India United Mills Ltd. Vs.
Commissioner of Excess Profits Tax, Bombay [1954] INSC 102 (28 October 1954)
AIYYAR, T.L. VENKATARAMA MAHAJAN, MEHAR CHAND
(CJ) DAS, SUDHI RANJAN HASAN, GHULAM BHAGWATI, NATWARLAL H.
CITATION: 1955 AIR 79 1955 SCR (1) 810
CITATOR INFO :
R 1963 SC1062 (10) RF 1976 SC 313 (31) R 1981
SC1887 (27)
ACT:
Excess Profits Tax Act (XV of 1940), ss. 15,
26(3)-Meaning and import of the word 'discovers'-Allowance granted to assessee
on his representation-Subsequent facts show that representation as untrue,
Effect of.
HEADNOTE:
The word 'discovers' in s. 15 of the Excess
Profits Tax Act, 1940, is not limited to facts discovered, which existed during
the relevant chargeable accounting period for which assessment is reopened
under the section but also includes facts so discovered which came into
existence subsequent to such accounting period.
Allowance was granted to an assessee by the
Central Board of Revenue under s. 26(3) of the Act for the chargeable
accounting period during the war on the ground that certain buildings, plant
and machinery provided for production of war materials will not be required for
the purposes of assessee's business after the termination of the war. But it
was discovered that even after the termination of war the buildings, plant and
machinery in question were actually used by the assessee for his business.
Held, that the Excess Profits Tax Officer had
ample power to proceed against the assessee to reassess him under s. 15 of the
Act.
Dodworth v. Dale ([1936] 2 K.B. 503: 20 Tax
Cases 285);
Anderton and Holstead Ltd. v. Birrell ([1932]
1 K.B. 271 :
16 Tax Cases 200); Gray (H.M. Inspector of
Taxes) v. Lord Penrhyn (21 811 Tax Cases 252); Williams v. Trustees of W. W.
Grundy ( [1934] 1 K.B. 524, 533); Commercial Structures Ltd. v.
Briggs ([1948] 2 All England Reports 1041)
and Inland Revenue Commissioners v. Pearson; Same v. Pratt ([1936] 2 K.B. 533),
referred to.
CIVIL APPELLATE JURISDICTION : Civil Appeal
No. 160 of 1953.
Appeal by Special Leave from the Judgment and
Order dated the 1st day of April, 1952, of the High Court of Judicature at
Bombay in Income-tax Reference No. 49 of 1951.
R.J. Kolah and Rajinder Narain for the
appellant.
M. C. Setalvad, Attorney-General for India,
(G. N. Joshi and P. G. Gokhale, with him) for the respondent.
1954. October 28. The Judgment of the Court
was delivered by VENKATARAMA AYYAR J.--This is an appeal from the judgment of
the High Court of Bombay on a reference under section 66(1) of the Indian
Income-tax Act, and the question for determination is as to the validity of
certain reassessments made under section 15 of the Excess Profits Tax Act,
which will hereafter be referred to as the Act.
In proceedings for assessment of excess profits
for the year 1941, the appellant Company applied for relief under section 26(3)
of the Act, which so far as is material for the purpose of this appeal, runs as
follows :
If on an application made to it through the
Excess Profits Tax Officer the Central Board of Revenue is satisfied that the
computation in accordance with the provisions of Schedule I of the profits of a
business during any chargeable accounting period would be inequitable, owing to
any of the following circumstances, namely(b) the provisions of buildings,
plant or machinery which will not be required for the purposes of the business
after the termination of the present hostilities;
The Central Board of Revenue may direct that
such allowances shall be made in computing the profits of 812 the business
during that chargeable accounting period as the Central Board of Revenue thinks
just:
Provided that in making such direction the
Central Board of Revenue may impose such conditions as it deems
appropriate." In their application under section 26(3) under the heading
" Buildings, Plant and -Machinery provided for the production of War
Materials, which will not be required for the purposes of the business after
the termination of the present hostilities", the assessees stated that the
production of khaki textiles for war purposes had " necessitated
additional plant in the Company's Dye Works ";
that the requirements as to canvas had "
necessitated additional Textile machinery for the various doubling processes
and additional winding machinery for the Canvas waft"; that " much of
the additional plant purchased by the Company in 1941 comes under these two
headings"; and that " their manufacture in bulk will cease once the
war is over and the plant bought for their manufacture will be idle and will
have to be disposed of" The assessees then proceeded to give particulars
of the machinery and plant which "will undoubtedly have to be scrapped
after the war", and whose " postwar value would be as scrap
material." Then they set out " the additional buildings, plant and
machinery which have been installed as a war measure", and estimated their
value at Rs. 4,85,633.
