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1998 DIGILAW 73 (MAD)

Commissioner of Income Tax v. Assembly Rooms

1998-01-27

A.SUBBULAKSHMY, N.V.BALASUBRAMANIAN

body1998
Judgment :- N. V. BALASUBRAMANIAN, J. In compliance with the directions of this Court in TCP Nos. 542 to 544 of 1983 and 310 of 1984 dt. 10th December, 1984, the following question of law in relation to the assessment of income of the assessee for the asst. yr. 1971-72 to 1974-75 under s. 256(2) of the IT Act, has been referred to us for our opinion: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding and had valid materials to hold that the reopening of the assessment for 1971-72 to 1974-75 was invalid in law and should, therefore, be cancelled?". The assessee, M/s Assembly Rooms, is a trust founded by Lord Wellington on 3rd November, 1923. According to the Tribunal, the assessee was treated as a public institution. The assessee derived income in a theatre popularly known as "assembly rooms"; besides, it had income from investments. The ITO originally completed the assessment for the asst. yrs. 1971-72 to 1974-75 treating the assessee as a charitable trust and granted exemption of the income of the assessee. After the completion of the original assessment, the Revenue audit party brought to the notice of the ITO that the exhibition of cinema involved by it would amount to carrying on of an activity for profit and therefore, the income derived by the assessee was not exempt under s. 11 of the IT Act. On the basis of the report of the internal audit party, the ITO issued the notice of reassessment under s. 147(b) of the Act and after hearing the objections, he found that the assessee was not entitled to the exemption granted under s. 11 of the Act inasmuch the assessee did not fulfil the requirements contemplated under s. 11 of the Act warranting such an exemption. The ITO thus in the proceedings initiated under s. 147(b) of the Act, withdrew the exemption and completed the assessment. After the reassessment, the assessee preferred an appeal before the AAC and contended that the reopening of the assessment was not valid and questioned the reassessment on the merits of the caseThe AAC on the basis of the decision of the Supreme Court in the case of R. K. Malhotra vs. Kasturbhai Lalbhai 1977 Indlaw SC 267 (SC), held that the reassessment was not valid and allowed the appeal preferred by the assessee. The Revenue preferred an appeal challenging the order of the AAC. The Tribunal held that the audit party has interpreted the provision of the law and therefore, the report of the audit party could not constitute information for the purpose of reopening the assessment in the light of the decision of the Supreme Court in the case of Indian & Eastern Newspaper Society vs. CIT 1979 Indlaw SC 138 (SC) : TC 51R.1371. The Tribunal held that it was not possible to hold that there was information to justify the reopening of the assessee. Mr. C. V. Rajan, learned counsel appearing for the Revenue, forcefully submitted that the audit party has not interpreted the law, that it merely brought to the attention of the ITO the decision of the Supreme Court in the case of Indian Chamber of Commerce vs. CIT 1975 Indlaw SC 385 : 1975 Indlaw SC 385 (SC) : TC 23R.250, and on the basis of that information regarding the correct provisions of the law furnished by the audit party, the ITO reopened the assessment. He, therefore, submitted that the audit party has not interpreted the provisions of the law, but merely brought to the attention of the ITO the correct provisions of the law and therefore, the report of the audit party could constitute the information for the purpose of reopening the assessment under s. 147(b) of the Act. Mr. P. P. S. Janarthana Raja, learned counsel appearing for the assessee, submitted that the audit party has interpreted the law and the report of audit could not constitute information for the purpose of reassessment under s. 147(b) of the ActWe have carefully considered the submissions of the learned counsel on both sides. If the audit party has merely brought to the attention of the ITO, the provisions of the law there can be no objection to hold that the report of audit could constitute the information for the purpose of reopening the assessment under s. 147(b) of the Act. The Supreme Court in the case of Indian & Eastern Newspaper Society vs. CIT (supra) drew the distinction between the source of the law and the communication of the law. If the audit party has drawn to the attention of the ITO, the correct provisions of the law, then the AO on the basis of the report, can reopen the assessment under s. 147(b) of the Act. If the audit party has drawn to the attention of the ITO, the correct provisions of the law, then the AO on the basis of the report, can reopen the assessment under s. 147(b) of the Act. The audit party in the instant case, according to the Tribunal, has not merely brought to the attention of the ITO the relevant provisions of the law, but interpreted the provisions of the law. No doubt the audit party has drawn the attention of the ITO to the decision of the Supreme Court in the case of Indian Chamber of Commerce vs. CIT (supra) but the finding of the Tribunal is that the audit party has applied the law laid down by the Supreme Court to the facts of the case. The facts of the case clearly show that the audit party has considered the decision of the Supreme Court and applied the same to the facts of the case and in our opinion this process adopted by the audit involves the interpretation of the law, as it is not the mere case of drawing the attention of the ITO to a decision of the Court, but it is a case where the audit has applied a judicial decision to the facts of the case and came to the conclusion which would amount to interpretation of the law. Therefore, in the instant case, the audit party has interpreted the provisions of the law and informed the ITO that on the basis of the decision of the Supreme Court in the Indian Chamber of Commerce vs. CIT (supra), the assessee was not eligible to get exemption under s. 11 of the Act. In our opinion, the report of the audit party cannot be regarded as 'information' for the purpose of reopening the assessment. The Supreme Court in the case of Indian & Eastern Newspaper Society vs. CIT (supra) held that: "In every case, the ITO 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 Tribunal, after perusal of the Audit report, held that report of audit involved the interpretation of the law on a disputed point involving application of the decision of the Supreme Court to the facts of the case and we are, therefore, of the view that the ITO was not justified in reopening the assessment on the basis of the report of the audit party. We, therefore, hold that the Tribunal was justified in holding that the reopening of the assessments in the instant case was not valid. Accordingly, we answer the common question of law referred to us in the affirmative and against the Department, but in the circumstances of the case, there is no order as to costs.