Kerala H.C : the assessment was validly reopened under s. 147(b)

Counsel Appeared

M. Pathrose Mathai & Joseph Vellapally for the Assessee : P.K.R. Menon for the Revenue

K. S. PARIPOORNAN, J.:

At the instance of the assessee, the Tribunal (in short “the Tribunal”) has referred the following questions of law for the decision of this Court:

“For the asst. yr. 1974-75:

(1) On the facts and in the circumstances of the case, was the Tribunal right in holding that the assessment was validly reopened under s. 147(b) of the IT Act, 1961 ?

(2) Was the Tribunal justified in its finding that the materials collected and relied, upon by the assessing officer for arriving at the market value of rubber trees as on January 1, 1954, are relevant ?

For the asst. yr. 1975-76 :

(1) On the facts and in the circumstances of the case, was the Tribunal right in holding that the assessment was validly reopened under section 147(b) of the IT Act, 1961 ?

(2) On the facts and in the circumstances of the case and in the light of the facts admitted in ground No. 2 of the appeal memorandum filed before the Tribunal, was the Tribunal justified in holding that the real ‘information’ for the reopening of the assessment was not the audit note of the Internal Audit Party ?

(3) Was there evidence on record to support the finding of the Tribunal that the ITO had received information after the date of the original assessment justifying reopening of the assessment under s. 147(b) of the IT Act, 1961 ?

(4) Was the Tribunal justified in its finding that the materials collected and relied upon by the assessing officer for arriving at the market value of rubber trees as on January 1, 1954, are relevant ?”

We are concerned with the asst. yrs. 1974-75 and 1975-76. Two questions have been referred relating to the asst. yr. 1974-75 and four questions have been referred for the asst. yr. 1975-76. The respondent in both the cases is the Revenue.

We heard counsel for the applicant (assessee) as also counsel for the Revenue. The controversy involved in these two cases is regarding the assessment to capital gains on the sale of old rubber trees by the assessee for the two years. Admittedly, capital gains that accrued on the sale of old rubber trees (if any) was not brought to tax in the original assessments made. The assessments were reopened under s. 147(b) of the IT Act. The reassessment proceedings were found to be invalid by the AAC ; but sustained by the Tribunal for both the years. It is agreed at the Bar that if the reopening of the assessments is valid, the Tribunal has only remitted the matter to be investigated afresh and so the answer to the other questions referred by the Tribunal will be only academic.

We proceed to consider whether the ITO validly reopened the assessments under s. 147(b) of the IT Act for both the years. In considering the said question, the Tribunal adverted to the fact that the assessee had shown the receipts from the sale of old rubber trees in Part III of the original return. It was also found that no efforts were made to bring to tax the capital gains embedded in the said receipts. The Audit Department drew the attention of the ITO to the fact that certain receipts are shown on sales of rubber trees and no steps were taken for computing the capital gains therefrom. Thereafter, the ITO entered into correspondence with the assessee. He ascertained the number of trees that were sold, the details of the estates with trees, the details from the Rubber Board referring to the report of the Tariff Commission, etc., and thereafter initiated proceedings to reopen the assessments. On the basis of the materials available before it, the Tribunal came to the conclusion that the audit note merely drew the attention of the ITO to the omission and the audit note was not an interpretation of the law as contended by the assessee. On the facts, the Tribunal also came to the conclusion that the materials that were available before the ITO constituted information, on the basis of which, the assessments were reopened.

Counsel for the assessee, Mr. Joseph Vellapally, vehemently contended that, in the background of the appellate order of the Tribunal for the earlier year, the ITO should have made necessary enquiries when once the sale proceeds of the rubber trees were shown in the return, wherein was embedded the accrual of the capital gains, if any. Counsel submitted that this is a case of mere change of opinion by the ITO or a mere display of arithmetic in arriving at the figure, which is insufficient to initiate proceedings under s. 147(b) of the IT Act. On the other hand, counsel for the Revenue submitted that though it may be said that the information, relied on for the purpose of reopening the assessments was there even at the time when the original assessments were made, the concerned ITO did not apply his mind, nor adverted to the fact of capital gains, and in such circumstances, the proceedings under s. 147(b) are not barred.

On hearing the rival contentions of the parties, we are of the view that the reopening of the assessments is valid. The Tribunal, in our opinion, correctly held that the audit report in this case only drew the attention of the ITO to the omission, namely, that the capital gains, which accrued, was not brought to tax. The Tribunal on the basis of materials available before it, held that the real information on the basis of which the assessments were reopened was the subsequent correspondence which the ITO entered into with the assessee and the subsequent investigation with regard to the value of the rubber trees as on January 1, 1954. According to the Tribunal, both these points were material for deciding whether there was information available to the ITO. Proceeding further, the Tribunal categorically found that the correspondence with the assessee gave most of the information with regard to the sales, etc., Which was not available earlier. On the basis of the materials disclosed during the correspondence, the ITO made further investigation with regard to the value of the rubber trees as on January 1, 1954, by referring to the findings of the Tariff Commission, details obtained from the Rubber Board and comparative sales in and around 1954, etc. In the light of the above findings, the Tribunal came to the conclusion that the assessments were validly reopened. We are of the view that in the light of the findings of the Tribunal that the real information on the basis of which the assessments were reopened was the facts that were disclosed or came to light as a result of the subsequent correspondence between the ITO and the assessee, there was information within the meaning of s. 147(b) of the IT Act which enabled the ITO to reopen the assessments for the two years. Even if the assessee disclosed in the original return the factum of sale of rubber trees and had claimed that it was exempt from tax, if the legal implications were not realised by the ITO then, it will not preclude the ITO from reopening the assessments on subsequent realisation that income has really escaped assessment. The details available in the original returns were transmitted into an item of information in the possession of the Officer on when its existence is realised and its implications are recognised. A Division Bench of this Court in United Mercantile Co. Ltd. vs. CIT (1967) 64 ITR 218 has held so. The said decision was referred to with approval by the Supreme Court in Anandji Haridas and Co. (P.) Ltd. vs. S. P. Kasture, AIR 1968 SC 565. In the light of the above, we have no hesitation to hold that the assessments were validly reopened for both the years.

It was next contended that the information on the basis of which the assessments were reopened was never disclosed to the assessee and so there is violation of natural justice. We are of the view that the reasons which enabled the ITO to reopen the assessments need not be disclosed or communicated to the assessee. The proceedings for assessment start only after a notice is issued and served on the assessee. The assessee becomes a party to the proceedings only then. The reasons for reopening the assessments are to be recorded at an earlier stage of the proceedings, long before the assessee becomes a party to the proceedings. The procedure to be followed, then, is “inquisitorial” rather than accusatorial or adversarial, in nature. At that stage, no duty is cast on the ITO either to afford an opportunity to the assessee or to furnish the reasons for reopening the assessments. That is a stage long before the assessee becomes a party to the proceedings. See S. Narayanappa vs. CIT (1967) 63 ITR 219 (SC). In this view of the matter, we answer question No. 1 for the asst. yr. 1974-75 and also question No. 1 for the year 1975-76 in the affirmative, against the assessee and in favour of the Revenue.

8. The Tribunal has held that the assessments were validly reopened. The Tribunal has not entered a definite finding regarding the assessability of capital gains, and even so, the quantum thereof. This has been directed to be done by the ITO. In the light of such finding, we are of the view that question No. 2 for the year 1974-75 and questions Nos. 2 to 4 for the year 1975-76 are really academic at this stage and we decline to answer these questions in the light of our conclusion that the reopening of the assessments is valid.

The income-tax references are disposed of as above.

[Citation :181 ITR 387]