P.D. Desai, J.@mdashThe assessee in this case is a registered partnership firm and we are concerned with proceedings relating to its assessment
to Income Tax for four assessment years, namely, assessment years 1966-67, 1967-68, 1968-69 and 1969-70. The corresponding previous
years for these assessment years are Samvat years 2021, 2022, 2023 and 2034, respectively. The proceedings for assessment to Income Tax in
the aforesaid assessment years were reopened by the Income Tax Officer u/s 147(b) of the Income Tax Act, 1961 (hereinafter referred to as ""the
Act""), and the question which arises for consideration is whether the reassessment was valid.
2. It appears that in the course of assessment to Income Tax for the aforesaid assessment years, the Income Tax Officer allowed as a permissible
deduction certain amounts which were paid to the partners of the assessee-firm as and by way of interest. The relevant particulars with regard to
the amounts of interest paid to each partner and allowed as permissible deductions in the course of assessment proceedings are set out in
paragraph 2 of the order of the Tribunal as well as in paragraph 3 of the statement of the case. Since nothing turn on the amounts so allowed we
do not set out those facts in this judgment.
3. After the completion of the assessments, it appears that the audit department pointed out to the Income Tax Officer that by virtue of the
provisions contained in section 40(b) of the Act, the claim for deduction of the amounts of interest paid to the partners during the relevant account
years ought not to have been allowed. The Income Tax Officer thereupon issued notices u/s 148 of the Act in respect of each year of assessment
and called upon the assessee to show cause why the assessment should not be reopened with a view to adding back the amounts of interest which
were wrongly allowed as deduction. The assessee showed cause and, inter alia, contended that assessments having been completed on merits, no
proceedings for reassessment could be initiated. The Income Tax Officer negatived the objections raised by the and reassessed the income of the
relevant assessment years adding back the amounts of interest which were allowed as deduction in the course of the original assessment
proceedings.
4. The assessee, aggrieved by the order of Income Tax Officer, carried the matter in appeal to the Appellate Assistant Commissioner held that in
view of the decision of the court in Kasturbhai Lalbhai Vs. R.K. Malhotra, Income Tax Officer, Group Circle II (1), Ahmedabad, , which decision
was binding on him, the audit department, which audits the work of the Income Tax department, was not an authority competent and authorised to
declare the correct state of the law or to pronounce upon it. The audit report could not, therefore, constitute ""information"" within the meaning of
section 147(b) entitling the Income Tax Officer to initiate proceedings for reassessment. The Appellate Assistant Commissioner, therefore, held
that the action for reassessment taken by the Income Tax Officer u/s 147(b) was ""not in order"" and that it was required to be cancelled.
5. The revenue, feeling aggrieved by the decision of Appellate Assistant Commissioner, carried the matter in further appeal to the Income Tax
Appellate Tribunal. The Tribunal held that since it was not in dispute that the basis of information before the Income Tax Officer was the report of
audit department, the decision of this court in Kasturbhai Lalbhai Vs. R.K. Malhotra, Income Tax Officer, Group Circle II (1), Ahmedabad,
would govern the facts of the case and that, following the said rulling, the decision of the Appellate Assistant Commissioner was required to
upheld.
6. At the instance of the revenue, the Tribunal has referred the following question of law to this court for its opinion :
Whether the action u/s 147(b) of the Income Tax Act, 1961, was justified in law, on the basis of the information received from the report of the
audit party ?
7. The question which arises for consideration in this reference is not new. It is a question which arises out of an aspect which is well settled by
pronouncements in decided cases. In Commissioner of Income Tax v. A. Raman and Co. [1968] 67 ITR (SC) it was held that ""information"", in the
context in which it occurs in section 147(b), must 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"". Mere change of opinion on the part of the Income Tax Officer cannot constitute
information"" so as to entitled the Income Tax Officer to initiate proceedings u/s 147(b). ""Information"" may be as to facts or particulars or it may be
as to the correct state of the law but it must be ""from an external source"" as distinguished from a mere change of opinion.
8. In Kasturbhai Lalbhai''s case [1971] 80 ITR (Guj), this court examined the ratio of the decision in Commissioner of Income Tax, Gujarat Vs. A.
