DIVAN C.J. - In this reference under s. 256(2) of the I.T. Act, 1961, made at the instance of the Revenue, the following question of law in referred to us by the Income-tax Appellate Tribunal:
'Whether the Tribunal was right in law in holding that the condition precedent for the issue of notice under section 148 read with section 147(b) of the Income-tax Act, 1961 was not fulfilled and the notice was without jurisdiction as there was no information within the meaning of section 147(b) of the Act, enabling the Income-tax officer to invoke such action reassessment ?'
The facts leading to this reference are as follows:
We are concerned in this reference with assessment year 1964-65, the relevant year of account being the calendar year 1963. The assessee before us is a limited company and it derives income from extraction of oil and manufacture of de-oiled cakes. It also seller extracted oil and de-oiled cakes. The company follows the mercantile system of account keeping. For the assessment year 1964-65, the assessment was originally completed by the ITO on March 25, 1968 and the total income which was assessed was Rs. 1,46,237. The return had been filed on September 24, 1965. During the relevant previous year of accounting the assessee had exported oil cakes of the aggregate value of Rs. 35,14,882. On the basis of the said exports the assessee-company claimed export profit rebate aggregating to Rs. 35,148 under the provision of s. 2(5)(a)(ii) of the Finance Act, 1964. The ITO, in the original assessment order, allowed the assessees claim to export profit rebate as regards the sum of Rs. 35,148. According to the statement of the case, the learned ITO did not take notice of the exception contained in s. 2(5)(c) of the Finance Act, 1964, by which item 28 of the Schedule in term, namely, 'vegetable oils and vanaspati' was excluded from the scope of s. 2(5)(a)(ii) of the Finance Act, 1964. This mistake seems to have been pointed out to the ITO by the internal auditor of the I.T. Dept. on September 27, 1968. When this was pointed out, the ITO replied back to the auditor stating that the item of de-oiled cakes on export of which the export profit rebate in question had been allowed buy him was not vegetable oils pr vanaspati and therefore, the exception contained in s. 2(5)(c)(i)(8) was not attracted to the facts of the case. However, the auditor called upon the ITO to rectify the mistake pointed out in the audit report. Copy of letters exchanged between the auditor and the ITO in this connections is a annexed as annex. B to the paper book in this case. In view of the insistence of the auditor, the ITO initiated reassessment proceeding by issuance of the requisite notice under s. 148 of the I.T. Act, 1961. This notice was served on the assessee on February 15, 1969, and a show cause notice why such a notice should not be issued was earlier issued on December 31, 1968. The decision to repel the assessment was taken on February 4, 1969. In response to this notice the assessee furnished a fresh return of income on August 6, 1969. In the reassessment proceedings the ITO, for regions which he had set out in the assessment order for the assessment year 1965-66 in this very assessees case, held that the assessee was not entitled to export profit rebate and this relief was consequently withdrawn and with a few other modification the total income was reassessed at Rs. 1,50,289. Against the order in reassessment proceedings the assessee appealed to the AAC and the AAC accepted the assessees contention that the reopening of assessment under s. 147 (b) of the Act was bad in law. He noted that at the time of the original assessment the ITO had duly considered the question of rebate under s. 2(5)(a)(ii) of the Finance Act, 1964. The AAC held that the ITO initiating the reassessment proceeding possessed no fresh information and that, in all probability, the ITO had merely reconsidered his predecessors decision in the matter of granting relief and found it to be incorrect. The AAC held that it was a case of change of opinion or rather a case of difference of opinion held by the successor ITO on the same set of facts. He, therefore, allowed the appeal and set aide the reassessment order.
Against the decision of the AAC, the matter was carried in appeal to the Appellate Tribunal by the Revenue and the Revenue contended that the assessment had been reopened on the basis of an audit objection and this reopening would be conveyed by the decision of the Gujarat High Court in the case of Kasturbhai Lalbhai : 80ITR188(Guj) . The Tribunal noted that the appeal against the Gujarat High Court decision in the case of Kasturbhai Lalbhai was at that time pending before the Superman Court. According to the Tribunal, however, the AACs order left no doubt that the reassessment in the instant case was the result of a change of opinion inasmuch as the ITO has allowed the relief under s. 2(5)(a)(ii) of the Finance Act, 1964, at the stage of original assessment after due scrutiny and after modification of the claim in that behalf. The Tribunal dismissed the appeal of the Revenue. Thereafter in pursuance of the direction given by this High Court on the income-tax application, the question hereinabove set out has been referred to us at the instance of the Revenue.
The Industries (Development and Regulation) Act, 1951, in its First Schedule sets out the list of industries engaged in the manufacture or production of any of the articles mentioned under each of the headings of sub headings in the list, inter alia, in the field of 'vegetable oil and vanaspati' and the industries engaged in the manufacture of vegetable oils, including solvent extracted oils and vanaspati, are industries set out in the First Schedule to the Industries (Development and Regulation) Act, 1951.
