Bimal Chandra Basak, J.
1. The following questions have been referred to the High Court by the Tribunal, under Section 256(1) of the I.T. Act, 1961 (hereinafter referred to as 'the said Act').
'1. Whether, on the facts and in the circumstances, the Tribunal was right in law in holding that the reassessment proceedings under Section 8 of the Companies (Profits) Surtax Act, 1964, for the purpose of making the second reassessment on 31st August, 1970, for the assessment year 1965-66 had been validly initiated?
2. Whether, on the facts and in the circumstances, the Tribunal was right in law in holding that the dividend reserve of Rs. 13,85,000 could not be taken into account in the computation of capital of the assessee under the Second Schedule to the Companies (Profits) Surtax Act, 1964, for the assessment year 1965-66 ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in refusing to entertain the additional ground of appeal filed on 26th June, 1973 ?
4. Whether the Tribunal was justified in holding that the assessment has not been vitiated by reason of mistake in the reassessment order ?'
2. The facts in this case as admitted and not disputed are as follows:
The assessee is M/s. Stewarts & Lloyds India (P.) Ltd. In respect of the assessment year 1965-66, the ITO made an assessment order in respect of surtax on 31st July, 1967, under the provisions of the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as 'the Surtax Act'). In this assessment order, he allowed standard deduction for a sum of Rs. 12,79,284, which was calculated at the rate of 10% of capital and reserves, being Rs. 1,27,92,837. It will appear from the connected statement showing computation of standard deduction, that to compute the statutory deduction, dividend reserve was taken into consideration. In respect of the said assessment year 1965-66, there was a reassessment by the ITO on 7th October, 1969, under Section 6(2) read with s. 8 of the Surtax Act. In the capital computation some change was made, but the figure in respect of dividend reserve being Rs. 13,85,000, which was originally there, was not disturbed. Then comes the second reassessment, which is the subject-matter of reference in the present case. The ITO made another reassessment by his order dated 31st August, 1970, after issuing notice under Section 8 of the Surtax Act and in the computation of the capital the dividend reserve was not taken into consideration, and the ITO gave the following reasons: 'It is seen that in the earlier assessment, in computing the capital base the amount of the dividend reserve a/c was included in the capital base. This amount of Rs. 13,85,000 is an amount transferred from the profit and loss account for the year ended on 28-9-63. This opening balance in the dividend reserve a/c is to be included in computing the capital base, as the transfer has been approved at a general meeting of the company held after the commencement of the previous year from 1965-66.'
3. Being aggrieved by the said order, the assessee filed an appeal before the AAC. The AAC upheld the order of the ITO. The AAC held that the ITO meant not to include this amount for the computation of the capital base and that the ITO actually excluded the above amount in the capital computation. Thereafter, the assessee filed an appeal before the Tribunal. It was, inter alia, contended before the Tribunal on behalf of the assessee that the ITO was not justified in issuing reassessment notice under Section 8 of the Surtax Act because all the materials and primary facts were disclosed at the time of the earlier assessment. It was further submitted that the ITO applied his mind to all the facts of the case and included the dividend reserve in the capital computation. His subsequent action in reopening the assessment was, therefore, not in accordance with law. On the other hand, it was contended by the departmental representative that the issue of notice under Section 8 of the Surtax Act was in accordance with law because the income for the purpose of surtax was not properly assessed by the ITO. On behalf of the assessee, an additional ground was sought to be raised to the following effect:
'The reassessment order dated 3lst August, 1970, under Section 6(2)/8 of the Companies (Profits) Surtax Act, 1964, is bad in law and should be cancelled since the Income-tax Officer could have no reason to believe that the conditions precedent to the issue of his notice dated 20th March, 1970, under Section 8 of the said Act calling for return had been satisfied.'
4. The Tribunal came to the conclusion that the ITO was justified in initiating reassessment proceedings under Section 8 of the Surtax Act. The plea of the assessee's representative that the ITO was not in possession of any information was held to be without any substance. In this context, it was observed as follows :
'The information must come to his knowledge either from external or internal source after the original assessment has been completed. In the instant case, two assessments had already been made and the Income-tax Officer, therefore, came to know that the dividend reserve was not excluded from the capital computation.'
5. The Tribunal referred to a decision in the case of CIT v. A. Raman and Co. : [1968]67ITR11(SC) and held that the ITO's action was in accordance with the decision of the Supreme Court. The Tribunal further held that the additional ground of appeal could not be entertained. On the merits of the case the Tribunal observed that the Income-tax Appellate Tribunal, Calcutta Bench, have consistently held that the dividend reserve cannot be taken into account in the computation of capital. It was held that the dividend reserve can never be taken as part and parcel of the capital. Hence this reference.
6. Dr. Pal, learned counsel for the assessee has mainly concentrated his submission on the question of the validity of the initiation of proceedings under Section 8 of the Surtax Act. Dr. Pal has submitted that before the ITO could exercise his jurisdiction to reopen a case under Section 8(b), the condition precedent for the exercise of his power must be satisfied. In this particular case. Dr. Pal has submitted that there is no material on record to show that the ITO was entitled to reopen the case under Section 8(b). There is no material disclosed by the ITO. So far as the Tribunal is concerned, similar is the position. The only finding of fact of the Tribunal, which can assist the revenue in this context, is the observation of the Tribunal that in the instant case two assessments had already been made and the ITO, therefore, came to know that the dividend reserve was not excluded from the capital computation. He has submitted that if this is to be treated as the material on which the ITO acted, this does not confer the ITO with the jurisdiction of reopening the case under Section 8(b). He has submitted that the law is now well settled on this point. There must be some information within the meaning of Section 8(b) which alone confers jurisdiction on the ITO to reopen the case under Section 8(b). He has submitted that in this case, at the most, it can be said that it is a case of change of opinion. This change of opinion by itself is not sufficient. In support of his contentions. Dr. Pal has relied on the following decisions :
7. CIT v. A. Raman and Co.. : [1968]67ITR11(SC) , Bankipur Club v. CIT : [1971]82ITR831(SC) , CIT v. Dinesh Chandra H. Shah : [1971]82ITR367(SC) , Reform Flour Mitts (P.) Ltd. v. CIT : [1973]88ITR150(Cal) , Diamond Sugar Mills Ltd. v. ITO : [1973]89ITR171(Cal) , ITO v. Panama P. Ltd. : [1974]97ITR210(Cal) , Shri Venkatesa Mitts Ltd. v. CIT : [1978]111ITR562(Mad) , CIT v. Jyoti Ltd. : [1978]112ITR973(Guj) .