On this application, the Central Board of
Revenue passed the following order:
"The Central Board of Revenue having
considered the application of E. D. Sasoon United Mills Ltd. under subsection
(3) of section 26 of the Excess Profits Tax Act, 1940, that, by reason of the
following circumstances, viz.,That the provision of buildings, plant or
machinery which will not be required for the purposes of the business after the
termination of the present hostilities, the computation of the profits of that
business during the chargeable accounting period commencing 1st January 1941,
and ending 31st December, 1941, in 813 accordance with the provisions of
Schedule I of the Act would be inequitable.
I (the First Secretary, Central Board of
Revenue) hereby give you notice that the Central Board of Revenue has directed
that, allowance of Rs. 4,06,394 shall be made in respect of such circumstances,
in computing the profits of such chargeable accounting period,-such allowance
to be inclusive of all depreciation allowable for excess profits tax purpose in
respect of the assets in question." There were similar applications by the
assessees for relief under section 26(3) of the Act for the accounting periods
1942 and 1943, and similar orders were passed by the Central Board of Revenue
granting allowance respectively of Rs. 4,00,000 and Rs. 3,94,000.
The war terminated on 31st March, 1946. In
the course of enquiry into the assessable profits of the Company for the
chargeable accounting period ending 31st March, 1946, the Excess Profits Tax
Officer found that the buildings, plant and machinery in respect of which
relief had been granted under section 26(3) of the Act were being actually used
by the assessees for the purposes of their business even after the termination
of the hostilities. He therefore decided to take action under section 15 of the
Act, and issued the requisite notices there under to them for reopening the
assessment for the years 1941, 1942 and 1943. That was resisted by them on the
ground that the facts discovered did not relate to the years of account, and
could not therefore form the basis for reopening the assessments for those
years. By his order dated 28th December, 1948, the Excess Profits Tax Officer
overruled this contention, and revised the assessments for the periods in
question on the footing that there were no grounds for granting relief to the
assessees under section 26(3) of the Act. This order was confirmed on appeal by
the Appellate Assistant Commissioner, but was reversed by the Appellate
Tribunal which held by a majority that it was not open to the 'Officer to take
action under section 15 of the Act on the basis of facts, which had come into
existence subsequently. The respondent thereupon applied for reference under
104 814 section 66(1) of the Income-tax Act, and section 21 of the Act, and on
that application, the Tribunal referred the following question of law for the
decision of the High Court:
" Whether the revised assessments for
the chargeable accounting periods 1941, 1942 and 1943 are liable to be
cancelled on the ground that the Excess Profits Tax Officer erred in invoking
the provisions of section 15 of the Excess Profits Tax Act." There was
also another question referred by the Tribunal to the High Court, and that was
answered adversely to the appellant. But as no argument was addressed before us
on that question, there is no need to refer to it.
The reference came before Chagla C. J. and
Tendolkar J., who disagreeing with the Tribunal held that the fact "the
assessee had obtained excessive relief " and the discovery of the fact
that it has used buildings, plant or machinery for the purpose of its own
business after the war" were sufficient to bring the case within the
purview of section 15 of the Act, and accordingly answered the question in the
negative. The correctness of this decision is challenged in this appeal, which
comes before us by special leave, on the ground that on a proper construction
of that section the Excess Profits Tax Officer had, on the facts found, no
power to revise the assessment for the accounting periods 1941, 1942, and 1943.
