28 October 1954
Supreme Court


Case number: Appeal (civil) 160 of 1953






DATE OF JUDGMENT: 28/10/1954


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.



JUDGMENT: 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   re- assessments 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  sub- section  (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  thereunder  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  inter- preted  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  deduc- tions 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, ralate  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.