8. Further, in anticipation of the contention of Mr. Balai Pal, appearing for the revenue, Dr. Pal has also drawn our attention to the decision of the Supreme Court in the case of Kalyanji Mavji & Co. v. CIT : [1976]102ITR287(SC) , and he has submitted that this decision has not made any change in the position in law.
9. So far as question No. 3 is concerned, Dr. Pal has submitted that this strictly does not arise for our consideration because though the Tribunal has refused to entertain the additional ground, the Tribunal has gone into the merits of the contention of the assessee regarding the validity of the initiation of proceedings under Section 8(b) of the Surtax Act. The first question arises from that finding of the Tribunal, and accordingly, it is not necessary to go into this question separately. On the second question, that is on the question as to whether the Tribunal was right in law in holding that the dividend reserve, could not be taken into account in the computation of the capital case. Dr. Pal has submitted that if we answer the first question in the negative and in favour of the assessee, then this question would not arise. In any event, in this connection, he has relied on the following decisions : Braithwaite and Co. (India) Ltd. v. CIT : [1978]111ITR729(Cal) , CIT v. Aryodaya Ginning and Mfg. Co. Ltd. : [1957]31ITR145(Bom) and CIT v. Mafatlal Chandulal & Co. Ltd. : [1977]107ITR489(Guj) . So far as the 4th question is concerned, Dr. Pal has submitted that in view of his contentions as stated above, it was not necessary to make any separate submission in respect of the same.
10. Mr. Balai Pal, the learned advocate appearing on behalf of the revenue, has submitted that in the facts of this case the ITO was justified in initiating the reassessment proceedings under Section 8(b) of the Surtax Act. In this connection, he has drawn our attention to the Tribunal's order and, referring to the portion quoted as above, he has submitted that the ITO has excluded it from the computation of the capital base. The only presumption which can be drawn from this is that the ITO came to know and ascertained the correct legal implication of the Surtax Act. The main reliance placed by Mr. Pal was on the decision of the Supreme Court in Kalyanji's case : [1976]102ITR287(SC) . He has submitted that there is a mistake and inadvertence on the part of the ITO within the meaning of Section 8(b) of the Surtax Act. In this connection, Mr. Pal has also relied on the following cases i United Mercantile Co. Ltd. v. CIT : [1967]64ITR218(Ker) , Anandji Haridas and Co. (P) Ltd. v. S. P. Kushare : [1968]1SCR661 , R. K. Malhotra v. Kasturbhai Lalbhai : 1975CriLJ1545 and Smt. Sarla Devi v. CED : [1976]103ITR652(All) .
11. Before we deal with this contention of the learned advocates and the cases cited by them, we think it proper to set out the relevant provisions of the Surtax Act which are relevant for our purpose in the present case :
'2. (5) 'Chargeable profits' means the total income of an assessee computed under the Income-tax Act, 1961 (43 of 1961), for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule :......
(8) 'Statutory deduction' means an amount equal to ten per cent. of the capital of the company as computed in accordance with the provisions of the Second Schedule, or an amount of two hundred thousand rupees, whichever is greater.
Provided that where the previous year is longer or shorter than a period of twelve months, the aforesaid amount of ten per cent. or, as the case may be, of two hundred thousand rupees shall be increased or decreased proportionately :
Provided further that where a company has different previous years in respect of its income, profits and gains, the aforesaid increase or decrease, as the case may be, shall be calculated with reference to the length of the previous year of the longest duration.'
'4. Charge of tax.--Subject to the provisions contained in this Act, there shall be charged on every company for every assessment year commencing on and from the. 1st day of April, 1964, a tax (in this Act referred to as the surtax) in respect of so much of its chargeable profits of the previous year or previous years, as the case may be, as exceed the statutory deduction, at the rate or rates specified in the Third Schedule.'
' 8. Profits escaping assessment.--If--
(a) the Income-tax Officer has reason to believe that by reason of the omission or failure on the part of the assessee to make a return under Section 5 for any assessment year or to disclose fully and truly all material facts necessary for his assessment for any assessment year, chargeable profits for that year have escaped assessment or have been under-assessed or assessed at too low a rate or have been made the subject of excessive relief under this Act, or
(b) notwithstanding that there has been no omission or failure as mentioned in Clause (a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that chargeable profits assessable for any assessment year have escaped assessment or have been under-assessed or assessed at too low a rate or have been the subject of excessive relief under this Act,
he may, in cases falling under Clause (a) at any time, and in cases falling under Clause (b) at any time within four years of the end of that assessment year, serve on the assessee a notice containing all or any of the requirements which may be included in a notice under Section 5, and may proceed to assess or reassess the amount chargeable to surtax, and the provisions of this Act shall, so far as may be, apply as if the notice were a notice issued under that section. The Second Schedule
1. Subject to the other provisions contained in this Schedule, the capital of a company shall be the aggregate of the amounts, as on the first day of the previous year relevant to the assessment year, of--
(i) its paid-up share capital;
(ii) its reserves, if any, created under the proviso (b) to Clause (vib) of Sub-section (2) of Section 10 of the Indian Income-tax Act, 1922 (11 of 1922), or under Sub-section (3) of Section 34 of the Income-tax Act, 1961 (43 of 1961);
(iii) its other reserves as reduced by the amounts credited to such reserves as have been allowed as a deduction in computing the income of the company for the purposes of the Indian Income-tax Act, 1922 (11 of 1922), or the Income-tax Act, 1961 (43 of 1961);
(iv) the debentures, if any, issued by it to the public :
Provided that according to the terms and conditions of issue of such debentures, they are not redeemable before the expiry of a period of seven years from the date of issue thereof ; and
(v) any moneys borrowed by it from Government or the Industrial Finance Corporation of India or the Industrial Credit and Investment Corporation of India or any other financial institution which the Central Government may notify in the behalf in the Official Gazette or any banking institution (not being a financial institution notified as aforesaid) or any person in a country outside India :
Provided that such moneys are borrowed for the creation of a capital asset in India and the agreement under which such moneys are borrowed provides for the repayment thereof during a period of not less than seven years.'
