# A.LA. FlRM v. C.l.T MADRAS

- **Citation:** [1991] 1 S.C.R. 624
- **Court:** Supreme Court of India
- **Decided:** 1991-02-21
- **Bench:** S. Ranganathan, N.M. Kasliwal, S.C. Agrawal
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/a-la-flrm-v-c-l-t-madras-11055
- **Pages:** 25

## Headnote

Income Tax Act, 1961: Section 147(b)-Scope of-Assessment
year 1961-62-Reassessment-Interpretation and meaning of the word
"information"-Material coming to the notice of the Income Tax
Officer subsequent to original assessment-Meaning of the word.
"Escape".
Dissolution of Firm-Valuation of closing stock-Principles-In
continuing business closing stock to be valued at cost or market price
which ever is lower-Where business is discontinued, the closing stock
D
to be valued at market price.
The Appellant-Assessee, a partnership firm was engaged mainly,
in Malaya, in money lending business since 1949 and incidental to this
business was also doing the business of sale and purchase of house
properties, gardens and estates. It was reconstituted under a deed dated
E
26.3.1960. The firm was dissolved on 13.3.1961 and closed its accounts
with effect from that date. ID its income-tax return filed on 10.4.1962
for the assessment year 1961-62 it had filed a profit and loss account
wherein an amount of $.1,01,248 equivalent of Rs.1,58,057 was shown
as "difference on revaluation of the estates, gardens and house properties" on the dissolution of the firm. In the memo of adjustment for
p
income-tax purposes this amount was deducted as being not assessable
either as revenue or capital. The Income Tax Officer issued notice
under section 23(2) of the Act on that very day and completed the
..:;.+
assessment also on the same day after making a petty addition of
Rs.2088 paid as property tax in Malaya.
G
When for the subsequent year 1962-63, the a~ssee filed its return
showing nil income stating in the forwarding letter that the Firm had
been dissolved on 13.3.1961, the I.T.O. wrote to the assessee that the
revaluation difference of Rs.1,58,057 should have been brought to tax
'--y'-
in the previous year. The assessee replied that no profit or less could be
assessed on a revaluation of assets, that the assessee was gradually
H
winding up its business in Malaya, the surplus would be only capital
624
A.LA. FlRM v. C.l.T.. MADRAS
625
gains and that revaluation had been at the market price prevalent since
1954 and thus no capital gains were chargeable to tax. Not satisfied, the
I.T.O. issued a notice under section 148 read with section 147(b) of the
Income Tax Act, 1961. The assessee filed objections. Overruling all the
objections, the Income Tax Officer completed reassessment of the
assessee Firm adding back the sum of Rs.1.58,057 to the previously
assessed income. Having failed right upto the High Court, the assessee
came in appeal before this Court.
Dismissing the appeal, affirming the decision of the High Court,
this Court,
HELD: (1) The proceedings u/s 147(b) were validly initiated. The
facts of this case squarely fall within the scope of propositions (2) and
(4) enunciated in Kalyanji Mavji's case. Proposition (2) may be briefly
summarised as permitting action even on a "mere change of opinion".
This is what has been doubted in the IENS case. But, even leaving this
out of consideration, there can be no doubt that the present case is
squarely covered by proposition (4) set out in Kalyanji's case. This
proposition clearly envisages a formation of opinion by the Income-Tax
Officer on the basis of material already on record provided the formation of such opinion is consequent on "information" in the shape of
some light thrown on aspects of facts or law which the Income Tax
Officer bad not earlier been conscious of. [ 636G-637B]
The difference between the situations envisaged in propositions
(2) and ( 4) of Kalyanji Mavji is this, that proposition ( 4) refers to a case
where the Income Tax Officer initiates reassessment proceedings in the
light of "information" obtained by him by an investigation into material already on record or by research into the law applicable thereto
which has brought out an angle or aspect that had been missed earlier.
Proposition (2) no doubt covers this situation also but it is so widely
expressed as to include also cases in wh

## Text

_Characters 0–39,707 of 62,631. This is a partial read: ask again with offset=39707 for what follows._

A
B
c
A.L.A. FIRM
·v.
COMMISSIONER OF INCOME TAX, MADRAS
FEBRUARY 21, 1991
[S. RANGANATHAN, N.M. KASLIWAL AND
S.C. AGRAWAL, JJ.]
Income Tax Act, 1961: Section 147(b)-Scope of-Assessment
year 1961-62-Reassessment-Interpretation and meaning of the word
"information"-Material coming to the notice of the Income Tax
Officer subsequent to original assessment-Meaning of the word.
"Escape".
Dissolution of Firm-Valuation of closing stock-Principles-In
continuing business closing stock to be valued at cost or market price
which ever is lower-Where business is discontinued, the closing stock
D
to be valued at market price.
