TMI Blog1973 (12) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... assessments for different years and the grounds on which the assessments are sought to be re-opened are identical. The petitioners challenge these notices under section 148 of the Act of 1961 seeking to re-open assessments under section 147. Special Civil Application No. 517 of 1971 refers to notices to re-open assessments for assessment years 1962-63 and 1963-64 whereas notices which are challengedin Special Civil Application No. 218 of 1972 are in connection with re-opening of the assessments for assessment years 1964-65 an 1965-66. Since the notices for these four different reassessment years are being challenged on the same grounds, it will be convenient to dispose of both these special civil applications by this common judgment. The petitioners have their registered office at Commercial Ahmedabad Mills' Premises, near Idga Chawky, Asarwa, Ahmedabad, and the petitioners are owners of two textile units both of which are situated at Ahmedabad. The petitioners have been assessed to income-tax under the Indian Income-tax Act, 1922, and after the coming into force of the Income-tax Act, 1961, under that Act as well. The assessments of the petitioners for the assessment years 1958 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese two notices, both dated March 30, 1971, have been challenged in Special Civil Application No. 517 of 1971. Thereafter, on January 17, 1972, two further notices were issued by the second respondent in respect of assessment years 1964-65 and 1965-66 and these notices, exhibit-B collectively to Special Civil Application No. 218 of 1972, have been challenged in that special civil application. As we have mentioned earlier, the grounds of attack against all the four notices are the same and it will, therefore, be convenient to dispose of both these matters by this common judgment. In the affidavit-in-reply filed in Special Civil Application No. 517 of 1971, the second respondent has started in paragraph 3 : "In the original return of income filed by the petitioner, depreciation was claimed on machineries on the written down value basis and it was accordingly allowed. However, in respect of certain block of machineries initial depreciation was allowed to the extent of Rs. 2,24,764. The total depreciation, which included the aforesaid amount of initial depreciation, allowed up to the assessment year 1958-59 in fact exceeded the total cost of the said machineries. As the total deprec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the aggregate of all allowances in respect of depreciation made under this clause and clause (via) or under any Act repealed hereby, or under the Indian Income-tax Act, 1886 (II of 1886), shall, in no case, exceed the original cost to the assessee of the buildings, machinery, plant or furniture, as the case may be." Thus under the Act of 1922 depreciation of three distinct kinds could be allowed, namely: (1) ordinary depreciation ; (2) initial depreciation which was granted in the first year of installation but which was not to be taken into consideration for the purpose of arriving at the written down value ; and (3) additional depreciation which was claimable for a period of five years but which, like ordinary depreciation, was to be taken into consideration for the purpose of working out the written down value. As regards the initial depreciation, it was in terms provided that this initial depreciation was not to be deductible in determining the written down value for the purposes of section 10(2)(vi). Under section 10(5)(b) of the Act of 1922 the written down value in the case of assets acquired before the previous year was to be the actual cost to the assessee less all depr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1962-63 to 1964-65, and half of the profits estimated under section 41(2) had been allowed and the sale proceeds had been charged as a balancing charge only to the extent of half instead of full because there was no written down cost of the oldest machinery and also the said balance of sale price, i.e., half of the said profits was charged as profits under section 41(2) of the Act of 1961 and the second respondent proposed to reopen the assessments for assessment years 1962-63 to 1965-66 for these two purposes, namely, for the excess depreciation allowance allowed during these respective four years and also in connection with the balancing charge of the sale proceeds which were not fully taxed under section 41(2). Section 41(2) of the Act of 1961 provides for what is known as the balancing charge. Under that sub-section where any building, machinery, plant or furniture which is owned by the assessee and which was or has been used for the purposes of business or profession is sold, discarded, demolished or destroyed and the moneys payable in respect of such building, machinery, plant or furniture, as the case may be, together with the amount of scrap value, if any, exceed the wri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lancing charge under section 41(2), and the further surplus shall be treated as capital gains (if a transfer of the asset is involved) under section 45. Suppose, A imported a machine at a cost of Rs. 1,00,000. During the years A used it for his business, he had been allowed a depreciation totalling to Rs. 36,000. Its written down value is Rs. 64,000. At such a time, A sells it for Rs. 1,60,000. The gross surplus, Rs. 1,60,000, minus Rs. 64,000, i.e., Rs. 96,000, is bifurcated into (i) depreciation actually allowed, Rs. 36,000, and (ii) the further surplus, Rs. 60,000. Thus, Rs. 36,000 shall be includible in A's total lncome as balancing charge under section 41(2) and, Rs. 60,000 shall be includible as capital gains under section 45." It is against this background of the provisions of law that we have to consider the validity of the notices issued under section 148 of the Act of 1961. We may point out that in Special Civil Application No. 218 of 1972, the petitioner has annexed to the petition the different assessment orders for assessment years 1963-64 to 1965-66 together with the annexures to those assessment orders for the relevant years. These annexures to the assessment ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of the petitioner for the relevant year. This will apply both to the question of depreciation allowance and also to the question of profits under section 