Holding

An internal audit party’s opinion on a point of law cannot be regarded as "information" under section 147(b) of the Income Tax Act, 1961.

Summary

The Indian and Eastern Newspaper Society, a registered society that owned a building with a hall and rooms let out for rent, had its income from these facilities assessed as business income for the years 1960‑61 to 1963‑64. During a departmental audit, the Income Tax Department’s internal audit unit opined that such receipts should have been taxed under "Income from property". The Income Tax Officer treated this audit opinion as "information" under section 147(b) of the Income Tax Act, 1961 and reassessed the society’s income. The Appellate Assistant Commissioner set aside the reassessment, but the Income Tax Appellate Tribunal held that the officer was empowered to reopen the assessment on the basis of the audit view. The matter was referred to the Supreme Court under section 257. The Court examined the meaning of "information" in section 147(b) and held that an internal audit party’s opinion on a point of law is not "information" within the statutory sense because it is not a declaration of law by a competent legislative or judicial authority. Consequently, the officer could not rely on the audit opinion to reopen the assessment. The appeal was allowed in favour of the society and the revenue was ordered to bear costs.

Issues considered

Whether the opinion of the Income Tax Department’s internal audit organization on a point of law constitutes "information" within the meaning of section 147(b) of the Income Tax Act, 1961 for the purpose of reopening an assessment.

Legislation cited

Comptroller and Auditor General (Duties, Powers and Conditions of Service) Act, 1971s. 16
Income Tax Act, 1961s. 147(b), s. 148, s. 149, s. 150, s. 151, s. 152, s. 153, s. 257

Subjects

Section 147(b)informationinternal auditincome tax assessmentreopening assessmentquasi‑judicial proceedinglaw interpretationaudit reportIncome Tax Act

Judgment

442

A INDIAN AND EASTERN NEWSPAPER SOCIETY.
NEW DELHI
v.
COMMISSIONER OF INCOME TAX, NEW DELHI
August 31, 1979
,.
B [P. N. BHAGWATI, V. D. TuLZAPURKAR AND R. S. PATHAK, JJ.]
Income Tax Act 1961--S. 147(b)--Scope of-"Information" "Reason to
believe"-Meaning of-Opinion of audit party of Income Tax Department-If
would comtitute "information".
Section 147(b) of the Income Tax Act, 1961 provides that if an Income
Tax Officer has, in consequence of information in his possesaion, reason to
c believe that income chargeable to tax has escaped assessment for any asc;ess-
ment year, he may assess or re~s such income.
l he internal audit organisation of the income tax department, in the course
of auditing the income tax records pertaining to the assessee for certain assess-
ment. years stated that the assessee's in.come on account of letting out of halls
and rooms should not have been assessed as income from business but an asses!-
-ment should have been niade uiider the head "Income from property". Treating
D the report as,information in his possession under s.147(b) the Income Tax
Officer re-t:lSseSsed the assessee's income. The Appellate Assistant ·Com.mi.1sioner
reversed th~ Income Tax Officer's order. On the other band, the Appellate Tribu-
nal took the view that the Income Tax Officer bad jurisdiction to proceed under
s.14 7 ( b). In a reference under s. 257 of the Income Tax Act the question was
whether the Income Tax Officer was legally justified in reopening the assess-
ment under s. 147 (b) on the basis of the view expressed by the Internal Audit
E party received by him subsequent to the original assessment.
Allowing tho appeal,
HELD : The opinion of the internal audit organization of the Department
on a point of law cannot be regarded as information within the meaning r.f
s. 147(b) of the Act. [455A].
1. {a) An assessment proceeding, which is a quasi-judicial proceeding, ac-
F quires hnality on the assessment order being made. The finality of such an
order can be disturbed only in proceedings, and within the confines, provided
by Jaw. An appeal, revision and rectification are proceedings in which the
fin51Jity of the assessment may be questioned. Section 147, under ·which an
assessment may be reopened, is a proceeding for assessing income which has
<!Caped asse,.ment. [446F-G]

G 2. In cases falling under s. 147(b) "information" is an indispensable in·
gredient. The word "infonnation" has been interpreted by this Court to mean
not only facts or factual material but include information as to the true_ and
corre:c.t state of the law and, therefore, informatiov. as to relevant judicial
decision~. The term is also defined as "instruction" or knowledge derived from
an external source concerning facts or particularF, or as to law, r.elating· to a
matter bearing on the essessment. [447P-Fl
H Maharaj Kamal Singh v. Commissioner of Income Tax 35 I.T.R. 1 (S.C.)=
[1959] Sup. I SCR 10, Commissioner of Income Tax v. Raman & Company
67 I.T.R. 1l(SC)=[1968] I SCR 10, referred to.
IE N S V. CIT 443

3. -(a) By its inherent nature, a fact has concrete existence. It influences the A
determination of an issue by the mere circumstance of its relevance. It require.11;
no further authority to make it significant. (447-HJ.