The Appellant-Assessee, a partnership firm was engaged mainly,
in Malaya, in money lending business since 1949 and incidental to this
business was also doing the business of sale and purchase of house
properties, gardens and estates. It was reconstituted under a deed dated
E
26.3.1960. The firm was dissolved on 13.3.1961 and closed its accounts
with effect from that date. ID its income-tax return filed on 10.4.1962
for the assessment year 1961-62 it had filed a profit and loss account
wherein an amount of $.1,01,248 equivalent of Rs.1,58,057 was shown
as "difference on revaluation of the estates, gardens and house properties" on the dissolution of the firm. In the memo of adjustment for
p
income-tax purposes this amount was deducted as being not assessable
either as revenue or capital. The Income Tax Officer issued notice
under section 23(2) of the Act on that very day and completed the
..:;.+
assessment also on the same day after making a petty addition of
Rs.2088 paid as property tax in Malaya.
G
When for the subsequent year 1962-63, the a~ssee filed its return
showing nil income stating in the forwarding letter that the Firm had
been dissolved on 13.3.1961, the I.T.O. wrote to the assessee that the
revaluation difference of Rs.1,58,057 should have been brought to tax
'--y'-
in the previous year. The assessee replied that no profit or less could be
assessed on a revaluation of assets, that the assessee was gradually
H
winding up its business in Malaya, the surplus would be only capital
624
A.LA. FlRM v. C.l.T.. MADRAS
625
gains and that revaluation had been at the market price prevalent since
1954 and thus no capital gains were chargeable to tax. Not satisfied, the
I.T.O. issued a notice under section 148 read with section 147(b) of the
Income Tax Act, 1961. The assessee filed objections. Overruling all the
objections, the Income Tax Officer completed reassessment of the
assessee Firm adding back the sum of Rs.1.58,057 to the previously
assessed income. Having failed right upto the High Court, the assessee
came in appeal before this Court.
Dismissing the appeal, affirming the decision of the High Court,
this Court,
HELD: (1) The proceedings u/s 147(b) were validly initiated. The
facts of this case squarely fall within the scope of propositions (2) and
(4) enunciated in Kalyanji Mavji's case. Proposition (2) may be briefly
summarised as permitting action even on a "mere change of opinion".
This is what has been doubted in the IENS case. But, even leaving this
out of consideration, there can be no doubt that the present case is
squarely covered by proposition (4) set out in Kalyanji's case. This
proposition clearly envisages a formation of opinion by the Income-Tax
Officer on the basis of material already on record provided the formation of such opinion is consequent on "information" in the shape of
some light thrown on aspects of facts or law which the Income Tax
Officer bad not earlier been conscious of. [ 636G-637B]
The difference between the situations envisaged in propositions
(2) and ( 4) of Kalyanji Mavji is this, that proposition ( 4) refers to a case
where the Income Tax Officer initiates reassessment proceedings in the
light of "information" obtained by him by an investigation into material already on record or by research into the law applicable thereto
which has brought out an angle or aspect that had been missed earlier.
Proposition (2) no doubt covers this situation also but it is so widely
expressed as to include also cases in which the Income Tax Officer,
having considered all the facts and law, · arrives at a particular
conclusion, but reinitiates proceedings because, on a reappraisal of the
same material which had been considered earlier and in the light of
the same legal aspects to which his attention had been drawn earlier, he
comes to a conclusion that an item of income which he had earlier
~y consciously left out from the earlier assessment should have been
brought to tax. (637F-H]
It is true that the return was filed and the assessment was completed on the same date. Nevertheless, it is opposed to normal human
A
B
c
D
E
F
G
H
A
8
626
SUPREME COURT REPORTS
[1991] 1 S.C.R.
conduct that an officer would complete the assessment without looking
at the"Dlaterial placed before him. It is not as if the assessment record
contained a large number of documents or the case raised complicated
issues rendering it probable that the Income Tax Officer had missed
these facts. It is a case where there is only one contention raised before
the Income Tax Officer -and it is, we think, impossible to hold that the
Income-Tax Officer did not at all look at the return-filed by the assessee
or the statements accompanying i,t. The more reasonable view to take
, would~ in our '!Pinion, be that the Income-Tax Officer looked at the facts
and accepted the assessee's contention that the surplus was not taxable.
