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[1978] 112 ITR 985 (Gujarat)

[1978] 112 ITR 985 (Gujarat)

HIGH COURT OF GUJARAT
Commissioner of Income-tax
v.
Ratanlal Lallubhai*
J.B. MEHTA AND P.D. DESAI, JJ.
IT REFERENCE NO. 14 OF 1975
AUGUST 1, 1977

Section 147 of the Income-tax Act, 1961 - Income escaping assessment - Information - Position
prior to 1-4-1989 - Assessment years 1966-67 to 1969-70 - Whether audit report would not
constitute 'information' within meaning of section 147(b) upon which ITO could have initiated
reassessment proceedings - Held, yes
FACTS

After the completion of the assessments, the audit department pointed out to the Income-tax Officer that by
virtue of the provisions contained in section 40(b), the claim for deduction of the amounts of interest paid to the
partners during the relevant account years ought not to have been allowed. On basis of such audit report, the
ITO reopened assessment under section 147(b) and reassessed the income adding back the amounts of interest
which were allowed as deduction in the course of the original assessment proceedings. On appeal, the AAC 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 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. He, therefore, held that
the action for reassessment taken by the Income-tax Officer under section 147(b) was not in order and that it
was required to be cancelled. On further appeal, the Tribunal upheld the AAC's decision.
On reference :
HELD

The true legal position is (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 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; it must be derived from the judicial decision of a person, body or
authority competent and authorized to pronounce upon the law.
In the instant case, the Income-tax Officer, in the course of the original assessment proceedings, had applied his
mind to the question of allowability of deduction in respect of interest and he had allowed the deduction. The
reassessment proceedings were started solely and exclusively on the basis of the report of the audit department
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which pointed out to the Income-tax Officer that having regard to the true state of law as embodied in section
40(b), 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". Thus, the "information" which the Income-tax Officer received subsequent to the original
assessment was as to the correct state of the law and 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's case [1971]
80 ITR 188 (Guj.) and in Kalyanji Mavji & Co.'s case [1976] 102 ITR 287 (SC), such report would not
constitute "information", within the meaning of section 147(b )(sic) 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) but of a mere change of opinion and under such circumstances the Income-tax Officer
could not have initiated proceedings for reassessment.
The Income-tax Officer was thus not justified in the instant case in initiating proceedings for reassessment to
income-tax and the Tribunal was right in law in holding that the proceedings for reassessment was not justified.
Note : The case was decided in favour of the assessee.
CASE REVIEW

KalyanjiMavji and Co. v. CIT [1976] 102 ITR 287 (SC) and KasturbhaiLalbhai v. R.K. Malhotra, ITO [1971]
80 ITR 188 (Guj) followed & relied upon.
R.K. Malhotra v. KasturbaiLalbhai [1977] 109 ITR 537-Ed.
CASES REFERRED TO

Bai Aimai Gustadji Karaka v. GTO [1975] 99 ITR 257 (Guj.), CIT v. Jyoti Ltd. [1978] 112 ITR 973 (Guj.), CIT
v. A. Raman & Co. [1968] 67 ITR 11 (SC), CWT v. Smt. Arundhati Balkrishna Trust [1977] 108 ITR 78 (Guj.),
Kalyanji Mavji & Co. v. CIT [1976] 102 ITR 287 (SC) and Kasturbhai Lalbhai v. R.K. Malhotra, ITO [1971] 80
ITR 188 (Guj.).
R.P. Bhatt for the Appellant. K.C. Patel for the Respondent.
JUDGMENT

P.D. Desai, J.—The 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 Sam vat years 2021,
2022, 2023 and 2024, respectively. The proceedings for assessment to income-tax in the aforesaid assessment
years were reopened by the Income-tax Officer under section 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.
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 turns on the amounts
so allowed we do not set out those facts in this judgment.
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 under section 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

