# i R. K. MALHOTRA, l.T.O. GROUP CIRCLE II(l), AHMEDABAD v. KASTUR BHAI LALBHAI (H.U.F.)

- **Citation:** [1978] 1 S.C.R. 289
- **Court:** Supreme Court of India
- **Decided:** 1977-08-11
- **Case number:** Civil Appeal No. 1977 of 1971
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/i-r-k-malhotra-l-t-o-group-circle-ii-l-ahmedabad-v-kastur-bhai-lalbhai-h-u-f-7275
- **Pages:** 6

## Headnote

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R. K. MALHOTRA, l.T.O.
GROUP CIRCLE II(l), AHMEDABAD
v.
KASTUR BHAI LALBHAI (H.U.F.)
August 11, 1977
(Y. Y, CHANDRACHUD AND P. S. KAILASAM, JJ.l
289
Income Tax Act, section I47(b), conditions for invoking-'lnfonnalion',
scope of,-Wltether includes i11titnation fro111 the Audit Departtnent pointing out
erroneous application of law.
A
B
The respondent, H.U.F., is an assessee owning two
houses.
During
the
assessment year 1965-66, the Income-tax Officer, in determining the annual valuation of its properties ur.der s. 23 (2) of the Income-ta·x Act, erroneously allowed
C
a deduction of municipal taxes amounting to Rs. 4,052/-.
Subsequently
on
scrutinising the assessments, the office of Con1ptroller and Auditor General of
India pointed out that the deduction of municipal taxes in respect of self occupied
properties was not admissible u /s. 23 (2).
The Income-tax Officer treated the
intimation as 'information' \\-'ithin the meaning of s. 147 (b), and consequently
propqsed to re-assess the respondent's income for 1965-66.
On September 12,
1969, he issued a notice u/s. 148 requiring the respondent to file a return of his
income.
On an application by the respondent, the High Court issued a writ of
mandamus quashing the notice, but granted a certificate under Art. 133 ( 1) ( c).
D
It was contended by the' respondent that the mere pointing out by the Auditor,
the error in the application of law, would not amount to 'inforn1ation' u/s. 147
(b): especially as the' I.T.0. knew the houses to be self-occupied.
Allowing the appeal, the Court,
HELD : ( 1) Two condHions are necessary for invoking sub-section (b) of
section 147; (i) The Officer should receive information after the original assessn1ent and (ii) in consequence of such information he should have reason
to
E
believe that income h.:'1s escaped assessment.
The 'information' may be of facts
or of law.
r291D-El
(2) That the Income-tax Officer with diligence could have
obtained
the'
information during the previous assessment on a proper investigation
of the
materials on record or the facts disclosed thereb}', would not make it any less
the information jf the fact was not, in fact, obtained and came to his_ knowledge
only subsequently. It would be 'information of law' if it is stated by a person,
body or authority competent and authorised to pronounce upon the law and is
F
invested with authority to do so.
[291E, F, 294E]
Maharaj Kun1ar Kania.I Singh v. Conunissioner of lnconze-tax, Bil1ar and
Orissa 35 ITR 1; R. B. Bansilaf Abirchand Finn v. Con1misiso11er of lnconze Tax,
1'.1.P. 70 ITR 74; Asstt. Controller of Estate Duty, Hyderabad v. Nawab Sir Mir
Os.111an Ali Khan Bahadur, H.E.H. the Nizc~1n oft Hyderabad & Ors~ 72 ITR 376,
referred to.
Cam1nissioner of !11co1ne-tax, Gujarat v. A. Ran1an & Co. 67 ITR 11, applied.
(3) 1he Audit Department is the proper machinery to scrutinise the assessG
ments of the Income-tax Officer and point out the errors, if any, in law.
The
I.T.0. \\-·ill not be precluded from using the auditors' note as fresh 'inforrniation'~
[294F]
Co1nn1is.sio11er of lnco1ne-tax, Delhi v. H. H. S111t. Chand Kanwarji 84 ITR
584; Con11nissio11er of lncon1e-tax v. -Keluku.tty 85 ITR 102 and Vashist Bhargava
v. lncon1e-tax Officer, Salary Circle, !>lew Delhi 99 ITR 148, approved.
