1. Section 34 of the Indian Income-tax Act, 1922, which has been interpreted by the Supreme Court and by different High Courts in India in a number of cases, still remains a rich germinating ground for forensic arguments. One such argument confronts us in this reference.
2. The circumstances in which this reference has been made are hereinafter related in brief.
3. The assessee, Messrs. Kalyanji Mavji & Co., is a registered firm. The year of assessment, with which we are concerned in this reference, is 1956-57, corresponding to the accounting year being the Gujrati Diwali year 2011. The original assessment for the year in question was completed, on February 20, 1957, on a total income of Rs. 7,44,551, after having allowed deduction of a sum of Rs. 43,116 being interest paid by the assessee on borrowed money. This assessment was reduced by the Appellate Assistant Commissioner by a sum of Rs. 9,200, by his order dated July 3, 1958.
4. In the course of the assessment proceedings for the year 1958-59, the Income-tax Officer discovered that the assessee's claim for payment of interest on money said to have been borrowed for the purpose of business was not sustainable. In the opinion of the Income-tax Officer the entire borrowed money had not been utilised for the purposes of the business, but for the purpose of giving interest-free advances to the partners of the assessee-firm.
5. As a result of the discovery, the Income-tax Officer took action under Section 34(1)(b) of the Indian Income-tax Act, 1922, on the ground that he had reasons to believe that the assessee's claim of payment of interest on money borrowed was not proper and that income to the extent of Rs. 43,116 was under-assessed. In the reassessment that followed, the Income-tax Officer added the sum of Rs. 43,116 to the total income and reassessed the total income at Rs. 7,78,467. The relevant portion of the order of the Income-tax Officer is hereinbelow set out:
'In their letter dated April 22, 1961, Messrs. S. K. Sawday & Co. have given their objections to my action under Section 34. In fact no argument as regards the allowance or disallowance of the interest amount in question was placed but the entire argument of the representative proceeded on the basis that the action under Section 34 itself was illegal. I do not, however, agree with the objections raised by them. The case law cited by them is entirely a case under Section 34(1)(a) and has nothing to do with the proceedings under Section 34(1)(b). The observations of the Supreme Court cited by the learned representative are, in my opinion, not relevant to the proceedings under Section 34(1)(b). The only conditions imposed by Clause (b) of Section 34(1) are (i) that the Income-tax Officer should have reason to believe that income has escaped assessment and (ii) that such belief should have proceeded on the basis of information in his possession.'
6. Aggrieved by the order of the Income-tax Officer, particularly on the point of the power of the Income-tax Officer to reopen the assessment in the circumstances of the case, the assessee preferred an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner dismissed the appeal with the following observation :
'Mr. Chowdhury attacked the assessment on the ground that the Income-tax Officer was not justified in starting action under Section 34(1)(b). It was stated by him that all the facts were in the possession of the Income-tax Officer at the time of the original assessment. For this purpose he invited my attention to the balance-sheet of the Calcutta office filed at the time of the original assessment. He stated that this balance-sheet clearly showed that the total drawings for both the partners stood at Rs. 29,31,998 while the capital was only Rs. 8,70,000 and the loans stood at Rs. 6,63,292, In short, he argued that there was no additional information in the possession of the Income-tax Officer so as to justify an action under Section 34(1 )(b). No doubt, the balance-sheet referred to by Mr. Chowdhury was before the Income-tax Officer at the time of the original assessment. However, it was during the assessment proceedings for the assessment years 1958-59 and 1959-60, as found by the Income-tax Officer, that the appellant could not prove that the borrowed fund was utilised for the purpose of business. Thus, during the subsequent assessment proceedings, it was found by the Income-tax Officer that the loans on which interest was paid were diverted to the partners. This was a piece of information which was not before the Income-tax Officer at the time of the original assessment. I am, therefore, of the opinion that the Income-tax Officer was justified in starting action under Section 34(1)(b) for this year. '
7. Thereupon, the assessee took a second appeal before the Appellate Tribunal. The Tribunal allowed the appeal with the following observations :
'In the present case the position is that in the original assessment deduction was claimed by the appellant in respect of the sum of Rs. 43,116 as interest paid on borrowed money and it was wholly allowed by the Income-tax Officer. There is nothing whatever on record to indicate that the Income-tax Officer did not apply his mind to the question of allowance of the interest claimed by the assessee. In the absence of anything to the contrary it must be presumed that the amount of the interest claimed was allowed by the Income-tax Officer with his eyes open on the basis of materials which were then produced before him. Subsequently, however, the assessment was reopened by the Income-tax Officer and he changed his mind holding that the interest had been wrongly allowed. There was no fresh material in his possession justifying the conclusion. It is true that, subsequently in the assessment proceedings for the year 1958-59, the Income-tax Officer was not satisfied that the borrowed funds were utilised for the purpose of the business of the assessee and that the same had been diverted to the partners in the shape of interest-free advances. The fact, however, remains that what the Income-tax Officer held in connection with assessment for the year 1958-59 was merely his opinion founded on the basis of the balance-sheet and other materials which were produced before him. The opinion formed by the Income-tax Officer in the course of the assessment for the year 1958-59 cannot be regarded as 'information' within the meaning of Section 34(1)(b).'