The Finance Act, 1964 (see Income Tax Reports, Volume 52, 1964, Statutes computation at p. 5) provided by s. 2 for income-tax and super tax being levied for the assessment year commencing on the first day of April 1964. These provisions were subject to the provisions of sub ss. (2),(3),(4) and (5) of s. 2 of the Finance Act 1964. We are concerned with sub-s. (5) and sub cl. (a) cl. (i) provided as follows: ' In respect of any assessment for the assessment year commencing on the 1st day of April, 1964 -
(i) an assessee being an Indian company or any other company which has made the prescribed arrangements for the declaration and payment of dividends within India or an assessee (other than a company) whose total income includes any profits and gains derived from the expert of any goods or merchandise out of India, shall be entitled to a deduction from the amount of income-tax and super tax with which he is chargeable of an amount equal to the income-tax and super-tax calculated respectively at on tenth of the average rate of income-tax and of the average rate of super-tax on the amount of such profits and gains included in the total income.'
Thus, sub-cl. (i) of cl. (a) of sub s. (5) of s. 2 the Finance Act, 1964, deals with rebate to be given at the rate mentioned in sub-cl. (i) in respect of goods exported by the assessee governed by that sub clause. Under sub cl. (iii) of cl. (a) of sub-s. (5) of s. 2:
'Where an assessee of the type referred to in sub-clause (i) engaged in the manufactures of any articles in an industry specified in the said First Schedule (to the Industries (Development and Regulation) Act, 1951 (65 of 1951) has sold after February 28, 1963, such articles to any other person in India who himself has exported than out of India and evidence is produced before the Income-tax Officer of such articles having been so exported, the assessee shall be entitled to a deduction from the amount of income-tax and super-tax with which he is chargeable for the assessment year a an amount equal to the income-tax and super-tax calculated respectively at the average rate on income-tax and the average rate of super-tax on a sum equal to two per cent of the sale provides receivable by him in respect of such articles from the exporter.'
Under clause (c) of sub-s. (5) of s. 2 :
'Nothing contained in sub-clause (ii) and sub-clause (iii) of clause (a) shall apply -
(i) in relation to - ....
(8) vegetable oils and vanaspati,...
respectively specified in items...28...of the first Schedule to the Industries (Development and Regulation) Act, 1951.'
In view of the provisions and s. 2(5)(c) read with item 28 of the First Schedule to the Industries (Development and Regulation) Act, 1951, the auditor by his note an annex. B at p. 38 of the paper book, mentioned as follows:
'The assessee has been allowed export profit rebate of Rs. 35,148 under section 2(5)(a)(ii) of the Finance Act, 1964, on the export of oil cake worth Rs. 35,14,882. In support of the claim the assessee has filed Form No. C prescribed under rule 6 of the Regulation framed under the Licensing of Industrial Undertaking Rules, 1952, wherein the assessee has been registered as falling in item No. 28 of the Scheduled industry.
It will be seen from section 2(5)(c) of the Finance Act, 1964, that the item No. 28 of the scheduled industry is specifically excluded from the scope of this action. Therefore, the rebate of Rs. 35,148 allowed in this case is not correct. The income-tax officer may kindly take necessary action to withdraw the rebate granted.'
The legal position as regards the information mentioned in s. 147(b) of the I.T. Act, 1961, is now clarified by the decision of the Supreme Court in Indian and Eastern Newspaper Society v. CIT : 119ITR996(SC) . There it was pointed out (headnote):
'The opinion of an internal audit party of the income-tax department 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 the poser to pronounce on the law, it nevertheless may draw the attention of the ITO to it. Law is one thing, and its communication is 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 section 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 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. 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 now 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 relief, add to or colour the significance of such law. The true evaluation of the law in its bearing on the assessment must be made directly and solely by the ITO.'
In this case, as the statement of the case prepared by the Tribunal shows that, when the audit objection was first raised, the ITO replied back stating that the item of de-oiled cakes on export of which export profit rebate in question had been allowed by him was not vegetable oils or vanaspati and, therefore, the exception contained in s. 2(5)(c)(i)(8) was not attracted to the facts of the case. However, the auditor called upon the ITO to rectify the mistake pointed out in the audit report. What we have reproduced from annex. B to the paper book clearly shows that the information of the audit party on the legal position was clearly expressed and the opinion expressed was that the rebate of Rs. 35,148 on the export of de-oiled cakes was not correct and the ITO was asked to withdraw the rebate granted. It nowhere appears from the record in this case that on the legal aspect his attention was being drawn to the provision of s. 2(5)(c)(i)(8) of the Finance Act, 1964, or that the ITO applied his own mind to the legal position and derived information for himself from a perusal of the legal position.
In this connection as has been pointed out in the statement of the case and the facts set out hereinabove, at the time of the original assessment the question was of entitlement of export rebate under s. 2(5)(a)(ii) of the Finance Act, 1964, and therefore it cannot be said that the provisions, of s. 2 (5)(c)(i)(8) has escaped the notice of the ITO at the time of the original assessment.
In any view of the matter, it cannot be said, on the facts and circumstance of this case, that the audit note merely constituted 'information' on a point of law so far as the ITO, at the time of reopening of the assessment under s. 147(b), was concerned. It is clear that there was a change of opinion on the part of ITO and not a case of 'information' within the meaning of s. 147(b) of the Act about income having escaped assessment.
Under these circumstance, the conclusion of the Tribunal that no knowledge was derived from any external source and that knowledge was sought to be derived from a now look at the old facts must be upheld. The Tribunal was, therefore, right in holding that there was a mere change of opinion and that the ITO was not acting on any 'information' in terms of s. 147(b) of the Act when he decided to reopen the assessment.
Under these circumstance, the question referred to us is answered in the affirmative, that is, in favour of the assessee and against the Revenue. The Commissioner will pay the costs of this reference to the assessee.