COMMISSIONER OF INCOME-TAX VS ENFIELD INDIA LTD, 2000 PTD-MADRAS-HIGH-COURT-INDIA 1055 (1996)

Income-tax

----Reassessment---Information that income had escaped assessment-- Opinion of audit party---Finding by Tribunal that notice under S.147(b) was based upon records of earlier years which in turn was based on opinion of audit party---Reassessment was not valid---Indian Income Tax Act, 1961, S.147.

Held, that, in the instant case, the Tribunal taking note of the fact that the reopening of the assessment under section 147(b) of the Income Tax Act, 1961, was based upon the earlier year's records, which in turn, was based upon the audit note, came to the conclusion that reopening under section 147(b) was, bad The Tribunal's order was correct. .

Indian and Eastern Newspaper Society v. CIT (1979) 119 ITR 996 (SC) applied.

C. V. Rajan for the Commissioner.

P. P. S. Janarthana Raja for the Assessee.

JUDGMENT

K. A. THANIKKACHALAM, J.----In pursuance of the direction given by this Court in T. C. P. No. 518 of 1982, dated April 5, 1983, the Tribunal referred the following question for the opinion of this Court, under section 256(2) of the Income Tax Act, 1961, hereinafter referred to as the "Act":

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in cancelling the reassessment made under section. 147(b) of the Income-tax Act for the assessment year 1974-75 is valid in law?"

The assessee is a company carrying on business at Madras. The assessment for the assessment year 1974-75, for which the previous year ended on December 31, 1973, was completed under section 143(3) of the Act. Subsequently, the Income-tax Officer noticed. that the expenditure allowed by way of remuneration to directors under section 40(c) of the Act was in excess of the ceiling prescribed and that the weighted deduction under section 35B was improperly allowed on an amount of Rs.1,34,411 which represented commission paid to U. K. and Nepal parties. He, therefore, reopened the assessment under section 147(b) of the Income-tax Act, and in the reassessment, added Rs.44,827 under section 40(c) and Rs.1,34,411 under section 35B of the Act. Aggrieved, the assessee filed an appeal before the Commissioner of Income-tax (Appeals), questioning the jurisdiction with regard to the reopening of the assessment as well as the additions made on the merits. The Commissioner of Income-tax (Appeals) upheld the Income- tax Officer's order in so far as the question of jurisdiction is concerned. In so far as the appeal filed on the merits is concerned the Commissioner of Income-tax (Appeals) upheld the addition made by the Income-tax Officer under section 40(c) of Rs.44,827 but deleted the other addition of Rs.1,34,411 made under section 35B of the Act. Aggrieved, the assessee filed an appeal before the Appellate Tribunal questioning the jurisdiction of the Income-tax Officer to reopen the assessment under section 147(b) of the Act. On merits, objection was taken to the disallowance sustained under section 40(c) of the Act. The Tribunal, taking note of the fact that the reopening of the assessment under section 147(b) was based upon the earlier year's records, which in turn, is based upon the audit note, came to the conclusion that reopening under section 147(b) is bad. On the merits, with regard to the addition made under section 40(c), the Tribunal has not expressed any opinion.

Before us, learned junior standing counsel appearing for the Department, submitted that the Tribunal was not correct in holding that the Income-tax Officer has got no jurisdiction to reopen the assessment under section 147(b) of the Act. It was submitted that the earlier year's assessment was reopened on the basis of the audit note, but in so far as the present assessment year is concerned, reopening was done not on the basis of the audit note, but on the basis of the previous year's records. Therefore, it was submitted that the conclusion arrived at by the Tribunal that the Income-tax Officer was influenced by the audit note relating to the earlier assessment year is not sustainable.

On the other hand, learned counsel appearing for the assessee, while supporting the order passed by the Tribunal, submitted that even though the audit report pointing out the question with regard to the application of section 40(c), related to the earlier assessment year, the said audit report could have influenced the Income-tax Officer while perusing the earlier year's records for reopening the assessment in the present assessment year.

We have heard both learned junior standing counsel appearing for the Department as well as learned counsel appearing for the assessee. In the assessment year 1974-75, original assessment was made without applying section 40(c) of the Act and weighted deduction was allowed under section 35B of the Act with regard to the commission paid to foreign agencies. On going through the earlier year's records, the Income-tax Officer came to the conclusion that section 40(c) was not applied in the assessment year under consideration and weighted deduction under section 35B of the Act was granted in excess. The assessment for the present assessment year was reopened on March 30, 1979, while the assessment for the previous assessment year was reopened on July 20, 1977. The assessment in the earlier year was reopened in pursuance of the audit objection stating that section 40(c) was not made applicable and the weighted deduction was granted in excess of the allowable limit. In the present assessment year, the Income-tax Officer was influenced by the earlier year's records. The earlier year's records would go to show that assessment in the earlier year was reopened on the basis of the audit note, pointing out the non-application of section 40(c) and an excessive allowance of weighted deduction under section 35B of the Act. Therefore, according to the Tribunal, when the Income-tax Officer was influenced by the earlier year's records, he would have been also influenced by the audit note on the basis of which the earlier year's assessment was reopened. Therefore, the Tribunal came to the conclusion that ultimately the Income-tax Officer would have been influenced by the earlier year's audit note. It is no doubt true that there is no audit objection for the present assessment year under consideration. But the facts on record would go to show that only on going through the earlier year's records, the Income-tax Officer came to the conclusion that section 40(c) was not applied and weighted deduction was granted in excess under section 35B of the Act. The earlier year's assessment was reopened on the basis of the audit: objection and the Income-tax Officer would have seen the same, while perusing the earlier year's assessment. Therefore, there is possibility of saying that the Income-tax Officer in the present assessment year under consideration, would have been influenced by the earlier reopening of the assessment, which was based upon the audit objection.

In Indian and Eastern Newspaper Society v. CIT (1979) 119 ITR 996, the Supreme Court held that 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 section 147(b) of the Income Tax .Act. 1961. However, learned junior standing counsel for the Department submitted that the audit party has merely drawn the attention of` the Income tax Officer with regard to the provision of law and not interpreted the law. The audit report, which was mentioned in the present case, relates to an earlier assessment year and the said audit report is not before us. Therefore, it is not possible for us now to say as to what was pointed out by the audit party. However, the Tribunal in its order, gave a finding that to say that the earlier year's audit party note would not have influenced the Income-tax Officer, would be hyper technical in nature. The Tribunal also pointed out that the audit party also interpreted the law to be applied and it is not a case where the audit party has merely drawn the attention of the Income-tax Officer to the provisions of law. Considering all these aspects, we are of the opinion that there is noinfirmity in the order passed by the Tribunal in coming to the conclusion that the reassessment made under section 147(b) of the Act in the present assessment year under consideration is bad in law. Accordingly, we answer the question referred to us in the affirmative and against the Department. No costs.

M.B.A./3354/FCReference answered.