8. The Tribunal thereafter referred to a Patna High Court decision in Bhimraj Panna Lal v. Commissioner of Income-tax,  32 I.T.R. 289 in which it was held that it was not open to the Income-tax Officer to act under Section 34 on a mere change of opinion on the same set of facts and law and also to a decision of the Nagpur High Court in D.R. Dhanwatay v. Commissioner of Income-tax,  29 I.T.R. 257, 260 expressing similar view, and following the aforesaid two decisions came to the conclusion that the reassessment made by the Income-tax Officer, under Section 34(1)(b), in the circumstances of the instant case, was incompetent.
9. Aggrieved by the order of the Appellate Tribunal, the revenue obtained a reference to this court on the following question of law:
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the reassessment made by the Income-tax Officer under Section 34(1)(b) of the Indian Income-tax Act, 1922, was incompetent?'
10. It is necessary for us at this stage to examine the language of Section 34(1 )(b), which reads :
'34. (1) If--. ....
(b) notwithstanding that there has been no omission or failure as mentioned in Clause (a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income, profits or gains chargeable to income-tax have escaped assessment for any year, or have been under-assessed, or assessed at too low a rate, or have been made the subject of excessive relief under this Act, or that excessive loss or depreciation allowance has been computed,
he may in cases falling under Clause (a) at any time .... and in cases falling under Clause (b) at any time within four years of the end of that year, serve on the assessee, or, if the assessee is a company, on the principal officer thereof, a notice containing all or any of the requirements which may be included in a notice under Sub-section (2) of Section 22 and may proceed to assess or reassess such income, profits or gains or recompute the loss or depreciation allowance ; and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section . . . .'
11. The words 'in consequence of information in his possession' as used in Section 34(1)(b) have been interpreted by the Supreme Court in the case of Maharaj Kumar Kamal Singh v. Commissioner of Income-tax,  35 I.T.R. 1, 6, 7, 8 ;  Supp. 1 S.C.R. 10 in the following language:
'It is not disputed that, according to its strict literal meaning, the word 'information' may include knowledge even about a state of the law or a decision on a point of law. The argument, however, is that the context requires that the word 'information' should receive a narrower construction limiting it to facts or factual material as distinguished from information as to the true state of the law. In support of this argument Mr. Sastri referred to the marginal notes of Sections 19A and 20A as well as the provisions of Section 22(3) and Section 28 and urged that the information contemplated by this provision is information as to facts or particulars and has no reference to the state of law or to any question of law; and so the said word in Section 34(1)(b) should be construed to mean only factual information. We are not impressed by this argument. If the word 'information' used in any other provision of the Act denotes information as to facts or particulars, that would not necessarily determine the meaning of the said word in Section 34(1)(b). The denotation of the said word would naturally depend on the context of the particular provisions in which it is used. It is then contended that Sections 33B and 35 confer ample powers on the specified authorities to revise the Income-tax Officer's orders and to rectify mistakes respectively and so it would be legitimate to construe the word 'information' in Section 34(1)(b) strictly and to confine it to information in regard to facts or particulars. This argument also is not valid. If the word 'information' in its plain grammatical meaning includes information as to facts as well as information as to the state of the law, it would be unreasonable to limit it to information as to the facts on the extraneous consideration that some cases of assessment which need to be revised or rectified on the ground of mistake of law may conceivably be covered by Sections 33B and 35. ... We would accordingly hold that the word 'information' in Section 34(1)(b) includes information as to the true and correct state of the law and so would cover information as to relevant judicial decisions. If that be the true position, the argument that the Income-tax Officer was not justified in treating the Privy Council decision in question as information within Section 34(1)(b) cannot be accepted.'
