TaxTMI 
TaxTMI 
1980 (2) TMI 9
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....it and claimed the same as a deductible expenditure from its income. The ITO passed his assessment order for the relevant assessment year on January 21, 1977. The said order is at annex. A to the petition. Thereafter, it appears that the ITO addressed under s. 154 a notice dated January 20, 1978, to the petitioner-company stating that an apparent error had crept in the original assessment in so far as he had allowed the amount of Rs. 71,045 and he proposed to rectify the said error by withdrawing the said deduction. The petitioner-company gave a reply to the above notice objecting to the proposed rectification. It was pointed out by the petitioner-company that there was no error in the assessment which would justify the ITO to have recourse to the (said) process under the Act. The ITO also issued a notice under s. 148 dated December 13, 1977, which is at Ex. C to the petition, stating that he had reason to believe that the petitioner's income for the above year had escaped assessment under s. 147 and asking the petitioner to submit a return. The petitioner-company in order to avoid the legal consequences under s. 271(1)(a) of the Act for the late filing of a return, submitted th....
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....t an allowable deduction. As per the provisions of s. 40A(7), the petitioner could not have been allowed the benefit of both provision and cash payment and thus the deduction of the gratuity of Rs. 71,045, which was actually paid during the accounting period in question, requires to be withdrawn. The action taken is perfectly valid, legal and binding to the petitioner. The decision of the Supreme Court in the case of Indian and Eastern Newspaper Society [1979] 119 ITR 996, is no bar to the proceedings being initiated in the instant case." Thus, it is obvious that the ITO has sought reliance on the so-called information which he received from the audit objection pertaining to two items: (1) about fees paid in connection with appearance before the M.R.T.P. Commission, and (2) about the deduction of a gratuity of Rs. 71,045 actually paid to the employees of the petitioner-company during the relevant assessment year as per the provisions of s. 40A(7). So far as the question regarding the deduction of gratuity amount of Rs. 71,045 as allowable under s. 40A(7) of the Act is concerned, it is clear that the ITO had, on the previous occasion, having considered the relevant provisions, gr....
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....usly untenable and is quashed and the impugned notice so far as that ground is concerned would be clearly without jurisdiction, as being devoid of any effective condition precedent to back the same. That takes us to the consideration of the first ground which has been put forward by the ITO in para. 5. Mr. Desai, learned Govt. pleader, appearing for the respondent, has placed before us the relevant audit objection. So far as the first ground made out by the ITO in his affidavit-in-reply regarding the legal fees is concerned, the extract of the audit note has already been seen above. A mere look at the aforesaid audit note shows that according to the audit dept. the ITO was not justified in granting legal expenses pertaining to the items mentioned therein. The legal expenses are in connection with the appearance before the M.R.T.P. Commission and the Company Law Board. In the view of the audit, as the expenses were not incurred for a business already in existence, the income of which was being computed and taxed, the same should not have been allowed as a deduction from such income. This is certainly an opinion of the audit dept. on a question of law. It is obvious that the audit....
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.... embodies the opinion of the audit party in regard to the application or interpretation of the law cannot be taken into account by the ITO. " It has been further held in the aforesaid decision (headnote): " That the opinion of the audit party on a point of law could not be regarded as 'information' enabling the ITO to initiate reassessment proceedings under s. 147(b). The ITO had, when he made the original assessment, considered the provisions of ss. 9 and 10 of the Indian I.T. Act, 1922. Any different view taken by him afterwards on the application of those provisions would amount to a change of opinion on material already considered by him. " Now, on the facts of the present case, the situation is almost identical. It is contended on behalf of the respondent that the audit department pointed out to the ITO that originally when he granted these legal expenses, the directors' report may not have been seen by the ITO. It is difficult to appreciate this contention. As stated earlier, the directors' report, as part and parcel of the balance-sheet, was duly supplied to the ITO. It is not as if some new material or some new fact was pointed out by the audit dept. subsequent to ....
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....in law could possibly arise on that point. " Placing heavy reliance on the aforesaid observations of the Supreme Court in Indian and Eastern Newspaper Society's case [1979] 119 ITR 996, Mr. Desai submitted that the Supreme Court had in terms upheld the decision of the Delhi High Court, though based on a different reasoning by holding that the reassessment proceedings were justified in that case, as the basic information was conveyed to the ITO subsequently, but this fact was already in existence even at the stage of initial proceedings. In order to appreciate the aforesaid contention it would be necessary to have a look at the relevant facts which are found in the judgment of the Delhi High Court in the case of Vashist Bhargava v. ITO [1975] 99 ITR 148. A mere look at the said judgment makes it clear that in that case before the Delhi High Court, the petitioner who belonged to the Indian Civil Service cadre took a loan of Rs. 65,000 from his provident fund as a non-refundable advance in 1958-59 to buy and reconstruct a house. He sold the house in 1967 for Rs. 1,25,000 without obtaining the permission of the Government and as a result the loan became payable together with interes....
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....re held by the ITO he was not in possession of the relevant fact, and subsequently came to know about it after the audit objection that the payment of interest by the concerned assessee would particularly amount to payment to himself in view of the rules of the provident fund., This information was not within the contemplation of the ITO when he originally assessed the income on May 27 l969. We have gone into those details regarding the facts of the case before the Delhi High Court only because Mr. Desai, for the respondent, submitted before us with emphasis that the Supreme Court in Indian and Eastern Newspaper Society's case [1979] 119 ITR 996, had approved of the reassessment proceedings on the basis of the information which the ITO received through the audit note pertaining to an existing fact. It is not possible to accept the said submission of Mr. Desai. The facts which we have narrated above show on the contrary that in the case before the Delhi High Court in Vashist Bhargava v. ITO [1975] 99 ITR 148, the ITO, on the prior occasion, at the time of original assessment, had not got information regarding the fact that the payment of interest was to go to the account of the asse....