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## Text

.i
R. K. MALHOTRA, l.T.O.
GROUP CIRCLE II(l), AHMEDABAD
v.
KASTUR BHAI LALBHAI (H.U.F.)
August 11, 1977
(Y. Y, CHANDRACHUD AND P. S. KAILASAM, JJ.l
289
Income Tax Act, section I47(b), conditions for invoking-'lnfonnalion',
scope of,-Wltether includes i11titnation fro111 the Audit Departtnent pointing out
erroneous application of law.
A
B
The respondent, H.U.F., is an assessee owning two
houses.
During
the
assessment year 1965-66, the Income-tax Officer, in determining the annual valuation of its properties ur.der s. 23 (2) of the Income-ta·x Act, erroneously allowed
C
a deduction of municipal taxes amounting to Rs. 4,052/-.
Subsequently
on
scrutinising the assessments, the office of Con1ptroller and Auditor General of
India pointed out that the deduction of municipal taxes in respect of self occupied
properties was not admissible u /s. 23 (2).
The Income-tax Officer treated the
intimation as 'information' \\-'ithin the meaning of s. 147 (b), and consequently
propqsed to re-assess the respondent's income for 1965-66.
On September 12,
1969, he issued a notice u/s. 148 requiring the respondent to file a return of his
income.
On an application by the respondent, the High Court issued a writ of
mandamus quashing the notice, but granted a certificate under Art. 133 ( 1) ( c).
D
It was contended by the' respondent that the mere pointing out by the Auditor,
the error in the application of law, would not amount to 'inforn1ation' u/s. 147
(b): especially as the' I.T.0. knew the houses to be self-occupied.
Allowing the appeal, the Court,
HELD : ( 1) Two condHions are necessary for invoking sub-section (b) of
section 147; (i) The Officer should receive information after the original assessn1ent and (ii) in consequence of such information he should have reason
to
E
believe that income h.:'1s escaped assessment.
The 'information' may be of facts
or of law.
r291D-El
(2) That the Income-tax Officer with diligence could have
obtained
the'
information during the previous assessment on a proper investigation
of the
materials on record or the facts disclosed thereb}', would not make it any less
the information jf the fact was not, in fact, obtained and came to his_ knowledge
only subsequently. It would be 'information of law' if it is stated by a person,
body or authority competent and authorised to pronounce upon the law and is
F
invested with authority to do so.
[291E, F, 294E]
Maharaj Kun1ar Kania.I Singh v. Conunissioner of lnconze-tax, Bil1ar and
Orissa 35 ITR 1; R. B. Bansilaf Abirchand Finn v. Con1misiso11er of lnconze Tax,
1'.1.P. 70 ITR 74; Asstt. Controller of Estate Duty, Hyderabad v. Nawab Sir Mir
Os.111an Ali Khan Bahadur, H.E.H. the Nizc~1n oft Hyderabad & Ors~ 72 ITR 376,
referred to.
Cam1nissioner of !11co1ne-tax, Gujarat v. A. Ran1an & Co. 67 ITR 11, applied.
(3) 1he Audit Department is the proper machinery to scrutinise the assessG
ments of the Income-tax Officer and point out the errors, if any, in law.
The
I.T.0. \\-·ill not be precluded from using the auditors' note as fresh 'inforrniation'~
[294F]
Co1nn1is.sio11er of lnco1ne-tax, Delhi v. H. H. S111t. Chand Kanwarji 84 ITR
584; Con11nissio11er of lncon1e-tax v. -Keluku.tty 85 ITR 102 and Vashist Bhargava
v. lncon1e-tax Officer, Salary Circle, !>lew Delhi 99 ITR 148, approved.
,
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1977 of 1971.
From the Judgment and Order dated 23-6-70 of the Gujarat High
Court in Special Civil Application No. 1372 of 1969.
A
B
290
SUPREME COURT REPORTS
[1978] 1 S.C.R.
B. B. Ahuja and Girish Chandra for the Appellant.
B. Sen, R. M. Mehta, S. K. Dholakia and R. Ramachandran for the
Respondent.