Raman and Company, and more particularly the question as to what would constitute ""information"" is as to any fact, it may be derived from any
person who know the fact. An 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 law is concerned, the external source from which it may be received must necessarily be of a limited
character. It must be 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. In the light of the test aforesaid, this court held that the audit
department was not an authority competent and authorised to declare the correct state of the law or to pronounce upon it and that, therefore, the
Income Tax Officer could not have reopened the assessment in that case on the basis of audit report which had pointed out that on a true
interpretation of section 23(2) of the Act, the deduction of municipal taxes in respect of self-occupied property was not admissible. Such audit
report could not have constituted ""information"" within the meaning of section 147(b) of the Act.
9. In BAI AIMAI GUSTADJI KARAKA (SINCE DECEASED) (BY HER HEIR, CHANDABEN JAMSHEDJI KARAKA). Vs. GIFT-TAX
OFFICER, CIRCLE V, WARD B, AHMEDABAD., , the question as to the validity of reassessment arose in the context of the Gift-tax Act,
1958. The proceedings for reassessment were there initiated u/s 16(1)(b) of the said Act on the ground that the Gift-tax Officer had reasons to
believe that taxable gift had escaped assessment. The language of section 16(1)(b) is in pari materia with the language of section 147(b) and having
noticed the said fact, this court observed in the said case that mere change of opinion of the part of the Gift-tax Officer would not be sufficient as it
would not constitute ""information"" in the context of the said provision. ""Information"" meant instructive knowledge concerning a matter bearing on
the assessment received from an external source after the completion of the original assessment. The ""information"" may be as to the correct state of
facts or of law relating to the taxable gift and it must be capable of arousing or suggesting ideas or notions not before existent in the mind of the
recipient. In other words, it must be of such a nature as to acquaint, enlighten or instruct the mind of the Gift-tax Officer for the first time concerning
a matter pertaining to the taxable gift 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. ""Information"", observed this court, in the context in which it was used in
section 16(1)(b) must, therefore, be derived from a source which had some authenticity and it must precise and certain and must have relation to
the taxable gift which is alleged to have escaped assessment. Any wayside gossip, any inference or surmise drawn by a person from certain facts
which are assumed to exist and not supported by any data or any general opinion expressed by a person not qualified, experienced or acquainted
with the subject-matter, cannot amount to ""information"" on which the Gift-tax Officer might act for reopening a completed assessment. This
decision, though rendered in the context of the provisions of the Gift-tax Act, has its bearing on the question arising u/s 147(b) as well, for, as
earlier started, the language of both the provisions is in pari materia.
10. Then came the decision in (1976) 102 ITR 287 (SC) . The Supreme Court there considered the language of section 34(1)(b) of the Indian
Income Tax Act, 1922 which is in pari materia with the language of section 147(b) of the present Act as also the decision in Commissioner of
Income Tax, Gujarat Vs. A. Raman and Company, and other decided cases. On a review of the statutory language and the authorities, the
Supreme Court laid down the following test and principles for the applicability of section 34(1)(b) :
(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. The decision in (1976) 102 ITR 287 (SC) and its effect on the ratio of the decision in Kasturbhai Lalbhai Vs. R.K. Malhotra, Income Tax
Officer, Group Circle II (1), Ahmedabad, came to be considered recently by a Division Bench of this court in COMMISSIONER OF
WEALTH-TAX, GUJARAT-III Vs. SMT. ARUNDHATI BALKRISHNA TRUST., . The Division Bench there noted that the ratio of the
decision in Kasturbhai Lalbhai Vs. R.K. Malhotra, Income Tax Officer, Group Circle II (1), Ahmedabad, was that ""information"" must 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"". The Division Bench was of the opinion that the decision of the Supreme Court in (1976) 102 ITR 287 (SC) , though it did not refer
to the decision in Kasturbhai Lalbhai Vs. R.K. Malhotra, Income Tax Officer, Group Circle II (1), Ahmedabad, , did not proceed on the view that
the Income Tax Officer should receive ""information"" from an external source after the original assessment as held in Kasturbhai Lalbhai Vs. R.K.
Malhotra, Income Tax Officer, Group Circle II (1), Ahmedabad, . According to the Division Bench it was manifest from the decision of the
Supreme Court in (1976) 102 ITR 287 (SC) that it was not necessary, as has been laid down by this court in Kasturbhai Lalbhai Vs. R.K.