12. We shall next consider the decisions cited before us. The case of United Mercantile Co. Ltd. v. CIT : [1967]64ITR218(Ker) was cited by Mr. Balai Pal, appearing on behalf of the revenue. The facts of this case are as follows ; The assessee was a public limited company doing business in printing and paper. For the assessment year in question, the assessee filed a return showing an income of Rs. 2,016. Along with the return, the assessee also produced the printed balance-sheet as at the 31st December, 1956, and the profit and loss account for the twelve months ended on that date. The assessment was completed on the 19th November, 1957, under Section 23(3) of the Indian I.T. Act, 1922, on an income of Rs. 3,789 after adding back some items considered by the ITO as inadmissible items of expenditure. The tax was worked out after allowing rebate, on the said sum of Rs. 3,789, at the rate of 35%. During the accounting period the assessee had issued bonus shares, not out of premiums received in cash, to the extent of Rs. 42,500. Under the Finance (No. 2) Act, 1957, such an issue would reduce the rebate from 35% to 5%. The papers produced before the ITO did indicate that the bonus shares were not issued out of premiums received in cash and that only a 5% rebate and not 35% rebate was attracted by the facts of the case. The fact that the bonus shares were not issued out of premiums received in cash and the consequent result in the light of the Finance (No. 2) Act, 1957, were, however, not realised by the ITO at the time of assessment was made on the 19th November, 1957. The realisation came only subsequently. A notice under Section 34(l)(b) of the Indian I.T. Act, 1922, followed and a fresh assessment was made. The assessee disputed the right of the ITO to invoke Section 34(1 )(b) of the Act in his appeal before the AAC and the Appellate Tribunal, but without success. A reference to this court was then sought and the application in that behalf was allowed by the Tribunal.
13. The question referred reads as follows :
' Whether, on the facts and in the circumstances of the case, the reassessment under Section 34(1 )(b) was valid ?'
14. The Kerala High Court held that the expression 'information' includes information not only as to facts but also as to the state of the law. However, it was observed that it was not equally clear whether a mere change of opinion will enable the ITO to proceed under that provision. In any event, the court held that the case before the High Court was not a case'of mere change of opinion, it was a case of an awareness, for the first time, of the true fact--that the issue of bonus shares was not out of premiums received in cash and the implications of that fact in the light of the provisions of the Finance (No. 2) Act, 1957. It was observed that 'to inform 'means 'to impart knowledge' and a detail available to the ITO in the papers filed before him does not by its mere availability become an item of information. It is transmitted into an item of information in his possession only if, and only when, its existence is realised and its implications are recognised. It was held that the awareness of the ITO for the first time after the assessment order of the 19th November, 1957, that the bonus shares were issued not out of premiums received in cash and the consequent result in the light of the Finance (No. 2) Act, 1957, was information within the meaning of that expression as used in Section 34(1 )(b) of the Indian I.T. Act, 1922.
15. The next case we shall consider is the case of Anandji Haridas and Co. (P.) Ltd. v. S.P.Kushare, STO : [1968]1SCR661 , relied on by Mr. Balai Pal. The section involved in this case was s. 11 of the C. P. & Berar Sales Tax Act, 1947, which provides that if in consequence of any information which has come into his possession, the Commissioner was satisfied that any turnover of a dealer during any period has been underassessed or has escaped assessment, etc , he may, at any time, after following certain procedure, reassess the tax payable. In this connection, the Supreme Court observed that information need not be about any fact, it may be even as to the legal position. In this connection, the Supreme Court observed as follows (p. 337) :
'In our judgment, the knowledge of the fact that the appellants had not submitted their quarterly returns as well as treasury challans, constituted an information to the assessing authority from which it could be satisfied and in fact it was satisfied that the turnovers with which we are concerned in this case had escaped assessment. '
16. In the case of CIT v. A. Raman and Co. : [1968]67ITR11(SC) , cited by Dr. Pal, the facts were as follows :
The assessees in that case, M/s. A. Raman & Company, were dealers in mill stores. In the course of their business they used to sell ' mill stores ' to other dealers including two concerns trading in the names of M/s. A. M. Shah & Co. and M/s. R. Ambalal & Co., which were owned by the HUFs, the managers of which were the only partners of the assessees. For the assessment years 1959-60, 1960-61 and 1961-62, the assessees were originally assessed by the ITO, Circle I, Ward-A, Ahmedabad, while the partners of the assessees and the HUFs, which traded in the names of M/s. A.M. Shah & Co. and M/s. R. Ambalal & Co., were assessed by the ITOs in other circles. The cases of the assessees, of the partners of the assessees and of the two HUF's trading in the names of A. M. Shah & Co. and R. Ambalal & Co. were later transferred to the ITO, Group Circle-J, Ahmedabad. That officer, by letter dated March 20, 1964, informed the assessees that he was convinced from a perusal of the assessment records of the assessees, their partners and their individual HUFs, that the partners of the assessees had contrived to divert the profits of the assessees to their respective HUFs and had tried to 'evade proper taxation', and on that ground he called upon the assessees to submit their objections, if any, to the reopening of the assessments for the years 1959-60, 1960-61 and 1961-62. The assessee in reply contended that the ITO had no jurisdiction to reopen the assessments since the HUFs of the two partners and the assessees had submitted 'correct and complete returns of income' supported by their books of account, 'quantity details' of purchases, sales and expenses, and had given all material facts and relevant information necessary for the assessment at the time of each assessment. The ITO issued three separate notices under Section 147 of the I.T. Act, 1961, requiring the assessees to show cause why the assessments for the years 1959-60, 1960-61 and 1961-62 should not be reopened. The High Court of Gujarat, in a petition for a writ under Article 226 of the Constitution, quashed those notices and restrained the ITO from taking proceedings in pursuance thereof. With special leave granted by the Gujarat High Court, the Commissioner appealed to the Supreme Court.