But, in doing so. he obviously missed to take note of the law laid down in
Ramachari -which there ls nothing to show, had been brought to his
notice. When he subsequently became aware of the decision, he initiaC ted proceedings under section 147(b). The material which constituted
information and on the basis of which the assessment was reopened was
the. decision in Ramachari. This material was not considered at the time
of the original assessment. Though it was a decision of 1961 and the
Income Tax Ofticer could ~ve known Or it had he been diligent, the obvious
D
fact is that he was not aware of the existence of that_ decision then and,
when he came to know aJ>out i~, he rightly initiated proceedings for
reassessment. [ 639E-640B]
The material on which the Income Tax Officer has taken action is
a judicial decision. This had been pronounced just a few months earlier
E
to the original assessment and it is not difficult to see that the Income
Tax Officer must have missed it or else he could not have completed
the assessment as he did. Indeed it has not been suggested that he was
_aware of it and yet chose not to apply it. It is therefore, much easier
to see that the initiation of reassessment proceedings here is based
on definite material not considered at the time of the original
F
assessment. [640D-E]
(2) The stock-in-tra_de !>fa firm !}t the time of its disolution, has to
be assessed at a fair volue. There can be no manner Of doubt that, in
taking accounts for purposes of dissolution, the firm and the partners,
being commercial inen, would value the,;lssets_only on a real basis and
G
not at cost or at their other value appearing in- the books. The real
rights of the partners cannot be mutually adjusted on any other .. basis.
This is what happened in Ramachari. Indeed, this is exactly what the
par,tners in this. case have done and, having done so, it is untenable for
them to contend that the vaiuation should be on some other basis. Once
this principle is applied and the stock-in-trade is valued at -market
H
price, the surplus, if any, has to get reflected as the profits of the firm
~-
'
A.LA. FIRM v. C.l.T., MADRAS
627
and has to be charged to tax. The view taken by the High Court has held
the field for about thirty years now and we see no reason to disagree
even if a different view was possible. [642B-D, 647E, 648A-C]
A
Popular Automobiles v. Commissioner of Income-Tax, [1989]
179 I.T.R. 632; Sunil Siddharthbhai v. Commissioner of Income Tax,
[1985] 156 I.T.R. 509; Pupular Workshops v. Commissioner of B
Income-Tax, [1987] 166 I.T.R. 348; Malabar Fisheries Co. v. Commissioner of Income Tax, [1979] 120 I.T.R. 49; Indian & Eastern Newspaper Society v. Commissioner of Income Tax, [1979].119 I.T.R. 996;
Kafyanji Mavji & Co. v. Commissioner of Income Tax, [1976] 102
I.T.R. 287; M/s. A.L.A. Firm v. The Commissioner of Incpme Tax,
Madras, [1976] I.T.R. 622; Commissioner of Income Tax v. Hind
Construction Ltd., [1972] 83 I. T .R. 211; Commissioner of Income Tax
c
v. Birla Gwalior (P.) Ltd., [1973] 89 I.T.R. 266; Anandji Haridas &
Co. (P.) Ltd. v. S.P. Kushare, Sales Tax Officer, [1968] 21S.T.C.326;
Commissioner of Income Tax v. Dewas Cine Corporation, [1968] 68
I. T ;R. 240; Ramachari & Co. v. Commissioner of Income Tax, [1961]
41 I.T.R. 142; Maharaj Kumar Kamal Singh v. Income Tax Officer,
[1954] 35 I.T.R. l S.C.; Commissioner of Income Tax v. A. Raman &
Co., [1968] 67 I.T.R. 11 S.C.; Salem Provident Fund Society Ltd. v.
Commissioner of Income Tax, [1961] 42 I.T.R. 547; Commissioner of
Income Tax v. Rathinasabapathy Mudaliar, [1964] 51 I.T.R. 204;
Addanki Narayanappa v. Bhaskara Krishnappa, [1966] 3 S.C.R. 400;
Commissioner of Income Tax v. Bankey Lal Vaidya, [1971] 79 I.T.R.
594; Kikabhai Premchand v. Commissioner of Income Tax, [1953] 24
I.T.R. 506 (S.C.); Commissioner of Income Tax v. K.A.R.K. Firm,
[ 1934] 2 I. T .R. 183; Chainrup Sampathram v. Commissioner of Income
Tax, [1953] 24 I.T.R. 481; Commissioner of Income Tax v. M/s.
Shoorji Vallabhdas & Co., [1962] 46 I.T.R. 144; Commissioner of
Income Tax v. Krishnaswamy Mudaliar, ]1964] 53 I.T.R. 122; Commissioner of Income Tax v. Ahmedabad New Cotton Mills Co. Ltd.,
]1930] L.R. 57 I.A. 21; Muhammad Hussain Sahib v. Abdul Gaffoor
Sahib, ]1950] 1M.L.J.81. referred to.
CIVIL APPEELLATE JURISDICTION: Civil Appeal No. 570
D
E
of 1976.
G
-yAppeal by Certificate from the Judgment and Order dated
9 .2.1976 of the Madras High Court in Tax Case No. 104 of 1969.
T.A. Ramachandran, P.N. Ramalingam and A.T.M. Sampath
for the Appellant.
H !
A
B
c
628
SUPREME COURT REPORTS
[ 1991] 1 S.C.R.
