Madras High Court
Needle Industries (I.) Ltd. vs Commissioner Of Income-Tax on 2 February, 1989
Equivalent citations: [1990]183ITR393(MAD)
JUDGMENT Ratnam, J.
1. In this reference under section 256(2) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), at the instance of the assessee, the following question of law last been referred to this court for its opinion:
"Whether the Income-tax Appellate Tribunal was right in reversing the order of the Appellate Assistant Commissioner on the ground that the report of the internal audit party was information received subsequent to the assessment although the said report did not contain any new facts which were not before the Income-tax Officer at the time of the original assessment and considered by him?"
2. The assessee is a company carrying on business in the manufacture and sale of needles. For purposes of its business, the assessee purchased raw materials, consumable stores, spare parts and sundry tools and it had insured them against the risk of loss by fire. In April, 1967, a fire broke out in the building where the raw materials, etc., were stocked and they were destroyed which led the assessee to making a claim on the insurance company. In terms of the contract of insurance, the assessee received Rs. 11,17,270 being the replacement value of the goods lost, the value of which, according to the books of the assessee, was Rs. 10,07,996. The excess amount of Rs. 1,09,274 realised by the assessee over and above the book value of the goods lost by fire was credited by the assessee to an account styled "insurance reserve account". In the return filed by the assessee for the assessment year 1968-69 with which we are concerned in this reference, the assessee had shown this amount in Part IV of its return. Besides, in a note appended to the return, the assessee had also disclosed the loss of goods by fire as well as the realisation of the replacement value from the insurance company and the crediting of Rs. 1,09,274 to the insurance reserve account in the profit and loss account for the year ending December 31, 1967. While completing the assessment on February 24, 1971, the total income was computed at Rs. 16,38,370, but in donning so, the Income-tax Officer did not advert to the question of the taxability of the sum of Rs. 1,09,274. Subsequently, by an order dated August 4, 1971, the assessment rider was modified and the revised total income was computed at Rs. 16,38,220. Later, the Income-tax Officer reopened the assessment under section 147(b) of the Act on the ground that he had information which led him to believe that the income of Rs. 1,09,274 had escaped assessment and he also issued a notice to the assessee under section 148 of the Act and the assessee was also informed that it was proposed to include that amount for the purpose of chargeability to tax in the assessment year 1968-69. In its reply dated February 24, 1972, the assessee not only objected to the proposal, but maintained that all the relevant facts relating to this amount had already been disclosed in the return as well as in the accounts and that only after consideration of all the matters, the amount had not been subjected to tax and that the amount received from the insurance company by the assessee did not arise from trading or manufacturing operations but otherwise as a result of force majeure and hence not liable to tax. However, the Income-tax Officer did not accept the stand of the assessee and subjected to tax the surplus of Rs. 1,09,274 on the ground that that amount had been received by the assessee only in the course of the carrying on of its business. Aggrieved by that, the assessee preferred an appeal and before the Appellate Assistant Commissioner, the assessee contended that the reopening of the assessment was not valid as it was made only owing to a change in the opinion of the Income-tax Officer and that the amount of Rs. 1,09,274 received by the assessee was not a trading receipt. It was also further contended by the assessee that even in the return as well as in the note appended thereto, full and complete details regarding this amount had been disclosed and, therefore, there was no question of receipt of information by the Income-tax Officer justifying either the reopening or subjecting to tax treatment the sum of Rs. 1,09,274. The Appellate Assistant Commissioner found that the assessee had placed all the relevant information before the Income-tax Officer even at the time when the original assessment was completed and that no specific information had come to the Income-tax Officer subsequent thereto leading him to a belief that the sum of Rs. 1,09,274 had escaped assessment and, consequently, the Income-tax Officer had no jurisdiction whatever to reopen the assessment under section 147(b) of the Act. In the view so taken, the Appellate Assistant Commissioner did not think it necessary to consider the question whether the sum of Rs. 1,09,274 was liable to tax or not. Accordingly, he cancelled the revised assessment. On further appeal by the Revenue before the Tribunal, it took the view that though the assessee might have disclosed the amount in Part IV of the return and no mention was made of any audit report by the Income-tax Officer in the revised order of assessment, in view of the absence in the file of the note stated to have been furnished by the assessee before the Income-tax Officer, the audit note had set out its reasons for its opinion that the amount of RS. 1,09,274 credited by the assessee to the insurance reserve account was liable to be included in the taxable income and that led the Income-tax Officer to the belief that that amount was the income of the assessee for the assessment year in question and, therefore, the reopening of the assessment by the Income-tax Officer under section 147(b) of the Act was valid and justified. The Tribunal directed the Appellate Assistant Commissioner to consider the case on merits also since that had not been done by him.
