Modi Spinning & Weaving Mills Co. Ltd. Vs. Income-Tax Officer, Special Investigation Circle, Meeru [1969] INSC 31 (10 February 1969)

10/02/1969 SHAH, J.C.

SHAH, J.C.

RAMASWAMI, V.

CITATION: 1969 AIR 944 1969 SCR (3) 592 1969 SCC (2) 135

ACT:

Income Tax Act, 1922, s. 34(1)(a)-Notice in respect of income escaping assessment-Conditions precedent to issue of.

HEADNOTE:

The appellant Company, which was incorporated in 1946, purchased and installed, machinery from time to time valued at Rs. 75 lacs. In respect of its assessment to, income tax for certain years, it was allowed 'initial depreciation' on new machinery 'installed in the relevant previous years and was also allowed 'normal depreciation' at appropriate rates.

In the assessment year 1956-57 the aggregate of all depreciation allowances including 'initial depreciation' exceeded the original cost of machinery but in respect of that year as well as for the assessment years 1957-58 and 1958-59, the Income Tax Officer failed to deduct 'initial depreciation and the company was allowed 'normal depreciation' in, excess of the amount permissible under proviso (c) to s. 10(2)(vi) of the Income Tax Act, 1922.

On November 20, 1964, the Income Tax Officer issued notices of reassessment for the three years under section 148 of the Income Tax Act,. 1961. The Company filed returns under protest and thereafter challenged the notices of reassessment by a writ petition under Art. 226 of the Constitution. It was common ground that excessive depreciation was in fact allowed to the Company and that certain income escaped assessment, but it was contended on behalf of the appellant that the income did not escape assessment "by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment of that year". A Single Judge of the High Court held that while the Company committed no error in failing to take into account the 'initial depreciation' while entering the written down value in its return, it was not open to the Company to set out only those facts which exaggerated its claim. He therefore rejected the petition. In dismissing a Letters Patent appeal, the High Court took the view that there was apparently "a mistake and error on the side of the Company as well as the Income Tax Officer" and that the Income Tax Officer could reasonably come to the conclusion that it was due to the omission and failure on the part of the assessee in disclosing fully and truly all material facts necessary for the assessment that the error was committed by the Income Tax Officer as a result of Which some income had escaped assessment.

On, an appeal,

HELD : The judgment of the High Court must be set aside and the case remanded.

Although the High Court held that the Income Tax Officer had decided that certain income had escaped assessment, it did not consider whether the income escaped assessment by reason of omission or failure on the part of the Company to disclose fully and truly all material facts necessary for assessment, within the meaning of section 34 of the 1922 Act. [596 F] 593 Calcutta Discount Co. Ltd. v. Income Tax officer, Companies District 1, Calcutta and Anr., 41 I.T.R. 191; referred to.

CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 890 to 892 of 1968.

Appeals by special leave from the judgment and order dated November 24, 1967 of the Allahabad High Court in Special Appeals Nos. 476 to 478 of 1965.

S. T. Desai, H. K. Puri and B. N. Kirpal, for the appellant (in all the appeals).

Sukumar Mitra, S. C. Manchanda, R. H. Dhebar, R. N. Sachthey and B. D. Sharma, for the respondent (in all the appeals).

The Judgment of the Court was delivered by Shah, J M/s Modi Spinning & Weaving Mills Co. Ltd.

hereinafter called 'the Company'-was incorporated in 1946.

From time to time the Company purchased and installed machinery of the value of Rs. 75 lakhs for its factory. In proceedings for assessment of income-tax, the Company was allowed, in computing its income from business for the assessment years 1950-51, 1951-52 and 1952-53 "initial depreciation" aggregating to Rs. 15,91,51 1/in respect of new machinery installed in the relevant previous years. The Company was also allowed "normal depreciation I' at the appropriate rates. In the assessment year 1956-57 the aggregate of all depreciation allowances including "initial depreciation" exceeded the original cost of the machinery, but the Income-tax Officer on the written down value of the machinery computed at Rs. 16,48,053/allowed Rs. 2,59,236/as normal depreciation. In so computing the normal depreciation the Income-tax Officer apparently lost sight of clause (c) of the proviso to s. 10(2) (vi) of the Income-tax Act, 1922. Depreciation allowance was also allowed in the assessment years 1957-58 and 1958-59 as a percentage on the appropriate written down value in those years. The Income tax Officer on November 20, 1964, issued notices of reassessment for the three years under s. 148 of the Indian Income-tax Act, 1961, which had replaced the Act of 1922.

The Company filed under protest fresh returns and objected to the issue of the notices of reassessment.

The Company also moved petitions in the High Court of Allahabad for writs quashing the three notices,. contending inter alia, that the notices issued more than four years after the expiry of the years of assessment were barred. At the hearing of the petitions counsel for the Company conceded that under proviso (c) to s. 10 (2) (vi) of the Indian Income-tax Act, 1922, in the form in which it stood in the assessment year 1956-57 and thereafter, excessive depreciation was in fact allowed to the Company. It was also common ground that by virtue of cl. (c) to Explanation 1 of s. 147 of the Income-tax Act, 1961, income having been made the subject matter of excessive relief under the Indian Income-tax Act, 1922, the income chargeable to tax had escaped assessment. But it was urged that the income had not escaped assessment "by reason of the omission or failure on the part of the assessee to disclose fully and truly, all material facts necessary for assessment of that year", for-(1) the Indian Income-tax Art, 1922, and the forms of returns prescribed under the rules did not require the, assessee to disclose that initial depreciation had been allowed in the earlier years; and (2) that in any event the Income-tax Officer knew that initial depreciation had been allowed to the Company in the years 1950-51, 1951-52 and 1952-53.