V. Gauri Shanker, Manoj Arora, S. Rajappa and Ms. A. Subhashini for the Respondent.
The Judgment of the Court was delivered by
RANGANATHAN, J. This is the assessee's appeal from a judgment of the Madras High Court dated 10.1.1975 answering three ques-.
tions referred to it by the Income-tax Appellate Tribunal in favour of
the Revenue and against the assessee. The reference related to .the
assessment year 1961-62, the previous year in respect of which commenced on 13.4.1960. The judgment of the High Court is reported as
(1976) 102 I.T.R. 622.
The appellant-assessee is a partnership firm. Since 1949, it was
carrying on, in Malaya, a money lending business and, as part of and
incidental to the said business, a business in the purchase and sale of
house properties, gardens and estates. It had been reconstituted under
a deed dated 26.3.1960. The firm's accounts for the year 1960-61,
o which commenced on 13.4.60, would normally have come to a close on
or about the 13th April, 1961. However, the firm closed its accounts as
on 13.3.1%1 with effect from which date it was dissolved. Along with
its income-tax return for the assessment year 1961-62 filed on 10th
· April 1962, the assessee filed a profit and loss account and certain
other statements. In the profit and loss account, a sum of$ 1,01,248
E
was shown as "difference on revaluation of estates, gardens and house
properties" on the dissolution of the firm on 13.3.61, such difference
being$ 70,500 in respect of "house properties" and$ 30,748 in respect
of estates and gardens. In the memo of adjustment for income-tax
purposes, however, the above sum was deducted on the ground that it
was not assessable either as revenue or capital. A statement was also
F
G
H
made before the officer that partner Ramanathan Chettiar, forming
one group and the other partners forming another group, were carrying on business separately with the assets and liabilities that fell to
their shares on the dissolution of the firm.
The Income-tax Officer (LT.O.) issued a notice under section
23(2) on the same day (10.4.1962) posting the hearing for the same day
and completed the assessment also on the same day, after making a
petty addition of Rs.2083 paid as property tax in Malaya, and recording the following note:
\
"Audit assessment-Lakshmanan appears-'-return filed1.T. 86 acknowledged in list of books-scrutinised-order
dictated" ..
~-
·'--
~·-
A.LA. FIRM v. C.l.T., MADRAS [RANGANATHAN, J.]
629
~
For the subsequent assessment year 1962-63, the assessee filed a .Ai\
return showing nil income along with a letter pointing out that the firm
I
had been dissolved on 13.3.1961. Thereafter, on 3.9.63, the I.T.O.
wrote a letter to the assessee to the effect that the revaluation difference of $ 1,01,248 should have been brought to tax in the assessment year 1961-62 in view of the decision of the Madras High Court,in
Ramachari & Co. v. C.I. T., [1961] 41 I.T.R. 142. He called for the :B
~-
basis for the valuation and also for the assessee's objections. The
assessee sent a reply stating that no profit or loss could be assessed on
a revaluation of assets. Relying on a circular of the Central Board of
Revenue dated 21.6.1956, it was urged that the assessee was gradually
winding up its business in Malaya and that, therefore, the surplus
'
-~
would only be capital gains. It was urged that the revaluation had been
...
c
at a market price prevalent since ~.1.1954 and that, therefore, no
capital gains were chargeable to tax. The l.T.O. followed up his letter
~-
by a notice under S. 148 read with S. 147(b). The assessee objected to
the reassessment on two grounds: (1) that the circumstances did not
justify the initiation of proceedings under S. 147(b); and (2) that no
assessable profits arose to the firm on the revaluation of assets on the D
eve of the dissolution of the firm. Overruling these objections, the
I. T. 0. completed a reassessment on the firm after adding back the ,
sum of Rs.1,58,057 (the equivalent of $ 1,01,248) to the previously
-)
assessed income. The assessee's successive appeals to the Appellate
""""
A~sistant Commissioner and the Appellate Tribunal and reference, at
its instance, to the High Court having failed, the assessee is before us.
E
Three questions of law were referred to the High Court by the
-
Tribunal. These were:
"l. Whether, on the facts and circumstances of the case,
the reassessment made on the assessee firm for the assessF
..
ment year 1961-62 under section 147 of the Income-tax Act
is valid in Law?
2. Whether, on the facts and circumstances of the case, the
assessment of the sum of$ 1,01,248 as revenue profit of the
assessee firm chargeable to tax for the assessment year
G
1961-62 is justified in law?
--y'
3. Whether, on the facts and circumstances of the case, the
Appellate Tribunal is right in law in sustaining the assess- .
ment of the sum of $ 1,01,348 after having found that the
Department Officers are bound by the Circular of the
Central Board of Revenue?"
H.
A
B
630
SUPREME COURT REPORTS
[1991] 1 S.C.R.
We may deal at the outset with the third question. Though the
High Court has dealt with this question at some length, we do not
think any answer to this question can or need be furnished by us for the
following reasons. First, the assessee has not been able to place before
us the circular of the Board on which reliance is placed. It is not clear
whether it is a circular or a communication of some other nature.
