1977 (8) TMI 3 - SC - Income Tax

Income Tax Reassessment Upheld: Audit Department Notes Provide Legitimate Grounds for Reopening Tax Assessment Under Section 148

RK Malhotra, Income-Tax Officer, Group Circle II (1), Ahmedabad Versus Kasturbhai Lalbhai

RK Malhotra, Income-Tax Officer, Group Circle II (1), Ahmedabad Versus Kasturbhai Lalbhai - [1977] 109 ITR 537 (SC), AIR 1977 SC 2129 Issues Involved:1. Validity of the notice issued under section 148 of the Income-tax Act.2. Interpretation of 'information' under section 147(b) of the Income-tax Act.3. Competence of the audit department to provide 'information'.Detailed Analysis:1. Validity of the Notice Issued Under Section 148:The respondent, a Hindu undivided family, was assessed for the year 1965-66, during which the Income-tax Officer allowed a deduction for municipal taxes on self-occupied properties. This assessment was later questioned, and a notice under section 148 was issued to reassess the income. The High Court of Gujarat quashed this notice, leading to the present appeal. The Supreme Court had to determine whether the notice under section 148 was validly issued based on the 'information' received by the Income-tax Officer.2. Interpretation of 'Information' Under Section 147(b):Section 147(b) allows the Income-tax Officer to reassess income if he has 'information' leading him to believe that income has escaped assessment. The Supreme Court emphasized that 'information' could be of facts or law and might come from an external source. The court cited previous judgments, such as Maharaj Kumar Kamal Singh v. Commissioner of Income-tax, which held that judicial decisions could constitute 'information'. The court also referenced R. B. Bansilal Abirchand Firm v. Commissioner of Income-tax and Assistant Controller of Estate Duty v. Nawab Sir Mir Osman Ali Khan Bahadur, which supported the notion that decisions from higher authorities or courts could be considered 'information'.3. Competence of the Audit Department to Provide 'Information':The Supreme Court examined whether a note from the audit department could be considered 'information' under section 147(b). The court reviewed several High Court decisions, including Commissioner of Income-tax v. H. H. Smt. Chand Kanwarji and Commissioner of Income-tax v. Kelukutty, which held that audit notes could constitute 'information'. The court concluded that the audit department is competent to scrutinize assessments and point out legal errors, thus qualifying as an external source of 'information'.Conclusion:The Supreme Court disagreed with the Gujarat High Court's view that the audit department is not competent to provide 'information' on legal matters. The court held that the audit department's note pointing out the error in allowing the deduction for municipal taxes on self-occupied properties constituted valid 'information' under section 147(b). Consequently, the Income-tax Officer was entitled to reopen the assessment based on this information. The appeal was allowed, and the notice under section 148 was deemed valid.Final Judgment:The Supreme Court allowed the appeal with costs, holding that the Income-tax Officer was justified in reopening the assessment under section 147(b) of the Income-tax Act based on the information provided by the audit department.Appeal Allowed.