(b) The term •taw' is used in the sense of norms or guiding princip188
having legal effect and legal consequences. To possess legal '1gru·
fic:i.nce for that purpose, law must be enacted or dedared by a competent B
authority. Tho legal sanction vivifying it imparts to it its force and validity
and binding nature. Lnv may be statutory law enacted by a competent le~is·
Iative authority, or it mtl'Y be judge made law emanating from a declaration or
exposition of the content of a legal principle or the interpretation of a statute
and may in particular cases extend to a definition of the status of a party or the
legal relationship between the parties, the declaration being rendered by a
competent judicial or quasi-judicial authority empowered to decide question.! C
of law between contending parties. The declaration or exposition is ordinarily
set forth in the judgment of a court or the order of a tribunal. Such de-
claration or exposition in itself bears the character of law. In every case,
therefore, to be law it must be a creation by a formal source, either legislative
or judicial authority. A statement by a person or body _not competent to
create er define the law cannot be regarded 86 law. [448A-D]
D
(c) Where s.147(b) is read as referring to 'information' as to law, what
is. contemplated is 'information' as to the law created by a formal source. It
is 1a"W which, because it issues from a competent legislature or a competen1
judicial or quasi-judicial authority, influences the course of the assessment and
deckle.s any one· or more of these matters which determine the assessee's ta:.:
liability [448GJ E

4. The Internal Audit Organisation of. the Inoome Tax Department was 'Set
up primarily for imposing a check over the arithmetical accuracy of the com-
putation of income and the determination of tax. The audit of income tax re-
celpts having been entrusted to the Comptroller and Auditor-General of India,
it is intended as an exercise in removing mistakes and errors in income tax
records before they are submitted to the scrutiny of the C.Omptroller and F
Auditor General. The audit by the Comptroller and Auditor General is, bY
l virtue of s. 16 of the Comptroller and Auditor General (Duties, Powers and
Conditions of Service) Act, 1971 intended to ensure the sufficiency or otherwise'
of the rules and procedures prescribed for the purpose of securing an effec-
tive check on the assessment, collection and proper allocation of revenue and to
ascertain whether the rules and procedures are being fully observed and
nothing more. Therefore the contents of an internal audit report cannot be G
construed as enjoying the status of a declaration of law binding on the Income
Tax Ofiicer. Both the internal audit party of the Income Tax Department :md
the Audit report of the Comptroller and Auditor General perform essentially
administrative or executive functions and cannot be attributed the power of
judicial supervision over the quasi~judicial acts of income tax authorities. ·rhc
statute does not contemplate such power The opinion of the audit p::ir·:y in
regard to the application of one section of the Income Tax Act instead t>f H
another by the Income Tax Officer is not law because it is not a declaration
by a body authorised to declare the law. [450B-F]
'
444 SUPREME COURT ·REPORTS (1980] l S.C.R.

5. While the law may be enacted or laid down only by a body or person
with authority in that behalf, knowledge or awareness of the law may be
communicated by any one. No authority is required for the purpose of com-
municating knowledge or awareness of the law. [4500]

