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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