The main legal point established is that the Income-tax Officer's competence to initiate proceedings under section 34 (1) is based on the information available, including a correct understanding of relevant notifications at a later stage.

( 1 ) IN this reference, under section 66 (1) of the Indian Income-tax Act, 1922, the Income-tax appellate Tribunal (Bombay Bench "b") has referred two questions of law our opinion. They are :

" (1) Whether initiation of action under section 34 (1) for the purposes of making reassessment for the assessment year 1954-55 has been validly made ? (2) Whether interest on Mysore Durbar Securities has been rightly held to be chargeable to super-tax under the Indian Income-tax Act for the assessment years 1954-55 and 1956-57 ?"

( 2 ) THE facts of the case as disclosed by the statement of the case submitted by the Tribunal to the extent relevant for our present purpose reads as follows :

( 3 ) THESE two reference applications arise out of the reassessments made upon the assessee, a public company, for the assessment year 1954-55 by taking recourse to the provisions of section 34 and the original assessment made upon it for the assessment year 1956-57. The corresponding previous years are the calendar years 1953 and 1955. The dispute between the assessee company and the department is in regard to the levy of corporation tax, more popularly known as super-tax, on income derived by the assessee company from Mysore Durbar Securities. The relevant facts relating to the said issue are these.

( 4 ) THE Government of the erstwhile India State of Mysore issued certain Durbar Securities between 1930 and 1946. There was in force the State income-tax law. The said Government issued notifications directing that the interest income derived from these securities was to be included in the computation of total income of an assessee for the purpose of determining the rate applicable to the taxable income. In other words, such interest income was partially exempt.

( 5 ) SECTION 60 (1) of the Indian Income-tax Act empowered the Governor-General in Council (subsequently changed to the Central Government) to make exemptions, etc. , and the material portion of it (with verbal changes made subsequently) stands as follows : "60. (1) The Central Government may, by notification in the Official Gazette, make an exemption, reduction in rate or other modification, in respect of income-tax in favour of any class of income, or in regard to the whole or any part of the income of any class of persons. "

( 6 ) SUB-SECTION (3) of section 60 was added by the Indian Income-tax (Amendment) Act, 1939, and it stands as follows :

"60. (3) After the commencement of the Indian Income-tax (Amendment) Act, 1939, the power conferred by sub-section (1) shall not be exercisable except for the purpose of rescinding an exemption, reduction or modification already made. "

( 7 ) THE said Amendment Act came into force with effect from April 1, 1939.

( 8 ) IN exercise of the powers conferred by section 60 (1), Notification No. 878-F (Income-tax)dated 21st March, 1922, was made. It provided as follows :

"the following classes of income shall be exempt from the tax payable under the said Act and they shall not be taken into account in determining the total income or salary of an assessee for the purpose of the said Act. . . (27) The interest on Mysore Durbar Securities. "

( 9 ) THE effect of this notification was that the interest on Mysore Durbar Securities was totally exempt under the Indian Income-tax Act in the hands of the holder of Mysore Durbar Securities, i. e. , interest was neither included in the total income for the purposes of the rate applicable to the taxable income nor was it taxed either to income-tax or to super-tax. It will be further observed that this exemption went much further than a partial exemption granted by the Mysore Durbar itself.

( 10 ) IN exercise of the powers conferred upon it by section 60 (3), the Central Government by its notification No. 39 (I. T.) dated 5th July, 1954, modified the said exemption and provided that interest on Mysore Durbar Securities shall be included in the total income and shall be exempt from income-tax but not from super-