Section 15 of the Act is as follows:
" If, in consequence of definite information
which has come into his possession, the Excess Profits Tax Officer discovers
that profits of any chargeable accounting period chargeable to excess profits
tax have escaped assessment, or have been under-assessed, or have been the
subject of excessive relief, he may at any time serve on the person liable to
such tax a notice containing all or any of the requirements which may be
included in a notice under section 13, and may proceed to assess or reassess
the amount of such profits liable to excess profits tax and the provisions of
this Act shall, so far as may be, apply as if the notice were a notice issued
under that section. " 815 For this section to apply, two conditions must
be satisfied : (1) the profits of any chargeable accounting period must have
escaped assessment or must have been under-assessed, or must have been the
subject of excessive relief; and(2) that must have been discovered by the
Excess Profits Tax Officer in consequence of definite information. There is no
question that on the facts found, the first condition has been satisfied. The
representations on which the appellant obtained relief under section 26(3) of
the Act were that the buildings, plant and machinery would not be fit for use
after the war. It was only on that ground that relief could be granted under
that provision. And when the appellant continued to use the machinery in
business after the termination of the war, the very basis on which relief had
been granted to it had disappeared, and the result was that the assessable
profits for the chargeable accounting periods bad been the subject of excessive
relief.
The controversy is thus limited to the
question whether on the facts found the Excess Profits Tax Officer could be
held to have discovered that there was grant of excessive relief.
The contention of Mr. Kolah on behalf of the
appellant was that discovery for the purpose of section 15 of the Act must be
of facts which were in existence during the chargeable accounting period, and
that facts which came into existence subsequent to the chargeable accounting
period could under no circumstances be made the basis for reassessment of the
profits of that period. On behalf of the respondent, the learned
Attorney-General contended that the words " If the Excess Profits Tax Officer
discovers" in section 15 of the Act meant nothing more than that " if
the Excess Profits Tax Officer finds or satisfies himself"; that there was
no justification for importing into the section a limitation that discovery
should relate to facts in existence during the chargeable accounting period;
and that when once it was found by the Excess Profits Tax Officer that the
buildings, plant and machinery were in use after the war, and that accordingly
there had been a grant of 816 excessive relief, the requirements of the section
were fully satisfied.
Considering the question on the language of
section 15 of the Act, it is difficult to find therein any support for the
contention, which has been urged on behalf of the appellant.
It is general in its terms, and would apply
whenever there is, as a result of definite information, a finding by the Excess
Profits Tax Officer that chargeable profits had escaped assessment, or had been
under-assessed, or bad been the subject of excessive relief. There is nothing in
the wording of the section which would exclude its application, when that
finding is based on facts which come into existence subsequently. It is argued
by Mr. Kolah that the word " discovers" can aptly be used only when
the facts on which the discovery is made were in existence during the
chargeable accounting period. In its natural and ordinary sense, the word
" discovers" carries no such limitation.
The meaning given to it in the Oxford English
Dictionary is "the finding out or bringing to light that which was
previously unknown." (Vol. 3, page 133). It will therefore be correct to
say that when a person comes to know of a fact of which he had no previous
knowledge he discovers that fact, whether his want of knowledge is due to its
not having been in existence during the material period, or to its having been
unknown to him even though it might have been in existence. The word thus being
one of wide import, what meaning it bears in any particular enactment must
depend on the context.
We must accordingly examine what indications
there are in the Act, which will show the precise connotation of the word
"discovers" in section 15 of the Act. That section is, it should be
emphasised, not a charging section, but a machinery section. And a machinery
section should be so construed as to effectuate the charging sections. Section
15 is intended to vest in the Excess Profits Tax Officer a power to amend the
assessment, when it is found that the relief granted is in excess of what the
law allows. One of the sections under which relief could be granted under the
Act is 817 section 26(3), and therefore section 15 must be so interpreted as to
confer a power on the Excess Profits Tax Officer to revise the assessment when
relief had been erroneously granted under that section. Now, section 26(3)
provides for relief being granted when the , buildings, plant or machinery
would not be required by the assessee for his business after the war. And when
it is found that after obtaining a relief under that section' the assessee uses
buildings, plant and machinery in his business after the war, and that he has
in consequence obtained a relief to which he was not entitled under the Act,
where is the machinery set up by the Act for imposing the correct charge,
unless it be under section 15 ? And how is that section to be invoked if "
discovery" is to be limited to facts, which were in existence during the
chargeable accounting period ? The relief to be granted under section 26(3) is
by its very nature with reference to a state of affairs in future ; and a
finding that it has been erroneously granted could be reached only on the basis
of facts which must arise subsequent to the chargeable accounting period. To
hold that no action could be taken in such cases under section 15 is to hold
that the statute has provided no machinery for carrying into effect the
conditions prescribed in section 26(3).
