Full Judgment Text
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PETITIONER:
MODI SPINNING & WEAVING MILLS CO. LTD.
Vs.
RESPONDENT:
INCOME-TAX OFFICER, SPECIAL INVESTIGATIONCIRCLE (B), MEERUT
DATE OF JUDGMENT:
10/02/1969
BENCH:
SHAH, J.C.
BENCH:
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 re-
assessment 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
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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.
JUDGMENT:
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 machi-
nery 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 re-
assessment 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
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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 Explana-
594
tion 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 1952-
53 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 seting 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
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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 es-
caped 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
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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 re-
assessment : 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.
597