12. In the aforesaid judgment the Supreme Court also explained the word 'escaped', as in Section 34(1)(b), in the following language :
'Then it is urged that the word 'escaped' according to the Oxford English Dictionary means 'to elude (observation, search, etc.); to elude the notice of a person'; and the contention is that it is only where income has not been returned for assessment that it can be reasonably said that income has escaped assessment. The dictionary meaning of the word does not support Mr. Sastri's contention. According to the same dictionary, the word 'escape' also means 'to get clear away from (pursuit or pursuer); to succeed in avoiding (anything painful or unwelcome)'; so that judging by the dictionary meaning alone it would be difficult to confine the meaning of the word 'escaped' only to cases where no return has beensubmitted by the assessee. Even if the assessee has submitted a return of his income, cases may well occur where the whole of the income has not been assessed and such part of the income as has not been assessed can well be regarded as having escaped assessment ..... We see no justification for holding that cases of income escaping assessment must always be cases where income has not been assessed owing to inadvertence or oversight or owing to the fact that no return has been submitted. In our opinion, even in a case where a return has been submitted, if the Income-tax Officer erroneously fails to tax a part of assessable income, it is a case where the said part of the income has escaped assessment.'
13. Thereafter, the Supreme Court again adverted to the 'information' aspect of the matter in the case of Commissioner of Income-tax v. A. Raman & Co., : 67ITR11(SC) . and observed :
'The expression 'information' in the context in which it occurs must, in bur judgment, mean instruction or knowledge derived from an external source concerning facts or particulars, or as to law relating to a matter bearing on the assessment. If, as a result of information in his possession, the Income-tax Officer has reason to believe that income chargeable to tax had escaped assessment, the Income-tax Officer has jurisdiction to assess or reassess income under Section 147(b) of the Income-tax Act, 1961. Information in his possession that income chargeable to tax has escaped assessment furnishes a starting point, for assessing or reassessing income. If he has that information, the Income-tax Officer may commence proceedings for assessment or reassessment. To commence the proceeding for reassessment it is not necessary that on the materials which came to the notice of the Income-tax Officer, the previous order of assessment was vitiated by some error of fact or law.'
14. Further, explaining the jurisdiction of the Income-tax Officer to reassess, the Supreme Court observed in the same judgment:
'Jurisdiction of the Income-tax Officer to reassess income arises if he has in consequence of information in his possession reason to believe that income chargeable to tax has escaped 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 an 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.'
15. Proceeding further the Supreme Court observed :
'It is clear that two conditions must be satisfied before the Income-tax Officer can act under Section 34(1)(b). He must have information inhis possession, which, in the context, means that the relevant information must have come into his possession subsequent to the making of the assessment order in question and this information must lead to his belief that income chargeable to income-tax has escaped assessment for any year, or that it has been under-assessed or assessed at too low a rate or has been made the subject of excessive relief under the Act.'
16. In the later decision, namely, in A. Raman & Co.'s case, the Supreme Court made it clear that the information need have to come into the possession of the Income-tax Officer after the previous assessment but it need not be information of the type which could not be obtained during the previous assessment from materials on record if the Income-tax Officer had cared to go through the records with greater vision and circumspection.
17. In an unreported decision of this court, namely, in Income-tax Reference No. 13 of 1964 (Dinesh Chandra H. Shah v. Commissioner of Income-tax), this court took notice of the law as laid down in the cases of Maharaj Kumar Kamal Singh and A. Raman and Company and made the following observation:
'There may be cases where the mere existence of materials on the record does not become informative at the first sight. The existence of a piece of information and the realisation of the effect of that piece of information are different things. We are prepared to uphold the argument of Mr. Mukherjee to this extent that there may be information existing on the record or placed to the notice of the Income-tax Officer which are of such a nature as do not carry the effect of the information to the mind of the Income-tax Officer forthright. In such cases, the realisation of the effect of the information, later on, may give to the Income-tax Officer the jurisdiction to start proceedings under Section 34(1)(b).'
