note of the revenue audit and the Ministry of Law had to be taken into account by the ITO because in his executive capacity he had to be guided by the advice rendered by the Ministry of Law and he had to pay due regard to the note of the revenue audit because the officers of the audit department were experts empowered to examine and check upon the work of the Income-tax Officers. It seems to us that the considerations on which the Delhi High Court rested its judgment are not correct. But the decision of the case can be supported on the ground that the basic information warranting the reopening of the assessment was the fact that the payment of interest was made to the provident fund account of the assessee himself. That the money so paid did not vest in the Government was a conclusion which followed automatically upon that fact, and no controversy in law could possibly arise on that point.'
13. Placing heavy reliance on the aforesaid observations of the Supreme Court in Indian and Eastern Newspaper Society's case : 119ITR996(SC) , Mr. Desai submitted that the Supreme Court had in terms upheld the decision of the Delhi High Court, though based on a different reasoning by holding that the reassessment proceedings were justified in that case, as the basic information was conveyed to the ITO subsequently, but this fact was already in existence even at the stage of initial proceedings. In order to appreciate the aforesaid contention it would be necessary to have a look at the relevant facts which are found in the judgment of the Delhi High Court in the case of Vashist Bhargava v. ITO : 99ITR148(Delhi) . A mere look at the said judgment makes it clear that in that case before the Delhi High Court, the petitioner who belonged to the Indian Civil Service cadre took a loan of Rs. 65,000 from his provident fund as a non-refundable advance in 1958-59 to buy and reconstruct a house. He sold the house in 1967 for Rs. 1,25,000 without obtaining the permission of the Government and as a result the loan became payable together with interest of Rs. 27,932 by him to the fund under the rules of the Indian Civil Service Provident Fund Rules, and he paid the amount accordingly. In calculating the capital gain arising from the sale of the house, the petitioner deducted the interest of Rs. 27,932, expenditure incurred wholly and exclusively in connection with the transfer of the house, representing that the interest was compulsorily payable to the Government under the terms of the advance, and the original assessment was made on that representation. Subsequently, the ITO had information that the interest was in fact credited to the petitioner's own account in the provident fund and the true and correct interpretation was brought to the notice of the officer by the revenue audit authorities as well as by the Ministry of Law that the petitioner was in law not entitled to the deduction of the interest paid. The ITO issued a notice under s. 147(b) of the Act to reopen the assessment. The petitioner in that case asked the ITO as to what subsequent information was received on the basis of which he proposed to make reassessment of his income. The ITO replied that the petitioner had claimed that this amount of interest was expenditure laid out wholly and exclusively in connection with the transfer of the house because under the terms of advance, interest was compulsorily payable on the sale of the house. Subsequently, after May 27, 1969, the date of assessment, the ITO got information that interest was not compulsorily payable. It became payable only because the house was sold in contravention of the provisions of the rule and the question before the Delhi High Court was whether these reassessment proceedings were justified. Though the reasoning of the Delhi High Court was based upon the binding nature of information supplied to the ITO by the Ministry of Law, it has not been approved by the Supreme Court in the aforesaid case of Indian and Eastern Newspaper Society : 119ITR996(SC) , wherein it has been further held that the decision of the Delhi High Court can be sustained on another ground that the information warranting reassessment proceedings was that the amount was made payable to the provident fund account. The aforesaid resume of the facts leading to the decision of the Delhi High Court in Vashist Bhargava v. ITO : 99ITR148(Delhi) shows that at the stage when the original assessment proceedings were held by the ITO he was not in possession of the relevant fact, and subsequently came to know about it after the audit objection that the payment of interest by the concerned assessee would particularly amount to payment to himself in view of the rules of the provident fund. This information was not within the contemplation of the ITO when he originally assessed the income on May 27, 1969. We have gone into those details regarding the facts of the case before the Delhi High Court only because Mr. Desai, for the respondent, submitted before us with emphasis that the Supreme Court in Indian and Eastern Newspaper Society's case : 119ITR996(SC) , had approved of the reassessment proceedings on the basis of the information which the ITO received through the audit note pertaining to an existing fact. It is not possible to accept the said submission of Mr. Desai. The facts which we have narrated above show on the contrary that in the case before the Delhi High Court in Vashist Bhargava v. ITO : 99ITR148(Delhi) , the ITO, on the prior occasion, at the time of original assessment, had not got information regarding the fact that the payment of interest was to go to the account of the assessee. He got that information subsequently. Consequently, it cannot be said that the ITO in that case was proceeding on a mere change of opinion. The facts of the case before the Delhi High Court were not the same as they exist in the present case. On the contrary, the facts in the present case are squarely covered by the ratio of the decision of the Supreme Court in the case of Indian and Eastern Newspaper Society Ltd. : 119ITR996(SC) . It is, therefore, clear that the ITO was possessed of all the relevant facts at the time of the original assessment. The directors' report was also before him. But it is only because the audit dept. tried to read the directors' report in a different way that they took a different view and only because the audit dept. had felt that the ITO was not justified in granting deduction of the legal fees that they wanted the ITO to reopen the proceedings. This type of difference of opinion between the ITO and the audit dept. on the question of law can never amount to information within the meaning of s. 147(b) of the Act. Hence it must be held that on the second ground also the ITO had no jurisdiction to reopen the previous proceedings, merely because in the light of the audit objection he felt in retrospect that he had erred earlier in granting deduction pertaining to legal fees of the advocates who had appeared before the Company Law Board and the M.R.T.P. Commission. Whether the concerned expenditure was revenue expenditure or capital expenditure would be a question of law and on that question of law if the ITO had taken one view only because the audit dept. does not agree with that view, there is no ground to enable the ITO to reopen the assessment proceedings under s. 147(b) on the supposition that there was any information received by him from the audit dept. In fact, such information would, at the highest, amount to information regarding opinion on the point of law formed by the audit dept. as it felt that the ITO's view on that legal aspect was not palatable to the audit dept. In any case, such situation can never result in information within the meaning of s. 147(b) so far as the ITO is concerned so as to permit him to issue the impugned notice seeking to reopen the reassessment proceedings. Consequently, even on the second ground which is mentioned in para. 5 of the affidavit-in-reply, the respondent had no jurisdiction to issue the impugned notice.
14. In the result, this petition will have to be allowed and the rule will be made absolute. The impugned notice at annex. 'D' dated December 13, 1977, is quashed and set aside. The respondent is permanently restrained from proceeding further pursuant to the aforesaid notice. Rule is, accordingly, made absolute with costs. A copy of the audit objection which has been furnished by Mr. Desai to be kept on record.