Second, the circular, to judge from its purport set out in the High
Court's judgment, seems to have _been to the effect that the surplus
arising from the sale of properties acquired by a money-lender in the
course of his business would be in the nature of capital gains and not of
income. Obviously such a proposition could not have been intended as
a broad or general proposition of law, for the nature of the surplus on
c sale Qf assets would depend on the nature of the asset sold and this, in r
turn, would depend on the facts and circumstances of each case. In this
case, no material was placed at any stage to show that the assets in
question constituted the capital assets of the firm and not its stock-intrade. Third, the plea of the assessee which was in issue all through
was that there was no sale of assets by the firm when its assets are
D
distributed among its partners and that no profits-whether capital or
revenue--could be said to arise to the firm merely because, at the time
of the dissolution, the firm revalued its assets on the basis of market
value or any other basis, for adjusting the mutual rights and liabilities
of the partners on the dissolution of the firm. The terms of the circular,
E
as set out in the order of the High Court, cannot therefore be of any
assistance to the assessee in answering the issues in this case. We,
therefore, do not answer the third question posed by the Tribunal.
Turning now to the first question, the relevant facts have already
been noticed. The following relevant and material facts viz. (i) the ·
dissolution of the firm, (ii) the revaluation of its assets, (iii) the
F
distribution thereof among two groups of its partners, and (iv) the
,division and crediting of the surplus on revaluation to the partner's
accounts were not only reflected in the balance sheet, the profit and
loss aCCOUJ!t and the proflt and loss a~justment account but-were also
mentioned in the statement filed before the I.T.O. along with the
return. Clearly, action u/s 148 read with clause (a) of s. 147 could not
G
be initiated in these circumstances but is action under clause (b) of that
section also impermissible? That is the question.
We may now set out the provisions of clause (b) of section 147
for purposes of easy reference .. This clause-which corresponds to
s. 34{1)(b) -of the fndian- Incom~~tax Act. 1922 ('the _1922 Act')
H
permits-initiation of reassessment of proceedings, "notwithstanding'
~
J
A.LA. FIRM v. C.l.T., MADRAS (RANGANATHAN, J.]
631
that there has been no omission or failure as mentioned in clause (a)
on the part of the assessee" provided "the Income-tax Officer has, in
consequence of information in his possession, reason to believe that
income chargeable to tax has escaped assessment".
In the present case, on the information already on record and in
A
view of the decision in Ramachari & Co. v. C.I.T., [1961] 411.T.R.
B
142, there can be no doubt that the l.T.O. could reasonably come to .._,
the conclusion that income, profits and gains assessable for the assessment year 1961-62 had escaped assessment. But is that belief reached
"in consequence of 1nformation in his possession"? The assessee's
counsel says "no", for, says he, it is settled law that the "information"
referred to in clause (b) above, should be "information". received by
the l.T.O. after he had completed the original assessment. Here it is
C
pointed out that all the relevant facts as well as the decision in
Ramachari (supra) had been available when the original assessment
was completed on 10.4.1962. Action cannot be taken under this clause
merely because the l.T.O., who originally considered the surplus to be
1
not assessable, has on the same facts and the same case law which had
D
been available to him when he completed the assessment original\y,
changed his opinion and now thinks that the surplus should have been
charged to tax.
The validity of the assessee's argument has to be tested in the
light of the decisions of this Court which have interpreted S. 147(b) of
E
the 1961 Act or its predecessor S. 34(l)(b) of the 1922 Act and expounded its parameters. We may start with the decision in Maharaj
Kumar Kama1 Singh v. LT.O., [1954135 i.T.R. 1 S.C. In thi~ case it
was held that the word "information" would include infon;nation as to
the true and correct state of the law and would also cover information
as to relevant judicial decisions. In that case, the l.T.O. had re-opened
F
the assessment on the basis of a subsequent decision of the Privy
Council and this was upheld. Referring to the use of the word
"escape" in the section, the Court observed:
"In our opinion, even in a case where a return has been
submitted, if the income-tax Officer erroneously fails to tax
G
a part of assessable income, it is a case where the said part of
the-income has escaped assessment. The appellant's attempt
to put a very narrow and. artificial ilinitation on the meaning of the word "escape" in section 34(1)(b) cannot, therefore, succeed."
(underlining ours)
H
632
SUPREME COURT REPORTS
[1991] 1 S.C.R.
A
The meaning of the word "information" was again explained
c
D
E
F
G
H
thus in C.l.!. v.A. Raman & Co., ['1968] 67 l.T.R. 11 SC:
"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 m_atter bearing on the
assessment . ...... .
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 informatioin, 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 the
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."
(underlining ours)
We may next refer to Kalyanji Mavji & Co. v. C./. T., [1976-102]
l.T.R. 287. It is unnecessary to set out the facts of this case. It is
sufficient to refer to the enunciation of the law regarding the scope of
section 34(1)(b) as culled out from the earlier decision~ of this Court
on the subject. At page 296 the Court observed:
"On a combined review of the decisions of this Court the
following tests and principles would apply to determine the
applicability of section 34(1)(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;
-
-~,-
--
!"
