TMI Blog1982 (7) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... grounds-(i) that the ITO has failed to record the reasons, as required by s. 148(2) of the Act, and that, therefore, the approval accorded by the Commissioner is vitiated. The approval has been accorded mechanically and without applying the mind to the relevant facts and circumstances of the case, and (ii) that what is sought to be done is merely to review the orders of assessment passed earlier. There is no allegation that any income has escaped assessment on account of non-disclosure of any material fact on the part of the assessee. The error, if any, was on the part of the assessing authority. In the counter-affidavit filed by the ITO, the details of the income that is said to have escaped assessment and which is sought to be included in the assessment year 1970-71 are furnished. They are-(i) that the assessee has failed to disclose the profit of Rs. 4,687 arising from the sale of machinery for a sum of Rs. 18,748, which amount is assessable u/s. 41(2) of the Act; (ii) that the assessee wrongly claimed deduction of Rs. 32,134 on account of depreciation in respect of confectionery plant and old sugar plant, even though the assessee had availed of the full permissible depreciat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "The assessee, M/s. K. C. P. Ltd., is a public limited company carrying on business in the manufacture and sale of sugar, alcohol, cement and heavy machinery meant for cement and sugar plants. The original assessment of the company was completed on January 25, 1971, on a total income of Rs. 57,62,016 which as, a result of rectification passed u/s. 154 finally stands as on today at Rs. 57,59,621. While examining the accounts for the assessment year 1977-78, it came to light that by reason of failure or omission on the part of the assessee to disclose fully and truly, income to the tune of Rs. 2,69,016, as noted below, escaped assessment: (1) Profit of Rs. 4,687 arising under s. 41(2) of the Act as a result of sale of certain machinery for a sum of Rs. 18,748. (2) Income of Rs. 32,134 as a result of wrong claim under depreciation in that, though the WDV of the confectionery plant and old sugar plant completely got 100% depreciated, still the assessee-company claimed and obtained depreciation of Rs. 32,134. (3) Income of Rs. 2,32,195 on account of wrong claim u/s. 80-I although the assessee was not entitled for deduction under s. 80-I due to balance loss of Rs. 68,72, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... necessary that the reasons recorded by the ITO must state the alleged non-disclosure on the part of the assessee and that such non-disclosure has led to escapement of assessable income. The requirement that the Commissioner should be satisfied that it is a fit case for the issuance of a notice before a notice under s. 148 is issued, is conceived as an administrative check upon the power of the ITO to issue such a notice. It is a safeguard designed to check or prevent arbitrary or mechanical issuance of notices, which necessarily means that the function of the Commissioner is not a mechanical one. He has to peruse the reasons and form an opinion that the assessee has failed to disclose fully and truly all material facts necessary for assessment of that year and that the same has led to the income chargeable to tax escaping assessment. Obviously, he cannot form this opinion, or satisfaction, as the case may be, unless the basic facts constituting such non-disclosure are stated in the reasons recorded by the ITO. While it is not necessary that the ITO should elaborately set out all the relevant facts, it is essential that he must indicate broadly the fact or facts, which constitutes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d should not be a mere pretence. It was also observed that it was open to the court to examine whether the reasons recorded by the ITO have a rational connection with or a relevant bearing upon the formation of the belief, and whether they were not extraneous or irrelevant for the formation of the relevant opinion. The same view was again reiterated by the Supreme Court in ITO v. Madnani Engineering Works Ltd. [1979] 118 ITR 1, where it was observed that mere disclosure of belief without setting out the material on the basis of which such belief was formed, was not sufficient and that, in such a case, the court would hold the notice to be void. In this context, we must mention that the law with respect to subjective satisfaction is exhaustively stated in the celebrated decision of the Supreme Court in Barium Chemicals Ltd. v. Company Law Board [1966] 36 Comp Cas 639 (SC), where it has been held that, while the formation of the opinion is subjective, the existence of facts upon which the satisfaction is formed is not subjective and that the requisite opinion/satisfaction must be formed on relevant material, and honestly and fairly. So long as that is done, the court cannot inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit. Of course, the ITO's case is that the full amount constituted profit, whereas the assessee is relying upon certain alleged practice being followed in the previous years. What is relevant for our purposes is that there is no allegation of any non-disclosure of material facts on the part of the assessee, either in the notice issued under s. 148, or in the reasons recorded by the ITO under s. 148(2), or in the counter-affidavit filed in this writ petition. It must, accordingly be held