JUDGMENT
T.N.C. Rangarajan, J.
1. The petitioner seeks a writ of prohibition against the respondents in respect of a notice issued under Section 147(a) of the Income-tax Act, 1961. The facts stated by the petitioner are that there was originally a firm carrying on a business of manufacture and sale of beedies. The petitioner-company was incorporated on May 12, 1977, for carrying on the said business and it took over the trademark of the beedies manufactured by the firm. The company set up a factory at Naidupet which is in a backward area. Some of the raw beedies were entrusted to the contractors for being manufactured and with this input along with raw beedies manufactured by the assessee itself in the industrial undertaking, the further processes of heating, ringing, bellying, wrapping and packing were carried on with the consequence that the finished product was made in the factory which is in the backward area. The assessee claimed deduction under Section 80HH of the Income-tax Act. For the assessment year 1979-80 which is the first year in which the industrial undertaking was established, the Income-tax Officer granted deduction. On the ground that the conversion of the firm into company disentitles the company from claiming the benefit, the deduction was withdrawn by an order of the Commissioner of Income-tax made under Section 263 of the Income-tax Act. This was reversed on an appeal by the Appellate Tribunal and it is stated that a referred case is pending in the High Court. For the subsequent year 1981-82, the Income-tax Officer himself disallowed the deduction, but it was subsequently allowed by the Appellate Tribunal and a referred case is pending. For the assessment years 1982-83 and 1983-84, the Commissioner of Income-tax (Appeals) allowed deduction and the Departmental appeals are pending in the Tribunal. For the assessment year 1984-85, the deduction has been allowed by the Income-tax Officer himself. In this background, for the assessment year 1979-80 to the assessment year 1984-85, on a fresh ground, namely, that part of the manufacturing activity was carried on outside the backward area, the Income-tax Officer sought to first amend the assessment under Section 154 of the Act and thereafter, the Commissioner of Income-tax sought to revise the assessment under Section 263 of the Act. Finding both these courses to be untenable, the impugned notices are being issued under Section 148 of the Income-tax Act alleging that the assessee has failed to disclose fully and truly all the material facts for making the assessment. The petitioner has questioned the issue of these notices for these assessment years on the ground that they lack jurisdiction inasmuch as the facts have been disclosed before the assessment was made and the claim of the assessee was considered and that proceedings are pending with respect to the same.
2. In the counter-affidavit, it is not denied that a list of contractors to whom the work was entrusted, the number of beedies manufactured and the amount paid was actually given. But it is stated that this information was not sufficient and, therefore, it amounted to omission to give all the primary facts and, therefore, the Income-tax Officer had the jurisdiction to reopen the matter.
3. Learned counsel for the petitioner submitted that the impugned notices were without jurisdiction because the information as to the manner of getting the beedies manufactured at the initial stage through sub-contractors at places outside Naidupet was already on record and it did not make any difference to the claim of deduction already allowed by the Tribunal for some years, by the Commissioner of Income-tax for some years and by the Income-tax Officer himself for the last year. It was further contended that even if a small part of the manufacturing activity which was done on the assessee’s own count was carried out by the contractors outside the backward area, the entire deduction could not be disallowed and since that part of the activity did not affect the computation of profit substantially, the issue of the impugned notices was unjustified on the facts also and was without jurisdiction.
4. Standing counsel for the Revenue submitted that mere information as to the amount paid to the contractors was not sufficient to find out whether any part of the manufacturing activity was carried on outside the backward area and what proportion of profit was attributable to the same. He submitted relying on the decisions in Sri Krishna (P.) Ltd, v. ITO and Phool Chand Bajrang Lal v. ITO that failure to give true and full material facts necessary for his assessment for that year, enables the Income-tax Officer to reopen the assessment under Section 147(a) of the Act.
5. Section 80HH of the Income-tax Act provides for a deduction in respect of profits and gains from newly established industrial undertakings in a backward area. Where the gross total income includes profits and gains derived from an industrial undertaking in a backward area, a deduction of 20 per cent of such profits is allowed therefrom. Sub-section (2) of Section 80HH lays down the conditions, one of which is that the industrial undertaking should manufacture or produce articles in any backward area and another condition is that it should employ ten or more workers in the manufacturing process carried on with the aid of power. It is not the case of the Revenue that any of these conditions are not fulfilled. Their only case is that the entire manufacturing activity from beginning to end is not carried on in the backward area and an initial part of it has been entrusted to the contractors, who carried on that part of the activity outside the backward area. The contention, therefore, is that the profit shown as the profit of the industrial undertaking in the backward area may actually include a small part of the profit derived from activity outside the backward area and, therefore, there is inflation of the profit and consequentially inflation of the deduction claimed by the assessee, that could be withdrawn by reopening the assessment.
6. We find that Sub-section (7) of Section 80HH provides for this contingency by stating that where it appears to the Assessing Officer that owing to the close connection between the assessee carrying on the business to which this section applies and any other person, the business between them is so arranged that it produces to the assessee more than the ordinary profit, the profits and gains of this industrial undertaking may be reasonably estimated. In the present case also if the Assessing Officer had carefully scrutinised the accounts of the assessee and drawn the inference that because of the entrust-ment of the initial part of the contract process to contractors, the income from the industrial undertaking is likely to be inflated, with reference to the profit derived from the backward area, he could have reasonably estimated the profit instead of accepting the profit as shown by the assessee. This estimate, he failed to do at the time of the assessment and he seeks to do the same by reopening the assessment. The question is whether he can do it by stating that there was an omission on the part of the assessee to disclose fully and truly all material facts. In the case of Parashuram Pottery Works Co. Ltd. v. ITO , the Supreme Court stated that the duty of the assessee in any case does not extend beyond making a true and full disclosure of primary facts. Once he has done that, his duty ends. It is for the Income-tax Officer to draw the correct inference from the primary facts. It is no responsibility of the assessee to advise the Income-tax Officer with regard to the inference which he should draw from the primary facts. If an Income-tax Officer draws an inference which appears subsequently to be erroneous, mere change of opinion with regard to that inference would not justify initiation of action for re-opening assessments. This statement of law has been confirmed in the decisions cited by learned standing counsel.
7. In the present case, the Income-tax Officer failed to draw an inference that because of the entrustment of the initial manufacturing activity to contractors, the income derived from the industrial undertaking with reference to the backward area could be inflated and to that extent the income has to be estimated for confining the deduction to that profit which could be said to have been derived only from the backward area. Failing to draw that inference, blame cannot be put on the assessee, when at the time of assessment the list of contractors, the quantity of beedies manufactured and the amount paid has been disclosed by the assessee. This disclosure is admitted in the counter-affidavit. The Income-tax Officer is not able to specify what extra information was required for him to have applied his mind to draw that inference for reducing the deduction to which the assessee was entitled. As long as it is not possible for the Income-tax Officer to specify the exact information which was required and which was not disclosed, it is not possible to accept the claim of learned standing counsel that there was no true and full disclosure in the case. When that jurisdictional fact is not established, the Income-tax Officer cannot issue a notice under Section 147(a). In the circumstances, the impugned notices are quashed.
8. The writ petition is allowed. No costs.