--~
A.L.A. FIRM v. C.I.T., MADRAS [RANGANATHAN, J.]
633
(3) where the information is derived from an external
source of any kind. Such external source would include
discovery of new and important matters or 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 othei; enquiry onesearch into facts or law."
Before applying the above principles to the facts of the present
case, we may refer to two earlier decisions of the Madras High Court
which have been followed in the judgment under appeal. In Salem
Provident Fund Society ltd. v. C.I. T., [1961] 42 ITR 547, the Incometax Officer, in calculating the annual profits of an insurance company,
had, under the statute, to work out the difference between the
deficiencies as shown in the actuarial valuation of the company in
respect of two successive valuation periods .. At the time of original
assessment, the Income-tax Officer, by mistake, added the two deficiencies instead of subtracting one from the another. This mistake he
committed not in one assessment year but in two assessment years.
Subsequently, he discovered his mistake and initiated proceedings under section 34(1)(b). The contention urged on behalf of the assessee
was that all the statements, on the basis of which the re-assessment
proceedings were taken, were already on record and that; in such a
case, there was no 'information' which would justify the reassessment.
An argument was also raised that the rectification, if any, could have
been carried out only under section 35 and not under section 34.'These
contentions were repelled. In regard to the former objection, the High
Court pointed out:
A
B
c
D
E
F
"We are unable to accept the extreme proposition that
nothing that can be found in the record of the assessment,
which itself would show escape of assessment or underassessment, can be viewed as information which led to the
belief that there has been escape from assessment or under-
· G
assessment. Suppose a mistake in the original order of
assessment is not discovered by the Income-tax Officer
himself on further scrutiny but it is brought to this notice by
another assessee or even by a subordinate or a superior
officer, that would appear to be information disclosed to
the Income-tax Officer. If the mistake itself is not extraneH
A
B
c
D
E
F
G
H
634
SUPREME COURT REPORTS
[1991] 1 S.C.R.
ous to the record and the informant gathered the information from the record, the immediate source of information
to the Income-tax Officer in such circumstances is in one
sense extraneous to the record. It is difficult to accept the
position that while what is seen by another in the record is
'information' what is seen by the Income-tax Officer himself is not information to him. In the latter case he just
informs himself. It will be information in his possession
within the meaning of section 34. In such cases of obvious
mistakes apparent on the face of the record of assessment
that record itself can be a source of information, if that
information leads to a discovery or belief that there has
been an escape of assessment or under-assessment.
A Similar question arose in CIT v. Rathinasabapathy Mudaliar,
[1964] 51 I..T.R. 204. In that case the assessee; who was· a partner ina
firm, did not include in his return the income of his minor son admitted
to the benefits of the partnership as required by section 16(3) of the
1922 Act. The minor son submitted a separate return and was assessed
on this income. Subsequently, the Income-tax Officer "discovered"
his error in not assessin_g the father thereon and started re-!lssessment ·
proceedings. The re-assessment was upheld by the Madras High Court
on the same logic as had been applied in Salem Provident Fund Society
Ltd. case (supra). The above line of thinking has not only held the
field for about thirty years now but has also received approval in
Anandji Haridas and Co. (P) Ltd. v. S.P. Kushare, Sales Tax Officer,
[1968] 21 S.T.C. 326.
This issue has further been considered in the decision of this
Court in the case of Indian and Eastern Newspaper Society v. C.I. T.
(the IENS case, for short) [1979] 119 I:T.R. 996: In this case the income
of the assessee derived by letting out certain portions of the building
owned by it to its members as well as to outsiders was being assessed as
business income. In the course of audit, an internal audit party expressed the view that the money realised by the assessee on account of the
occupation of its conference hall and rooms should have been assessed
under the head "income from property" and not as business income.
The Income-tax Officer thereupon initiated re-assessment proceedings
and this was upheld by the Tribunal. On a direct reference under s. 257
of the Act, this Court held that the opinion of the audit party on a
point of h1w could not be regarded as "information" and that the
initiation of the reassessment proceedings was not justified. It was
contended for the Revenue, that the reassessment proceedings would
.....
I
A.LA. FIRM v, C:I.T., MAD~S [RANOANATHAN, J.]
635
. ,·
·~
be valid even on this premise. Dealing with this argu~ent, the Court
~
observed:
1
"Now, in the case before.us, 'the IT9 had, when he made
the original assessment, COQSidered the provisions, of
sections 9 and 10. Any different ,view taken by him afterwards on the applica~iOn of th9se-provisions would amount
to a change. of opinion on material already .. con_sisJered by
him. The revenue contends that.it is open to him. to do so,
and on that basis to reopen the assessment under s. 147(b).