It was contended that the Central Board of
Revenue might, acting under the proviso to section 26(3), have imposed
appropriate conditions for safeguarding their interests before granting a
relief under that section, that when there was a failure to observe the
conditions of that section, the only course open to the respondent was to
proceed under that proviso, and that action under section 15 was incompetent.
This argument proceeds on a misconception of
the true scope of section 26(3). If a condition had been imposed under the
proviso to that section, and that condition was subsequently broken, the only
action that could be taken thereon is initiation of proceedings for reassessing
the profits, ignoring the relief granted under section 26(3) ; and the
machinery therefore is provided only in section 15 of the Act. The scope of the
two sections being different, the proviso to section 26(3) 818 cannot be
construed as affecting, to any extent, the jurisdiction conferred by section 15
of the Act.
We may now examine the decisions which have
been cited by Mr. Kolah in support of his contention. In Dodworth v. Dale (1),
the assessee, Dale, married one Kathleen Richards in 1921 and lived with her
till 1933, in which year he obtained a decree declaring the marriage null and
void on the ground of her incapacity. From 1921 to 1932 he had obtained reliefs
under section I 8(1) of the Finance Act under which a claimant is entitled to a
deduction if he proves that "for the year of assessment he has his wife
living with him or that his wife is solely maintained by him during the year of
assessment." In 1934 the Inspector of Taxes made additional assessments in
respect of the deductions made during the years 1928 to 1932 on the ground that
the marriage having been declared void ab initio, Dale must be held to have
"obtained a deduction not authorised by this Act" as provided in
section 125 of the Income Tax Act, 1918.
It was held by Lawrence J. that the
additional assessments were not justified under section 125, because the effect
of a decree declaring marriage a nullity was not to wipe out the past and to
undo What had been done, and that under section 18(1) of the Finance Act, the
basis of relief was a de facto marriage. Then follow certain observations, on
which the appellant relies :
" There is, however, another difficulty
in the way of the Crown. In my opinion it is not lawful for an additional
assessment or an original assessment to be made by reference to facts which
arise after the year of assessment. In my view that is the reasoning of the
decision of Rowlatt J. in Anderton and Halstead Ltd. v. Birrell (
2)............... In my view it is incompetent to the revenue authorities to
make a fresh assessment on him by reason of a fact which is a real fact which
arose after the year of assessment." Though these observations appear at
first Bight to support the contention of Mr. Kolah, when examined closely it will
be seen that is not their true effect.
(1) [1936] 2 K.B. 503; 20 Tax Cas. 285.
(2) [1932] 1 K.B. 271; 16 Tax CaS. 200.
819 The assessee had been granted relief for
the years 1928 to 1932, because he was in fact living with his wife or
maintaining her during that period. The decree passed in 1933 could not alter
that fact. If on that fact the assessee was entitled to relief for those years
under section 18(1) of the Finance Act, then no question arose of his having
obtained a deduction to which he was not entitled under the Act, in which event
alone there could be further assessment under section 125. The decree passed in
1933 could not therefore be said to be "discovery" on which action
could be taken under section 125, not because it was a subsequent event, but
because it could have had no effect on a relief which depended on facts then in
existence. That is the ratio of the decision will appear from the following
passages in the judgment:
" I apprehend that there is no
distinction in this matter between an original assessment and an additional
assessment under section 125. Taking section 125 of the Income Tax Act, 1918,
for the purposes of illustration, and because it was the section under which
the additional assessments were made in this case, it seems to me that section
18 of the Finance Act, 1920, and the Income Tax Act, 1918, relate to the facts
as they exist at the time. The person chargeable was allowed a deduction, and
be was rightly allowed a deduction at the time. He proved within the terms of
section 18 of the Act of 1920 that his wife was living with him, and he was
rightly allowed a deduction at that time." The principle of this decision
is that assessments should not be reopened on the basis of subsequent events,
when the facts on which the assessments had been made remained unaffected
thereby.
In this connection, reference may be made to
the decision in Gray (H. M. Inspector of Taxes) v. Lord Penrhyn (1), where it
was held that action under section 125 could be taken with reference to events
which happened subsequently, those events having relation to the facts on which
the assessments had been made. There, the assessee, who was the owner of a
slate (1) (1937) 21 Tax Cas. 252.
