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PETITIONER: ASSOCIATED STONE INDUSTRIES (KOTAH) LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, RAJASTHAN

DATE OF JUDGMENT:       05/02/1997

BENCH: B.P. JEEVAN REDDY, K.S. PARIPOORNAN

ACT:

HEADNOTE:

JUDGMENT:                           W I T H        SPECIAL LEAVE PETITION (C) NO. 10840 OF 1980)                       J U D G M E N T      Paripoornan, J.      The appellant  is a  public  limited  company.  It  was incorporated in  the then Indian State of Kotah on 17.1.1945 for carrying  on the  business of quarrying stones. it is an assessee to Income-tax. This appeal is filed in pursuance to the certificate  of fitness  granted by  the High  Court  of Rajasthan, Jaipur  Bench dated 26.11.1979 arising out of the judgment and  order dated  30.7.1979 in Income-tax Reference No. 24  of 1970. The said judgment is reported in (1981) 130 ITR 868  [CIT v.  Associated Stone Industries (Kotah) Ltd.]. The High Court considered the validity of the re-assessments made on  the appellant  for the  years 1950-51 to 1956-57 as also the legality f the assessments made for the years 1957- 58 to  1961-62 in  its common  judgment dated 30.7.1979 (ITR NO. 24  Of 1970).  In deciding  the legality and validity of the re-assessments  for the  years 1950-51  to 1956-57  some aspects were  decided in   favour of the assessee/appellant. On a consolidated reference made by the Income-tax Appellate Tribunal in respect of the assessment Years 1950-51 to 1961- 62, seven questions of law were referred for the decision of the High Court. Out of the same the following 5 questions of law, namely question Nos. 1,2,5,6 and 7, which were answered against the assessee, are still in appeal before us:-      1. Whether, on the facts and in the      circumstances of  the case, the re-      assessments for  the years  1950-51      to 1956-57, were validly made under      section 34(1)  (a)  of  the  Indian      Income-tax Act, 1922?      2. Whether, on the facts and in the      circumstances  of   the  case,  the      Revenue  was  entitled  to  contend      that reassessments  for  the  years      1954-55, 1955-56  and 1956-57  were      validly made under section 34(1)(b)      of the Act?      3.  Whether   an  appeal   can  lie

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    against  an   order  levying  penal      interest under  section 18A  of the      Act for  the assessment years 1957-      58 to 1961-62?      4. Whether the assessee-company was      entitled to  a credit of the amount      of excess  royalty  paid  which  is      held to  be in  lieu of the income-      tax and  super-tax liability of the      company?      5. Whether, on the facts and in the      circumstances  of   the  case,  the      payment of  royalty  in  excess  of      Rs.1,50,000 paid under clause 18 of      the lease granted by the Government      of His  Highness the  Maharao Saheb      of Kotah  on May 2, 1945, which has      been held  to be in lieu of income-      tax,   super-tax   etc.,   by   the      District   Judge,   Kotah,   is   a      permissible   deduction    in   the      assessment years  1957-58 to  1960-      61? 2.   At this  stage, it should be mentioned that the assesee has filed  special leave  petition No. 10840 of 1980, by way of abundant  caution against  the very  same judgment of the High Court  to be considered in case the certificate granted by the High Court is found to be defective or unsustainable. it  is  unnecessary  to  consider  the  said  special  leave petition on merits separately. 3.   We heard counsel. 4.   the  relevant   facts  for   deciding  the  controversy involved in  this appeal  are not in dispute. The High Court has summarised them correctly in its judgment as follows:      The then  Maharao of  Kotah State  granted a  lease  to assessee-company on  May 2,  1945, for  a period of 15 years beginning  from  October,  1944.  clause  18  of  the  lease agreement entered into by the assessee-company with the then Maharao of  Kotah  for  quarrying  flooring  stones  was  as under:-      18. (i)  In  consideration  of  the      concessions and  privileges granted      by  the  GRANTOR  and  in  lieu  of      income-tax,  super-tax  and  excess      profits tax,  the GRANTEE covenants      to pay  to the  GRANTOR royalty  on      the stone  excavated at the rate of      rupee one  per 100 sq. ft., subject      to   the    minimum    amount    of      rs.1,50,000  per   financial  year,      provided that the aforesaid rate of      Re.1  per  100  sq.  ft.,  will  be      operative so  long as  the  selling      rate of  unpolished slabs  does not      exceed Rs.  10 per  100 sq. ft.; in      the event of the selling rate going      above this  figure the  royalty per      100 sq.  ft. shall  be increased by      25% of the excess over ten rupees.      (ii) The  minimum royalty  will  be      payable in  four equal  instalments      in advance  every quarter. Provided      that if  in any quarter the royalty      payable  calculated  tat  the  rats      mentioned in  sub-para (i)  exceeds

