Court invalidates reopening of tax proceedings based on audit report, emphasizing lack of jurisdiction & legal grounds.

Income-Tax Officer And Others Versus Jiyajeerao Cotton Mills Ltd.

Income-Tax Officer And Others Versus Jiyajeerao Cotton Mills Ltd. - [2001] 247 ITR 122, 164 CTR 519, 116 TAXMANN 16 Issues:
1. Validity of reopening of proceedings under section 148 of the Income-tax Act, 1961 based on information provided by internal audit.
2. Whether the audit report constitutes 'information' within the meaning of section 147(b) of the Act.
3. Entitlement to relief under sections 80-I and 80J based on the audit report's findings.
4. Consideration of circular issued by the Central Board of Direct Taxes as information for reopening assessments.

Analysis:
The judgment involved an appeal against a decision where the learned single judge had deemed the reopening of proceedings under section 148 of the Income-tax Act, 1961 as invalid, improper, baseless, and without jurisdiction. The Income-tax Officer had issued a notice for reopening the assessment for the year 1971-72, citing that income had escaped assessment based on information regarding relief under sections 80-I and 80J and penalty imposition for controlled cloth production shortfall. The court considered whether the audit report could be deemed as 'information' for reopening assessments under section 147(b) of the Act.

The appellant's counsel argued that a bona fide belief regarding income escapement allows for the issuance of a notice under section 148 if the Income-tax Officer possesses relevant information. The counsel relied on a previous apex court decision that permitted reopening based on factual errors pointed out by internal audit. However, the respondent's counsel contended that the audit report merely reflected a change of opinion and did not constitute valid information under section 147(b) of the Act. The circular issued by the Central Board of Direct Taxes was also challenged as not constituting actionable information for reopening assessments.

The court referred to previous apex court decisions emphasizing that internal audit reports do not possess judicial powers to interpret the law and their opinions do not qualify as 'information' for reopening assessments. The court further analyzed the entitlement to relief under sections 80-I and 80J based on the audit report's findings, emphasizing that the incidental income from a by-product does not alter the priority industry status. Additionally, the court considered the circular issued by the Central Board of Direct Taxes, concluding that it did not constitute valid information for reopening assessments.

Ultimately, the court held that the Income-tax Officer lacked jurisdiction in issuing the notice under section 148 read with section 147(b) as there was no valid information supporting the reopening of assessments. The court dismissed the appeal, upholding the decision of the learned single judge regarding the invalidity of the reopening proceedings.