JUDGMENT B.P. Jeevan Reddy, C.J.
1. This writ petition is directed against a notice under Section 147/148 of the Income-tax Act, 1961, relating to the assessment year 1974-75. An assessment order with respect to the said assessment year was made on February 25, 1977. The impugned notice was given on March 6, 1979, and it is now beyond dispute that it is relatable to Clause (b) of Section 147 of the Act. The petitioner filed this writ petition questioning the validity of the said notice on the ground that the said notice is exclusively based upon the objections of the audit party and that the objections or report of an audit party, cannot constitute "information" within the meaning of Section 147(b) of the Act.
2. In the counter-affidavit, it is admitted that the internal audit party pointed out certain facts and that the "same have been considered while the notice under section 148/147(b) was issued". It is further averred in the counter-affidavit that the facts pointed out by the audit party can constitute "information" within the meaning of Section 147(b) of the Act. Along with the counter-affidavit, the respondent has enclosed a copy of the reasons recorded under Section 148 of the Act as well as a copy of the objections pointed out by the audit party. The reasons recorded by the Income-tax Officer (annexure "CA-1") read as follows :
"The assessee is a private limited company dealing in manufacture and sale of medicines. After completion of the assessment for the assessment year 1974-75 on an income of Rs. 87,610, the internal audit party pointed out that the sums of Rs. 38,212 and Rs. 23,386 debited to the profit and loss account as provision for gratuity and bonus, respectively, were wrongly given deduction. The former because the provisions of Section 40A(7) were neither complied with nor was any trust created to which the amount could have been paid and the latter because the said sum of Rs. 23,386 was not paid within the statutory period.
Since such mistakes pointed out by the audit tantamount to information which has come into my possession, I have reason to believe that income chargeable to tax amounting to Rs. 61,598 has escaped assessment within the meaning of Section 147(b) of the Income-tax Act, 1961.
I, accordingly, issue notice under Section 148 to assess the said escaped income."
3. It is evident from a reading of the said reasons as well as from a reading of the objections raised by the internal audit party that the impugned notice is based exclusively upon the objections pointed out by the audit party. The audit party pointed out that the deduction granted in a sum of Rs. 38,212 as provision for gratuity was erroneously granted by the Income-tax Officer inasmuch as Section 40A(7) of the Act was not complied with by the assessee. Similarly, the audit party pointed out that the deduction of a sum of Rs. 23,386 on account of bonus was also wrongly granted inasmuch as it was not said that the said amount was paid within the statutory period.
4. In Indian and Eastern Newspaper Society v. CIT [1979] 119 ITR 996, the Supreme Court pointed out 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). It was pointed out that while the law can be brought to the notice of the Income-tax Officer by any one including the audit party, the application of law in the particular facts and circumstances is a different matter. It was pointed out that 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"
but that part which embodies the opinion of the audit party in regard to the application or interpretation of the law cannot constitute "information" and hence cannot be taken into account by the Income-tax Officer, It was further pointed out that in every case, the Income-tax Officer must determine for himself what is the effect and consequence of the law which has now come to his notice. The basis of his 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 such law.
5. On a consideration of the reasons recorded in this case read in the light and in the context of the. objections of the audit party, it is clear that this is not merely a case where law was brought to the notice of the Income-tax Officer and which constituted the basis of the impugned notice. This is a case where the audit party pointed out an error in the application of the particular provisions of the Act in the facts and circumstances of the case. Accordingly, it must be held that the initiation of proceedings in the facts and circumstances of this case is bad.
6. In the ordinary course, we would have relegated the assessee to raise this question before the Income-tax Officer himself and to draw his attention to the said decision of the Supreme Court and other decisions on the said point. But inasmuch as, in this case, the writ petition was entertained as far back as in 1979, and the proceedings stayed all these years, we do not think that adoption of such a course would be just in this case. We also find that the amounts given deduction of are too small compared to the total income of the assessee. Since the entire material is before us and because of the above circumstances, we thought it fit to decide the matter on merits.
7. For the reasons given above, the impugned notice is quashed and the writ petition is allowed with no order as to costs.