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    the instalment  of minimum  royalty      paid in  advance for  that quarter,      the balance shall be made up within      the next quarter.      The  Kotah  State  merged  with  the  United  State  of Rajasthan and  the Indian  I.T. Act,  1922, was brought into force in  the newly  formed State  of rajasthan  with effect from  April  1,  1950.  The  assessee-company  submitted  an application  to   the  commissioner   of  Income-tax  for  a declaration that  it was  exempt form  the payment of income tax in  accordance with the terms of the lease granted to it by the  then Maharao of Kotah. But the aforesaid application was rejected. Thereafter, the assessee-company filed a civil suit in  the court of the District Judge, Kotah, against the Union of  India  and  the  State  of  Rajasthan,  seeking  a declaration that  it was  exempt from  payment of income tax and that  the royalty  paid by  it in  excess of the minimum amount of 1,50,000 was in lieu of income-tax, super-tax etc. The learned  District Judge  by his  decree and  order dated August 23, 1957, held that the royalty which was paid by the assessee-company to  the State  of Rajasthan,  in accordance with the  provisions of cl.18 of the grant, consisted of two parts, namely,  the sum  of Rs.1,50,000  represented royalty proper, while  the remaining  amount of  royalty paid by the assessee-company was  in lieu  of income-tax,  super-tax and excess profits-tax. According to the learned District Judge, the State  of Rajasthan  was entitled to the minimum royalty of Rs.  1,50,000 as,  according to  him, the said amount was attributable to  the concessions  and privileges  granted by the Government  to the assessee-company, while the remaining amount  paid   by  the   assessee-company,  in   excess   of Rs.1,50,000, was further divisible into two parts consisting of the  amount paid  in lieu  o  income-tax,  super-tax  and excess profits  tax, which was payable to the Union of India by way  of federal  taxes on  incomes or  profits, while the amount left by way of residue, out of the amount paid by the assessee-company  under  cl.  18  of  the  grant  after  the deduction of  the income-tax,  super-tax and  excess profits tax, shall  be payable  to the State of Rajasthan. Thus, the State of  Rajasthan was held entitled to the minimum royalty amount of  Rs. 1,50,000  while the  Union of  India was held entitled to  the amount  equal to  the tax  liability of the assessee-company in  respect of the federal taxes out of the excess royalty paid in that year, and the State of Rajasthan was entitled  to the  residue left  out of  the total amount paid by  the assessee-company  under cl.18 of the grant. The learned District  Judge, however, dismissed the suit against the Union of India. The order passed by the learned District Judge, Kotah,  had not binding effect so far as the Union of India is  concerned.      The Income  Tax Officer,  in the  assessments  for  the years 1950-51  to 1956-57,  disallowed the  deduction of the minimum royalty  amount  of  Rs.1,50,000  from  the  taxable income of  the assessee-company  on the ground that the same was capital  expenditure, while deduction of royalty paid by the assessee-company  in excess  of Rs.1,50,000 was allowed. The same  position was  maintained by  him in respect of the assessments for  the assessment years 1957-58 to 1961-62. In the year  1959,  notices  for  reassessment  of  tax,  under Section 34(1)(a)  of the  Indian Income  Tax Act, 1922, were issued for  the assessment years 1950-51 to 1956-57. The ITO reassessed the  income of the assessee-company for the years 1950-51 to  1956-57 and  held that  as the amount of royalty paid by  the  assessee-company  in  excess  of  the  sum  of Rs.1,50,000 was  in lieu  of income-tax etc., the same could

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not be  allowed as  deduction to the assessee-company and as such  that  mount  of  excess  royalty  allowed  earlier  as deduction was disallowed and was added back to the income of the assessee-company. the assessee-company preferred appeals before the  AAC against the aforesaid orders of reassessment passed by  the ITO,  Kotah, but  the appeals were dismissed. Then the  assessee-company filed  appeals before  the Income Tax Appellate  Tribunal, which  disposed  of  seven  appeals relating to  the reassessment proceedings made under Section 34(1)(a) of  the Act,  for the  assessment years  1950-51 to 1956-57, by  one consolidated order dated September 7, 1968. the Tribunal  held that  the proceeding  under Section 34 of the Act  could not  be initiated  in view of the decision of the Supreme  Court in  Calcutta Discount  Com. Ltd.  vs. ITO [(1961) 41  ITR 191].  It was  held by the Tribunal that the assessee-company had  disclosed  all  relevant  or  material facts and  as there  was no  failure  on  the  part  of  the assesee-company to  disclose fully  and truly  any  relevant material necessary  for the  assessments in  respect  of the years in  question, the  necessary pre-requisite  conditions for invoking the jurisdiction for reassessment under Section 34(1)(a) of  the Act  were absent. The Tribunal further held that the  proceedings for  reassessment for  the  assessment years  1954-55,  1955-56  and  1956-57,  although  initiated within a  period of four years from the date of the original assessment for  those years,  yet because  such  proceedings were initiated under Section 34(1)(a) of the Act, they could not be  upheld as having been made under Section 34(1)(b) of the Act.  The Tribunal  also held  that the  portion of  the excess royalty  paid by  the assessee-company  to the  State Government, which was equivalent to the tax liability of the assessee-company,  could   not  be   held   as   permissible deduction, as the income-tax and other taxes were payable to the Union  Government. However, the remaining portion of the excess royalty,  which was left out by way of residue, after deducting the  amount paid  in lieu  of tax liability by the assessee-company, out of the excess royalty, was permissible deduction on  the basis of the principles laid down by their Lordships of  the Supreme  Court in Gotan Lime Syndicate vs. CIT [(1966) 59 ITR 718]. It was further held by the Tribunal that the royalty paid on polished stones, in accordance with the provisions  of cl.  19 of  the agreement,  constituted a part of  the  cost  of  the  stones  and  is  a  permissible deduction, being  an  expenditure  of  revenue  nature.  The Tribunal lastly  held that the assessee-company was entitled to the  credit of the portion of the royalty, which was paid by it  in lieu  of income-tax and super-tax liability of the assessee-company.      By another  order passed  on  September  7,  1968,  the Tribunal allowed  the appeals  preferred  by  the  assessee- company in  respect of the assessment years 1957-58 to 1961- 62, holding that a sum of Rs.1,50,000, as the minimum amount of royalty  payable by it, was expenditure of revenue nature and was  a permissible  deduction and that out of the excess royalty paid  by the  assessee-company,  the  residue  left, after payment of the amount equivalent to income-tax, super- tax,  etc.,  to  the  Union  Government,  was  also  revenue expenditure and  was a  permissible deduction  although  the amount of  excess  royalty  representing  its  liability  in respect of  income-tax, super-tax  and  other  direct  taxes payable to the Union of India couldnot be deducted from the taxable  income   of  the   assessee-company,  adopting  the reasoning given  by it  in the  earlier order  passed on the same day, which has been referred to above. 3.   We are  concerned only  with the  answers given  by the

