Income-tax---

----Re-assessment---Information that income had escaped assessment Opinion of audit party---Audit report drawing attention of 1.T.O. to correct provision of law would amount to information---Interpretation of law by audit party would not amount to information---Audit report that on the basis of a decision of Supreme Court assessee was not entitled to exemption---Re-assessment on the basis of such audit report was not valid---Indian Income Tax Act, 1961, S.147(b).

If the audit party has drawn the attention of the Income-tax Officer to the correct provisions of - the law, then the Assessing Officer on the basis of the report, can re-open the assessment under section 147(b) of the Income Tax Act, 1961. But if the audit party has interpreted a provision of law the report of the audit party would not constitute information for the purpose of re-opening an assessment.

Held, that, in the instant case, the audit party had interpreted the provisions of the law and informed the Income-tax Officer that on the basis of the decision of the Supreme Court in Indian Chamber of Commerce v. CIT (1975) 101 ITR 796 the assessee was not eligible to get exemption under section 11. The report of the audit party could not be regarded as information for the purpose of re-opening the assessment The re-assessment was not valid and was liable to be quashed.

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

Malhotra (R.K.) ITO v. Kasturbhai Lalbhai (1977) 109 ITR 537 (SC) and Indian Chamber of Commerce v. CIT (1975) 101 ITR 796 (SC) ref.

C.V. Rajan for the Commissioner.

P.P.S. Janarthana Raja for the Assessee

JUDGMENT

N. V. BALASUBRAMANIAN, J.---In compliance with the directions of this Court in T.C.P. Nos.542 to 544 of 1983 and 310 of 1984, dated December 10, 1984, the following question of law in relation to the assessment of income of the assessee for the assessment years 1971-72 to 1974-75 under section 256(2) of the Income-tax Act has been referred to us for our opinion:

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right m holding and had valid material to hold that the re-opening of the assessments for 1971-72 to 1974-75 was invalid in law and should, therefore, be cancelled?"

The assessee, Assembly Rooms, is a trust founded by Lord Wellington on November 3, 1923. According to the Appellate Tribunal, the assessee was treated as a public institution. The assessee derived income in a theatre popularly known as "Assembly Rooms". Besides, it had income from investments. The Income-tax Officer originally completed the assessment for the assessment years 1971-72 to 1974-75 treating the assessee as a charitable trust and granted exemption of the income of the assessee. After the completion of the original assessment the Revenue audit party brought to the notice of the Income-tax Officer that the exhibition of cinema films involved by it would constitute to carrying on an activity for profit and, therefore, the income derived by the assessee was not exempt under section 11 of the Income-tax Act. On the basis of the report of the internal audit party, the Income-tax Officer issued the notice of re-assessment under section 147(b) of the Act and after hearing the objections, he found that the asseasee was not entitled to the exemption granted under section 11 of the Act inasmuch as the assessee did not fulfil the requirements contemplated under section 11 of the Act warranting such an exemption. The Income-tax Officer, thus in the proceedings initiated under section 147(b) of the Act, withdrew the exemption and completed the assessment. After the re-assessment, the assessee preferred an appeal before the Appellate Assistant Commissioner of Income-tax and contended that the reopening of the assessment was not valid and questioned the re-assessment on the merits of the case.

The Appellate Assistant Commissioner on the basis of the decision of the Supreme Court in the case of Malhotra (R.K.) ITO v. Kasturbhai Lalbhai (1977) 109 ITR 537. held that the re-assessment was not valid and allowed the appeal preferred by the assessee.

The Revenue preferred an appeal challenging the order of the Appellate Assistant Commissioner of Income-tax. The Income-tax Appellate Tribunal held that the audit party has interpreted the provision of the law and, therefore, the report of the audit party could not constitute information for the purpose of re-opening the assessment in the light of the decision of the Supreme Court in the case of Indian and Eastern Newspaper Society v. CI.T (1979) 119 ITR 996. The Appellate Tribunal held that it was not possible to hold that there was information to justify the re-opening of the assessment.

Mr. C.V. Rajan, learned counsel appearing for the Revenue, forcibly submitted, that the audit party has not interpreted the law that it fierely brought to the attention of the Income-tax Officer the decision of the Supreme Court in the case of Indian Chamber of Commerce v. CIT (1975) 101 ITR 796, and on the basis of that information regarding the correct provisions of the law furnished by the audit party, the Income-tax Officer re-opened the assessment. He, therefore, submitted that the audit party has not interpreted the provisions of the law, but merely brought to the attention of the Income-tax Officer the correct provisions of the law and, therefore, the report of the audit party could constitute the information for the purposes of re-opening the assessment under section 147(b) of the Act.

Mr. P.P.S. Janarthana Raja, learned counsel appearing for the assessee, submitted that the audit party has interpreted the law and the report of the audit could riot constitute information for the purpose of re assessment under section 147(b) of the Act.

We have carefully considered the submissions of learned counsel on both sides. If the audit party has merely brought to the attention of the Income-tax Officer, the provisions of the law there can be no objection to hold that the report of the audit could constitute information for the purpose of re-opening the assessment under section 147(b) of the Act. The Supreme Court in the case of Indian and Eastern Newspaper Society v. CIT (1979) 119 ITR 996, drew the distinction between the source of the law and the communication of the law. If the audit party has drawn to the attention of the Income-tax Officer, the correct provisions of the law, then the Assessing Officer on the basis of the report, can re-open the assessment under section 147(b) of the Act. 'The audit party, in the instant case, according to the Appellate Tribunal, has not merely brought to the attention of the Income-tax Officer the relevant provisions of the law, but interpreted the provisions of the law. No doubt the audit party has drawn to the attention of the Income-tax Officer, the decision of the Supreme Court in the case of Indian Chamber Commerce v. CIT (1975)101 ITR 796, but the finding of the Appellate Tribunal is that the audit party has applied the law laid down by the Supreme Court to the facts of the case.

The facts of the case clearly show that the audit party has considered the decision of the Supreme Court and, applied the same to the facts of the case and in our opinion this process adopted by the audit involves the interpretation of the law, as it is not the mere case of drawing the attention of the Income-tax Officer to a decision of the Court, but it is a case where the audit has applied a judicial decision to the facts of the case, and came to one conclusion which would amount to interpretation of the law. Therefore, in the instant case, the audit party has interpreted the provisions of the law and informed the Income-tax Officer that on the basis of the decision of the Supreme Court in Indian Chamber of Commerce v. CIT (1975) 101 ITR 796, the assessee was not eligible to get exemption under section 11 of the Act. In our opinion, the report of the audit party cannot be regarded as "information" for the purpose of re-opening the assessment. The Supreme Court in the case of Indian and Eastern Newspaper Society v. CIT (1979) 119 ITR 996, held that (page 1004): "In every case, the Income-tax Officer 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 Appellate Tribunal, after perusal of the audit report, held that the report of the audit involved the interpretation of the law on a disputed point involving application of the decision of the Supreme Court to the facts of the case and we are, therefore, of the view that the Income-tax Officer was not justified in reopening the assessment on the basis of the report of tile audit party. We, therefore, hold that the Appellate Tribunal was justified in holding that the re-opening of the assessments in the instant case was not valid. Accordingly, we answer the common question of law referred to us in the affirmative and against the Department, but in the circumstances of the case, there is no order as to costs.

M.B.A./667/FC

Reference answered.