TMI Blog1985 (5) TMI 113X X X X Extracts X X X X X X X X Extracts X X X X ..... Appeal No. 662 of 1983 dated 31-10-1983 the Tribunal considered the earlier decision for the assessment year 1978-79 was distinguishable, and the claim for investment allowance and initial depreciation was not allowed, when the present appeal came up for hearing a reference was made by the Bench to the President of the Tribunal under section 255(3) of the Act for constituting a Special Bench. Consequent to the President's orders in this regard, the appeal, and the cross-objection have been assigned to this Special Bench for decision. 3. The assessment under consideration is the reassessment made consequent to initiation of proceedings under section 147(b) of the Act. The assessee contested the validity of the initiation of reassessment proceedings, but without success, before the Commissioner (Appeals). The assessee challenges this finding of the Commissioner (Appeals) by way of cross-objection. 4. As the cross-objection challenges the assumption of jurisdiction the cross-objection is taken up for disposal first. 5. In this case the original assessment was completed on 12-10-1979 and there was a subsequent rectification under section 154 of the Act on 19-12-1980. While making ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls) for the assessment year 1976-77, which was dated 28-10-1981 and which was considered by the ITO to constitute information, had been overruled by the Tribunal in IT Appeal No. 2216 (Mad.) of 1981 dated 31-7-1982 and, therefore, the reopening was invalid. The Commissioner (Appeals) observed that the reopening of the assessment for 1976-77 was based on an audit objection and, with reference to that the Tribunal had held for that year that the reopening was not valid. In the current year the reopening was based on a view taken by the Commissioner (Appeals), who was a quasi-judicial authority and such decision of the Commissioner (Appeals) for 1976-77 constituted information. Eventually, the Commissioner (Appeals) held that the initiation of proceedings under section 147 for the assessment year 1977-78 was validly done. 10. The assessee has taken two grounds in the cross-objection which read as under : " 1. The Commissioner (Appeals) erred in holding that the initiation of reassessment proceedings on the basis of the order of the Commissioner (Appeals) dated 28-10-1981 by the Income-tax Officer was valid. 2. The Commissioner (Appeals) should have found that the Income-tax Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee had taken only two grounds, viz., that the Commissioner (Appeals) erred in holding that the initiation of reassessment proceedings on the basis of the order of the Commissioner (Appeals) dated 28-10-1981 was valid and secondly, that the finding should have been that the ITO had no information for reopening the assessment. According to the learned counsel, an appellate order could clearly be the basis of information and in the order dated 28-10-1981 for the assessment year 1976-77, the Commissioner (Appeals) had held that extra depreciation had been erroneously granted and when for this year also similar depreciation stood granted the ITO had every reason to believe that such depreciation was wrongly granted. This was clearly information for reopening the assessment. According to the learned standing counsel, the two grounds taken in the cross-objection, therefore, did not survive. 13. Another factual point on which stress was placed by the learned standing counsel was that for the assessment year 1976-77 the Tribunal had not pronounced on the merits of the correctness of the decision of the Commissioner (Appeals) relied on by the ITO as constituting information for the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lier decision of the Commissioner (Appeals). 16. The learned standing counsel for the revenue, on the other hand, relied on the ratio of the judgment of the Calcutta High Court in Assam Oil Co. Ltd.'s case where the relevant observations of the Madras High Court in Madras Auto Service's case were set out and where the Calcutta High Court thereafter considered the judgment of the Madras High Court in the case of Family of V.A.M. Sankaralinga Nadar as corroborating their view. Particular emphasis was also laid on observations of the Gujarat High Court in Maneklal Harilal Spg. Mfg. Co. Ltd.'s case and Ahmedabad Mfg. Calico Printing Co. Ltd.'s case. 17. We have considered the rival submissions. The grounds taken in the cross-objection are of wide amplitude and, therefore, permit all facets thereof to be argued. The arguments put forth on behalf of the assessee all fall within the scope of the grounds urged. In the case of Maneklal Harilal Spg. Mfg. Co. Ltd., while making the original assessment for the year 1961-62, which was completed on 16-6-1962, the ITO had allowed development rebate on items known as 'warp stop motions'. These were admittedly parts of machinery. There we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n which the proceedings in reassessment were commenced under section 148 did not survive in view of the Supreme Court decision in Mir Mohammad Ali's case [1964] 53 ITR 165 (SC) the Income-tax Officer was not justified in making reassessment in respect of other items of income which had escaped assessment or in those cases where certain excessive relief by way of tax had been granted. The Appellate Assistant Commissioner rejected this contention and he upheld the order of the Income-tax Officer. Before the Income-tax Tribunal, the same argument which was urged before the Appellate Assistant Commissioner, namely, regarding the basis for the reassessment proceedings having disappeared was again urged and the Tribunal held that the foundation on which the reassessment proceedings were based having vanished, the Income-tax Officer could not bring in the assessment some other