ORDER
M.A.A. Khan, Judicial Member
1. This is an appeal from CIT(A)’s order dated 7-8-1990 for A.Y. 1985-86 quashing the order of the Assessing Officer (AO) for reopening the assessment Under Section 147(b) of the I.T. Act, 1961 (the Act).
2. In this case the assessee-company returned a loss of Rs. 15,81,117 and the assessment was completed Under Section 143(3) on 15-1-1986 at loss of Rs. 15,41,117. Subsequently the audit pointed out that claim of the assessee for depreciation on diesel generating sets, furniture and tubewell had wrongly been allowed on high rates. Similarly extra shift allowance on electric installations and motor cars had also been wrongly allowed. Even investment allowance on the tubewell was also wrongly allowed. The AO taking note of audit objections, issued notice Under Section 148 to the assessee-company and withdrew the excess depreciation, extra shift allowance and the investment allowance wrongly allowed in the original assessment. In appeal, however, the Id. CIT(A) quashed the initiation of re-assessment proceedings on the ground that there was no failure or omission on the part of the assessee to disclose all the primary facts truly and wholly and that in his recorded reasons, the AO did not mention that he was reopening the assessment on the basis of audit objection. The Id. CIT(A) was of the opinion that the AO had initiated the re-assessment proceedings only to correct his own mistakes. In support of his views the Id. CIT(A) relied upon the Supreme Court decisions in Maharaj Kumar Kamal Singh v. CIT [1959] 35 ITR 1, CIT v. A. Raman & Co. [1968] 67 ITR 11, R.B. Bansilal Abirchand Firm v. CIT [1968] 70 ITR 74, Bankipur Club Ltd. v. CIT[1971] 82 ITR 831 and Indian & Eastern Newspaper Society v. CIT [1979] 119ITR 996.
3. Inviting our attention to Sub-clause (iv) of Clause (c) below Expl 2 to Section 147, the Id. D/R urged that grant of excessive loss or depreciation allowance or any other allowance makes a case where income chargeable to tax has escaped assessment and, therefore, reopening of the assessment in this case was justified. He further submitted that notice Under Section 148 issued on the basis of audit report was a valid notice. In this behalf, the Id. D/R relied upon the Madras High Court decision in Smt. Indira Devi v. CIT [1994] 210 ITR 537 and Supreme Court decision in A.L.A. Firm v. CIT [1991] 189 ITR 285. In its turn, the assessee has supported the order under appeal by filing written submissions wherein reliance has been made on the decisions mentioned in the order of Id. CIT(A).
4. After study of the cases relied upon by the parties and on going through the material on record, we feel inclined to agree with the Id. D/R.
5. Prior to its substitution by Direct Tax Laws (Amendment) Act, 1987 w.e.f. 1-4-89, Clause (d) of Explanation 1 and Explanation 2 to Section 147 provided that :-
Section 147(1):
Explanation 1 : For the purpose of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely,-
(a) ** ** ** (b) ** ** ** (c) ** ** ** (d) where excessive loss or depreciation allowance has been computed: Explanation 2:
Production before the AO of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of this sub-section.
The change brought about by the Direct Tax Laws (Amendment) Act, 1987 in the above position of law may be referred to as under :-
Sec. 147:
Explanation 1 :
Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso.
Explanation 2 :
For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely:-
(a) ** ** ** (b) ** ** ** (c) where an assessment has been made, but- (i) ** ** ** (ii) ** ** ** (iii) ** ** ** (iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed.
6. It may be noted that present Explanation 1 has practically been substituted for the provisions of old Explanation 2 and the mandate contained in old Sub-clause (d) of Expl. 1 has been reiterated in the provisions of Clause (iv) of Sub-clause (c) of the substituted Explanation 2, with some modification. The intention of the Legislature, as was initially there in the old provisions contained in Explanation 1(a) and Explanation 2 has been retained in the newly substituted provisions of Explanation 1 and Explanation 2(c)(iv). If follows, therefore, that the newly substituted provisions of Sub-clause (iv) of Clause (c) of Explanation 2 and the Explanation 1 are simply clarificatory of law as it stood earlier in the provisions of Explanation 1(d) and the Explanation 2 of the substituted Section 147. It means that there has been no change in the legal position that grant of excessive loss or depreciation allowance would make a case of income chargeable to tax as escaping assessment and production before the AO of account books or other evidence from which material evidence could with due diligence have been discovered by the AO would not necessarily amount to disclosure within the meaning of Section 147.