The Judgment of the Court was ddivered by
KAILASAM, J.-This appeal is by the Income-tax Officer, Group
Circle II(!), Ahmedabad, by certificate granted under Art. 133(1)-
(c) by the High Court of Gujarat against its judgment June 23, 1970,
allowing the application filed by the respondent assessee and issuing a
writ of mandamus quashing and setting aside the notice dated September 12, 1969, issued by the Income-tax Officer under section 148 of the
Income-tax Act.
The respondent who is a Hindu undivided family is an assessee ownC
ing 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 Income-tax Officer treated the properties as self-occupied properties. 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 Incometax Act.
The Income-tax Officer allowed the claim.
The order of
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assessment was made by the Income-tax Officer on March 14, 1966.
Subsequently after a lapse of over 3 years the Income-tax Officer by a
letter dated July I 5, 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, 13, 1969 replied that the Income-tax Officer was
not competent to reopen the assessment under section 147 and that the
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municipal taxes were validly allowed as a deduction in computing the
income from sell-occupied properties. Not satisfied with the explanation the Income-tax Officer 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 14 7, he proposed to re-assess the income for the said assessF
ment 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 writ under Art. 226 of the Constitution for a writ in the
nature of mandamus for quashing the notice dated September 12, 1969
issued by the Income-tax Officer.
The High Court by its judgment
dated June 23, 1970 in Special Civil Application No. 1372 of 1969
allowed the application and issued the writ of mandamus quashing the
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notice dated September 12, 1969. On an application filed
by the
appellant the High Court granted a certificate ,and the appeal is thus
before us.
H
It is not in dispute that for determining the annual value of the
house which is in the occupation of the owner section 23(2) of the
Income-tax Act is applicable and that the assessee is not entitled to
deduct the sum of Rs. 4,052 being the municipal tax. The Income-tax
Officer when he assessed the tax for the year · 1965-66 was aware of
the fact that the property was self-occupied but erroneous.Jy thought
that the assessee was entitled to deduction of the municipal taxes. Sub-
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R. K. MALHOTRA v. K. B. LALBHAI (Kai/asam, !.)
291
sequently when the assessmen,ts were scrutinised in the office of CompA
!roller and Auditor-General of India, that office pointed out to the
Income-tax Officer that on a true interpretation of section 23 (2), the
deduction of municipal taxes in respect of self-occupied properties was
not admissible.
On receipt of this intimation from the Audit Department the Income-tax Officer treated the intimation as 'Information'
within the meaning of section 147 (b) and in consequence of this information he was satisfied ~hat he.had reason to believe that the income
B
of the respondent for the assessment year 1965-66 had escaped assessment and therefore proceeded to issue the impugned notice under section 148 read with section 147(b) of the Income-tax Act.
·
The only question that arises for consideration in this
appeal is
whether the 'intimation which the Income-tax Officer received from the
Audit Department would constitute 'information' within the meanrng
.of section 147(b). Section 147(b) provides:
"notwithstanding that there has been no
om1ss1on
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 income chargeable to tax
has escaped asscss.n1cnt for any assessment year,"
he may assess or reassess such income for the assessment year concerned.
Sub-section (b) of section 147 enables the Income-tax Officer to
assess or reassess the income if in consequence of information in his
possession he has n;ason to believe that income chargeable to tax has
escaped assessment.
Two conditions are necessary for invoking the
sub-section : ( l) the officer should receive
information after the
original assessment; (2) in consequence of such information he should
have reason to believe that income has escaped. assessment.
The 'information' may be of facts or of law.
The 'information' of a fact may
be from external source. The fact that the Income-tax Officer with
diligence could have obtained the information during the
previous
assessment on a proper investigation of the materials on the record or
the facts disclosed thereby, would not make it any the less information
if the fact was not in fact obtained and came to his knowledge only
subsequently. So also the fact that on a research as to the state of law
the Income-tax Officer would have ascertained the true legal position
would not make anv difference if the officer came to know the real
position of the law only subsequently. The decision of a court of law
subsequent to the assessment would be 'information' and the Income1ax Officer is entitled to take note of it. Mr. B. Sen, the learned counsel
for the assessee, contended that on the facts of this case it cannot be
said that the Income-tax Officer had any 'information' as required under
the section. He submitted that the officer was fully aware of the fact
that the houses were self-occupied and therefore the question of coming
into possession of any information as to facts does not arise. The
Income-tax Officer took an erroneous view in applying the provisions
of the section and mere pointing out by the Auditor the error in the
application of the law would not amoun! to 'information'. The c<'.n!ention of the learned counsel will be exammed in the bght of the dec1s10ns
bearing on the question.