6. (a) In every case the Income Tax Officer must determine for himself
what the effect and consequence of the law mentioned in the audit note. a.i-e
and whether in consequence of the law which has come to his notice he can
reasonably believe that income had escaped assessment. The basis of his
belief must be the law of which he has now become aware. The true evalua-
tion of the law in its bearing on the assessment must be made directly and
oolely by the Income Tax Officer. [4,lC-Dl
Maharai Kamal Singh v. Commissioner of Income Tax 35 I.T.R. 1 (SC)=
[1959] SUp. 1 SCR 10, Commissioner of Income Tax v. Raman & Company 67
I.T.R. 11 (SC)=[1968] 1 SCR 10, Banklpur Club Ltd. v. Commissioner of
Income Tax [1971] 82 I.T.R. 831 followed.
R. K. Malhotra, Income Tax Officer, Group Circle 110), Ahmedabad v.
Kasturbhai Lalbhai, 109 I.T.R. 537, Kalyanii Mav;i & Co. v. Commissianer
of Income Tax, 102 I.T.R. 287, over-ruled.
ASsistant Controller of Estate Duty v. Nawab Sir Mir Osman Ali Khan
D Bahadur, 72 I.T.R. 376, referred to.
Commissioner of. Income Tax v. H. H. Smt. Chand Kanwarii Alwar 84
I.T.R 584, Commissioner of Income Tax v. Kalukutty 85 I.T.R. 102, Vashist
Bhargava v. Income Tax Officer, 99 I.T.R. 148, Muthukrishna Reddier v. Com;
missioner of Inc.ome Tax, Kerala, 90 I.T.R. 503, Raj Kumar Shrawan Kumar
v. Central Board of Direct Taxes & Anr. 107 I.T.R, 570, Elgin Mills Co. Ltd.,
v. Income Tax Officer, Companies Circle, 'A' Ward, Kanpur, 111 I.T.R. 287
not approved.
(b) The error discovered by the Income Tax Officer on a reconsideration
of the same material (and nothing n:iore) does not give the Income Tax Offic.er
the power to reopen the assessment. [451G)
(c) The sllbmission of the Revenue that upon receipt of the audit note the
F Income Tax Officer discovers or realises that a mistake has been commi'ted
in the original assessment and therefore the discovery of th'e mistake would be
"'informaition" within the meaning of s. 147(b) is inconsistent wi1h the terllJS J
of the section. What the section envisages is that the Income Tax Officer must
firs• have information in his possession and then in consequence of such infor·
mation be must have reason to believe that income has ~aped assessment.
The realisation that income has escaped 369CS6ment is covered by the words
"reason to believ'C", and it follows from the "information" received by him.
The information is not the realisation; the informetion gives birth to the
realisation. ' [452C-D] •
CIVIL APPELLATE JURJSDICTION : Tax Reference Case Nos. 1 to
4 of 1973. t.
D Income Tax Reference under section 257 of Income Tax Act 1961 _}-
made by I T. Appellate Tribunal Delhi Bench 'C' in R.A. Nos. 491
to 494 of 1971-72 (I.T.A. Nos. 6992, 19629-19631 of 1967-68).
IE N s V, c IT (Pathak, J.)

V S, Desai, (Mrs,) A. M, Verma, A. N. Haskar and J, B. Dada- A
chanji for the appellant.
T. A. Ramachandran and Miss A. Subhashini for the respondent.
(Dr.) Devi Pal, Ravinder Narain and J. B, Dadachanji for the

\ -
Intervener.
The Judgment of the Court was delivered by
B

PATHAK, J,-Can the view expressed by an intern,;! audit party
of the Income Tax Department on a point of law be regarded as
"information"' for the purpose of initiating proceedings under section
147(b) of the Income Tax Act, 1961? Opinion on the question has c
been divided among the High Courts, and accordingly the present cases
have been referred by the Income-tax Appellate Tribunal under s, 257
of the Act.
The assessee, Messrs. Indian and Eastern Newspaper Society, is
a society registered under the Indian Companies Act. It is a profes- D
sional association of newspapers established with the principal object
of promoting the welfare and interest of all newspapers, The assessee
owns a building in which a conference hall and rooms are let out on
rent lo its members as well as to outsiders. Certain other services are
also provided to the members, The income from that source was
assessed to tax all along as income from business, It was so assessed
for the years 1960-61, 1961-62, 1962-63 and 1963-64 also.
'The Income Tax Department includes an internal audit organisa-
tion whose function it is to examine income-tax records and check
mistakes made therein with a view ultimately to improve the quality
of assessments. In the course of auditing the income-tax records per- F
taining to the assessee for the assessment years 1960-61 to 1963-64,
the internal andit party expressed the view that the money realised by
the assessee on account of the occupation of its conference hall and
·-.., rooms should not have been assessed as income from business. It said
that an assessment should have been made under the head "Income
from property", The Income Tax Officer treated the contents of the G
report as "information" in his possession for the purpose of s. 147 (b)
of the Income Tax Act 1961, and reassessed the income on that
basis. The Appellate Assistant Commissioner allowed the appeals
filed by the assessee holding, inter alia, that in law it could not be said
that the Income Tax Officer had any "information" in his possession
enabling him to take action under s. 147(b), On appeal by the H
Revenue, the Income Tax Appellate Tribunal, Delhi Bench noticed a
conilict of judicial opinion on the question whether the internal audit
10-53 l SCI/79
446 SUPREME COURT REPORTS [1980] 1 S.. C.R.