Malhotra, Income Tax Officer, Group Circle II (1), Ahmedabad, , that the Income Tax Officer should received ""information"" from an external
source. All that was required was whether he had ""information"" relating to escaped assessment on the material already on record after the original
assessment. That ""information"" may consist of oversight or inadvertent mistake committed by the Income Tax Officer or he may discover an error
on the face of the record from further enquiry or research into facts and law. The Division Bench in terms observed in COMMISSIONER OF
WEALTH-TAX, GUJARAT-III Vs. SMT. ARUNDHATI BALKRISHNA TRUST., :
The expression ''information'' is of wider amplitude than construed by this court in Kasturbhai Lalbhai Vs. R.K. Malhotra, Income Tax Officer,
Group Circle II (1), Ahmedabad, , the only limitation or restriction on the authority of the Income Tax Officer being that he must have reason to
believe that it is a case of escaped assessment.
12. Last in the series of decisions is the one rendered by my learned brother in this very session in Income Tax reference No. 82 of 1974 decided
by us on June 21, 1977 Commissioner of Income Tax, Gujarat Vs. Jyoti Ltd., . in that case, the question arose in the context of Super Profits Tax
Act, 1965. u/s 9(b) of the said Act, reassessment proceedings were initiated and it was there pointed out that the provisions of section 9(b) were
in pari materia with the provisions of section 147(b) of the Act as also of section 16(1)(b) of the Gift-tax Act, 1958. Reference was then made to
the decision in Commissioner of Income Tax, Gujarat Vs. A. Raman and Company, , BAI AIMAI GUSTADJI KARAKA (SINCE
DECEASED) (BY HER HEIR, CHANDABEN JAMSHEDJI KARAKA). Vs. GIFT-TAX OFFICER, CIRCLE V, WARD B,
AHMEDABAD., , Kasturbhai Lalbhais'' case [1971] 80 ITR (Guj), (1976) 102 ITR 287 (SC) and COMMISSIONER OF WEALTH-TAX,
GUJARAT-III Vs. SMT. ARUNDHATI BALKRISHNA TRUST., . This court expressed the view in the said decision that the rulling of the
Supreme Court in Kalyanji Mavji & Co.''s case [1968] 67 ITR (SC) merely clarified the ratio in Commissioner of Income Tax, Gujarat Vs. A.
Raman and Company, and that all that it laid down was that the information may come from external source or even from materials already on the
record or may be obtained from discovery of new and important matters or knowledge or may include information derived from relevant judicial
decisions either of the Income Tax authority or other courts of law which decided Income Tax matters. It was pointed out that in (1976) 102 ITR
287 (SC) , a further scrutiny of the balance-sheet and a close calculation had revealed that the assessee had not only wrongly claimed but was also
allowed a deduction on what was really in the nature of interest-free loans given to the partners to meet their Income Tax liabilities. The said case
was, therefore, not a case of mere change of opinion but fresh facts were revealed in the assessment, informed the mind of the officer for the first
time that the deduction was wrongly claimed and allowed to the assessee. My learned brother in terms observed that although the Supreme Court
was inclined prima facie, to agree to make a distinction between a change of opinion unsupported by subsequent information subsequently
obtained on the other, it had not expressed a final opinion and had rested the case only on the Commissioner of Income Tax, Gujarat Vs. A.
Raman and Company, ratio. The argument forcefully urged on behalf of the revenue to the effect that the decision of this court in Kasturbhai
Lalbhai Vs. R.K. Malhotra, Income Tax Officer, Group Circle II (1), Ahmedabad, must be taken to have been overruled by the decision of the
Supreme Court in (1976) 102 ITR 287 (SC) was next considered and it was pointed out that such an argument was based on a complete
misapprehension of the settled legal position. It was observed - See Commissioner of Income Tax, Gujarat Vs. Jyoti Ltd., :
If the ''information'' is understood as definite information which informs the mind of the officer concerned for the first time as explained by my
learned brother in BAI AIMAI GUSTADJI KARAKA (SINCE DECEASED) (BY HER HEIR, CHANDABEN JAMSHEDJI KARAKA). Vs.
GIFT-TAX OFFICER, CIRCLE V, WARD B, AHMEDABAD., , it is obvious that while applying the Raman [1968] 67 ITR (SC) ratio this
distinction of external source when applied to matters of facts or particulars and matters as to the correct state of law would a have great bearing
to distinguish the case of the mere change of opinion. The concerned officer is not entitled to proceed on mere second thoughts on the same
materials when he had already applied his mind and he does not rely on any subsequent information falling within the aforesaid test.