Reliance is placed on Kalyanji Mavji & Co. v. CIT, [1976]
102 l.T.R. 287, where a Bench of two learn'ed,,Judges of
this Coutt observed that a case where income had escaped
assessment due to the "oversight, inadvertence or mistake"
of the ITO must fall withins. 34( l)(b) of the Indiaii.'focome
Tax Act, 1922. It appears to us, with respect,' that .the
proposition is stated (oo widely and travels farther than the
statute warrants in so far as it can be said to Jay down that if,,
B
c
on re-appraising the material considered by him during the b.
original assessment, the ITO discovers that he has committed an error in consequence of which income has escaped
assessment, it is open to him to reopen the assessment. In
our. opinion, an error discovered on a reconsideration of
the same material (and no more) does not give him that
power. That was the view taken by this Court in Maharaj
E,
Kumar Kamal Singh v. CIT, [1959] 35 I.T.R. 1; CITv. A.
Raman & Co., [1968] 67 ITR 11 and Bankipur Club Ltd. v. ·
CIT [ 1971] 82 ITR 831 and we do not 1'elieve that the law
has since taken a different course. Any observation in
Kalyanji Mavji & Co. v. CIT, [1976] 102 I.T.R. 287
suggesting the contrary do not, we say with respect, lay F
down the correct law."
(underlining ours)
The Court proceeded further to observe:
"A further submission raised by the revenue on G
.s. 147(b) of the Act may be considered at this stage. It is
urged that the expression "information" ins. 147(bfrefers
to the realisation by the ITO that he has committed an
error when making the original assessment. It is said that,
when upon receipt of the audit note the ITO discovers or
realizes that a mistake has been committed in the original
H
I
A
B
c
D
E
F
G
H
636
SUPREME COURT REPORTS
(1991] 1 S.C.R.
assessment, the discovery of the mistake would be "information" within the meaning of s. 147(b ). The submission
appears to us inconsistent with the terms of s. 147(b).
Plainly, the statutory provision envisages that the ITO
must first have information in his possession, and then in
consequence of such information he must have reason to
believe that income has escaped assessment. The realisation that income has escaped assessment is covered by the
words "reason to believe", and it follows from the "information" received by the ITO. The information is not the
realisation, the information gives birth to the realisation."
Sri Ramachandran submits that these decisions support his contention that reassessment proceedings can be validly initiated only if
there is some information received by the l.T.O. from an external
source after the completion of the original assessment but not in a case
like the present where there is nothing more before the l.T.O. than
what was available to him when the original assessment was completed. He also submits that the observations in the JENS case have cast
doubts on the propositions enunciated in Kalyanji Mavji's case (supra)
and reiterates the proposition that reassessment proceedings cannot be
availed of to revise, on the same material, the opinion formed or
conclusion arrived at earlier in favour of the assessee.
On the other hand, Dr. Gaurisankar, appearing for the
Revenue, mentioned that the decision in the JENS case holding that
the opinion of an audit party would not constitute 'information' and
qualifying the principles enunciated in Kalyanji Mavji is pending consideration by a larger Bench of this Court. He, however, submitted
that the reassessment in this case would be valid even on the strength
of the observations in the JENS case. We shall proceed to consider the
correctness of this submission.
We have pointed out earlier that Kalyanji Mavji (supra) outlines
four situations in which action under S. 34(1)(b) can be validly
initiated. The JENS case has only indicated that proposition (2) outlined in this case and extracted earlier may have been somewhat widely
stated; it has not cast any doubt on the other three propositipns set out
in Kalyanji Mavji's case. The facts of the present case squarely fall
within the scope of propositions 2 and 4 enunciated in Kalyanji Mavji's
case. Proposition (2) may be briefly summarised as permitting action
even on a "mere change of opinion". This is what has been doubted in
the JENS case (supra) and we shall discuss its application t~ this case a
-
A.L.A. FIRM v. C.l.T., MADRAS [RANGANATHAN; J.]
637
~1ittle later. But, even leaving this out of consideration, there can be no
doubt that the present case is squarely covered by proposition (4) set
out in Kalyanji Mavji & Co. (supra). This proposition clearly envisages
a formation of opinion by the Income-tax Officer on the basis of
material already on record provided the formation of such opinion is
consequent on "information" in the shape of some light thrown on
aspects of facts or law which the I.T.O. had not earlier been conscious
~of. To give a couple of illustrations, suppose an I. T. 0., in the original
·
assessment, which is a voluminous one involving several contentions,
accepts a plea of the assessee in regard to one of the items that the
profits realised on the sale of a house is a capital realisation not charge-
~-
able to tax. Subsequently he finds, in the forest of papers filed in
connection with the assessment, several instances of earlier sales of
house property by the assessee. That would be a case where the I.T.0.
derives information from the record on an investigation or enquiry
./into facts not originally undertaken. Again, suppose in l.T.O. accepts
the plea of an assessee that a particular receipt is not income liable to
tax. But, on further research into law he finds that there was a direct
decision holding that category of receipt to be an income receipt. He
would be entitled to reopen the assessment under s. 147(b) by virtue of
proposition (4) of Kalyanji Mavji. The fact that the details of sales of
house properties were ~lready in the file or that the decision subse-
--,).- quently come across by him was already there would not affect the .
position because the information that such facts or decision existed
comes to him only much later.