that, on this ground alone, the notice is bad in so far as it relates to the first of the three items. We shall now take up the third item, in the reasons recorded by the ITO. The allegation is that the assessee made a wrong claim of deduction under s. 80-I, in a sum of Rs. 2,32,195. The contention is that the assessee owns two priority industries, viz., Ramakrishna Cements and Central workshop; that, for the purpose of claiming deduction u/s. 80-I, the assessee ought to aggregate the profits and losses of all the priority industries held by him and that, if this principle were adopted, the assessee would not have been entitled to any deduction on this account. It is stated that, in the Central W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nit. On the first page of annexure to the return where the total income of the assessee is shown, the loss arising from the Central Workshop Unit is disclosed, as also the profits derived from Ramakrishna Cements, under separate items ; and where the benefit under s. 80-I is claimed only the profit from Ramakrishna Cements was shown. In the circumstances it cannot be said that the assessee was under an obligation to show the losses suffered in the Central Workshop Unit in that part of the return where it claimed the benefit u/s. 80-1 of the Act. The law did not oblige the assessee to do so, nor did the prescribed form say that it must also indicate the losses, if any, suffered from another priority industry. On the relevant date, and indeed even today, the law does not appear to be clear and definite that for the purpose of claiming benefit under s. 80-I, the profits and losses arising from all the priority industries held by an assessee ought to be aggregated. Thus, it is clear that, even with respect to this item, it is not a case of non-disclosure. Indeed, the proposed action appears to be more in the nature of a review, or change of opinion. While the ITO who made the initial a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain any column requiring the assessee to state the initial depreciation, if any, availed of. The contention is that the record of assessment for the previous years which is available with the ITO, does show that the assessee had availed of the initial depreciation, and it was the look out and duty of the ITO to have looked into the said record while allowing the depreciation claimed by the assessee. The omission on the part of the ITO to look into that record is an error on his part, and cannot constitute non-disclosure on the part of the assessee. A mere wrong claim for depreciation, it is contended, does not amount to a non-disclosure of a material fact, nor does it amount to failure on the part of the assessee to disclose fully and truly all the material facts. Before we refer to the decisions relied upon by both parties on this question, it is well to notice the language of s. 147(a). It speaks of " omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment for that year ...... Section 139 requires every person whose income exceeds the prescribed limit, to " furnish a return of his income...... during the previous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easonable to say that, on each item, the ITO is bound to look into the previous returns, nor is it possible to lay down that the ITO is bound to look into the previous assessments for a certain number of years, say, 5 years, 10 years or 15 years ? While it is not necessary for our purpose to hold that the assessee is guilty of a deliberately false statement in this case, it is sufficient for us to hold that there has been omission or failure, as the case may be, on the part of the assessee to disclose fully and truly all material facts necessary for assessment for that year, inasmuch as it has failed to disclose the fact that it had availed of the initial depreciation and had thus crossed the permissible ceiling, even before the said assessment year. This claim for normal depreciation, in the circumstances, necessarily implies concealment of a material fact, viz., the fact of availment of initial depreciation. That fact is material because if that fact were known, the assessee would not have been allowed the normal depreciation. We shall now refer to the decisions upon which reliance is placed by the counsel for the petitioner. The first case relied upon is in Modi Spinning and W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt allowed the appeal and remanded the matter to the High Court 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 ". After the matter went back to the High Court (the High Court's decision is reported in [1975] 101 ITR 637) the High Court purporting to follow the decision of the Supreme Court in Muthiah Chettiar v. CIT [1969] 74 ITR 183, held that as per the columns in Part V of the return, the assessee was not bound to disclose the fact of availment of initial depreciation and that all that it was required to state was the amount of depreciation which, according to it, is claimable under law. It was observed that even if it is found that claim for depreciation is erroneous or exaggerated for some reason, it can not be said that the assessee had furnished inaccurate particulars of its income for assessment. The Bench also observed that there wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... return, and none else. This, in our opinion, would be an unwarranted cutting down of the natural and reasonable ambit and field of the said words. We must also mention here that, according