report could be treated as "infonnation" for the purpose of
s. 147(b). The Gujarat High Court in Kasturbhai Lalbhai v. R. K.
·Malhotra, btcome-tax Officer, Group Circle ll(l), Ahmedabad(')
had held that an internal audit report could not be regarded as "infor-
mation", while the Delhi High Court in Commissioner of Income-tar
v. H. H. Smt. Chand Kpnwarji Alwar( 2 ) has expressed a contrary
view. Following the view adopted by the Delhi High Court, the :I
Tribunal held that the Income Tax Officer had jurisdiction to proceed
under s. 147 (b) . The assessee applied for a reference, and having
regard to the difference between the High Courts on the point, the
Tribunal has considered it expedient to refer the following question of
t
law directly to this Court:-
•
"Whether, on the facts and in the circumstances ·of the
case, the Income-tax Officer was legally justified in reopen-
ing the assessments under section 147(b) for the years •
1960-61, 1961-62, 1962-63 and 1963-64 on the basis of '
the view expressed by the Internal Audit party and received
D
by him subsequent to the original assessment?"'
Since then, the judgment of the Gujarat High Court in Kasturbhai
Lalbhai's case (supra) has, on appeal, been reversed .by this Court in
R. K. Malhotra, Income Tax Officer, Group Circle ll(l) Ahmedabad
v. Kasturbhai Lalbhai( 3 ). It has been strenuously contended that the
E view taken by this Court calls for further consideration. Having
regard to the dimensions of the controversy and the importance of the
question, we have· been persuaded to take a fresh look at the point.
An assessment proceeding is a quasi judicial proceeding. I(
acquires finality on the assessment order being made. And the fina-
lity of such an order can be disturbed only in proceeding, and within
the confines provided by law. An appeal, revision and rectification are
••
proceedings in which the finality may be questioned. The assessment
may also be reopened uuder section 147 of the Act. It is a proceeding
for assessing income which has "escaped assessment". Section 147
reads:- ' I
"147. If-
(a) the Income.Tax Officer has reason to believe that, by
reason of the omission or failure on the part of an
assessee to make a return under section 13 9 for any
H (I) 80 I. T. R. !88.
(2) 84 I. 1'. R. 584.
(3) 109 I.T.R. 537 (S.C.).
I E N s v. c IT (Pathak, !.) 44 ']

assessment year to the Income Tax Officer or to dis-
' close fully and truly all material facts necessary for
his assessment for that year, income chargeable to
tax has escaped assessment for that year, or

.(b) notwithstanding that there has been no omission or
8
failure as mentioned in clause (a) on the part of the
assessee, the Income-tax Officer has in consequence
I

'\. of information in his possession reason to believe that
income chargeable to tax has escaped assessment for
any assessment year,

he may, subject to the provisions of sections 148 to 153,
c
assess or reassess such income or recompute the loss or the
depreciation allOwance, as the case may be, for the assess-
1nent year concerned."

In cases falling under section 147 (b), the expression "information" D
pre•cribes one of the conditions upon which a concluded assessment
may be reopened under that provision. It is an indispensable ingre-
, <lient which must exist before the section can be availed of. What
does "information" in section 147 (b) connote ? In Maharaj Kamal
Singh v. Commissioner of Income-tax(') this Court, construing the
corresponding section 34(1) (b) of the Indian Income Tax Act, 1922 E
field the word "information" to mean not only facts or factual mate-
rial but to include also information as to the true and correct state of
the law and, therefore, information as to relevant judicial decisions.
Thereafter, in Commissioner of Income-tax v. Raman·& Company( 2 ),
the Conrt defined the expression "information" in section 147(b) of
the Income-Tax Act 1961 as "instruction or knowledge derived from F
an external source concerning facts or particulars, or as to law, relat-
ing to a matter bearing on the assessment." That definition has been
reaffirmed in subsequent cases, and with it as the point of departure
- "' we shall now proceed.