items of income or withdraw excessive relief by way of tax allowed at the time of the original assessment, while dealing with reassessment proceedings. The Tribunal, therefore, held that the proceedings under section 147 were bad in law and have, therefore, to be cancelled.... ... After this notice was issued on M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the belief must have a direct bearing on the final order in reassessment proceedings because the existence of the reason is necessary not only at the stage when the notice regarding reassessment is issued but the reason must continue to exist till the order in reassessment proceedings is passed. He has in this connection relied upon certain observations of the Supreme Court in Chhugamal Rajpal v. S.P. Chaliha [1971] 79 ITR 603 (SC), Sheo Nath Singh v. AAC [1971] 82 ITR 147 (SC) and of the Bombay High Court in Shriyans Prasad Jain v. R.K. Bhalla, ITO [1974] 94 ITR 34 (Bom.). Ultimately, the entire argument on behalf of the assessee as urged by the learned Advocate-General was that the proceedings could not be said to be validly initiated because the information on which the Income-tax Officer acted at the time of initiating the reassessment proceedings was no information at all in the eye of the law or looked at from any other angle, it cannot be said that the Income-tax Officer had reason to believe that the development rebate regarding warp stop motions had been incorrectly allowed in the original assessment proceedings. According to the learned Advocate-General whether the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had correctly and validly initiated the proceedings. There is no question of the basis or the foundation of the reassessment proceedings having disappeared. It may be that in respect of the item regarding which the reassessment proceedings were started it may ultimately turn out to have been correctly assessed when reassessment proceedings are considered. But that does not deprive the Income-tax Officer of his power to consider all the items in reassessment proceedings. Once the reassessment proceedings are validly started, the Income-tax Officer is not confined merely to the item in respect of which or on the basis of which he had initiated reassessment proceedings. As Ramaswami J. has stated in V. Jaganmohan Rao's case [1970] 75 ITR 373 (SC), the Income-tax Officer has not only the jurisdiction but it is his duty to levy tax on the entire income that had escaped assessment during the relevant assessment year when the original assessment was done. Under these circumstances, the proceedings in reassessment having been found to be validly initiated, it is obvious that the Income-tax Officer had not only the jurisdiction to bring the other two items regarding corporation tax rebate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch was reversed by the Supreme Court in Gotan Lime Syndicate v. CIT [1966] 59 ITR 718. Sabyasachi Mukherji J. speaking for the Calcutta High Court with reference to the arguments based on the observations of the Madras High Court in Madras Auto Service's case observed as under : " Relying on this proposition, learned advocate for the assessee sought to urge that even if the decision be subsequent to the issue of the notice as it declared the law, as it stood, the notice on that assumption could not be held to have been given on the basis of valid information. In our opinion, on principle it is true that the Supreme Court does not make the law from the date it is pronounced but the Supreme Court declares it to be so from the very inception. But the knowledge about that law or the realisation about that law is not always there. Human knowledge is always improving and progressing. The world was assumed to be flat until it became known that the world is round. That does not mean that gravitation did not exist before Newton's discovery of the law of gravitation. Human knowledge is never static. Theory of Evolution of Darwin does not make the previous knowledge non-existent. Human know ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [Emphasis supplied] A ground for which an assessment is initiated may become non-existent due to a factual discovery made later or due to the operation of law, viz., a judgment of the higher appellate forum altering the legal position on the basis of which it was assumed that there was escapement of income. In either event, it is considered in conformity with the ratio of the decision of the Madras High Court in Family of V.A.M. Sankaralinga Nadar's case there would be no bar to reassessment being continued, if otherwise warranted, and initial initiation would not be vitiated. 19. When an assessment order is cancelled for want of jurisdiction, it is clear that the original order was non est. The Tribunal had declared the assumption of jurisdiction for the assessment year 1976-77 to be void. Therefore, the assessment order For that year can be considered to have been declared non est. It is settled law that an order which is non est may not be followed by a citizen, which course of action will of course be at his peril, or he may adopt the alternate course of getting it quashed and declared non est through an appellate forum. In the present case, the assessee chose the appellat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase having been valid at the time the notice under section 148 dated 24-4-1982 was served on the assessee on 1-3-1982, subsequent events in the form of the decision of the Tribunal rendered on 31-7-1983 did not render the initiation void and, therefore, it was not necessary for the ITO to stop short and not proceed to the finalisation of the assessment. The question of his staying his hands from bringing to tax the extra depreciation allowance or investment allowance or other items, which he considered was wrongly allowed, on merits, did not arise at this stage because there was no decision by the Tribunal on merits on this aspect in its order dated 31-7-1982. The cross-objection would, therefore, fall to be dismissed. 