to the learned counsel for the assessee the decision of the Supreme Court in Modi Spinning Weaving Mill's case [1970] 75 ITR 367, itself lays down that mere failure to mention the fact of availment of initial depreciation does not amount to omission or failure of the kind contemplated by s. 147(a). We are unable to agree. The decision of the Supreme Court is to be found in the penultimate paragraph, which we have extracted hereinbefore. The judgment of the Division Bench, which was the subject-matter of appeal before the Supreme Court, had not considered the question whether the escapement of income was on account of omission or failure on the part of the company to disclose fully and truly all material facts necessary for assessment. The Bench merely observed that the income escaped assessment and that it cannot be said that the ITO was not acting reasonably in holding the view that the assessee was responsible for income escaping assessment. That was not a finding sufficient to sustain a n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It seems that the Income-tax Officer in working the figures of depreciation for certain items of capital assets lost sight of the fact that the aggregate of the depreciation, including the initial depreciation, allowed under different heads could not exceed the original cost to the assessee of those items of capital assets. The appellant cannot be held liable because of this remissness on the part of the Income-tax Officer in not applying the law contained in clause (c) of the proviso to section 10(2)(vi) of the Act of 1922. As observed by Shah J. in Commissioner of Income-tax v. Bhanji Lavji [1971] 79 ITR 582 (SC), section 34(1)(a) of the Act of 1922 (corresponding to section 147(a) of the Act of 1961) does not cast a duty upon the assessee to instruct the Income-tax Officer on questions of law." Thus, it was a case where the depreciation was worked out by the ITO on the basis of his own record and, therefore, the error or omission, if any, was attributable to him, and could not be attributed to the assessee. This decision cannot be understood as saying that once the requisite columns in the return are filed, no more material facts remain to be stated or disclosed. In other wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve been under an obligation to disclose the income of his wife and minor children, and the same cannot be said to be necessary for his assessment. We must also make it clear that at this stage we are only concerned with the question whether the ITO had, before issuing the notice, formed the opinion on relevant material that income had escaped assessment by reason of omission or failure on the part of the assessee to disclose fully and truly all material facts relevant for its assessment. We are not concerned with the merits of the issue. In other words, it may be that, ultimately, it may be proved that no income had escaped assessment. But, that is a stage which would arrive after the enquiry is over in pursuance of the impugned notice. We are only concerned with the validity of the notice, and not with the correctness of the grounds upon which the assessment is sought to be reopened. That will be decided, as stated above, in the enquiry which will be held in pursuance of the notice. Lastly, we must refer to an argument of Mr. S. Parvatha Rao that, according to the decision in Maharana Mills (P.) Ltd. v. ITO [1959] 36 ITR 350 (SC), " record " means record of assessment proceedi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... But, the writ petition is dismissed in so far as item No. (2) is concerned. It is open to the ITO to proceed further in respect of item No. (2) in accordance with law. No costs. W. P. No. 6276 of 1979: The facts of this writ petition are identical with the facts in W. P. No. 6247/1979, with the only difference that this writ petition relates to the assessment year 1974-75. Indeed, we find that by this year the pro forma of the return was amended, and note 5 was added in the relevant part. Note 5 reads : " Indicate in column 19 the amount of initial depreciation or development rebate allowed in respect of any asset in an earlier year. " Column 19 in term contains a reference to note 5. Thus, even on the restricted view contended for by the assessee in this case, it must be held that there was an obligation upon the assessee to disclose the initial depreciation availed of by him. In other words, because of the said note, it was obligatory upon the assessee to state in col. 19 that it had availed of the initial depreciation. The failure of the assessee to do so amounts to failure to disclose the material facts. We must mention that in this writ petition the assessment is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and, under these circumstances, the petitioner was led to believe that it would treat the excess realisation as its own. Accordingly, the petitioner in working out its profit and loss for the year took the entire figure as its realisation and, based thereupon, the accounts were closed and taxes were paid. In fact, when returns were submitted and taxes were paid to the respondent even though to a different wing of the respondent, the respondent took no objection thereto..." This averment in writ affidavit (in W. P. No. 1535 of 1976) is made the basis for issuing the reopening notice with respect to this item. The contention of the Department is that, according to the subsequent affidavit filed by the petitioner-company itself, it is clear