In so far as the word "information" means instruction or know- G
ledge concerning facts 'or particulars, there is little difficulty. By its
inherent nature, a fact has concrete existence. It influences the deter-
mination of an issue by the mere circumstance of its relevance. It
requires no further authority to make it significant. ItS quint essen-
tial value lies in its definitive vitality.
H
(1) 35 I.'F.R. I (SC).
(2) 67!.T.R. 11 (SC).
448 SUPREME COURT REPORTS [1980] 1 s.c.R.

A But wheu "information" is regarded as meaning instruction er
knowledge as to law the position is more complex. When we speak
of "law'', we ordinarily speak of norms or guiding principles having
legal effect and legal consequences. To possess legal significance for
that purpose, it must be enacted or declared by competent authority.
The legal sanction vivifying it imparts to it its force and validity and
B binding nature. Law may be statutory law or, what is popularly des-
cribed as, judge-made law. In the former case, it proceeds from
enactment having its source in competent legislative authority. Judge-
made law emanates from a declaration or exposition of the content of
' a legal principle or the interpretation of a statute, and may in particu-
lar cases extend to a definition of the status of a party or the legal
crelationship between parties, the declaration being rendered by a
competent judicial or quasi-judicial authority empowered to decide
questions of law between contending parties. The declaration or
exposition is ordinarily set. forth in the judgment of a court or the
order of a tribunal. Such declaration or exposition in itself bears the
D character of law. In every case, therefore, to be law it must be a
creation by a formal source, either legislative or judicial authority.
A statement by a person or body not competeµ! to create or define the
law cannot be regarded as law. The suggested interpretation of
enacted legislation and the elaboration of legal principles in text books
and journals do not enjoy the status of law. They are merely opinions
and, at best, evidence iu regard to the state of the law and in them-
selves possess no binding effect as law. The forensic submissions of
professional lawyers and the seminal activities of legal academics
enjoy no hig)ler status. Perhaps the only exception is provided by the
writings of publicists in international law, for in the law of nations the
distinction between formal and material sources is difficult to maiA-
F tain.

In that view, therefore, when section 147(b) of the Income Tax
Act is read as referring to "information" as to law, what is contem-
plated is information as to the law created by a formal source. It is
law, we must remember, which because it issues from a competent
G legislature or a competent judicial or quasi-judicial authority, in:fluencOA
the course of the assessment and decides any cine or more of those
matters which determine the assessee's tax liability.
In determining the status of an internal audit report, it is necessary
to consider the nature and scope of the functions of an internal audit
B party. The internal audit organisation of the Income Tax Department
' over the arithmetical accuracy
was set up primarily for imposing a check
of the computation of income and the determination of tax, and now,
I E N s v. C'I T (Pathak, !.) 449

because of the audit of income-tax receipts being entrusted to the A
Comptroller and Auditor-General of India from 1960, it is intended
all an exercise in removing mistakes and errors in income tax records
before they are submitted to the scrutiny of the Comptroller and Audi-
tor-General, Consequently, the nature of its work and the scope of
audit have assumed a dimension co-extensive with that of Receipt
Audit(1). The nature and scope of Receipt Audit are defined by B
section 16 of the Comptroller and Auditor General's-(Duties, Powers
and Conditions of Services) Act, 1971 (').

Under that section, the audit by the Comptroller and Auditor
General is principally intended for the purposes of satisfying him with
regard to the sufficiency of the rules and procedures prescribed for the
c
purpose of i;ecuring an effective check on the assessment, collection
and proper allocation of revenue. He is entitled to examine the
accounts in order to ascertain whether the rules and procedures are
being duly observed, and he is required, upon such examination, to
submit a report. His powers in respect of the audit of income-tax D
receipts and refunds are outlined in the Board's Circular No. 14/19/
56-II dated July 28, 1960( 3 ). Paragraph 2 of the Circular repeats
the provisions of section 16 of the Comptroller and Auditor General's
(Duties, Powers and Conditions of Service) Act, 1971. And para-
graph 3 warns that "the Audit Depart,ment should not in any way subs-
titute itself for the revenue authorities in the performance of their E
statutory duties." Paragraph 4 declares :
"4. Audit does not consider it any part of its duty to
pass in review the judgment exercised or the decision taken
in individual cases by officers ,entrusted with those duties,
but it must be recognised that an examination of such cases F
·may be an important factor in judging the effectiveness of
assessment procedure ...... It is however, to forming a
general judgment rather than to the detection of individual
errors of assessment, etc. that the audit enquiries should be
(I) Internal Audit Ma,nual, Vol, II p. I.
G
(2) "16. Audit of receipts of Union or of States.
It shall be the duty of the Comptroller and Auditor-General to audit
all receipts which are payable into the Consolidated Fund of India and of
each State and of each Union Territory having a Legislative Assembly and
to satisfy himself that the rules and procedures in that behalf are designed to
secure an effective check on the assessment, collection and proper allocation
of revenue and are being duly observed and to _make for this purpose H
such examination of the accounts as he thinks fit and report thereon."
{l) Internal Audit Manual, Vol. II p. 39.
450 SUPREME COURT REPORTS [1980] 1 S.C.R.