17. The Supreme Court pointed out that the condition which invests the ITO with jurisdiction has two branches: (i) that the ITO has reason to believe that income chargeable to tax has escaped assessment; (ii) that it is in consequence of information which he has in his possession that he has reason to believe. It was pointed out that in the case before the Supreme Court only the second branch of the condition was involved. In this connection, it was observed as follows (p. 15 & 16):
'The expression ' information ' in the context in which it occurs must, in our judgment, mean instruction or knowledge derived from an external source concerning facts or particulars, or as to law relating to a matter bearing on the assessment. If, as a result of information in his possession, the Income-tax Officer has reason to believe that income chargeable to tax had escaped assessment, the Income-tax Officer has jurisdiction to assess or reassess income under Section 147(b) of the Income-tax Act, 1961. Information in his possession that income chargeable to tax has escaped assessment furnishes a starting point, for assessing or reassessing income. If he has that information, the Income-tax Officer may commence proceedings for assessment or reassessment. To commence the proceeding for reassessment it is unnecessary that on the materials which came to the notice of the Income-tax Officer, the previous order of assessment was vitiated by some error of fact or law--...Jurisdiction of the Income-tax Officer to reassess income arises if he has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment. That information must, it is true, have come into the possession of the Income-tax Officer after the previous assessment, but even if the information be such that it could have been obtained during the previous assessment from an investigation of the materials on record or the facts disclosed thereby or from other enquiry or research into facts or law but was not in fact obtained, the jurisdiction of the Income-tax Officer is not affected.'
18. The Supreme Court, however, held that the appeal of the Commissioner must still fail because the case of the Commissioner on the materials placed before the High Court suffered from a serious infirmity on the first branch of the jurisdictional condition. It was held that the averments made in the affidavit filed by the ITO in that behalf did not establish the existence of that branch of the condition.
19. In the case of Bankipur Club Ltd. v. CIT : [1971]82ITR831(SC) , on which great reliance has placed by Dr. Pal, the facts were as follows :
20. The assessee was a members' club incorporated under the Indian Companies Act. The concerned assessment was for the assessment years 1956-57, 1957-58, 1958-59 and 1959-60, the corresponding accounting years being the calendar years 1955, 1956, 1957 and 1958. In response to a notice issued by the ITO under Section 22(2) of the Indian I.T. Act, 1922, the assessee filed 'Nil' returns for all the four years. It was claimed that it was not liable to pay income-tax as it was a members' club. Before the ITO, the balance-sheets and profit and loss accounts of the assessee for the relevant accounting years were produced. After perusing those records the ITO came to the conclusion that the assessee was not liable to pay any tax in respect of the amounts realised by it from its members. Some time thereafter, the ITO issued notices to the assessee under Section 34(1)(b) of the 1922 Act. In response to those notices, the assessee again filed 'Nil' returns but the ITO did not accept those returns. He assessed the assessee for the assessment years 1956-57, 1957-58, 1958-59 and 1959-60 on Rs. 7,526, Rs. 3,521, Rs. 5,313 and Rs. 6,881, respectively. He came to the conclusion that the amounts received from the members of the club as guest charges must be considered as the income of the assessee and that the same was liable to be taxed. Aggrieved by the orders of the ITO, the assessee took up the matter in appeal to the AAC. The AAC affirmed the orders of the ITO. A further appeal was taken by the assessee to the Income-tax Appellate Tribunal. The Tribunal upheld the contentions of the assessee and came to the conclusion that the notices issued under Section 34(1 )(b) were incompetent notices as the ITO cannot be said to have received any information after he made the assessments in question. The Supreme Court observed that the ITO had not placed any material before the Tribunal to show that he had received any fresh information either on questions of fact or on questions of law subsequent to the date on which he passed the original assessment orders. In this connection it was pointed out as follows (p. 834):
'This court has repeatedly ruled that the information referred to in Section 34(l)(b) must be what the Income-tax Officer receives after he makes the original order of assessment. It must come to his knowledge subsequent to the assessment sought to be reopened. In these cases it is submitted that all the facts were placed before the Income-tax Officer when he passed the original orders of assessment. The fact that the club had received certain amounts as guest charges from its members had been placed before the Income-tax Officer. It is not the case of the Income-tax Officer that he did not come to know all the relevant facts when he made the original orders of assessment. It is also not his case that at the time he made those orders he was not aware of the true legal position. It was for the Income-tax Officer to show that he had received some information subsequent to his passing the original orders of assessment. No such material was placed before the Tribunal. That being so, the Tribunal, in our opinion, was right in holding that the Income-tax Officer was incompetent to initiate proceedings under Section 34(l)(b). The High Court has given no reason to come to the conclusion that there was any subsequent information on the basis of which the Income-tax Officer could have reassessed the assessee under Section 34(l)(b).'
21. In the case of CIT v. Dinesh Chandm H. Shah : [1971]82ITR367(SC) , relied upon by Dr. Pal, the relevant facts were as follows ; The assessee was one H. K. Shah, The assessment year concerned was 1955-56, the previous year being that ending on March 31, 1955. The assessee had a share of profit from the Mysore Premier Metal Factory, Madras, of which he was a partner. He was also carrying on other business and was being assessed at Calcutta. In his return, which he filed before the ITO at Calcutta, he specifically disclosed his share in the income of the Madras firm. The profit allocation report of the share of profit from the Madras firm had been received in the office of the ITO in September, 1955, and an order was recorded on the order sheet of the proceedings to that effect. The assessment for tbe year in question was completed sometime in November, 1958. The ITO failed to include in the total income, the share of profit from the Madras firm. On March 22, 1960, the ITO issued a notice under Section 34(l)(b) of the Indian I.T. Act, 1922, hereinafter called 'the Act', calling upon the assessee to show cause why the profits from the Madras firm, which had escaped assessment, should not be included in the income. The assessee wrote a letter saying that he had fully disclosed the details of his income from all sources in his original return and nothing had escaped assessment, In fact, he had indicated that he had a share in the profits of the Madras firm and was also entitled to interest on the capital invested therein. The ITO, however, completed the assessment for the aforesaid year, as also the subsequent assessment year, in which also the share of income from the Madras firm had not been included. The assessee went up in appeal to the AAC which was allowed on the ground that the ITO had no additional information either externally or internally which came into his possession subsequent to the making of the assessment to justify the action taken under Section 34(l)(b). The revenue appealed to the Appellate Tribunal which reversed the decision of the AAC in respect of the assessment year 1955-56. The view of the Tribunal was that the information on the record in respect of the share of profit assessable to tax had escaped the notice of the ITO and, therefore, he was justified in taking action under Section 34(l)(b). Two questions were referred for the opinion of the High Court but we are only concerned with the first question which is as follows:
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the action under Section 34(l)(b) of the Income-tax Act, 1922, was legal and valid? '
22. Ultimately, the matter came up before the Supreme Court, The Supreme Court referred to the decisions in Maharaj Kumar Kamal Singh v. CIT : [1959]35ITR1(SC) and C1T v. A. Raman and Co. : [1968]67ITR11(SC) and held that it was wholly unnecessary to go into the question whether an inadvertent omission in the original assessment can justify the reopening of the assessment under Section 34(l)(b) on its subsequent discovery by the ITO. It was pointed out that no such position was adopted by the ITO when he was called upon by the AAC to state the reason for not including the income of the Madras firm about the factum and existence of which full disclosure had been made in the return filed by the assessee and with regard to the income of which a note had been made on the file when the share allocation report was received from the ITO, Madras, on the 21st September, 1955. The Supreme Court found that the ITO clearly sought to justify the reopening of the assessment under Section 34(l)(b) merely on the ground of change of opinion. It was pointed out that it was well settled by then that the mere change of opinion could not be a valid ground for reopening the assessment under Section 34(l)(b) of the Act.