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292
SUPREME COURT REPORTS
[1978] 1 s.C.R.
In Maharaj Kumar Kamal Singh v. Commissioner of Income-tax,
Bihar and Orissa (1), the Income-tax Officer omitted to bring to assessment for the year 1945-46, the sum of Rs. 93,604 representing interest
on arrears of rent due to the assessee in respect of agricultural land on
the ground that the amount was agricultural income. The Privy Council
held that interest on arrears of rent payable in respect of agricultural
land was not agricultural income. As a result of fhe decision the
Income-tax Officer initiated re-assessment proceedings under section
34(1) (b) of the Income-tax Act.
The Supreme Court held that the
word 'information' in section 34( !) (b) included information as to the
true and correct state of the law, and so would cover information as to
relevant judicial decisions.
Section 34(1) (b) of the Income-tax Act,
1948, which the court was dealing with had a similar provision the
material words being, ''The Income-tax Officer has in consequence of
information in his possession reason to believe,".
In R. B. Bansilal Abirachand Firm v. Commissioner of Income-tax,
M.P. ( 2), the first assessment of the appellant firm was made on the
Officer's 'information that the assessee wa a partner and that the interest
was received by him in the capacity of a partner, but after the Tribunal
gave its decision in subsequent proceedings the Income-tax Officer
came to know that the interest was not received by the appellant in the
capacity of a partner but in its capacity of financier.
In the circumstances, this Court held that the information received from the decision
of the Tr(bunal and the High Court in assessment proceedings would
be 'information'.
In Assistant Controller of Estate Duty, Hyderabad v. Nawab Sir
Mir Osman Ali Khan Bahadur, H.E.H. The Nizam of Hyderabad, and
Others('), this Court was con'sidering the question whether the opinion
of the Central Board of Revenue would amount to 'information' within
section 59 (b) of the Estate Duty Act.
AJ;ter citing the decision in
Maharaj Kumar Kamal Singh v. Commissioner of Income-tax, Bihm·
and OrissaCJ, under section 34(1) (b) of the Income-fax Act, this
Court reiterated the view taken in that case and observed that the
opinion expressed by the Board of Revenue as to valuation was clearly
'information'.
The authorities cited above make it clear that a subsequent decision
_of the Privy Council (35 I.T.R. I), the Income-tax Appellate Tribunal
(70 I.T.R. 74) and the opinion of the Central Board of Revenue (72
I.T.R. 376) as to the state of Jaw would be 'information' under section
14 7 (b). While conceding this position Mr. B. Sen, the learned counsel,
submitted that a note by the Audit Department that the I.T.O.'s view
of law that the assessee is entitled to deduct the municipal taxes is
erroenous would not amount to 'information' especially when the
I.T.O. wa's aware of the fact that the houses were self-occupied. The
fact that the I.T.O. was aware of the fact that the houses were self-
(I) 35 J.T.R. 1.
(2) 70 I.T.R. 74.
(3) 72 1.T.R. 376.
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R. K. MALHOTR.A v. K. B. LALBHAI (Kai/asam, J.)
293
occupied and that he could have with diligence found that the assessee
A
would not be entitled lo the exemption will not preclude the officer from
using the auditor's note as fresh 'information' .
. This Court in Commissioner of Income-tax, Gujarat v. A. Raman
and Co. ( 1), disagreed with the view taken by the High Court of
Gujarat that the information in consequence of which proceedings of
reassessment were intended to be started could have been gathered
B
by the Income-tax Officer in charge of the assessment in the previous years from the disclosures made by the two Hindu undivided
families and would not be 'information'.
This court held :
"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 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."
