1972 (7) TMI 12 - HC - Income Tax

Kerala HC Validates Income Tax Reassessment Based on Audit Note

Muthukrishna Reddiar Versus Commissioner of Income-Tax, Kerala.

The Kerala High Court affirmed the legality and validity of proceedings initiated under section 147(b) of the Income-tax Act, 1961, based on an audit ... Whether, on the facts and in the circumstances of the case, the proceedings initiated under section 147(b) of the Income-tax Act, 1961, are legal and valid?' Issues Involved:1. Legality and validity of proceedings initiated under section 147(b) of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Legality and Validity of Proceedings under Section 147(b):The core question referred to the High Court was whether the proceedings initiated under section 147(b) of the Income-tax Act, 1961, were legal and valid. The assessment year in question was 1963-64, with the original assessment completed on March 16, 1964. The Income-tax Officer reopened the assessment under section 147(b) on the ground that capital gains from the transfer of a property had not been taxed.The property in question, Machungal Purayidom, originally belonged to the assessee's wife and was bequeathed to her four daughters. Two daughters sold their shares to the assessee, who then sold his interest to another daughter. The reassessment aimed to tax the capital gains of Rs. 30,000, the difference between the selling price and the purchase price.The Income-tax Officer initially accepted the assessee's contentions about the property's value and improvements, resulting in a lower tax amount. However, during reassessment, the Officer concluded that the income had escaped assessment, leading to the taxation of Rs. 30,000 as capital gains.Section 147(b) stipulates that the Income-tax Officer can reassess income if he has 'reason to believe' that income chargeable to tax has escaped assessment due to information received after the original assessment. The definition of 'information' was central to this case.The information in this case was a communication from the audit party, pointing out errors in the original assessment. The Supreme Court in Commissioner of Income-tax v. A. Raman & Co. clarified that 'information' must come from an external source and not be a mere change of opinion by the Income-tax Officer.The revenue argued that information could come from any external source, including the audit department, while the assessee contended that it must come from a judicial authority. The Gujarat High Court in Kasturbai Lalbai v. R. K. Malhotra supported the latter view, while the Delhi High Court in Commissioner of Income-tax v. H. H. Smt. Chand Kanwarji supported the former.The Kerala High Court favored the Delhi High Court's view, stating that the Supreme Court did not limit 'external source' to judicial authorities. The Court emphasized that the information must lead the Income-tax Officer to believe that income had escaped assessment, regardless of whether the information could have been obtained during the original assessment.The Court cited several cases supporting the broader interpretation of 'information,' including Salem Provident Fund Society Ltd. v. Commissioner of Income-tax and United Mercantile Co. Ltd. v. Commissioner of Income-tax. These cases established that information could come from any source, including audit notes, and still be valid under section 147(b).In conclusion, the Kerala High Court held that the proceedings initiated under section 147(b) based on the audit note were legal and valid, answering the question in the affirmative. A copy of the judgment was directed to be sent to the Income-tax Appellate Tribunal, Cochin Bench.