23. The next decision to be described is the decision of a Division Bench of this court in the case of Reform Flour Mills (P.) Ltd. v. CIT : [1973]88ITR150(Cal) , relied upon by Dr. Pal. The facts of that case are as follows;
24. Reform Flour Mills (P.) Ltd., the assessee herein, was a company carrying on business, among others, in conversion and sale of wheat flour. The assessments for 1945-46 and 1946-47 were completed on June 4, 1946, and December 2, 1946, on income of Rs. 96,202 and Rs. 43,973, respectively. In the assessment for the year 1945-46, a sum of Rs. 49,199 paid to Bimal Kumar, Nirmal Kumar on account of banian's commission for sale of flour and a sum of Rs, 34.767 paid to Omkarmal Kanailal & Co., for brokerage for purchase of wheat were allowed as deduction. Similarly, in the assessment for the year 1946-47, a sum of Rs. 1,48,663 paid to Bimal Kumar, Nirmal Kumar as banian's commission for sale of flour and a sum of Rs. 41,227 paid to Omkarmal Kanailal on account of brokerage for purchase of which were allowed as deduction. The assessee was previously managed by M/s. Andrew Yule & Co. Ltd. On September 9, 1944, M/s. J. K. Eastern Industries Ltd. took over as managing agents. Messrs. Bimal Kumar, Nirmal Kumar were appointed as banian under an agreement dated December 28, 1944, with effect from September 8, 1944, and M/s. Omkarmal Kanailal as brokers by M/s, J.K. Eastern Industries Ltd., after they took over as managing agents. At the time of the original assessment, the assessee had filed the balance-sheet which contained the director's report and in the director's report the existence of control over the distribution of wheat and wheat flour is referred to. In the course of the original assessment for 1945-46, the ITO wrote a letter dated April 25, 1946, to the assessee asking for information about the amount payable to the Government of Bengal. The assessee sent a reply on April 29, 1946, stating that the production and supply of wheat were controlled by the Government and that the mills were allowed guaranteed profits at 10% of the capital employed. It was also stated that as the amount was not assessed in time the profit payable to the Government was not assessed. The assessment for 1945-46 was completed on June 4, 1946, after this correspondence. Similar assessment for 1946-47 followed on December 2, 1946. At the time of the assessment for 1947-48, which was completed on December 7, 1948, the ITO found that the assessee regularly charged in its accounts commission and brokerage and that there was no necessity for incurring these expenses. In his order the ITO observed (p, 153):
''While the expenditure of the kind mentioned might have been necessary when the mills were buying and selling their products in open market there was absolutely no necessity of incurring these expenses in the accounting year when the wheat had been supplied to the mills exclusively by the Government and wheat products had been purchased back from the mills either by the Government or by bulk allottees in accordance with the directions issued by the Government.' '
25. The amounts claimed in that year in respect of such payments made for banian's commission for sale of flour and for brokerage for purchase of wheat were disallowed. The ITO thereafter proceeded under Section 34 of the Indian I.T. Act, 1922, which was in force at the relevant time, for reopening the assessment for 1945-46 and 1946-47. The notices are dated March 30, 1950, for each of those years. The reassessments were made on September 6, 1950, and in the reassessment orders the ITO disallowed the banian's commission and brokerage which were allowed in the original assessments. The assessee challenged the jurisdiction of the ITO to reassess and the matter ultimately came to the High Court on reference. It was contended before the High Court that no information as contemplated in Section 34(1 )(b) of the Act had come into the possession of the ITO after the original assessment and the ITO, therefore, had no power or jurisdiction to reopen the assessment already made. It was submitted that it was basically and essentially a case of change of opinion on the same materials and that was not information within the meaning of Section 34(l))b). This court, in this connection, held as follows (p. 157) :
'An assessment already made cannot be reopened under Section 34(l)(b), unless the requirements of the said section are satisfied. It is well settled that an Income-tax Officer does not have any power and jurisdiction to reopen an assessment under Section 34(l){b), if the conditions of the said section are not fulfilled. The necessary compliance with the conditions of the said section is a condition precedent to the exercise of any power and jurisdiction by the Income-tax Officer to reopen an assessment under Section 34(1 )(b). The necessary conditions, as clearly mentioned in the section itself and recognised in judicial decisions, are : (1) The Income-tax Officer must have information which comes into his possession subsequent to the making of the original assessment order ; and (2) that information must lead to his belief that income chargeable to tax has escaped assessment, has been under-assessed or assessed at too low a rate, or has been made the subject of excessive relief.
Whether these conditions have been satisfied or not will necessarily depend on the facts and circumstances of each particular case. If the Income-tax Officer does not have the necessary information, the question of any information leading to his belief that income chargeable to tax has escaped assessment, has been under-assessed or assessed at too low a rate, or has been made the subject of excessive relief, will not arise at all.'
