1979 (8) TMI 1 - SC - Income Tax

ITO cannot reopen assessments under Section 147 based solely on internal audit party's legal opinions

SC held that ITO was not legally justified in reopening assessments under s. 147 based solely on views expressed by internal audit party of income-tax ... Information as to law for reopening assessments under Section 147(b) - reopening of assessment on the basis of information - distinction between law and opinion - status and functions of internal audit reports - limitations on administrative/executive bodies pronouncing lawInformation as to law for reopening assessments under Section 147(b) - distinction between law and opinion - Whether the opinion of an internal audit party on a point of law constitutes 'information' within the meaning of Section 147(b) of the Income Tax Act, 1961. - HELD THAT: - The Court held that 'information' in Section 147(b) includes instruction or knowledge as to law only when that law emanates from a formal source competent to create or declare it (legislature or a judicial/quasi-judicial authority). Statements, interpretations or opinions by persons or bodies not so authorised are merely opinions and do not constitute law. While anyone may communicate knowledge of the law, only declarations by a competent source can be treated as 'information' of law for the purpose of creating a reason to believe that income has escaped assessment. Consequently, an internal audit party's expression of view on the application or interpretation of law is not itself 'information' under Section 147(b); only that part of an audit note which points out the applicable law (as a communicated fact) can constitute information, and the Income Tax Officer must independently evaluate the legal effect. The Court relied on the established definitions of 'information' in earlier decisions and stressed the legal distinction between the source of law and its communicator. [Paras 6, 9, 11, 13, 20]The opinion of an internal audit party on a point of law cannot be regarded as 'information' within the meaning of Section 147(b); only communication of the law from an audit note may supply information, but the legal effect must be determined independently by the Income Tax Officer.Status and functions of internal audit reports - reopening of assessment on the basis of information - Whether the Income Tax Officer was legally justified in reopening the assessments for the years 1960-61 to 1963-64 on the basis of the view expressed by the internal audit party. - HELD THAT: - The Court examined the nature and scope of the internal audit organisation and Receipt Audit, including the Internal Audit Manual and the role of the Comptroller and Auditor-General, and concluded that audit parties perform administrative/executive functions and are not vested with judicial power to pronounce the law. An audit note expressing an opinion on the application of legal provisions cannot, by itself, create the requisite 'information' under Section 147(b). Where the Income Tax Officer, at the original assessment, has already considered the same statutory provisions, a subsequent change of view based solely on reappraisal of the same material does not amount to fresh 'information' enabling reopening; the realisation that an error has been made is part of the 'reason to believe' and not the antecedent 'information.' Applying these principles to the facts, the reassessments reopened on the basis of the internal audit party's view were unjustified. [Paras 14, 15, 16, 20, 21]The Income Tax Officer was not legally justified in reopening the assessments for 1960-61, 1961-62, 1962-63 and 1963-64 on the basis of the internal audit party's view; the reassessments are invalid.Final Conclusion: The reference is answered in the negative: an internal audit party's opinion on points of law does not constitute 'information' under Section 147(b) and the reopening of assessments for the years 1960-61 to 1963-64 on that basis was not justified; the assessee succeeds with costs. 1. ISSUES PRESENTED and CONSIDEREDThe core legal question considered by the Supreme Court was whether the view expressed by an internal audit party of the Income Tax Department on a point of law can be regarded as 'information' within the meaning of Section 147(b) of the Income Tax Act, 1961, thereby justifying the reopening of assessments. Specifically, the Court examined if such an internal audit report, which opined on the proper head under which income should have been assessed, could constitute valid 'information' enabling the Income Tax Officer to initiate reassessment proceedings under Section 147(b) for the assessment years 1960-61 to 1963-64.2. ISSUE-WISE DETAILED ANALYSISIssue: Whether the internal audit party's opinion on a point of law amounts to 'information' under Section 147(b) of the Income Tax Act, 1961, justifying reopening of assessments.Relevant legal framework and precedents: Section 147(b) permits reopening of an assessment if the Income Tax Officer has, in consequence of 'information' in his possession, reason to believe that income chargeable to tax has escaped assessment. The term 'information' was previously interpreted by this Court in Maharaj Kamal Singh v. Commissioner of Income-tax to include not only facts but also information as to the true state of law, including relevant judicial decisions. In Commissioner of Income-tax v. Roman and Company, 'information' was defined as 'instruction or knowledge derived from an external source concerning facts or particulars, or as to law, relating to a matter bearing on the assessment.' These principles formed the foundation for the Court's analysis.Court's interpretation and reasoning: The Court distinguished between information relating to facts and information relating to law. Facts have concrete existence and can influence assessment directly. Information as to law must emanate from a formal source competent to declare or create law, such as legislative enactments or judicial/quasi-judicial authorities. Opinions, interpretations, or views expressed by persons or bodies lacking such authority, including internal audit parties, do not constitute law. The Court emphasized that the internal audit organization functions primarily as an administrative or executive body, tasked with checking arithmetical accuracy and procedural compliance, not