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High Court regarding questions Nos. 1,2,5,6 and 7, which are against the assessee. On question No. 1, the High Court held that the  re-assessment proceedings for the years 1950-51 to 1956-57 were  initiated and  concluded validly under Section 34(1)(a) of  the Act.  On question  No.  2,  concerning  the assessment years  1954-55, 1955-56  and  1956-57,  the  High Court found on the alternate plea, that the reassessments of the appellant-company  for the said years could be justified under Section  34(1)(b) of  the Act.  On question No. 5, the High court  held that  the  penal  interest  calculated  and charged  under  Section  18A(6)  or  18A(8)  could  only  be challenged in  an appeal  against the order of assessment to tax and the assessee would be entitled to deny his liability to  payment   of  penal  interest  also  while  denying  his liability to  be assessed  to tax  under the  Act.  it  also agreed with  the view  expressed by  the  Allahabad,  Andhra Pradesh, Madras, Karnataka, Gujarat, Gauhati and Bombay High Courts which  held that  no appeal  lies against  the  order levying penal  interest. The  matter was left vague, without applying the  law laid  down by the High Court, to the facts of the case. On question No. 6, the High Court held that the assessee-company was  not entitled  to get  credit  for  any amount of the excess royalty. On question No. 7, it was held that the  expenditure being  not one  of  a  revenue  nature cannot be a permissible deduction in the relevant assessment years. 4.   We shall  consider the  above questions of law answered by the High Court (Questions 1,2,5,6 and 7) in seriatim. Question No.  1 relates  to the legality and validity of re- assessments made  for the  years 1950-51  to  1956-57  under Section 34(1)  (a) of  the Income-tax  Act,  1922.  Sections 34(1)(a) and (b) of the Act are to the following effect:      "34. Income  escaping assessment --      (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 and year or to      disclose  fully   and   truly   all      material facts  necessary  for  his      assessment for  that year,  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      (b) notwithstanding  that there has      been  no  omission  or  failure  as      mentioned in clause (a) on the part      of the  assessee, in the Income-tax      Officer  has   in  consequence   of      information   in   his   possession      reason  to   believe  that  income,      profits  or   gains  chargeable  to      income-tax have  escaped assessment      for any  year, or  have been under-      assessed, or  assessed at too low a      rate, or have been made the subject      of excessive relief under this Act,      or   that    excessive    low    or      depreciation  allowance   has  been