26. It was pointed out that it was well settled that a mere change of opinion on the same materials does not constitute information within the meaning of the said section and, therefore, does not justify the reopening of any assessment. The court held that it is a case of mere change of opinion on the same materials on the part of the ITO and that this did not constitute information within the meaning of Section 34(l)(b).
27. In the case of Diamond Sugar Mills Ltd. v. ITO : [1973]89ITR171(Cal) , relied on by Dr. Pal, Sabyasachi Mukharji J,, sitting in writ jurisdiction, had to examine this question. In that proceeding the notice under Section 148 of the I.T. Act, 1961, was challenged. It was stated that there were no grounds or material for the reopening of the assessment. In answer to the rule nisi the ITO affirmed an affidavit. After consideration of various decisions of the Supreme Court, the learned judge held as follows (p. 177) :
' Reading the expression in the context of the said section, in the context of the scheme of the Act and in the light of the decisions of the Supreme Court referred to above, it appears to me, that in order to be information in terms of Clause (b) of section 147 of the Income-tax Act, 1961, the following conditions must be fulfilled:--(a) it must be knowledge or instruction concerning facts or particulars or as to law relating to a matter bearing on the assessment, (b) such knowledge or instruction must come into the possession of the Income-tax Officer after the previous assessment, (c) the knowledge or information must be such which leads to the formation of the belief that the income of the assessee had escaped assessment or had been under-assessed, (d) the proximate or immediate source of such information and knowledge must be external, but (e) the fact that such knowledge or information could have been derived during the previous assessment from an investigation of the materials on record or facts disclosed thereby or from other enquiry but was in fact not derived would not prevent such knowledge or instruction from being 'information' in terms of the Section, (f) a case where the Income-tax Officer on his own initiative and on material which was before him at the time of the original assessment changed his opinion and came to a different conclusion, that would not be acting on information in terms of the section.'
28. On examination of the facts of the case, the learned judge came to the conclusion that there was no knowledge derived from any external source; the knowledge was sought to be derived from a new look at the old facts of the assessment. The learned judge held that that would be a mere change of opinion and not acting on information in terms of the section. In ITO v, Panama P. Ltd. : [1974]97ITR210(Cal) , it was an appeal in a writ matter challenging five notices issued under Section 148 of the I.T. Act, 1961, for the assessment years 1964-65, 1965-66, 1966-67, 1967-68 and 1968-69. It was the case of the assessee that in respect of the said assessment years the assessee had filed its returns of income along with and supported by the audited profit and loss accounts, depreciation statements, various other statements in detail. The assessee claimed under Rule 5 of the I.T. Rules, 1962, read with App. I, Pt. I, under item Ill(ii), 10% depreciation and was allowed the same. According to the assessee, this was allowed after consideration of the relevant facts as this had already been allowed since the assessment year 1961-62. Thereafter, the assessments were sought to be reopened by the aforesaid notices and the petitioner challenged the said reopening by this application under Article 226 of the Constitution. In the affidavit-in-opposition, in answer to the rule nisi, the ITO stated that the reasons for the reopening were as follows (p. 211):
'The petitioner claimed depreciation on blade making machinery at the rate of 10% which was inadvertently and/or erroneously allowed in the assessment years 1964-65 to 1968-69. The said machinery is not entitled to the higher rate of depreciation @ 10% but only at 7%. After the said assessments for the said years 1964-65 to 1968-69 were completed, information came into my possession that the petitioner was in fact entitled to claim depreciation at 7 % on the said blade making machinery. Furthermore, in the assessments of the sister concern of the petitioner, Messrs. Indo-Swing, depreciation allowance on the said machinery had all along been claimed and had been allowed at the rate of 7% only. I say that the petitioner's alleged claim of the special depreciation rates in respect of the said machinery for manufacture of safety razor blade was incorrect and extensive. The said information has also come into possession subsequent to the completion of the said assessments.
The recorded reasons were also produced before us and these were as follows J
' Depreciation on plant & machinery was claimed and obtained by the assessee @ 10%.
The correct rate of depreciation, however, is 7% in respect of blade making machinery, (as this) is not machinery qualifying for that higher rate. Thus income liable to tax has escaped assessment prima facie within the meaning of Section 147, Explanation l(d), in consequence of information in my possession. (I have now ascertained that in the sister concern M/s. Indo-Swing, C II/I-263/A, the assessee has all along claimed and has been allowed depreciation @ 7% only on identical machinery). Accordingly, I reopen the assessments for 64/65 to 66/67 under Section 147(b): notice under Section 148 to issue.' '
29. The appeal court found that the reopening was sought, because (i) of the view of the ITO that on the blade making machinery the petitioner was entitled to depreciation at the rate of 7% and not at the rate of 10% and as such the petitioner had enjoyed more depreciation than it was entitled to and such a view is based on the (ii) subsequent knowledge that in a sister concern the similar kind of machinery got depreciation at the rate of 7% because it was so claimed by that assessee. It was observed that the question was whether the same could be considered information in terms of Section 147(b) of the I.T. Act, 1961. Sabyasachi Mukharji J., in his judgment, referred to his earlier decision in Diamond Sugar Mills Ltd. v. ITO : [1973]89ITR171(Cal) , where he had laid down the conditions to be fulfilled in order that it may amount to ' information ' in terms of Section 147(b) of the Act. The learned judge held that the decision of the ITO in respect of another assessee for another assessment year was not a decision of any higher authority and it was merely the opinion of an officer of co-ordinate authority on the basis of the facts of the case and that caanot be considered to be an information in terms of Clause (b) of Section 147 of the I.T. Act, 1961.
30. The next case, we shall refer to is the case of Kalyanji Mavji & Co. v. CIT : [1976]102ITR287(SC) , which has been strongly relied upon by Mr. Balai Pal. In that case, Fazal 'Ali J., after referring to the various decisions of the Supreme Court, held as follows (p. 296):
'On a combined review of the decisions of this court the following tests and principles would apply to determine the applicability of Section 34(l)(b) to the following categories of cases :
(1) where the information is as to the true and correct state of the law derived from relevant judicial decisions;
(2) where in the original assessment the income liable to tax has escaped assessment due to oversight, inadvertence or a mistake committed by the Income-tax Officer. This is obviously based on the principle that the taxpayer would not be allowed to take advantage of an oversight or mistake committed by the taxing authority;
(3) where the information is derived from an external source of any kind: Such external source would include discovery of new and important matters of knowledge of fresh facts which were not present at the time of the original assessment;
(4) where the information may be obtained even from the record of the original assessment from an investigation of the materials on the record or the facts disclosed thereby or from other enquiry or research into facts or law.