820 quarry had shown in his income-tax
returns various amounts as paid to labourers, and those amounts had been
allowed as business expenses. In fact, sums amounting to pound 5,201 had been
misappropriated by the officers employed by him and had not been expended. The
defalcations were subsequently discovered, and in 1934 the assessee realised
that amount from his auditor and his insurer as damages for negligence.
The Income-tax Inspector sought to revise the
assessments from 1930 to 1933 by claiming that amount as wrongly deducted
during those years, or in the alternative, to assess it as a business income in
1934. The Commissioner held that the assessments for 1930 to 1933 could not be
reopened on the basis of the receipt in 1934, as that was an event subsequent
to the period of assessment, one of the cases relied on by him in support of
his conclusion being Dodworth v.Dale (1). Finlay J. disagreed with this view.
He held firstly that the amount could be
treated as a business receipt and added :
" If I felt any difficulty about that,
which I do not, I should be prepared to say that there is nothing in the
authorities which prevents that reopening which manifestly ought to be made, if
necessary, and that if necessary the previous years ought to be
re-opened".
Then there is the decision in Anderton and
Halstead Ltd. v. Birrell (2) referred to in Dodworth v. Dale (1) and relied on
by Mr. Kolah. There, the assessees had written off certain debts as
irrecoverable in 1921 and 1922. The Inspector of Taxes had,' on a consideration
of all the facts, agreed to this, and assessments were made on the footing that
they were bad debts. Thereafter, the assessees continued to have dealings with
those debtors, and gave them further credit in subsequent years. On this, the
Inspector sought to review the assessments on the ground that the debts were
not, in fact, bad debts. In negativing this contention, Rowlatt J. observed
that " the word 'discover' does not, in my view, include a mere change of
opinion on the same facts and figures (1) [1936] 2 K.B. 503; 20 Tax Cases 285.
(2) [1932] 1 K.B. 271; 16 Tax Cases 200.
(3) [1936] 2 K.B. 503: 20 Tax Cases 285.
821 upon the same question of accountancy,
being a question of opinion", that under the Rules, the estimate to what
extent a debt is bad was "not a prophecy to be judged by after events, but
a valuation of an asset de praesenti upon an uncertain future to be judged with
regard to its soundness as an estimate upon the then facts and
probabilities", and that an estimate once made could not, on the same
materials, be revised in subsequent years.
Apart from the fact that some of the
observations contained in this judgment were considered by Finlay J. in
Williams v. Trustees of W. W. Grundy (1) and by the Court of Appeal in
Commercial Structures Ltd. v. Briggs (2), to have been widely expressed, the
decision itself has no application to the facts of the present case. We are
concerned here not with a valuation in praesenti of a debt estimated to be bad,
but with a relief granted with reference to a state of facts which were
anticipated to come into existence only in the future. Moreover, Inland Revenue
Commissioners v. Pearson Same v. Pratt (3) and Anderton and Halstead v. Birrell
(4) are decisions on section 125 of the English Income Tax Act of 1918. There
has been quite a literature on the meaning of the word "discovers"
occurring in that section and in the corresponding sections of other English
Income Tax statutes, and the question has, also been considered in the Indian
Courts on the language of section 34of the Indian Income-tax Act, as it stood
prior to the amendment of 1948.
Whatever the position if the question were to
arise under the Indian Income-tax Act-and there is no need to express any final
opinion on it-having regard to the nature and scope of the provisions of the
Excess Profits Tax Act and in particular section 26(3), we are of opinion that
the word "discovers" in section 15 of the Act is of sufficient
amplitude to take in subsequent events which have a material bearing on the
facts and circumstances on which assessment had been made or (1) [1934] 1 K.B.
524, 533.
(2) [1948] 2 A. E. R. 1041 at 1045, 1048 and
1049.
(3) [1936] 2 K.B. 533.
(4) [1932] 1 K.B. 271; 16 Tax CaS. 200.
105 822 relief granted, and that when the
Excess Profits Tax Officer finds that an assessee to whom relief had been
granted under section 26(3) has utilised the buildings, plant or machinery in
business after the termination of the war, he is entitled to proceed under
section 15 of the Act.
In the result, the appeal fails, and is
dismissed with costs.
Appeal dismissed.
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