21. We now take up the appeal by the revenue. The learned standing counsel took us through the reasons which weighed with Government in introducing the provisions relating to grant of investment allowance. She stated that such reasons stood enumerated in the Budget Speech of the Finance Minister for the year 1976-77 the relevant extract of which was as under : " I have, therefore, decided to introduce a scheme of investment allowance for certain priority industri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it that the instructions issued by the CBDT which found reference in the form of circulars in relation to the Finance (No. 2) Act, 1977 and in the extract of the Circular at page 979 in the Commentary on Income-tax by Chaturvedi, Vol. 1, and in relation to the Finance Act, 1981 in Circular No. 308, dated 29-6-1981, also placed emphasis on the assessee, which claimed investment allowance, installing the machinery. In the aforesaid background, the learned counsel proceeded to read the provisions of section 32A of the Act, which related to the grant of investment allowance and submitted that the first requirement under section 32A(1) was that machinery should be owned by an assessee. In the present case that requirement could be taken as satisfied. The next requirement was that the machinery should be wholly used. According to the learned counsel, the assessee was carrying on the business of leasing. The machinery could not be said to be wholly used for leasing because possession of the machinery was given over to the lessee and thereafter it was the lessee who was using the machinery. Hence, this requirement was not satisfied. The provisions of section 32A(1) then spoke to the grant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce, even if for argument's sake it was assumed that the assessee was entitled to the grant of investment allowance, the submission was that the moment the machinery was leased out, the investment allowance would have to be withdrawn as a mistake apparent from records and, therefore, the question of actually making an allowance and committing a mistake did not arise. In this view also the assessee would not be entitled to the grant of investment allowance. 24. The same arguments, as aforesaid, it was stated, would apply to the grant of initial depreciation also. 25. The learned counsel for the assessee submitted that when a plain reading of the statutory provisions led to an interpretation which was certain, the question of calling in aid the speeches of the Finance Minister, which set out the objects for introduction of the provision did not arise. He also submitted that it was settled law that while circulars of the CBDT could give an extra judicial benefit to the assessees, the circulars could not curtail the benefits which otherwise would be available on a plain reading of the statute. In the present case, he submitted that a plain reading of the statute would lead to the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndustry carried on by them was such as would entitle them to the grant of the investment allowance. 29. With reference to the provisions of section 32A(5), on which reliance was placed by the learned standing counsel, it was submitted in reply by the learned counsel for the assessee that what was described as a lease in the agreements of hire of machinery was really not a lease since no interest in property was conveyed in any case to the lessee. The agreements clearly provided that the ownership of the property would remain vested in the assessee alone. There was no extinguishment of any right thereon and at best there was only a benefit which the lessee enjoyed in the form of a licence. 30. In reply, the learned standing counsel submitted that merely because depreciation was granted, there was no bar to contend that investment allowance was not admissible unless the specific conditions required for the grant of the same was satisfied. The user of the machinery, it was reiterated, had to be only by the assessee, who was entitled to the investment allowance and not any other assessee. 31. We have considered the rival submissions. For the investment allowance being granted und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not use of the machinery by the assessee, still investment allowance cannot be denied because the assessee is entitled to the grant of such allowance on the basis of installation. It is also not easy to say that machinery, when it is let out, is not used for the purposes of business because it is on this basis depreciation has been allowed under section 32 of the Act. No bar is, therefore, seen to the grant of investment allowance on the ground that any of the requirements of section 32A(1) are not satisfied. Section 32A(2) specifies in the case of new ship or aircraft for getting investment allowance the assessee should be engaged in the operation of ships or aircraft. The further requirement of the nature of the business which the assessee concerned should be carrying on has been specifically incorporated by the Legislature as far as ship or aircraft is concerned. Such a requirement is absent in respect of other machinery or plant and, therefore, on a plain reading of the provision we cannot spell any requirement that the assessee should itself carry on the industrial undertaking where the requisite articles or things are manufactured. We, therefore, consider that there is no re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taking' in section 32A(iv) does not place any bar on the grant of investment allowance. 