A directed. The detection of individual errors is an incident
rather than the object of audit."

Other provisions stress that the primary function of audit in relation
to assessments and refunds is the consideration whether the internal
procedures are adequate and sufficient. It is not intended that the
B purpose of audit should go any further. Our attention has been
invited to certain provisions of the Internal Audit Manual more speci-
fically defining the functions of internal audit in the Income Tax
Department. While they speak of the need to check all assessments.
and refunds in the light of the relevant tax laws, the orders of the
Commissioners of Income Tax and the instructions of the Centraf
c Board of Direct Taxes, nothing contained therein can be construed as
conferring on the contents of an internal audit report the status of a
declaration of law binding on the Income Tax Officer. Whether it is
the internal audit party of the Income Tax Department or an audit
party of the Comptroller and Auditor-General, they perform essentially
D administrative or executive functions and cannot be . attributed the
powers of judicial supervision over the quasi-judicial acts of Income-
tax authorities. The Income Tax Act does not contemplate such
power in any internal audit organisation of the Income Tax Depart·
ment; it recognises it in those authorities only which are specifically
authorised to exercise adjudicatory functions. Nor does section 16
E of the Comptroller and Auditor-General's (Duties, Powers and Condi-
tions of Service) Act, 1971 envisage such a power for the attainment
of the objectives incorporated therein. Neither statute supports the
conclusion that an audit party can pronounce on the law, and that
such pronouncement amounts to "information" within the meaning of
section 147(b) of the Income Tax Act, 1961.
F
But although an audit party does not possess the power to so pro-
nounce on the law, it nevertheless may draw the attention of the
Income Tax Officer to it. Law is one thing, and its communication
another. If the distinction between the source of the law and the
communicator of the· Jaw is carefully maintained, the confusion which
G often results in applying section 147(b) may be avoided. While the
law may be enacted or laid down only by a person or body with authoc
rity in that behalf, the knowledge or awareness of the law may be com-
municated by anyone. No authority is required for the purpose.
In the present case, an internal audit party of the Income Tax
H Department expressed the view that the receipts from lhe occupation
of the-conference hall and rooms did not attract section 10 of the Act
and that the assessment should have been made under secti.on 9. While
I EN s v. c I T (Pathak, J.) 451

...j sections 9 and 10 can be described as law, the opinion of the audit A
party in regard to their application is not law. It is not a declaration
by a body authorised to declare the law. That part alone of the note
of an audit party which mentions the law which escaped the notice of
the Income Tax Officer constitutes "information" within the meaning
of section 147(b); the part which embodies the opinion of the audit
B
party in reg~rd to the application or interpretation of the law cannot
be taken into account by the Income Tax Officer. In every case, the
Income Tax Officer must determine for himself. what is the effect and
consequence of the law mentioned in the audit note and whether in
consequence of the law which has now come to his notice he can
reasonably believe that income has escaped assessment. The basis of c
h;s belief must be the law of which he has now become aware. The
opinion rendered by the audit party in regard to the law cannot for
the purpose of such belief, add to or colour the significance of snch
law .. In short, the true evaluation of the law in its bearing on the
assessment must be made directly and solely by the Income Tax
Oflicer. D
Now, in the case before us, the Income Tax Officer had, when he
made the original assessment, considered the provisions of sections 9
and 10. Any different view taken by·him afterwards on the applica-
tion of those provisions would amount to a change of opinion on
material already considered by him. The Revenue contends that it is
open to him to do so, and on that basis to reopen the assessment E
under section 147 (b). Reliance is placed on Kalyanji Mavji & Co.
v. Commissioner of Income Tax('), where a Bench of two learned
Judges of this Court observed that a case where income had escaped
assessment due to the "oversight, inadvertence or mistake" of the
Income Tax Officer must fall within section 34(1) (b) of the Indian
,, Income Tax Act, 1922. It appears to us, with respect, that the pro-
F
position is stated too widely and travels farther than the statute
warrants in so far as ·it can be said to lay down that if, on reappraising
the material considered by him during the original assessment, the
Income Tax Officer discovers that he has committed an error in conse-
, quence of which income has escaped assessment it is open to him to G
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
Kamal Singh v. Commissioner of Income Tax (supra), Commissioner
of Iru;ome Tax v. Raman and Company (supra) and Bankipur Club
Ltd. v. Commissioner of Income Tax('), and we do not believe that H
(l) 102 I.T.R. 287
(2) 82 I.T.R. 831
452 ,lJl'Rl!MI! COURT REPORTS [1980] 1 S.C.R.