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    computed.      he  may   in  cases  falling  under      clause (a) at any time and in cases      falling under  clause  (b)  at  any      time within  four years  of the end      of  that   year,   serve   on   the      assessee.....a notice."      It is  evident that  two conditions should be fulfilled to exercise  jurisdiction under Section 34(1)(a) of the Act. (1) The  Income Tax  Officer should  have reason  to believe that income  has escaped  assessment, and  (2) he  must have reason to  believe that  such escapement is by reason of the omission or  failure on  the part  of the assessee to make a return or  to disclose  fully and  truly all  material facts necessary for  his assessment  for the  relevant year. It is now well  settled by  the decisions  of this  Court that the duty of the assessee is only to fully and truly disclose all material facts. The expression "material facts" contained in Section 34(1)(a)  of the  Act refers  only to Primary facts, and the  duty of  the assessee  is to  disclose such primary facts. There  is no duty cast on the assessee to indicate or draw the attention of the Income Tax Officer what factual or legal, or  other inferences  can ben  drawn from the primary facts disclosed. (see - Calcutta Discount Co. Ltd. vs. ITO - 41 ITR  191). In  this case, the Appellate Tribunal found in paragraph 12 of its order (page 321 of the paper book) thus:      The primary  fact in  this case was      the lease  agreement and  the terms      and conditions  thereof.  This  was      before the  Income-tax Officer from      the beginning.  He was aware of the      triangular  dispute   between   the      assessee  company,   the  State  of      Rajasthan and  the Union Government      pending before  the District Court,      Kotah.  He   was  served   with  an      interim injunction  to refrain from      proceedings with  the  assessments.      He  had  got  the  said  injunction      modified. In  these  circumstances,      the  charge  against  the  assessee      company  that  it  had  omitted  or      failed to  fully and truly disclose      any material fact fails completely.      We are,  therefore, of  the opinion      that the Income-tax Officer did not      have  any  material  whatsoever  to      have some reason to believe that as      a reason  of omission or failure on      the part of the assessee-company to      fully  and   truly   disclose   any      relevant material necessary for its      assessments  for  the  years  under      appeal,    income    had    escaped      assessment. In other words, we hold      that   the    material    condition      requisite for invoking jurisdiction      under section  34(1)(a) was absent.      We,  therefore,   hold   that   the      reassessments    completed    under      section   34(1)(a)    are   without      jurisdiction  and  are,  therefore,      liable to be cancelled."      On the other hand, the High Court has taken a different view of  the matter  by stating  that the Income Tax Officer

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was not  a party  to the suit filed by the appellant, that a copy of  the plaint  filed in the court was not submitted to him and  the assessee-company  failed in  its duty to make a pointed reference to the particular portion of the document, namely, clause  18 of the lease agreement dated 2,5,1945 and in this view of the matter held thus:-      Thus, we  are  satisfied  that  the      Tribunal was not correct in holding      that the  assessee-company did  not      fail  to   disclose  all   material      relevant or  primary facts  and the      mere  production   of   the   lease      agreement or  some vague  awareness      on the  part of  the ITO  about the      triangular  dispute   between   the      assessee, the  State  of  Rajasthan      and the  Union of  India before the      District  Judge,   Kotah,  and  the      service of  the interim  injunction      upon  him,   cannot  lead   to   an      inference that the ITO was aware as      a matter  of fact  that the  amount      paid by  the assessee-company under      the lease  agreement consisted  not      only or  royalty  proper  but  also      some amount  was paid  in  lieu  of      income-tax and other taxes."      In this  view, it  was held  that the  assessee-company failed to  disclose all material or primary facts and so the proceedings under Section 34(1)(a) of 1922 Act were validity initiated and  concluded.  We  are  of  the  view  that  the approach and  conclusion so  made  by  the  High  Court  are patently erroneous for the following reasons. 5.   The primary  fact in  this case  is the lease agreement entered into  by the  appellant with  the Maharao  of  Kotah State dated  2.5.1945. It  was placed  before the Income Tax Officer at  the time  of original assessments. It is not the duty of the assessee to draw the attention of the Income Tax Officer to  any  pa particular  clause  or  portion  of  the document and  invite him  to draw  any particular  inference therefrom. Moreover,  in the suit the Union of India and the State of  Rajasthan were  parties.  The  interim  injunction passed by the court from assessing or levying any income tax against   the    assessee-company   was    varied   on   the representation made  by the Union of lndia, by later orders. Indeed, the  Union of  India and the Commissioner of Income- tax have  filed written statements in the suit. The order of injunction was  within  the  knowledge  of  the  Income  Tax Officer, as could be seen from the original assessments. The Income Tax  Officer was  aware  of  the  triangular  dispute between the  assessee-company, State  of Rajasthan and Union of India  pending before  the District  Court. What is more, the order  of injunction to refrain from proceeding with the assessments was  served on  the Income Tax Officer which was later modified.  In view of these salient features, the High Court totally  erred in  holding that there was any omission on the  part of  the appellant-company  to fully  and  truly disclose  material   or  primary  facts  necessary  for  the assessments for  the years  in question. We, therefore, hold that the  answer given  to question  No. 1 by the High Court that the  reassessment proceedings  initiated under  Section 34(1)(a) of  the Act  were valid  for the  years 1950-57, is totally erroneous  in law. We set aside the said finding and hold that  the re-assessment  proceedings for the assessment years  1950-57  under  Section  34(1)(a)  of  the  Act  were