13. My learned brother then proceed to point out the distinction made in Kasturbhai Lalbhai Vs. R.K. Malhotra, Income Tax Officer, Group
Circle II (1), Ahmedabad, between ""information"" as to the correct state of law and ""information"" as to the matters of facts and particulars and
observed that it is only when the ""information"" which was relied upon was as to the matters of facts and particulars, that ""information"" could be
from any source as explained in Kasturbhai Lalbhai Vs. R.K. Malhotra, Income Tax Officer, Group Circle II (1), Ahmedabad, and it could be
even from the same record. It is only this latter aspect which was elaborately dealt with in (1976) 102 ITR 287 (SC) . My learned brother then
referred to; the decision of this court in COMMISSIONER OF WEALTH-TAX, GUJARAT-III Vs. SMT. ARUNDHATI BALKRISHNA
TRUST., and observed - See Commissioner of Income Tax, Gujarat Vs. Jyoti Ltd., :
It is true that the learned Chief Justice has widely observed that the Supreme Court in (1976) 102 ITR 287 (SC) , although did not refer to
Kasturbhai Lalbhai Vs. R.K. Malhotra, Income Tax Officer, Group Circle II (1), Ahmedabad, , was not of the view that the Income Tax Officer
should receive information for external source after original assessment as held by Bhagwati C.J. He, therefore, observed that it was manifest from
what the Supreme Court has ruled in Kalyanji Mavji''s case that it was not necessary, as has been laid down by this court in Kasturbhai Lalbhais''
case, that the Income Tax Officer should receive ''information'' from an external source. In Kasturbhai Lalbhai''s case, Bhagwati C.J. had made this
distinction of an external source for distinguishing the case of mere change of opinion and that is why the external source was held as one importing
element of authority when the information related to matter regarding the correct state of law and that view is even now approved specifically in
Kalyanji Mavji''s case as is clear from the aforesaid passages. As to the external source, so far as the matters of facts, on the other hand, are
concerned, Bhagwati C.J. (as he then was) had clearly stated in Kasturbhai Lalbhai Vs. R.K. Malhotra, Income Tax Officer, Group Circle II (1),
Ahmedabad, that ""information"" could come from any source as explained by him. In fact, this latest decision in COMMISSIONER OF
WEALTH-TAX, GUJARAT-III Vs. SMT. ARUNDHATI BALKRISHNA TRUST., was not in the context of information as regards the state
of the correct law. Therefore, the ratio in Kasturbhai Lalbhai''s case is not in any manner undermined even by the recent decision in (1976) 102
ITR 287 (SC) and the whole contention of the learned standing counsel is wholly misconceived.
14. It would thus appear that the view which now prevails finally is that the true legal position is as follows :
(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 or 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 the Income Tax Officer would not be sufficient and it would not constitute ""information"";
(6) that ""information"" as to any fact bearing of 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.
15. Bearing in mind this settled legal position, let us now proceed to examine whether, in the facts and circumstances of the case, the power of
reassessment was validity exercised. The question here was relating to the allowance of a deduction in respect of interest paid to the partners by
the assessee-firm. The Income Tax Officer, in the course of the original assessment proceedings, had applied his mind to the question of
allowability of such deduction and he had allowed the deduction. It is not in dispute that the reassessment proceedings were started solely and
exclusively on the basis of the report of the audit department which pointed out to the Income Tax Officer that having regard to the true state of
law as embodied in section 40(b) of the Act, in the case of any firm any payment of interest made by it to any partner could not be allowed as an
amount deductible in computing the income chargeable under the head ""profits and gains of business or profession"". It would thus appear that the
information"" which the Income Tax Officer received subsequent to the original assessment was as to the correct state of the law and that it was
received from the report of the audit department. The information as to the true and correct state of the law was not derived from any research
made by him or from any judicial decision of a competent authority but it was received entirely from the report of an administrative authority.
Having regard to the clear pronouncement of law in Kasturbhai Lalbhai Vs. R.K. Malhotra, Income Tax Officer, Group Circle II (1), Ahmedabad,
and in (1976) 102 ITR 287 (SC) , such report would not constitute ""information"" within the meaning of section 40(b) upon which the Income Tax
Officer could have initiated proceedings for reassessment. It was, therefore, a case not of receiving ""information"" within the meaning of section
147(b) as understood and explained in decided cases but a mere change of opinion and under such circumstances the Income Tax Officer could
not have initiated proceedings for reassessment.
16. The foregoing discussion would show that the Income Tax Officer was not justified in the present case in initiating proceedings for
reassessment to Income Tax in respect of the four assessment years in question and that the Tribunal was right in law in holding that the
proceedings for reassessment were not justified. Accordingly, we answer the question referred to us in the negative, that is to say, in favour of the
assessee and against the revenue. The Commissioner will pay the costs of this reference to the assessee.