32. A perusal of the hire agreement shows that the ownership of the assets, which are leased out, vests only in the assessee. We are unable to hold, therefore, that there is extinguishment of any right when the assets are hired out. Only the benefit of user is obtained by the person who takes out the assets on hire. The assets cannot, therefore, be considered on being hired out, though the expression 'lease' is used in the agreement, as having been 'otherwise transferred'. The provisions of section 32A(5) are also not attracted merely because the assets are leased out and no mistake would have been committed in granting investment allowance. 33. In IT Appeal No. 662 (Mad.) of 1983 dated 31-10-1983, the Bench of the Tribunal was of the view that having regard to the decision of the Madras High Court in CWT v. K. Lakshmi [1983] 142 ITR 656, the conclusion reached in the earlier decision in IT Appeal No. 1069 (Mad.) of 1982 dated 30-11-1982 required modification. No arguments were addressed before us as to how the ratio of the decision of the Madras High Court referred to would have the result ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year under consideration, i.e., 1977-78 vide his order dated 22-10-1979, as modified on 19-12-1980. When the Commissioner (Appeals) upheld the order of the ITO reopening the assessment of the assessee for the assessment year 1976-77, the ITO treated this order of the Commissioner (Appeals) as 'information' and issued a notice to the assessee on 1-3-1982 under section 148 to reopen the assessment for the assessment year 1977-78. The assessee raised an objection to the effect that this was a case of mere 'change of opinion' which did not warrant the reopening of the assessment, and that, in any case, the order dated 28-10-1981 of the Commissioner (Appeals) for the assessment year 1976-77 on the basis of which the proceedings under section 147(b) were initiated had been cancelled by the Tribunal on 31-7-1982. The ITO rejected these objections and passed the reassessment order on 24-2-1983 disallowing the claim of the assessee for investment allowance. On appeal, the Commissioner (Appeals) held that the ITO had validly reopened the assessment under section 147(b). The assessee is, therefore, in appeal before us. 5. The arguments of the parties have been elaborately stated in the orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le in law under section 147(b). This view derives support from the decision of the Madras High Court in the case of Madras Auto Service. This authority lays down as follows : " ....The learned counsel for the revenue submitted that at the time when the notice was issued under section 147(b) our decision was not given and that it cannot be said that the Income-tax Officer had no reason to believe that the income has been made the subject of excessive relief. It is true that our decision was given long subsequent to the notice under section 147(b) but our decision only declares the law as it stood even at the time when the notice was issued. Therefore, he could not have entertained any reasonable belief that the income chargeable to tax has escaped assessment.... " [Emphasis supplied] This authority of the Madras High Court squarely covers the point at issue in favour of the assessee. 7. No doubt, the Calcutta High Court and the Gujarat High Court have taken somewhat different views in Assam Oil Co. Ltd.'s case and Maneklal Harilal Spg. Mfg. Co. Ltd.'s case respectively, but, being at Madras, we are bound by the decision of the Madras High Court in the case of Madras Auto Ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vious year. (2) The ship or aircraft or machinery or plant referred to in sub-section (1) shall be the following, namely :-- (a) a new ship or new aircraft acquired after. the 31st day of March, 1976, by an assessee engaged in the business of operation of ships or aircraft ; (b) any new machinery or plant installed after the 31st day of March, 1976, (i) for the purposes of business of generation or distribution of electricity or any other form of power ; or (ii) in a small-scale industrial undertaking for the purposes of business of manufacture or production of any article or thing ; or (iii) in any other industrial undertaking for the purposes of business of construction, manufacture or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule. " [Emphasis supplied] 11. The important question for consideration is whether the assessee-company satisfies the conditions of section 32A in order to claim investment allowance. The two conditions are that the assessee must own the machinery and that the machinery must be wholly used for the purpose of the business carried on by him. That the machinery is owned by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus, on the plain construction of section 32A(1), the assessee-company, which is the owner of the machinery and which is wholly using the same for the purpose of its business of 'leasing the machinery', is entitled to investment allowance under section 32A. If the interpretation sought to be placed by the standing counsel on section 32A were to be accepted, then neither the lessor nor the lessee would be entitled to investment allowance. Such an interpretation must be avoided because that will defeat the very purpose of the enactment of section 32A which is to encourage industrialisation. It is well-known that the endeavour of all the Judges should be to make such construction as shall suppress the mischief and advance the remedy. Since our interpretation will advance the object of section 32A and not defeat the same, we are of the opinion that the assessee, in the present case, is entitled to investment allowance under section 32A. 15. It is not necessary to repeat the other reasons of the learned Accountant Member. I am in agreement with him. I may simply add that even if there are two possible interpretations of a fiscal enactment, the one in favour of the assessee should be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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