18. This court, however, pointed out that there must be a limit put on such things. In that context this court observed:
'The fact that the Income-tax Officer changes his opinion subsequently or that the fact that he had failed to notice a palpable fact glaring at his face earlier should not be treated as additional information coming to his notice subsequent to the assessment order.'
19. Now, this being the state of law we need see whether the Income-tax Officer overstepped the limitations on his jurisdiction in taking action under Section 34(1)(b) against the assessee. It is no doubt true that, during the assessment year 1957-58, the assessee made it clear to the Income-tax Officer that it had borrowed a large sum of money in its business and was entitled to deduction of the interest paid on the borrowed capital, under Section 10(2)(iii) of the Indian Income-tax Act, 1922, which reads as follows :
'10. (2) Such profits or gains shall be computed after making the following allowances, namely:......
(iii) in respect of capital borrowed for the purposes of the business, profession or vocation, the amount of the interest paid.'
20. The returns submitted by the assessee itself showed all these things. In support of the return, the assessee had also submitted before the Income-tax Officer the balance-sheet of the Calcutta office of the assessee. The Income-tax Officer apparently did not examine the balance-sheet with the vision and circumspection which would have revealed to him that the borrowed capital had not been applied to the business of the assessee. When scrutinising the balance-sheet for the subsequent assessment year the realisation dawned upon him that, since the partners' total drawings figured at Rs. 29,31,998, while the capital of the firm stood at Rs. 8,70,000 and the loans at Rs. 6,63,292, the borrowed capital must have been diverted to the drawings account of the partners.
21. Mr. S. R. Banerjee, learned counsel for the assessee, submitted that the assessee had made a claim for deduction of interest, under Section 10(2)(iii), on borrowed capital; before allowing that claim the Income-tax Officer was required to find out if the borrowed capital was for the purposes of the business of the assessee. If satisfied on that point, then only could the Income-tax Officer allow the deduction as claimed by the assessee. Whether the borrowed capital was actually applied for the purpose of the business, he submitted, could be scrutinised and ascertained from the balance-sheet and if the fact which seemed to be revealing to the Income-tax Officer later on had not been noticed at the earlier stage, he could not have allowed deduction. Mr. Banerjee submitted that all the material information being before the Income-tax Officer, on consideration of which he allowed the deduction, he could not thereafter change his opinion on the same material and come to the conclusion that the borrowed capital had not been applied for the purpose of the assessee's business and, therefore, the interest paid on borrowed capital should not have been allowed as deduction.
22. Mr. Dipankar Gupta, learned counsel for the revenue, however, submitted that the Tribunal was in error in presuming that what had been done by the Income-tax Officer for the year 1957-58 must be presumed to have been done with his eyes open, on the basis of materials, which were then produced before him. In short, Mr. Gupta's submission was that the nature of information contained in the balance-sheet was not such as would carry the information forthright to the Income-tax Officer. The information was that the partners of the assessee-firm had withdrawn more than the capital of the firm and the loans stated above. Now, this material may be compatible with the theory that the assessee was carrying on business with borrowed capital and was consuming its capital and profits indistribution to the partners. It may also be compatible, with the theory that the assessee was borrowing only for the purpose of advancing interest-free loans to the partners and was taking advantage of deduction of interest on such loans in the partnership account. In our opinion, the information was not such as was fully informative on production of the balance-sheet. Therefore, this case comes within the statement of law by the Supreme Court in A. Raman & Co.'s case, in which their Lordships held that, even if the information be such that it could have been obtained during the previous assessment from an investigation of the materials on record or the facts disclosed thereby or from any other enquiry or research into facts or law, but was not in fact obtained the jurisdiction of the Income-tax Officer is not affected. We are of the opinion that the information on which the action under Section 34(1)(b) was taken could be with greater diligence, vision and circumspection obtained from the materials produced before the Income-tax Officer at the time of the original assessment. The examination of the materials at that stage without such vision did not deprive the Income-tax Officer of his jurisdiction to take action under Section 34(1)(b). That being the position, we agree with Mr. Gupta that the Tribunal was in error in presuming too much, particularly in presuming that the amount of interest claimed was allowed by the Income-tax Officer with his eyes open on the basis of materials which were then produced before him.
23. In the result, we answer the question referred to this court in the negative and against the assessee. In the circumstances of this case, we do not make any order as to costs.
K.L. Roy J.
24. I agree.