If these conditions are satisfied then the Income-tax Officer would have complete jurisdiction to reopen the original assessment. It is obvious that where the ITO gets no subsequent information, but merely proceeds to reopen the original assessment without any fresh facts or materials or without any enquiry into the materials which form part of the original assessment, Section 34(l)(b) would have no application, '
31. We shall next refer to the case of Smt. Sarla Devi v. CED : [1976]103ITR652(All) , relied upon by Mr. Balai Pal. The facts of this case were as follows:
32. One Shri Kanhaiya Lal died on 3rd April, 1962. His widow, Smt. Sarla Devi, filed a return under the E. D. Act, 1953. She claimed, inter alia, that her husband had one-fourth share in the coparcenary properties. The Asst. Controller, Meerut, felt that the deceased's share in the coparcenary properties was half because the deceased was the sole surviving coparcener in the bigger HUF. He called upon the accountable person by a notice dated February 5, 1963, to show cause why the deceased's share should not be taken as one-half. The accountable person filed a reply on 23rd February, 1963, and pointed out that her husband's share would only be one-fourth. The Asst. Controller examined the matter and upheld the contention of the accountable person. On scrutiny later, the Asst. Controller found that on a correct view of Hindu law, the share of the deceased in the coparcenary properties would be half. He issued notice to the accountable person under Section 59(b) of the E.D. Act for reopening the proceedings. The accountable person filed a reply stating that there was no new information in the possession of the Asst. Controller and, therefore, he had no jurisdiction to reopen the assessment under Clause (b) of Section 59. The Asst. Controller repelled the preliminary objection. He held that according to Hindu law the correct share of the deceased in the bigger HUF would be one-half and not one-fourth. He further held that in this case the correct position of law came to the notice of the Asst. Controller, subsequent to the completion of the original assessment and information, that is, the correct position of law so known led to the belief that the property had escaped assessment on account of adopting wrong share of the deceased in the bigger HUF. He, accordingly, included one-half share for assessment purposes. The accountable person went up in appeal. The Zonal Appellate Controller held that the facts of the case clearly go to establish that subsequent to the order of assessment on 24th July, 1963, there was no information obtained. This notice for reassessment was invalid and bad in law. He further held that in view of the fact that the reopening of the assessment itself had been held to be invalid it was not necessary to decide as to what would be the correct share of the deceased in the coparcenary property. The appeal was allowed. The department took the dispute to the Income-tax Appellate Tribunal. The Tribunal held that in the instant case 'information' was obtained by the Asst. Controller from other enquiries or research into law made by him subsequent to the previous assessment. The Asst, Controller had jurisdiction to reopen the assessment under Clause (b) of Section 59. Since the Zonal Appellate Controller had not decided the question as to the correct share, the case was remanded to him for a decision of this issue in accordance with law.
33. Thereafter, the matter came up before the Allahabad High Court on reference. The only question before the High Court was the question of jurisdiction to reopen the assessment under Clause (b) of Section 59. The controversy was whether the material on which the Asst. Controller proceeded to reassess was information in his possession within the meaning of Clause (b). In this connection the High Court observed that during the course of the original assessment certain facts were not known to the Asst. Controller. It is pointed out that the examination at the first stage was whether the deceased was the sole surviving coparcener so that his entire share would pass by succession. In this context it was observed as follows (p. 657) :
'Subsequently, the Assistant Controller found that for the purposes of determining the share of the deceased in the coparcenary properties a partition is deemed to have taken place on the date of his death for estate duty purposes. He also found that on such a partition the wife of the deceased would not have got a share because there was no son. Under the Hindu law the wife gets a share where there is a partition between the father and sons and not otherwise. Therefore, the share of the deceased was half.
It is apparent that this legal aspect was not canvassed or examined before the Assistant Controller during the original assessment proceedings. At that time the question of share was examined from an entirely different legal standpoint. The Tribunal has found that in the instant case the information was obtained by the Assistant Controller from other enquiries or research into law made by him subsequent to the assessment. It is obvious that the Assistant Controller was unaware of the legal position on the basis of which he initiated reassessment proceedings at the time of drawing up the original assessment. He became aware of the legal position as a result of his research into law subsequent to the assessment order. The question that requires consideration is whether this acquisition of knowledge as to the true legal position applicable to the facts of the case is information in the possession of the Assistant Controller within the meaning of Clause (b) of Section 59. '
34. The next case we shall refer to is the case of R. K. Malhotra, ITO v. Kasturbhai Lalbhai : 1975CriLJ1545 . The facts of this case are as follows:
35. The assessee owned two house properties, one in Ahmedabad and the other in Bombay. During the relevant assessment year 1965-66, both the properties were occupied by the respondent. The ITO treated the properties as self-occupied property. The respondent claimed that a sum of Rs. 4,052 being the municipal taxes be deducted in determining the annual valuation of the properties under Section 23(2) of the I.T. Act. The ITO allowed the claim. Subsequently, after a lapse of over 3 years, the ITO, by a letter dated July 15, 1969, called upon the respondent-assessee to show cause why the amount of municipal taxes allowed as deduction should not be added back on the ground that it was wrongly allowed. The respondent on July 18, 1969, replied that the ITO was not competent to reopen the assessment under Section 147 and that the municipal taxes were validly allowed as a deduction in computing the income from self-occupied properties. Not satisfied with the explanation, the ITO issued a notice dated September 12, 1969, to the respondent under Section 148 stating that whereas he had reason to believe that the income of the respondent chargeable to tax for the assessment year 1965-66 had escaped assessment within the meaning of Section 147, he proposed to reassess the income for the said assessment year and required the respondent to file a return of his income within 30 days from the date of receipt of the notice. The respondent then filed a petition under Article 226 of the Constitution for a writ in the nature of mandamus for quashing the notice dated September 12, 1969, issued by the ITO.