...
What then, is the difference between the situations envisaged in
propositions (2) and (4) of Kalyanji Mavji (supra)? The difference, if
one keeps in mind the trend of the judicial decisions, is this. Proposition (4) refers to a case where the I.T.O. initiates reassessment
A
B
c
D
E
~proceedings in the light of "information" obtained by him by an
F
investigation into material already on record or by research into the
law applicable thereto which has brought out an angle or aspect that
had been missed earlier, for e.g., as in the two Madras decisons
referred to earlier. Proposition (2) no doubt covers this situati9n also
but it is so widely expressed as to include also cases in which the
I. T. 0., having considered all the facts and law, arrives at a particular
G •
_-._
conclusion, but reinitiates proceedings because, on a reappraisal of the
'--( same material which had been considered earlier and in the light of the
same legal aspects to which his attention had been drawn earlier, he
comes to a conclusion that an item of income which he had earlier
consciously left out from the earlier assessment should have been
brought to tax. In other words, as pointed out in JENS case, it also
H
A
B
c
D
E
638
SUPREME COURT REPORTS
[1991] 1 S.C.R.
ropes in cases of a "bare or mere change of opinion" where the I.T.O.
{very often a successor officer) attempts to ·reopen the assessment
because the opinion formed earlier by himself (or, more often, by a
predecessor I.T.O.) was, in his opinion, incorrect. Judicial decisions
had consistently held that this could not be done and the JENS case
(supra) has warned that this line of cases cannot be taken to have been
overruled by Kalyanji Mavji (supra). The second paragraph from the
judgment in the JENS case earlier extracted has also reference only to
this situation and insists upon the necessity of some information which
make the ITO realise th.at he has committed an error in the earlier
assessment. This paragraph does not in any way affect the principle
enumerated in the two Madras cases cited with approval in Anandji
~
·
Haridas, [1986] 21 S.T.C. 326. Even making allowances for this limitation placed on the observations in Kalyanji Mavji, the position as
summarised by the High Court in the following words represents, in
'..
our view, the correct position in law:
"The result of these decisions is that the statute does
not require that the information must be extraneous to the
record. It is enough if the material, on the basis of which
the reassessment proceedings are sought to be initiated,
came to the notice of the Income-tax Officer subsequent to
the original assessment. If the Income-tax Officer had ,...~
considered and formed an opinion on the said material in
the original assessment itself, then he would be powerless
to start the proceedings for the reassessment. Where,
however, the Income-tax Officer had not considered the
-
material and subsequently come by the material from the
. record itself, then such a case would fall within the scope of
section 147(b) of the Act."
F
.~
Let us now examine the position in the present case keeping in
v
mind the narrow but real distinction pointed out above. On behalf of
the assessee, it is emphasised (a) that the amount of surplus is a very
substantial amount, (b) that full details of the manner in which it had
resulted had been disclosed, (c) that the profit and loss account, the
G
profit and loss adjustment account and statement made before the
I. T.O. had brought into focus the question of taxability of the surplus '-y,.._
and (d) that the decision in Ramachari's case had been reported by
10.4.1962. No Income-tax Officer can be presumed to have completed
the assessment without looking at all this material and the said decision. No doubt, some doubt had been thrown as to whether a stateH
ment had been given at the time of original assessment that the amount
-
A.L.A. FIRM v. C.I.T., MADRAS [RANGANATHAN, J.]
639
~of
surplus was not taxable as an income or a capital gain but the case
has proceeded on the footing that such a statement was there before
the officer. This, therefore, is nothing but a case of "change of
opinion'.'. On the other hand, the authorities and the Tribunal have
drawn attention to the fact that the return, the S. 143(2) notice and
assessment were all on the same day and counsel for the Revenue
urged that, obviously, in his haste, the I.T.O. had not looked into the
facts at all. It is urged that no Income-tax Officer who had looked into
~the facts and the law could have failed to bring the surplus to tax in
view of the then recent pronouncement in Ramachari's case. Dr.
Gaurishankar submitted that the Tribunal has found that the I.T.O.
"had acted mechanically in accepting the return without bringing his
mind to play upon the entry in the statement with reference to the
distribution of the assets". He pointed out that there is no evidence of
any enquiry with reference to this aspect and that, the amount
_ involved being sufficiently large, the I.T.O., if he had been aware of
the existence of the entry would certainly have discussed it. He urged
that the question whether the I.T.O.