that the claim of the assessee during the assessment proceedings that the said amount was kept in suspense account, is wrong and untrue and, therefore, the notice under s. 148 was proper and justified. Counsel for the assessee, Mr. S. Parvatha Rao, contends that the statement made in the writ affidavit in W. P. No. 1535/76, is wrong and that the earlier statement made during the assessment proceedings that the said amount was kept in suspen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as claimed as deduction in that year under an impression that the gratuity fund will be approved with retrospective effect. In this connection, we further state that the provision for gratuity made in the year 1970-71 in respect of all units was disallowed in the assessment year 1972-73, but the same has been allowed in the assessment year 1973-74 as the gratuity fund has been an approved fund with effect from July 1, 1971. But the provision for gratuity made in respect of the managing director was neither disallowed in the assessment year 1972-73 nor allowed in the assessment year 1973-74. Therefore, if the said gratuity of Rs. 7,500 is going to be disallowed in the assessment year 1972-73, the same has to be allowed in the assessment year 1973-74. In any case, we submit that as the assessee is a company which is taxable at a flat rate of tax for both 1972-73 and 1973-74 assessment years, it makes no difference whether the amount is allowed in any of those two years. Regarding disallowance of Rs. 3,600, being the value of perquisites provided to the managing director, we submit that the same, i.e., the value of perquisites was not included and the assessee-company has no object ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd consequent scaling down of the amount of instalment of deferred payment in rupees. The cost of the machinery to that extent is reduced and, as such, the development rebate also has to be reduced correspondingly ". In the reply affidavit filed by the assessee, it is stated that in the period year, relevant for the assessment year 1969-70, the assessee did not claim any development rebate on the machinery, the value whereof got reduced on account of the devaluation of the pound. It is stated that the development rebate in respect of the machinery in question was claimed in the previous year relevant for the assessment year 1968-69. The devaluation took place on November 19, 1967, i.e., during the period relevant for the assessment year 1969-70. From the above material, and particularly from the averments in the counter-affidavit that the machinery in question was purchased, as contended by the learned counsel for the petitioner, during the accounting year July 1, 1966, to June 30, 1967, Mr. S. Parvatha Rao contended that the machinery was purchased during the period July 1, 1966, to June 30, 1967 ; that development rebate was claimed for the assessment year relevant thereto and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all be added to, or as the case may be, deducted from the actual cost of the assets defined in s. 43(1), and for certain other purposes specified therein. Sub-section (2) says that " the provisions of sub-section (1) shall not be taken into account in computing the actual cost of an asset for the purpose of the deduction on account of development rebate under section 33. " We agree with Sri S. Parvatha Rao that, by virtue of sub-s. (2) it is not open to the Department to say in the subsequent year (year subsequent to the year in which the machinery was purchased) that, because of the change in the rate of exchange, the actual cost has gone down and, therefore, the development rebate must be revised. In our opinion, the correct position appears to be this: the development rebate under s. 33 is granted only for the year in which the machinery or plant is installed. No development rebate can be claimed or granted, in the subsequent assessment year. In other words, if in this case the machinery was installed during the accounting year July 1, 1966, to June 30, 1967, the development rebate could have been granted only in the assessment year 1968-69. Admittedly, no devaluation took pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of machinery. Obviously, in such a case section 43A(2) can have no application. Same is the position with respect to the decision in CIT v. Arun Spinning Mills [1982] 133 ITR 382 (P H). These cases, therefore, do not in any manner support the respondent's contention. For the above reasons we hold that the impugned notice is bad in so far as it seeks to reopen the deduction already granted under section 33. Now, coming to the second aspect, the main complaint of the Department is that instead of valuing the closing stock with reference to the prices prevailing on June 30, 1968, the assessee adopted the prices prevailing at a later date. Similarly, it is complained that the loss suffered on account of export quota subsequent to June 30, 1968, was taken into account for the purpose of the accounting year July 1, 1967, to June 30, 1968. It is, however, explained by Mr. S. Parvatha Rao for the assessee that, according to the method of accounting and the accounting practice followed by the assessee, and which is consistent with the practice followed both in India and abroad, the closing stocks are valued with reference to their cost, or net realisable value, whichever is lower. He ..... X X X X Extracts X X X X X X X X Extracts X X X X
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