36. The only question which arose for consideration in the appeal before the Supreme Court was whether the intimation which the ITO received from the audit department would constitute 'information' within the meaning of Section 147(b). After consideration of the authorities cited, Kaila-sam J. pointed out that the same made it clear that a subsequent decision of the Privy Council, the Income-tax Appellate Tribunal and the opinion of the Central Board of Revenue as to the state of law would be ' information' under Section 147(b). Kailasam J. observed that the Gujarat High Court was correct in its view that it would be information if it was stated by a person, body or authority competent and authorised to pronounce upon the law and was invested with authority to do so. In applying this principle, Kailasam J. observed that the High Court erred in holding that the audit department was not an authority competent and authorised to declare the correct state of law or to pronounce upon it.
37. In the case of Shri Venkatesa Mills Ltd. v. CIT : [1978]111ITR562(Mad) , the assessments of the assessee-textile mills for the years 1960-61 to 1963-64 were completed by allowing development rebate on all the purchases made for the introduction of the casablanca conversion system in its spinning plant. The assessments were later reopened under Section 147(b) on the ground that the assessee was not entitled to development rebate and, therefore, the grant of the same had resulted in the income being underassessed. The Madras High Court examined the scope of Section 147(b) of the 1961 Act. The first question which was considered by the High Court was whether the ITO had come to possess information subsequent to the original assessment or not. In that case, there was an assessment order in which the ITO referred to the circumstances under which the case was reopened. In this connection, it was observed by the Madras High Court as follows (p. 570):
'Apart from stating,' subsequently it came to notice that development rebate was wrongly allowed', the Income-tax Officer in his order does not state as to how it came to his notice. On the other hand, the rest of the order of the Income-tax Officer will make it clear that he did not have any external information and that he came to the conclusion that development rebate was wrongly allowed solely on the basis of reconsideration of the original order made by his predecessor.'
38. It was further pointed out that from the assessment order it was clear that the ITO acted solely on the basis of bestowing second thoughts over the same matter. Accordingly, it was held that there was no external information whatever which came into the ITO's possession subsequent to the original order of assessment. On the question as to whether there has been internal information the Madras High Court held that it was well settled that mere change of opinion will not confer jurisdiction on the ITO.
39. The last case on this point, relied on by Dr. Pal, is that of CIT v. Jyoti Ltd, : [1978]112ITR973(Guj) . In that case for the assessment year 1963-64, the assessment was sought to be reopened under Section 9(b) of the Super Profits Tax Act, 1963, on the ground that certain reserves created for specific purposes and the excess of the development reserves were considered for the purpose of capital computation for determining the standard deduction under r. 1 of the Second Schedule to the Act. The assessee's contention was that there was no information to warrant reopening as this was a case of mere change of opinion. It was held that it was merely a case of added second thought and that on a mere change of opinion he attempted to initiate these proceedings for reopening the assessment.
40. Applying the principles laid down in the aforesaid cases, it is quite clear that in the present case the initiation of reassessment proceedings by the ITO cannot ,be supported. The power of the ITO to reopen the assessment proceedings under Section 9(b) is circumscribed by the provisions of Section 9(b) of the Act. In the present case, it is admitted that Section 8(a) has no application. But that power was invoked under Section 8(b). Before the power under Section 8(b) can be invoked by the ITO, he has to satisfy that the condition precedent to the exercise of power has been complied with. He has to show that there was information within the meaning of this sub-section, In the present case, what has merely happened is that subsequent to the order of assessment and the first reassessment the successor officer, on a wrong authority, has merely on the basis of difference in the opinion reopened the case. It is really a case of a new or a second move on the old facts. There was no information before the ITO on the basis of which he reopened the case. There was no extrinsic information like change in law or some new facts found by him. Further, no case is made out regarding any intrinsic information on the basis of the records of the case. As such no such material is disclosed by the ITO in his order and no such material is disclosed from the order of the Tribunal. The passage relied on by Mr. Pal as the basis of such information does not help the revenue. If that is to be treated as information it is not an information within the meaning of Section 8(b) of the Act. We cannot draw the presumption as sought for by Mr. Pal. We do not find any material on the basis of which we can come to the conclusion that the ITO on the basis of further enquiry has found out some other facts or law on the basis of which he found out that there was any mistake or inadvertence made in the earlier order. In the absence of any such material we cannot speculate regarding the same. For the aforesaid reasons, we must hold that the condition precedent to the exercise of power under Section 8(b) has not been satisfied in the facts of this case. In the facts and circumstances of this case, there is no provision within the meaning of Section 8(b) which would empower the ITO to reopen the assessment as he has sought to do.
41. For the aforesaid reasons, we answer the first question in the negative and in favour of the assessee. We hold that, on the facts and in the circumstances, the Tribunal was not right in law in holding that the reassessment proceedings under Section 8 of the Companies (Profits) Surtax Act, 1964, for the purpose.of making the second reassessment on 31st August, 1970, for the assessment year 1965-66 had been validly initiated.
42. So far as the second question is concerned, in view of our answer to question No. 1 that the reassessment proceedings had not been validly initiated, it is not necessary for us to go into the merits of the question as to whether, on the facts and in the circumstances, the dividend reserve of Rs. 13,85,000 could not be taken into account in the computation of capital of the assessee under the Second Schedule to the Surtax Act. We may, however, point out that there is no material on the record to show that it was in respect of any proposed dividend as sought to be argued by Mr. Balai Pal. There is no material on the record to show that this was in respect of some present or contingent liability in connection with dividend. Accordingly, we decline to deal with question No. 2.
43. So far as the third question is concerned we accept the contention of Dr. Pal. The Tribunal itself went into the question as to the validity of the proceedings initiated under Section 8 of the Surtax Act. It dealt with the merits of such contention and question No. 1 specifically deals with the same. Accordingly, it is not necessary for us to go into the question 'whether the Tribunal was justified in law in refusing to entertain the additional ground. Accordingly, we decline to deal with question No. 2.
44. So far as question No. 4 is concerned, in view of our answer to the questions above, it is not necessary for us to deal with the same.
45. We answer the questions accordingly. There will be no order as to costs.
Dipak Kumar Sen, J.
46. I agree.