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invalid. 6.   We shall  now consider question No. 2 as to whether the Revenue could  contend or  defend the  reassessments for the years 1954-55,  1955-56 and  1956-57 as  validity made under Section 34(1)(b) of the Act?      The High  Court has  held on  question No.  2 that  re- assessments of  the appellant-company  for  the  said  three years were  justified under  Section 34(1)(b) of the Act. We have noticed  in the  earlier portion of the judgment that a civil suit  was filed  in the  Court of  the District Judge, Kotah by  the appellant-assessee  against the Union of India and the State of Rajasthan seeking a declaration that it was exempt from  payment of income tax and that the royalty paid by it  in excess of the minimum amount of Rs. 1,50,000/- was in lieu  of income  tax, super-tax etc. Construing clause 18 of the  grant, the  District Judge held that the amount paid by the  assessee consisted  of two parts, namely, the sum of Rs.  1,50,000/-   represented  royalty   proper,  while  the remaining amount,  i.e., the  amount paid over and above Rs. 1,50,000/- represented  the amount  in lieu  of income  tax, super-tax and excess profits tax. The State of Rajasthan was held entitled  to Rs.  1,50,000/- which  was attributable to the concessions  and privileges granted by the Government to the appellant-company.  The amount  paid in  excess  of  Rs. 1,50,000/- was  further divisible  into two  parts. One part representing the  amount paid  in lieu  of income tax, super tax and  excess profits  tax, which was payable to the Union of India  and the  residue out  of the  amount paid  by  the assessee-company under  clause 18  of the  grant  after  the deduction of  the income  tax, super  tax and excess profits tax shall be payable to the State of Rajasthan. The State of Rajasthan will  be entitled  to the  residue.  The  District Judge, however,  dismissed the  suit against  the  Union  of India. In the appeal filed by the State of Rajasthan, it was held that  the agreement  dated 2.5.1945  became void on the coming into  force of  the Constitution  of India on January 26, 1950,  that the  amount paid  by the assessee-company in excess of  the minimum  of Rs.  1,50,000/- was refundable to it. The  Income Tax  Officer held that the amount of royalty paid by  the appellant-company  in excess  of Rs. 1,50,000/- being in  lieu of  income tax,  super tax and excess profits tax could  not be allowed as deduction. In the re-assessment proceedings, the amount of excess royalty allowed earlier as deduction was disallowed and added back to the income of the assessee-company.  The   appeals  filed  by  the  appellant- assessee before  the Appellate  Assistant Commissioner  were dismissed. The  Appellate Tribunal held that the proceedings are invalid  under Section 34(1)(a) of the Act for the years 1950-51 to  1956-57 and  alternatively that  the proceedings for re-assessment  for the years 1954-55, 19555-56 and 1956- 57 though  initiated within  a period of four years from the date of  the original  assessment for those years, could not be sustained  under Section  34(1)(b) of  the Act, since the proceedings were  initiated under  Section 34(10(a)  of  the Act. The  Tribunal also  held that the portion of the excess royalty paid by the assessee-company to the State Government which was  equivalent to  the tax liability of the assessee- company is  not a  permissible deduction  as the  taxes were payable to  the Union  Government. It  was further held that however, the  remaining portion  of the excess royalty which was left  out by  way of residue, after deducting the amount paid in  lieu of tax liability by the assessee-company, (out of the  excess royalty)  was permissible  deduction. In  the High Court  it was  not disputed  that re-assessment for the years 1954-55,  1955-56 and  1956-57  were  taken  within  a

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period of  four years  from the  date of  completion of  the original assessment  proceedings and so they could have been validly made  under Section  34(1)(b) of  the Act.  Nor  was there any  dispute before  the High Court that the amount of royalty paid  over and  above the  minimum royalty amount of Rs. 1,50,000/- was paid in lieu of income tax, super tax and excess profits  tax and  the amount which was so paid cannot be claimed  as exempt from payment of income-tax. It was the income of the assessee-company and was chargeable to tax and which had,  as a  matter of  fact, escaped assessment at the time of  the completion  of the  original assessment. In the original assessment  order, the  Income Tax  Officer allowed deduction for the entire amount paid by the assessee-company by way of royalty including the amount paid in lieu of taxes as well  as of the residue. The High Court held, on a resume of  the   above,  that  the  Income  Tax  Officer  had  some "information" relating  to escapement  of income  or  under- assessment of  income and since action was taken within four years of  the  original  assessment  such  action  could  be sustained under  Section 34(1)(b)  of the  Act, even  if the proceedings were  initiated under  Section 34(1)(a)  of  the Act. 7.   We are of the view that the reasoning and conclusion of the High Court in this regard are justified in law. The plea made in this behalf by the appellant’s counsel was two fold.      (1) The  first plea  was  that  the      proceeding initiated  under Section      34(1)(a)  of  the  Act,  which  was      found  to   be  invalid   for   the      assessment years  1954-55,  1955-56      and  1956-57  cannot  be  sustained      under Section  34(1)(b) of the Act.      Strong reliance  was placed  on the      decision  of   the  Allahabad  High      Court in  Raghubar Dayal Ram Kishan      v. C.I.T. (63 I.T.R. 572).      (2) The  second plea  was that  the      decision  of  the  District  Judge,      Kotah rendered  in the  civil  case      was only  based on  the lease deed.      The  lease  deed  as  well  as  the      decision of the District Judge were      already available  at the  time  of      original assessment  and cannot  be      considered to  be fresh material or      information sufficient  to  attract      Section 34(1)(b) of the Act. 8.   A look  at Section  34, clauses  (a) and  (b) will show that the  said clauses  deal with  two different situations. Section 34 is only a machinery section. They cover different contingencies and  situations, but they do not deal with two distinct and separate jurisdictions. Section 34 as a whole - - clause (a) or clauses (b) deals with cases of reopening of income  escapement   assessment.  Whereas  Section  34(1)(a) requires the  formation  of  a  belief  by  the  Income  Tax Officer, that  there is a failure or omission on the part of the assessee  to disclose fully and truly all material facts and there  must be  some material  to form  such a facts and there must  be some  material to form such a belief that the failure or  omission on  the part of the assessee has led to the  escapement   or  under-assessment   of  income  of  the assessee, Section  34(1)(b) requires  that even if there was no omission  or failure on the part of the assessee, but the Income Tax  Officer has  information and  he could  form the belief that  the income  has escaped assessment, he could do