3. Learned counsel for the assessee contended that the assessee on its part had made available to the Department the full and complete particulars regarding the amount which formed the subject-matter of reassessment not only in Part IV of the return filed by it but also in a note appended along with the accounts and if in spite of it the Income-tax Officer initially did not choose to assess the amount for whatever reasons, he cannot subsequently, under the guise of receipt of information from the audit party, proceed to change his opinion and subject to tax that amount. It was also further pointed out that the assessee cannot be penalised for the absence of the note in the file at the time when the matter was heard by the Tribunal, while the Appellate Assistant Commissioner had made pointed reference to such a note and that the opinion of the audit party that the amount was liable to be included in the taxable income for the assessment year in question would not constitute information for the purpose of enabling the Income-tax Officer to reopen the assessment under section 147(b) of the Act. Reliance in this connection was placed by learned counsel upon the decisions reported in Indian and Eastern Newspaper Society v. CIT and CIT v. Hackbridge-Hewittic and Easun Ltd. [1985] 154 ITR 378 (Mad). On the other hand, learned counsel for the Revenue maintained that on the facts and in the circumstances of the case, the audit report would constitute information justifying the reopening of the assessment as had been done and relied upon the decision in Murugappan (M. A.) v. CWT [1985] 153 ITR 626 (Mad).
4. Before we proceed to consider these rival contentions, it is necessary to make a brief reference to certain undisputed facts. Even at the time of the filling of the return, the assessed had drawn the attention of the Department to the sum of Rs. 1,09,274 shown in Part IV of the return specifically mentioning that that amount represented the insurance claim in respect of loss due to fire and claiming that that amount is not taxable. In addition, the assessee had also furnished a note at the foot of the profit and loss account and item No. 5 in that note related to this amount. In that note, the assessee had referred to the outbreak of fire in its factory premises and the receipt of an amount of Rs. 11,17,271 inclusive of the sum of Rs. 1,09,274 sought to be reassessed. A further note on the fire claim had also been furnished, presumably in response to some queries raised at the time of the original assessment proceedings and that had set out the details of the materials destroyed by fire, the value thereof as well as the gross amount of the insurance claim, etc., and finally that note wound up, as could be gathered from the order of the Appellate Assistant Commissioner, as under:
"The receipt represented by the amount credited to the "insurance reserve account" fulfils all the above conditions. In addition, we may state that the goods that were lost are not trading stock. In the above circumstances, the amount credited to "insurance reserve account" is correctly shown in Part IV of the income-tax return for the assessment year 1968-69."
5. It is thus seen that with reference to this amount of Rs. 1,09,274, the assessee had placed the complete as well as the full particulars before the Department. However, we find from paragraph 7 of the order of the Tribunal that no such note was found in the file. We are of the view that for the negligence of the Department in the maintenance of its records, the assessee cannot be visited with a reassessment in the manner done. We need not embark upon a consideration as to why despite the furnishing of full and complete particulars by the assessee, the Income-tax Officer did not choose to advert to this claim and pass appropriate orders in that regard. It might well be that while passing the first order and also revising it subsequently, the Income-tax Officer felt that the claim made by the assessee was justified and sustainable and that was why nothing had been said as regards this either in the first assessment order or even in the revised order. We are, therefore, inclined to feel that there was a change in the opinion of the Income tax Officer regarding the tax treatment of this amount and that was shy the Income-tax Officer chose to reopen the assessment. Such change of opinion on the part of the Income-tax Officer cannot be accepted as a ground to justify the reopening of an assessment. This is not all. It is seen from paragraphs 7 and 9 of the order of the Tribunal that the Income-tax Officer had information in the shape of the audit report. The Tribunal conceded that in the revised order of assessment, there is no reference to this audit report by the Income-tax Officer, though it had been stated that subsequently information was available that a sum of Rs. 1,09,274 represented income arising in the business of the assessee and it had been omitted to be included in the original assessment. We do not see how any Income-tax Officer, who had scrutinised the return as well as the note appended to the accounts, could have missed the inclusion of the amount shown in Part IV of the return and also a narration with reference to the circumstances under which the assessee secured this amount. Obviously, therefore, it is clear that despite the furnishing of full and complete particulars by the assessee, the concerned Income-tax Officer was of the opinion that the amount need not be subjected to tax ; as otherwise, the non-inclusion of this amount cannot be explained. We, therefore, hold that, on the facts, there was no question whatever of the Income-tax Officer resorting to section 147(b) of the Act.