A the law has since taken a different course. Any observations in
Kalyanji Mavji & Co. v. Commissioner of Income Tax (supra) sug-.
gesting the contrary do not, we say with respect, Jay down the correct
law.
A further submission raised by the Revenue on section 147(b) of
B the Act may be considered at this stage. It is urged that the expres-
sion "information" in section 147(b) refers to the realis/Jtion by the
Income Tax Officer that he has committed an error when making the
original assessment. It is said that, when upon receipt of the audit
note the Income! Tax Officer discovers or realizes that a mistake has
been committed in the original assessment, the discovery of the mis-
c take would be "information" within the meaning of section 147 (b).
The submissiori appears to us inconsistent with the terms of >ection
14 7 (b). Plainly, the statutory provision envisages that the Income
.(
Tax Officer must first have information in bis possession, and then in

D
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 Income Tax Officer.
The information is not the realisation, the information gives birth to
the realisation.

The recent decision of this Court in R. K. Malhotra v. Kasturbhai
E Lalbhai (supra) may be examined now. While making an assess-
ment on a Hindu undivided family, the Income Tax Officer allowed a
deduction of municipal taxeil in determining the annual value of two
house properties occupied by the assessee. Subsequently, the Income
Tax Officer re-opened the assessment ion receipt of a report from the
office of the Comptroller and Auditor-General of India that on a true
F
interpretation of s. 23(2) of the Income Tax Act, 1961, the deduction
of municipal taxes was not admissible in the computation of the annual
value of self-occupied house properties. The assessee contended that
the report did not constitute "information" within the meaning of
section 147(1i) of the Act, and the Gujarat High Court accepted the
G plea in the view that information as to Jaw would consist of a state-
ment by a person, body or authority competent and authorised to pro-
nounce upon the law and invested with the authority to do so, and
that the Audit Department was not such competent or authoriiled
authority. On appeal by the Revenue, a Bench o{ two learned
Judges of this Court, although endorsing the principle enunciated by
H the High Court, said that the audit department was the proper niachi-
nery to scrutinise assessments made by the Income Tax Officer and
to point out ~rrors of Jaw contained therein, and the High Court had
l E N s v. c I T (Pathak, J.) 453

erred in taking the strict view which it. did. The Court nsted its A
decision on Assistant Controller of Estate Duty v. Nawab Sir Mir
Osman Ali Khan Bahadur('), Commissioner of Income Tax v. H. H.
Smt. Chand Kanwarji (supra), Commissioner of Income Tax v.
Kalukutty( 2 ) and Vashist Bhargava v. Income Tax Officer(").