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so within  the period  of four  years. There are limitations for the  exercise of  power under  Section 34(1)(a), namely, that the  Income Tax Officer is bound to record the reasons, which led  to  the  formation  of  the  belief  and  further sanction of the Commissioner of the Central Board of Revenue is required.  Section 34(1)(b) is of wider import covering a larger class of cases. In ordinary civil actions, if a party prays for a larger relief and the Court holds that he is not entitled to  the same,  but it  is apparent  from the  facts proved or  admitted that  the party  is entitled to a lesser relief, it  is always open to the court to grant the latter. Similarly,  if   the  Income   Tax  Officer   has  initiated proceeding under  the stringent  and onerous  provisions  of Section 34(1)(a) which is found to be invalid, nothing could prevent  the   appellate  or  other  higher  authority  from invoking Section  34(1)(b) if  the pre-requisite  conditions for the  application of  clause (b)  are satisfied. In other words,  if  the  conditions  for  applicability  of  Section 34(1)(b)  which   only  provides   for  shorter   period  of limitation is  satisfied, the  assessment  though  initiated under Section 34(1)(a) could be sustained or justified under Section 34(1)(b)  of the  Act. On this aspect, the decisions of various  High Courts  are not uniform. The Allahabad High Court in Raghubar Dayal Ram Kishan v. C.I.T. (63 I.T.R. 572) has held  that it is not permissible. On the other hand, the Calcutta High  Court in Mriganka Mohan Sur v. C.I.T. (95 ITR 503) has  expressed dissent  from the  aforesaid decision of the  Allahabad   High  Court  has  held  that  re-assessment proceedings initiated  under Section 34(1)(a) of the Income- tax Act,  1922 though  set aside  by the Appellate Tribunal, can nevertheless  be sustained under Section 34(1)(b) of the Act provided  that on  the  materials  on  record,  all  the requirements under  Section 34(1)(b) are satisfied. The same High Court  in Nirmala  Birla v. W.T.O. (105 ITR 483-FB) has followed its  earlier decision.  To similar  effect  is  the decision of  the Delhi  High Court  in Ganga Saran & Sons v. I.T.O. (130  ITR 212).  A Division  Bench of the Bombay High Court in  Rajabally Hirji  Meghani v.  S. N. Sahane (170 ITR 614 has  concurred with the decision of the Delhi High Court in Ganga Saran’s case (130 ITR 212) in the context of a writ petition filed  to strike  down notices issued under Section 148 of  the Income-tax  Act. The  other decisions which take similar view  are T.M.  Kousali v.  Sixth ITO (155 ITR 739), CIT v.  Banwarilal &  Sons (137  ITR 91); Mysore Tobacco Co. Ltd. v.  CIT (157 ITR 606) and CIT v. Surendra Kumar Bhadani (164 ITR 323). 9.   Regarding the  second plea,  it is  now fairly  settled that the information obtained by the Income Tax Officer need not be  one outside  the record; it may be one obtained from the assessment  records already  available. The  law on this point has  been laid  down in  Salem Provident  Fund Society Ltd. v.  C.I.T. (42  ITR 547) and United Mercantile Co. Ltd. v. C.I.T.  (64 ITR  218). These  decisions have  been quoted with approval  by a  Constitution Bench  of  this  Court  in Anandji Haridas  & Co. v. S.P. Kasture (AIR SC 565). At page 573, the Court observed thus:      "In  Salem   Provident  Fund  Society  Ltd.  Commr.  of lncometax, Madras  (1961) 42  ITR 547 (Mad) a division Bench of the Madras High Court interpreting the scope of the words ’information which  has come  into his  possession’ found in Sec. 34 of the Indian Income Tax Act, observed thus:      We are unable to accept the extreme      proposition that  nothing that  can      be  found  in  the  record  of  the      assessment which  itself would show