R. S. Pathak, J., who heard the petitions held that the Company committed no error in failing to take into account the initial depreciation while entering the written down value in column (2) of Part V of the return. But the learned Judge held that it was. incumbent upon the Company to inform the Income-tax Officer of all material facts necessary to make out its claim to depreciation and it was not open to the Company to set out only those facts which exaggerated its claim : the Company was bound to disclose all material facts which went to show what the true amount of the allowance to which it was entitled. The learned Judge accordingly rejected the petitions. The order passed by Pathak, J., was confirmed in appeal under the Letters Patent.

By cl. (vi) of sub-s. (2) of s. 10 of the Income-tax Act, 1922, as amended by Act 8 of 1946, in computing the profits or gains. of business, profession or vocation carried on by him, an assessee was entitled to allowances not only of normal depreciation but also initial depreciation at the rates set out in cls. (a), (b) & (c) in respect of buildings which had been newly erected, or the machinery or plant being new had been installed after the 3 1st day of March, 1945. It was, however, expressly enacted that the initial depreciation was not deductible in determining the written down value for the purpose of cl. (vi). Allowance for initial depreciation was therefore not to be taken into account in determining the written down value for determining the normal depreciation. But on that account proviso (c) to s. 10 (2) (vi) was not modified.

The written down value of the machinery of the, Company in the year 1956-57 was Rs. 16,48,053, but 'for the application of cl. (c) of the proviso to s. 10(2) (vi) the initial depreciation allowed in the years 1950-51, 1951-52 and 195253 had to be taken into account. The Income-tax Officer inadvertently failed to take into account the initial depreciation, and the Company was allowed normal depreciation in the year 1956-57 in excess of the amount permissible under proviso (c) to s. 10(2) (vi). The 595 Income-tax Officer later sought to rectify the error and to bring to tax the income which had escaped tax.

Before R. S. Pathak, I., it was contended that the definition of written down value" in s. 10(5) (b) applies wherever the expression is used in s. 10(2) and on that account the Company in setting out the written down value in column (2) of Part V of the return was obliged to take into account all the depreciation actually allowed to it including the initial depreciation and as the Company computed the written down value only by deducting the normal depreciation and not the initial depreciation, it failed to' disclose fully and truly all material facts necessary for the purpose of assessment. This argument was not accepted by the learned Judge. But he was still of the opinion that the Act imposed upon the Company a duty to disclose all material facts which went to show the true amount of the allowances to which it was entitled, and the Company by failing to disclose that initial depreciation had been allowed in three earlier years, the Company had failed to disclose fully and truly all material facts necessary for assessment, and on that account s. 147 ( 1 )(a) was attracted and the, notice was properly issued.

In appeal, the High Court observed that the "only question for consideration" was whether the Income-tax Officer was justified in issuing a notice under s. 148 of the Income-tax Act, 1961. After stating that there was apparently "a mistake and error on the side of the Company as well as the Income-tax Officer", the, Court observed that the Income-tax Officer could reasonably comer to the conclusion that it was due to the omission and failure on the part of the assessee in disclosing fully and truly all material facts necessary for the assessment that the error was committed by the Income-tax Officer as a result of which some income had escaped assessment. The High Court then observed :

"It is difficult to hold that the Income-tax Officer while issuing the notices under Act could not reasonably hold the assessee was responsible for assessment.", and held that the notices were not Section 34(1) (a) of the Income-tax Act, 1922, provided:

" (1) if(a) the Income-tax Officer has reason to believe that by reason of the omission or failure on the part of an assessee to make a return of his income under section 22 for any year or to disclose fully and truly all material facts necessary for his assessment for that year, 596 income, profits or, gains chargeable to income-tax have escaped assessment for that year, or have been under assessed, or assessed at too low a rate, or have been made the subject of excessive relief under the Act, or excessive loss or depreciation allowance has been computed, or he may proceed to assess or re-assess such income, profits or gains or re-compute the loss or depreciation allowance; and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section :" Section 34 confers jurisdiction upon the Income-tax Officer to 'issue a notice in respect of the assessment beyond the period of four years, but within a period of eight years, from the end. of the relevant year, if two conditions exist (1) that the Income-tax Officer has reason to believe that income, profits or gains chargeable to income-tax had been under-assessed; and (2) that he has also reason to believe that such "under.-assessment" had occurred by reason of either (i) omission or failure on the part of an assessee to make a return of his income under s. 22, or (ii) omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment for that year. These conditions are cumulative and precedent to the exercise of jurisdiction to issue a notice of reassessment : Calcutta Discount Co. Ltd. v. Income-tax Officer, Companies District 1, Calcutta and Anr. (1) In deciding the appeal, the High Court held that the Income-tax Officer did in fact decide that the income had escaped assessment, but the High Court did not consider whether the income escaped assessment by reason of omission or failure on the part of the Company to disclose fully and truly all material facts necessary. for assessment.

The judgment of the High Court is set aside and the case is remanded for determination of the question whether by reason of the omission or failure on the part of the Company to disclose fully and truly all material facts necessary for assessment of the Company for the three years in question, any income, profits or gains chargeable to income-tax have escaped assessment or the Company has been given excessive depreciation allowance in computing its income.

Costs of these appeals will be costs in the High Court. One hearing fee.

Appeal allowed and case remanded.

R.K.P.S.

(1) 41 I.T.R. 191.

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