The Court further observed that 'information' means instruction or
knowledge derived from an external source. But the words "external
source" cannot be construed a's implying that the source must be outside the record.
The 'information' may be gathered from the assessment record itself.
The plea of the learned counsel that the audit report is not 'information' remains to be considered. A few decisions of the High Court
on this point may now be referred to. In Commissioner of Income-tax,
Delhi v. H. H. Smt. Chand Kanwarji( 2 ), the Delhi High Court held
that the scrutiny note of the Revenue Audit and the Jetter
of the
Inspecting Assistant Commissioner constituted 'information' within the
meaning of section 14 7 (b) froin an "external source" and the assessments were, therefore, valid. The Income-tax Officer treated the income derived by way of interest from bank deposits as "earned income" and accepted the assessee's claim of expenditure on the salary
paid to her daughter-in-law.
Subsequently, the revenue audit staff
working under the Comptroller and Auditor-General of India, while
scrutinising these assessments, brought to the notice of the department
that the Income-tax Officer had wrongly treated the "interest income"
as "business income" and also that the Income-tax Officer had wrongly
allowed the assessee's olaim with regard to the salary paid to her
daughter-in-Jaw. The Income-tax Officer acted upon this note and reopened the original assessment.
A Bench of the Delhi High Court
relying on the reasoning of this Court in 72 I.T.R. 376 that the opinion
expressed by the Central Board of Revenue in appeal under the Estate
Duty Act would be 'information' held that the note of the revenue audit
under the Comptroller and Auditor-General of India would be 'infor-
----
(I) 67 J.T.R. l I.
(2) .S4 T.T.R. 584.
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294
SUPREME COURT REPORTS
(1978] l S.C.R.
mation'. The same view was expressed in Commissioner of Income-tax
v. Kelukutty( 1) by the Kerala High Court. Mathew J. speaking for the
court held that the note put up by the Audit to the effect that the assessment ought to have been made on the reconstituted firm for the entire
income of the two periods and therefore the Income-tax Officer committed an error, was instruction or knowledge derived from an external
source and would constitute 'information'. In Vashist Bhargava v.
Income-tax Officer, Salary Circle, New Delhi('), a Bench of the Delhi
High Court held that when subsequent to the assessment the Ministry
of Law and the Revenue Audit pointed out that as a question of fact
the payment of interest by the petitioner was made to his own account
in the Provident Fund and as a question of law the money so paid did
not vest in the Government but continued to belong to the petitioner.
and therefore, the income of the petitioner had escaped assessment, it
would be 'information' available to the Income-tax Officer.
We feel that the view of the Delhi High Court in 84 l.T.R. 584 and
99 LT.R. 148 and that of the Kerala High Court in 85 I.T.R. 102 is
correct. Ample support is derived for that view from the law laid down
by this Court in Commissioner of Income-tax, Gu;arat, v. A. Raman
and Co.("), where it was held that the expression 'information' in the
context would mean instruction or knowledge derived from an external
source concerning fact or particulars or as to law relating to a matter
bearing on the assessment. It is not disputed that the decisions of
courts of law and Income-tax Appellate Tribunal would be 'information•
of law. This Court, as already pointed out in 72 I.T.R. 376 has held
that the opinion of the Central Board of Revenue as regard the valuation of securities for the purpose of Estate Duty would be information.
The Gujarat High Court was correct in its view that it would be information of law if it is stated by a person, body or authority competent
and authorised to pronounce upon the law and is invested with authority
to do so. In applying this principle the Court erred in holding that
Audit department is not an authority competent and authorised to declare the correct state of law or to pronounce upon it.
The Audit
Department is the proper machinery to scrutinise the assessments of the
Income-tax Officer and point out the errors, if any, in law.
For the reasons stated we are unable to accept the conclusion arrived at by the Gujarat High Court. We allow this appeal and hold that
the Income-tax Officer in the circumstances is entitled to reopen the
assessment under section 147(b) of the Income-tax Act. The appeal
is allowed with costs.
M.R.
(1) 85 J.T.R. 102.
(2) 99 l.T.R. 148.
(3) 67 J.T.R. l I.
Appeal allowed.
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