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    escape  of   assessment  or  under-      assessment,  can   be   viewed   as      information which led to the belief      that there  has  been  escape  from      assessment   or   under-assessment.      Suppose a  mistake in  the original      order   of    assessment   is   not      discovered  by   the   Income   Tax      Officer himself on further scrutiny      but it  is brought to his notice by      another  assessee   or  even  by  a      subordinate or  a superior officer,      that would appear to be information      disclosed   to   the   Income   Tax      Officer. If  the mistake  itself is      not extraneous  to the  record  and      the    informant    gathered    the      information from  the  record,  the      immediate source  of information to      the  Income  Tax  Officer  in  such      circumstances  is   in  one   sense      extraneous to  the  record.  It  is      difficult to  accept  the  position      that while  what is seen by another      in the record is ‘information’ what      is seen  by the  Incometax  Officer      himself is  not information to him.      In the  latter case he just informs      himself. It will be information his      possession within  the  meaning  of      section  34.   In  such   cases  of      obvious mistakes  apparent  on  the      face of  the record  of assessment,      that record  itself can be a source      of information, if that information      leads to a discovery or belief that      there  has   been  an   escape   of      assessment or under-assessment.      The    meaning    of    the    word      "information"  came  up  again  for      consideration  before   a  division      bench of  the Kerala High in United      Mercantile Co.  Ltd. v.  Commr.  of      Income Tax.  Kerala (1967)  64  ITR      218  (Ker).  Their  Lordships  held      that to  ‘inform’ means  to "impart      knowledge" and  a detail  available      to the  Incometax  Officer  in  the      papers filed before him does not by      its  mere  availability  become  an      item   of    information.   It   is      transmuted   into    an   item   of      information in  his possession only      if  and   when  its   existence  is      realised   and   its   implications      recognised."      We hold  that though the proceedings of the three years 1954-55, 1955-56  and  1956-57  cannot  be  sustained  under Section 34(1)(a)  of the  Act, they  could be  sustained  or justified under  Section 34(1)(b)  of  the  Act,  since  the materials on record disclose that the conditions required to be fulfilled  under section  34(1)(b)  are  satisfied.  With great respect,  we hold that the decision to the contrary of the Allahabad  High Court  in Raghubar  Dayal Ram  Kishan v. C.I.T. (63 ITR 572) is not good law.

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    We are  next concerned  with question No. 5 which deals with appealability  of an order levying penal interest under Section 18A  of the  Act for the assessment years 1957-58 to 1961-62. The  High Court has rightly answered question No. 5 stating that the penal interest calculated and charged under Section 18A(6)  or 18A(8)  can be  challenged in  an  appeal filed by the assessee against the order of assessment to tax and the  assessee would be entitled to deny his liability to payment of  penal interest  also while denying his liability to be  assessed to  tax under Section 18A of the Act. It was opined that  no appeal  would lie  against the order levying interest under  section 18A(6) or 18A(8) of the Act. The law so stated  by the High Court is not open to objection. Under the Income-Tax Act, 1922 there was no specific right against an order  levying interest.  But, if  an appeal is preferred against an order of assessment and interest is levied by the assessment order itself, the assessee can raise the question regarding the  exigibility of  interest. In this connection, the High  Court has  concurred with the view so expressed by the Allahabad  High Court  in Pt.  Deo Sharma v. Cit (23 ITR 226), the  Andhra Pradesh High Court in Boddu Seetharmaswamy v. CIT  (28 ITR  156), the  Madras High Court in South India Flour Mills  Ltd. v.  CBDT (70  ITR 863), the Karnataka High Court in National Products v. CIT (108 ITR 935), the Gujarat High Court  in CIT v. Sharma Construction Co. (100 ITR 603), Gauhati High  Court in  K.B. Stores v. CIT (103 ITR 505) and the Bombay  High Court in Keshardeo Shrinivas Morarka v. CIT (48 ITR  404). It  is submitted  that in this case the penal interest was  levied under  Section 18A(6) or (18A(8) in the assessment order  and it was objected to in the appeal filed against the  order of  assessment. The assessee was entitled to take  the objection  regarding the levy of penal interest in the  said appeal.  The High  Court has not dealt with the facts of  this case  pointedly in the light of law laid down by it  nor has  stated whether  and if  so  the  relief  the assessee is  entitled to in the matter while concurring with the view  expressed by  other High  Courts regarding the law applicable in  the instant  matter. We direct the High Court to pass  appropriate orders  after ascertaining  the factual situation and  the consequential  order that is necessary to give effect  to the finding that may be arrived at, may also be passed. The matter shall stand remitted to the High Court for that purpose. 10.  We are  next concerned  with questions  No. 6  and 7 -- whether the  appellant-company is  entitled to credit of the amount of  excess royalty paid by it to the State Government in lieu  of income-tax,  and super  tax liability  and  also whether the  payment of  royalty in excess of Rs. 1,50,000/- paid under  clause 18  of the lease deed dated 2.5.1945 is a permissible deduction  for the  assessment years  1957-58 to 1960-61. 11.  In answering  question No.  6, the  High Court has held that the  amount of  excess royalty paid cannot be deemed to have been  paid to  Union of  India in  respect of  the  tax liability of  the appellant-company,  since no amount at all was paid  to the Union of India by the appellant-company. It was also  held that  the excess  royalty paid  to the  State Government cannot  be said  to be  paid on  behalf or  as an agent of  the Union  of India.  It was, therefore, held that the assessee-company  was not entitled to get credit for any amount of  the excess royalty, said to have been paid by the assessee-company to the State Government. 12.  In answering  question No.  7, the High Court held that the amount  equal to  the tax  liability of  the  appellant- company for  the relevant  years, out of the excess royalty,

