TMI Blog1980 (7) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... December 6, 1975, the ITO issued three notices under s. 8(b) of the Act for the assessment years 1971-72, 1972-73 and 1973-74, proposing to reassess the income of the petitioner for these assessment years, as he had reason to believe that the petitioner's chargeable profit chargeable to tax had escaped assessment within the meaning of s. 147 of the I.T. Act, 1961. The petitioners have challenged these notices at P-8, P-9 and P-10, in the three writ petitions detailed above, respectively. Section 8 of the Act deals with the profits escaping assessment and it reads: " 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 asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount of any fund, any surplus and any such reserve as is not to be taken into account in computing the capital under rule 1 ........" The relevant part of the audit report for the disputed assessment years, a copy of which was allowed to be placed on the file on the request of Mr. Awasthy, learned counsel for the revenue, reads: Under rule 2 of the Second Schedule to the Surtax Act, the capital computed in accordance with rule I of the Second Schedule to the Surtax Act was diminished by the cost of assets the income from which is excluded under clauses (iii), (vi) and (viii) of rule I of the First Schedule. The cost of assets so diminishable was not to exceed the aggregate of (i) any, money borrowed; and (ii) the amount of any surplus fund and such reserve as is not to be taken in computing capital under rule I of the Second Schedule. It will be found from item (i) and (ii) above that exclusion for diminishable capital was for borrowing funds, surplus and reserves. Any amount which could not classify as borrowing funds, surplus or reserve would not reduce the diminishable capital in the instant case. The exclusion from diminishable capital was made on the fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as also the notice (P-5) reiterate that the items detailed in both were wrongly taken into account for restricting reduction in capital under r. 2 of the Second Schedule. It is clear from the copies of the disputed assessment orders that the ITO had taken into account the items detailed in the audit report for restricting the reduction in capital under r. 2 of the Second Schedule. The audit authorities found that it had been done wrongly. It is to rectify this mistake that the ITO first issued a notice under s. 13(1) of the Act and thereafter issued the impugned notice under s. 8(b) thereof. The ITO can reopen an assessment under s. 8(b) of the Act if he has reason to believe, that the chargeable profits assessable for any assessment year have escaped assessment, in consequence of information in his possession. The vital point for consideration is, whether the audit report on the basis of which the ITO has issued the impugned notices under s. 8(b) of the Act constitutes " information " within the meaning thereof. In Kasturbhai Lalbhai v. R. K. Malhotra, ITO [1971] 80 ITR 188 (Guj), the term " information " in the context in which it occurs in s. 147(b) of the I.T. Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 119 ITR 996 (SC). It has been held that according to the ratio of Kalyanji Mavji Co.'s case [1976] 102 ITR 287 (SC), a mistake committed by the ITO could justify a reassessment and that it was too wide a proposition and travelled further than the statute warranted. It was further held that an error discovered on a reconsideration of the same material does not authorise the ITO to initiate reassessment proceedings. To this limited extent the decision in Kalyanji Mavji Co.'s case [1976] 102 ITR 287 (SC) was overruled by a larger Bench of the Supreme Court in Indian and Eastern Newspaper Society v. CIT [1979] 119 ITR 996. In the latter Supreme Court decision, their Lordships made the following observations (p. 1003): But although an audit party does not possess the power to so pronounce on the law, it nevertheless may draw the attention of the ITO to it. Law is one thing, and its communication another.. If the distinction between the source of the law and the communication of the law is carefully maintained, the confusion which often results in applying s. 147(b) may be avoided. While the law may be enacted or laid down only by person or body with authority in that behalf, th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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