with judicial or quasi-judicial authority to declare law.The Court examined the nature and scope of the internal audit party's functions, referencing the Internal Audit Manual and Section 16 of the Comptroller and Auditor-General's (Duties, Powers and Conditions of Service) Act, 1971. The audit's role is to ensure effective checks on revenue assessment and collection procedures, not to substitute or override the statutory duties of revenue authorities or to pronounce on legal questions binding on Income Tax Officers.Key evidence and findings: The internal audit party had expressed the view that income from letting out conference halls and rooms should be assessed under 'Income from property' rather than as 'Income from business.' The Income Tax Officer initially considered Sections 9 and 10 of the Income Tax Act during original assessments but later sought to reopen assessments based on the audit party's opinion. The Court found that the audit party's opinion was not a formal declaration of law but merely a communication of a viewpoint.Application of law to facts: The Court held that only the part of the audit note which mentions the law that escaped the Income Tax Officer's notice constitutes 'information' under Section 147(b). The opinion or interpretation of the audit party regarding the application of that law cannot be treated as information. The Income Tax Officer must independently evaluate the law and decide whether there is reason to believe income has escaped assessment. A mere change of opinion on material already considered does not justify reopening under Section 147(b).Treatment of competing arguments: The Revenue contended that a discovery of error or oversight by the Income Tax Officer upon receipt of the audit report constitutes 'information' under Section 147(b). The Court rejected this, clarifying that 'information' must precede the reason to believe; the realization of an error is the reason to believe, not the information itself. The Court also addressed prior conflicting High Court decisions and this Court's own earlier rulings, concluding that the view that audit reports can be treated as information was erroneous.Conclusions: The Court concluded that the opinion of an internal audit party on a point of law does not amount to 'information' under Section 147(b) of the Income Tax Act, 1961. Consequently, reopening assessments solely on the basis of such an audit opinion is not legally justified.Issue: The scope of 'information' under Section 147(b) and the power of Income Tax Officer to reopen assessments on reconsideration of the same material.Relevant legal framework and precedents: The Court referred to prior judgments including Maharaj Kamal Singh, Roman and Company, and Bankipur Club Ltd., which held that reopening requires fresh information and not merely a change of opinion on the same material. The Court also discussed Kalyanji Mavji and Co., where a broader interpretation was suggested but ultimately rejected as inconsistent with the statute.Court's interpretation and reasoning: The Court held that a mere reappraisal or reconsideration of the same material already considered during the original assessment, leading to a different opinion, does not constitute 'information' enabling reopening under Section 147(b). This principle preserves the finality of assessments and prevents abuse of the reassessment process.Application of law to facts: Since the Income Tax Officer had considered Sections 9 and 10 during the original assessments, any subsequent change of view on their application was a change of opinion on the same material, insufficient to justify reopening.Conclusions: The reopening of assessments cannot be based solely on a change of opinion by the Income Tax Officer on material already considered.Issue: Whether audit reports from the Comptroller and Auditor-General or Revenue Audit constitute 'information' under Section 147(b).Relevant legal framework and precedents: The Court examined previous decisions including R.K. Malhotra v. Kasturbhai Lalbhai, Assistant Controller of Estate Duty v. Nawab Sir Mir Osman All Khan Bahadur, and others. It noted that the Comptroller and Auditor-General is empowered by statute to audit receipts and report on procedural adequacy, but does not have adjudicatory powers.Court's interpretation and reasoning: The Court distinguished between formal declarations of law by competent authorities and audit notes or reports. While audit reports may point out errors or defects, they cannot be equated with authoritative pronouncements of law. The Court criticized the Delhi High Court's broader interpretation that audit notes constitute information but recognized that where audit reports reveal factual information (e.g., payments made to the assessee's own account), such facts constitute information.Application of law to facts: The Court held that only factual information contained in audit reports may be treated as information under Section 147(b), not the audit party's opinions or interpretations of law.Conclusions: Audit reports do not confer judicial or quasi-judicial authority on audit parties to declare law, and their opinions on legal questions do not amount to 'information' under Section 147(b).3. SIGNIFICANT HOLDINGS'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.''An error discovered on a reconsideration of the same material (and no more) does not give the Income Tax Officer the power to reopen an assessment under Section 147(b).''The Income Tax Officer must determine for himself the effect and consequence of the law mentioned in the audit note; the opinion rendered by the audit party in regard to the law cannot for the purpose of such belief add to or colour the significance of such law.''The internal audit organisation performs administrative or executive functions and cannot be attributed the powers of judicial supervision over the quasi-judicial acts of Income-tax authorities.''The realization by the Income Tax Officer that he has committed an error is not 'information' within the meaning of Section 147(b); rather, information is the antecedent which gives rise to the reason to believe.'The Court answered the referred question in the negative, holding that reopening of assessments under Section 147(b) on the basis of the internal audit party's opinion was not legally justified.