In Assista[lt Coniroller of Estate Duty v. Nawab Sir Mir Osman B
Ali Khan Bahadur (supra), this Court held the opinion of the Central
Board of Revenue as regards the correct valuation of securities for the
• purpose of estate duty to be "information" .within the meaning of sec-
tion 59 of the Estate Duty Act, 1953 on the basis of which the Con-
troller of Estate Duty was held entitled to entertain a reasonable belief
that property assessed to estate duty had been under-valued. The c
circumstance that the opinion of the Board was rendered in an appeal
filed before it under the Estate Duty Act against the assessment made
by the Assistant Controller of Estate Duty was apparently not brought
to the notice of this Court when it heard R. K. Malhotra v. Kasturbhai
Lalbhai (supra). The opinion of the Board represented its view as a D
quasi-judicial authority· possessing jurisdiction to lay down the law.
Although the Board did not enhance the valuation of the; securities in
the appellate proceeding because of the argument advanced by the
appellant, nonetheless its observations amounted to information as to
the law. It was not a case where the Board was functioning as an
extra-judicial authority, performing administrative or executive func- · E
tions, and not competent or authorised to pronounce upon the law.
The Delhi High Court in Commissioner of Income Tax v. Ii. II. Smt.
Chand Kanwarji (supra) held that the scrutiny note of Revenue
Audit constituted "information" withilll the meaning of section 14 7 (b)
of the Income Tax Act because the Comptroller and Auditor-General
·Of India was empowered by statute to scrutinise the proceedings of the F
Income Tax Department and to point out defects and mistakes which
adTersely affected the Revenue. The High Court considered that the
view that information as to law could be gathered only from the deci-
sions of judicial or quasi-judicial authorities was unduly restrictive.
In Commissioner of Income-tax v. Kalukutty (supra), the Kerala High
Court also regarded the note put np by Audit as "information" within G
the meaning of section 147(b) of the Act, but it appears to have
assumed, without anything more, that an audit note would fall within
that expression. As regards Vashist Bhargava v. Income Tax Officu
(supra) the "information" consisted in a ~ote of the Revenue Audit

(I) 72 I.T.R. 376. H
(2) 85 I.T.R. 102.
(3) 99 I.T.R. J4g,

I
454 SUPREME COURT REPORTS (1980] 1 S.C.R-

and the Ministry of Law that. the payment of interest by the assessee.
was in fact made to his own account in the Provident Fund and, there-
fore, in law the money paid did not vest in the Government and, conse-
quently, the original assessment was erroneous in so far as it allowed
the deduction of the interest as expenditure made by the assessee.
The Delhi High Court upheld the reassessment on the finding that the
B
note of the Revenue Audit and the Ministry of Law had to be taken t
into account by the Income Tai< Officer, because in his executive
capacity he had to be guided by the advice re11dered by the Ministry
of Law and he had to pay due regard to the note of the Revenue Audit •
because the officers of the Audit Department were expterts empowered
c to examine and check upon the work of the Income Tax Officers. It
seems to us that the considerations on which the Delhi High Court
rested its judgment are not correct. But the decision of the case can
be supported on the ground that the basic information warranting the
re-opening of the assessment was the fact that the payment of interest
was made to the Provident Fund account of the assessee himself. That
D the money so paid did not vest in the Government was a conclusion
which followed a.utomatically upon that fact, and no controversy in
law could possibly arise on that point.

On the considerations prevailing with us, we are of opinion ihat
the view taken by the Delhi High Court and the Kerala High Court in )'.'.'.,
E the aforementioned cases is wrong and we must, with great respect,
hold that this Court was in error in the conclusion reached by it in
R. K. Malhotra v. Kasturbhai Lalbhai (supra).

Our attention has been drawn. to the further decision of the Kerala
High Court in Muthukrishna Reddier v. Commissioner of Income Tax,
Kera la(') and the decisions of the Allahabad High Court in Raj'
F
Kumar Shrawan Kumar v. Central Board of Direct Taxes & Anr.( 2 )
and Elgin Mills Co. Ltd. v. Income Tax Officer, Companies Circle,.
"A" Ward, Kanpur('). The Kerala High Court merely followed its
earlier judgment in Commissioner .of Income Tax v. Kalukutty
(supra) and the Allahabad High Court was impressed by the same
G reasons substantially which. persuaded the Delhi High Court and the •
Kerala High Court in the cases referred to above.
Therefore, whether considered on the basis that the nature and
scope of the functions of the internal audit organisation of the Income
Tax Department are co-extensive ~ith that of Receipt Audit or on the
ff (I) 90 l.T.R. 503
(2) 107 I .1'.R. 570
(3) 111 l.1'.R. 287
I E N s v. c I T (Pathak, J.) ~5 5

basis of the provisions specifically detailing its functions in the Inter- A.
nal Audit Manual,(') we hold that the opinion of an internal audit
party of the Income Tax Department on a point of law cannot be
regarded as "information" within the meaning of section 147(b) of
the Income Tax Act, 1961.
The qnestion referred by the Income Tax Appellate Tribunal is s.
answered in the negative, in favour of the ass·essee and against the
Revenue. The assessee is entitled to one set of costs in these appeals .
•
P.B.R. Appeals allowed.

..\.
(

. ~

(I) Internal A.dit Mnual, Vol. 2.