6. Whether section 147(b) of the Act would at all stand attracted may now be considered. Even if there had been no omission or failure on the part of the assessee to disclose fully and completely all particulars, under section 147(b) of the Act, if the Income-tax Officer, in consequence of information in his possession, has reason to believer that income chargeable to tax has escaped assessment, he may, subject to the provisions of sections 148 to 153 of the Act, assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned. The twin requisites before resort to section 147(b) of the Act can be had are -
(i) the Income-tax Officer should have had or received information; and
(ii) such information in his possession leads him to a belief that income chargeable to tax has escaped assessment. In this case, the only justification to sustain the reopening put forth by the Tribunal is that the audit report has set out some reasons for entertaining the opinion that the surplus amount of Rs. 1,09,274 credited by the assessee to the insurance reserve account was liable to be included in the taxable income for the assessment year under consideration. We desired to peruse the audit report ourselves with a view to find out whether that report was merely intended to convey information to the effect that a sum of Rs. 1,09,274 had escaped assessment in the hands of the assessee or it went further than that even to set out the reasons for including that amount in the taxable income of the assessee. We regret to state that though before the Tribunal a copy of the audit report appears to have been placed, we have not had that privilege. We are, therefore, constrained to go by the order of the Tribunal in so far as the contents of the audit report are concerned. The Tribunal has made a passing reference to the audit report in paragraph 9 of its order and has stated that the audit had set out its reasons for its opinion that the surplus amount was liable to be included in the taxable income. From this reference to the report of the audit party, we are unable to hold that the audit report did not embody its opinion either in regard to the application or even the interpretation of the law and this certainly cannot be taken note of and acted upon by the Income-tax Officer. We may in this connection refer to the decision in Indian an Eastern Newspaper Society v. CIT [1979] 199 ITR 996 (SC). The assessee in that case owned a building consisting of a conference hall and rooms which were let out on rent to its members and the income from that source was assessed as "income from business" in respect of the assessment years in question. The report of the internal audit party took the view that the income should have been assessed under the head "Income from property" and not as "business income" and treating the contents of this report as information, reassessment proceedings were initiated under section 147(b) of the Act. The Appellate Assistant Commissioner held that the Income-tax Officer did not have any information in his possession. But the Tribunal held that an internal audit report could be regarded as information. On a reference to the Supreme Court, it was pointed out that the information of the audit party on a point of law could not be regarded as information enabling the Income-tax Officer to initiate reassessment proceedings under section 147(b) of the act and the Income-tax Officer, when he made the original assessment, considered the provisions of sections 9 and 10 of the Indian Income-tax Act, 1922, and a different view taken afterwards on the application of those provisions would amount to a change of opinion on material already considered by him. We are inclined to hold that, on the facts and in the circumstances of this case, this decision would squarely apply, especially when on the reference to the audit report in the order of the Tribunal, it is not possible to exclude an expression of opinion by the audit party that in law the amount was assessable. We may in this context usefully refer to the scope of the report of an internal audit party constituting information, as pointed out in Indian and Eastern Newspaper Society v. CIT [1979] 119 ITR 996, 1004 (SC):
It is not a declaration by a body authorised to declare the law. That part alone of the note of an audit party which mentions the law which escaped the notice of the Income-tax Officer constitutes 'information' within the meaning of section 147(b); the part which embodies the opinion of the audit party in regard to the application or interpretation of the law cannot be taken into account by the Income-tax Officer."
7. Finally, it was held by the Supreme Court that the information 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 Act. We may also refer to CIT v. Hackbridge Hewittic and Easun Ltd. [1985] 154 ITR 378 (Mad), where it was held that the audit was not competent to give any advice on points of law and the Income-tax Officer cannot seek to reopen an assessment merely on the ground that he rendered a wrong decision on facts or on a wrong understanding of the facts relevant to the assessment in making the original assessment. We find on a due consideration of the facts and circumstances that the present case would fall within the ratio of the aforesaid decisions and that the audit report cannot be considered as information justifying the Income-tax Officer to reopen the assessment under section 147(b) of the Act. That leaves for consideration the decision in Murugappan (M. A.) v. CWT [1985] 153 ITR 626 (Mad), relied on by learned counsel for the Revenue. In that case, though the assessment under the Wealth-tax Act, 1957, was reopened, it was done on the basis that the Wealth-tax Officer proceeded to give relief to the assessee even beyond what was claimed by him and further that an exempted item of asset had been treated as a debt deductible. It was this factual position which was pointed out that was held to constitute information within the meaning of section 17(1)(b) of the Wealth-tax Act, 1957. In our view, that decision cannot have any application at all on the facts and circumstances of this case. We, therefore, answer the question referred to us in the negative and in favour of the assessee. The assessee will have the costs of this reference. Counsel's fee Rs. 500.