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was not  a permissible  deduction. The  remaining portion or residue out  of the excess royalty would partake of the same character as  the minimum  royalty of R. 1,50,000/- and is a permissible deduction.  It was  made clear  that the  amount equal to  the tax  liability of the assessee-company, out of the excess  royalty, said  to have  been  paid  in  lieu  of income-tax, super tax etc., is not a permissible deduction. 13.  It was  argued before  us that  the High Court erred in answering questions No. 6 and 7 in the above manner ignoring the orders  passed by  the Court  wherein the Union of India and State  Government were  parties and vital materials were available in  that regard.  Counsel submitted  the arguments thus:      The amount  of excess  royalty was  clearly towards the payment  of  income-tax  and  super  tax  liability  of  the assessee-company. The  aforesaid amount  was received by the State of  Rajasthan on behalf of the Union of India with the consent of  the Union  of India  and under the orders of the District Judge,  Kotah dated  18.02.1956 on  the basis of an undertaking given  to the  Court. In such circumstances, the Tribunal had  rightly held  that the  payment to  the  State Government was  a payment  by the  assessee-company  to  the Union of  India towards its tax liability and rightly gave a direction to  the Income  Tax Officer to give credit thereof to the  assessee-company. The Court of District Judge, Kotah passed a decree dated 25th September, 1956 in Civil Suit No. 17/53 against  the State  of Rajasthan  and in favour of the Union of India to the effect that since the assessee-Company has paid  full royalty  and excess  royalty to  the State of Rajasthan upto  1956-57, the  State Government should pay to the Union  of India  out of  the excess  royalty paid by the assessee-company the  amount of  income tax, super tax etc., that has been assessed and demanded and which may be further assessed and  demanded  by  the  Union  of  India  from  the assessee-company right  from the  assessment year 1950-51 to 1958-59. Accordingly,  the District  Judge, Kotah  passed  a decree for  Rs. 23,99,474/-  in favour of the Union of India and against the State of Rajasthan for payment to be made in respect of  the income  tax,  super  tax  etc.,  levied  and demanded from  the  assessee-company.  The  effect  and  the impact of  this decree has escaped notice of the High Court. In the light of the aforesaid decree of a competent court in favour of  the Union  of India  it will  be deemed  that the State of  Rajasthan  was  holding  the  money  paid  by  the assessee-company under  the orders of the District Court and with the  consent of  the Union  of India  on behalf  of the Income Tax  Officer. The  High Court  has erred  in ignoring this fact  and in  answering  question  No.  6  against  the assessee-company. The entire amount of the royalty including the  component  of  income  tax  and  super  tax  etc.,  was deposited in  the court  of District  Judge, Kotah under its order in  Civil Suit  No. 17  of 1953  and when  the  entire amount was  withdrawn by  the State  of Rajasthan  under the orders of  the District  Court subject  to final decision of the suit  and when  the  Court  of  District  Judge  at  the conclusion of  the suit  ordered the  State of Rajasthan for the payment  of Rs.  23,99,474/- to  the Union  of India  in respect of its income tax demand for the relevant assessment years, the High Court ought to have held that payment of the aforesaid amount  was made  to the  Union of  India and  the assessee company  was entitled  to the  credit of the amount from the Income-tax authorities. It was also stated that the High Court  has not  considered the matter from the point of view of  Section 10(2)(xv)  of the  Income-tax Act, 1961 nor was  the   earlier  decision  of  this  Court  inter-parties

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(Associated Stone Industries (Kotah) Ltd. v. C.I.T. - 82 ITR 896) adverted  to in  this  regard.  (The  earlier  decision reported in  82 ITR 896 was relating to the assessment years 1948-49 and  1949-50, when there was no law imposing income- tax, super-tax  etc., in  the State  of Kotah and this Court held that  the excess  royalty paid  cannot be  in  lieu  of income-tax, super  tax etc.,  and was a payment on the terms of a  contract. This  is an  important aspect to be borne in mind). 14.  The above aspects have not been adverted to by the High Court in the judgment rendered. If, as a matter of fact, the above materials  were available before the High Court, along with the  statement of the case submitted by the Tribunal to the High  Court, we  should say  that the High Court has not considered questions  No. 6  and 7  in accordance  with law. This is  a matter  for verification from the records land it is for the High Court to apply its mind to the above aspects and render a proper decision. We decline to answer questions No. 6 and 7, on the basis of the available records. However, we remit  the matter to the High Court to consider questions No. 6 and 7 afresh, in the light of the facts stated above. 15.  The appeal  is disposed  of as  above and the matter is remitted to  the High Court to consider and pass appropriate orders regarding  questions No.  5, 6 and 7, in the light of the observations  contained in this judgment. There shall be no order as to costs in this appeal.