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alia, contended that the assessments having been completed on merits, no proceedings for reassessment could
be initiated. The Income-tax Officer negatived the objections raised by the assessee 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.
The assessee, aggrieved by the order of the Income-tax Officer, carried the matter in appeal to the Appellate
Assistant Commissioner. The Appellate Assistant Commissioner held that in view of the decision of this court in
Kasturbhai Lalbhai v. R.K. Malhotra, Income-tax Officer [1971] 80 ITR 188 (Guj), 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 under section 147(b) was "not in order" and that it was required to
be cancelled.
The revenue, feeling aggrieved by the decision of the 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 the audit department, the decision of this
court in Kasturbhai Lalbhai's case [1971] 80 ITR 188 (Guj) would govern the facts of the case and that,
following the said ruling, the decision of the Appellate Assistant Commissioner was required to be upheld.
At the instance of the revenue, the Tribunal has referred the following question of law to this court for its
opinion:
"Whether the action under section 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?"
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 11 (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 entitle the Income-tax Officer to initiate proceedings under
section 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.
In Kasturbhai Lalbhai's case [1971] 80 ITR 188 (Guj), this court examined the ratio of the decision in A. Raman
and Co.'s case [1968] 67 ITR 11 (SC) and more particularly the question as to what would constitute
"information" derived from "an external source". This court held that, if "information" is as to any fact, it may
be derived from any person who knows 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.
In Bai Aimai Gustadji Karaka v. Gift-tax Officer [1975] 99 ITR 257 (Guj), 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 under section 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
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on 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 bad some
authenticity and it must be 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 under section 147(b) as well, for, as earlier stated, the
language of both the provisions is in pari materia.
Then came the decision in Kalyanji Mavji & Co. v. Commissioner of Income-tax [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 A. Raman and Co.'s
case [1968] 67 ITR 11 (SC) 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."
The decision in Kalyanji Mavji & Co.'s case [1976] 102 ITR 287 (SC) and its effect on the ratio of the decision
in Kasturbhai Lalbhai's case [1971] 80 ITR 188 (Guj) came to be considered recently by a Division Bench of
this court in Commissioner of Wealth-tax v. Smt. Arundhati Balkrishna Trust [l917] 108 ITR 78 (Guj). The
Division Bench there noted that the ratio of the decision in Kasturbhai Lalbhai's case [1971] 80 ITR 188 (Guj)
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 Kalyanji Mavji & Co.'s case [1976] 102 ITR 287 (SC), though
it did not refer to the decision in Kasturbhai Lalbhai's case [1971] 80 ITR 188 (Guj), 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's case [1971] 80 ITR 188 (Guj). According to the Division Bench it
was manifest from the decision of the Supreme Court in Kalyanji Mavji & Co.'s case [1976] 102 ITR 287 (SC)
that it was not necessary, as has been laid down by this court in Kasturbhai Lalbhai's case [1971] 80 ITR 188
(Guj), that the Income-tax Officer should receive "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 [1977] 108 ITR 78, 83 (Guj):
"The expression 'information' is of wider amplitude than construed by this court in Kasturbhai Lalbhai's
case [1971] 80 ITR 188 (Guj), the only limitation or restriction on the authority of the Income-tax Officer
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being that he must have reason to believe that it is a case of escaped assessment."
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 v. Jyoti Ltd. [1978] 112
ITR 973 (Guj)]. In that case, the question arose in the context of the Super Profits Tax Act, 1965. Under section
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 A. Raman & Co.'s case [1968] 67 ITR 11
(SC), Bai Aimai Gustadji Karoka's case [1975] 99 ITR 257 (Guj), Kasturbhai Lalbhai's case [1971] 80 ITR 188
(Guj), Kalyanji Mavji & Co.'s case [1976] 102 ITR 287 (SC) and Shrimati Arundhati Balkrishna Trust's case
[1977] 108 IIR 78 (Guj). This court expressed the view in the said decision that the ruling of the Supreme Court
in Kalyanji Mavji & Co.'s case [1976] 102 ITR 287 (SC) merely clarified the ratio in A. Raman & Co.'s case
[1968] 67 ITR 11 (SC) 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 Kalyanji Mavji &
Co.'s case [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 of the subsequent
years, which when taken with the conduct of the assessee, 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 on the one hand and a change of opinion based on information
subsequently obtained on the other, it had not expressed a final opinion and had rested the case only on the
Raman [1968] 67 ITR 11 (SC) ratio. The argument forcefully urged on behalf of the revenue to the effect that
the decision of this court in Kasturbhai Lalbhai's case [1971] 80 ITR 188 (Guj) must be taken to have been
overruled by the decision of the Supreme Court in Kalyanji Mavji & Co.'s case [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 [1978] 112 ITR 973 , 981 (Guj):
"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 Karaka's case [1975] 99 ITR 257 (Guj), it is obvious
that while applying the Raman [1968] 67 ITR 11 (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."
My learned brother then proceeded to point out the distinction made in Kasturbhai Lalbhai's case [1971] 80 ITR
188 (Guj) 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's case
[1971] 80 ITR 188 (Guj) and it could be even from the same record. It is only this latter aspect which was
elaborately dealt with in Kalyanji Mavji & Co.'s case [1976] 102 ITR 287 (SC). My learned brother then
referred to the decision of this court in Smt. Arundhaii Balkrishna Trust's case [1977] 108 ITR 78 (Guj) and
observed—See [1978] 112 ITR 973 , 982 (Guj):
It is true that the learned Chief Justice has widely observed that the Supreme Court in Kalyanji Mavji's case
[1976] 102 ITR 287 (SC), although did not refer to Kasturbhai Lalbhai's case [1971] 80 ITR 188 (Guj), was not
of the view that the Income-tax Officer should receive information from 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 casa that it was not necessary, as has been laid down by this court in Kasturbhai
Lalbhai's 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
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information related to matters regarding the correct state of the 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's case [1971] 80 ITR 188 (Guj) that "information" could come from any source as explained
by him. In fact, this latest decision in Smt. Arundhati Balkrishna's case [1977] 108 ITR 78 (Guj) 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 Kalyanji Mavji's case [1976] 102 ITR 287 (SC)
and the whole contention of the learned standing counsel is wholly misconceived.
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 beof 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 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.
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 validly 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 bad 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's case [1971]
80 ITR 188 (Guj) and in Kalyanji Mavji & Co.'s case [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 of a mere change of opinion and under such
circumstances the Income-tax Officer could not have initiated proceedings for reassessment.

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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.
■■

*In favour of assessee.

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