7. In the instant case the Id. CIT(A) though appreciated that mistake had been committed by the AO in granting excessive loss or depreciation allowance and investment allowance, yet appears to have been carried away by the fact that since the assessee had furnished all the primary evidence and material to the AO for completing the assessment, the underassessment had not resulted from any failure or omission on his part. That was not the case of the AO. The case of Revenue squarely fell within the purview of Section 147(b) and not Under Section 147(a) as has wrongly been considered by the Id. CIT(A). The approach of the Id. CIT(A) has thus been inherently wrong vitiating his conclusions.
8. It is true that Section 147(b) does not permit the AO to apply his mind to the same assessment with a view to correct his own mistakes and in this behalf the position of law is well-settled by the decisions of the Supreme Court cited in the order of the Id. CIT(A) as also in the written submissions. But that was not the position in the instant case. Herein, it was the audit which had pointed out that excessive loss had been granted by allowing depreciation allowance at higher rates and by wrongly allowing extra shift allowance and investment allowance to the assessee. This audit could have made an information in possession of the AO in forming the belief that income chargeable to tax has escaped assessment. In this behalf a reference to the following observations of the Madras High Court in Smt. Indira Devi’s case (supra) may usefully be made :-
We have considered the submissions made on both sides and applied our mind to the impact of the audit note. It is clear that the audit note only brings to the attention of the ITO two vital facts, namely, the donee did not become a partner of the firm and there was no transfer of capital. Actually, the question whether the interest in the firm had been transferred by the assessee to the minor is a question of fact, which itself is based on other primary facts. Obviously, the ITO had not applied his mind to all the relevant facts and the production of the settlement deed alone was insufficient to make a proper assessment. The appellate Tribunal has pointed out that the partnership deed itself contains a clause prohibiting the assignment of the share in the firm without the consent of the partners and it is not in dispute that the consent of the other partner had not been taken. Since the ITO had not applied his mind at all to the relevant facts, the audit party had only brought to his notice those facts, which had escaped his attention. Consequently, in the revision, the ITO had to apply his mind to those facts and come to a proper finding as to whether the share in the firm had been effectively transferred. In our opinion, therefore, the appellate Tribunal is right in holding that the ITO had ample jurisdiction under Section 147(b) to initiate the assessment proceedings.
The above observations of their Lordships of the Madras High Court get, we think, good support from the following observations of their Lordships of the Supreme Court in A.L.A. Firm’s case (supra):-
… that though the ITO at the time of the original assessment, had looked at the facts and accepted assessee’s contention that the surplus was not taxable, in doing so, he had obviously missed to take note of the law laid down in the case of GR Ramachari & Co. (41 ITR 142) and there was nothing to show that the case had been brought to his notice. When he, subsequently became aware of the decision, he initiated proceedings under Section l47(b). The material which constituted information and on the basis of which the assessment was reopened was the decision in GR Ramachari & Co. (supra). This material was not considered at the time of original assessment. Though it was a decision of 1961 and the ITO could have known of it had he been diligent, the obvious fact was that he was not aware of the existence of that decision then and, when he came to know about it, he rightly initiated proceedings for assessment.
9. It may be noted that the Apex Court has favoured the view that an audit objection may well make an information in the possession of the AO for making the belief that income chargeable to tax has escaped assessment. The decisions of the Supreme Court, relied upon by the assessee are not directly relevant on this particular issue and, therefore, could not have been usefully and successfully relied upon by the Id. CIT(A) for the purpose of quashing the re-assessment proceedings in this case.
10. To sum up, we hold that the AO was justified in reopening the assessment in this case on the basis of audit objection which made a good information in his possession for his belief that income chargeable to tax had escaped assessment. We accordingly vacate the CIT(A)’s order and restore that of the AO on this point.
11. In the result the appeal is allowed.