41(2). As regards the question under section 41(2) it is obvious that it is because the old practice which was being followed by the income-tax department for several years in connection with the computation of the profit under section 41(2) was discontinued that the second respondent proposed to reopen the assessment regarding the profits under section 41(2) in these three years. The written down value of each piece of machinery which was sold was apparently disclosed by the petitioner-company but, following the usual practice, the Income-tax Officer, in two of the three years under consideration, and the Appellate Assistant Commissioner in the third year, had treated one-half of the sale proceeds as the profit under section 41(2). Merely because the income-tax authorities changed their practice or started applying the provisions of section 41(2) in full force, it cannot be said that that part of the sale proceeds, which was deemed income as profit under section 41(2), escaped assessment by reason of any omission or failure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iction upon the Income-tax Officer to issue a notice in respect of the assessment beyond the period of four years, but with in 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 section 22, or (ii) omission or 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 reassessment." We are in the present case concerned with the second condition, namely, that the Income-tax Officer must have reason to believe that income escaped assessment or there was under-assessment by reason of omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that year. It is no doubt true that if the Income-tax Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the assessee was bound during the course of the previous assessment proceeding to disclose fully and truly all material facts necessary for its assessment for the relevant years to the assessing authority although such material was admittedly on the record of the department and it was not exclusively within the knowledge of the assessee ; and (2) whether, on a true and proper interpretation of section 147(a) of the 1961 Act, the jurisdiction of the Income-tax Officer to reassess income that had escaped assessment or to recompute loss at depreciation allowance, was affected in cases where the material necessary for the assessment in respect of which the alleged omission or failure to disclose had occurred, is such as could have been gathered by him from an investigation into the records the department. On both these points the Division Bench decided against the assessee. The Division Bench observed : "Since the fact that initial depreciation allowance was granted to the petitioner in respect of certain items of its capital assets is admittedly a material fact for the purpose of the assessment of the petitioner, it was bound to disclose the said fact to the Income-tax Officer du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and truly such material facts. Under section 10(2)(vi), proviso, clause (c), as we have noticed, the aggregate of all allowances in respect of depreciation made under section 10(2)(vi) of the Act of 1922, and under clause (via) or under any Act repealed thereby, or under the Indian Income-tax Act 1886, was, in no case, to exceed the original cost to the assessee of the buildings, machinery, plant or furniture, is the case may be. Therefore, it was the duty of the Income-tax Officer concerned who was assessing the income of the petitioner-company in the years 1962-63 to 1965-66 to see to it that the aggregate of all depreciation allowances, ordinary depreciation allowance or initial depreciation allowance or additional depreciation allowance, allowed under the provisions of section 10(2)(vi) or section 10(2)(via) did not exceed the original cost to the petitioner-company just as there was an obligation on the part of the petitioner-company to see to it that the factum of initial depreciation was disclosed by it, there was also a duty on the part of the Income-tax Officer concerned to see to it that the aggregate of all allowances in respect of depreciation made under section 10(2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey-General that the written down values determined under section 35 are not final and can be redetermined in the following assessment years and in support he referred to Karnani Industrial Bank v. Commissioner of Income-tax, where the original cost of the machinery purchased, Rs. 3,40,000, was accepted in the successive assessment years till it was doubted in the assessment year 1946-47 and was determined at Rs. 2,80,000 and it was contended that the Income-tax Officer had to take the written down value of the previous year as correct. Thus, the question there raised was whether the Income-tax Officer was entitled in law to go behind the original cost accepted by his predecessor ever since the assessment year 1939-40. It was held that neither the principle of res judicata nor estoppel nor the terms of section 10(2)(vi) of the Act prevented the Income-tax Officer from determining for himself what the actual cost of the machinery had been and that depreciation had to be calculated for every year and it was open to the Income-tax Officer not merely to perform a mathematical operation, on the basis of the written down value of the previous year, but one of determining the written down ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of the assessee, namely, the petitioner-company before us, in not disclosing fully and truly all material facts which were necessary for the assessment for those four years, still it is not possible for us to say that it was only by reason of such omission or failure on the part of the assessee that the income chargeable to tax had escaped assessment. The income escaped assessment also by reason of the fact that the Income-tax Officer concerned in the relevant year had not followed the method enjoined upon him for the purposes of calculating depreciation allowance and not taking into consideration all allowances granted in the past in respect of these different pieces of machinery. We may point out that in Modi Spinning Weaving Mills Co. Ltd. v. Income-tax Officer, Meerut, the Supreme Court remanded the matter back to the High Court because the High Court did not consider whether the income escaped assessment by reason of the omission or failure on the part of the company to disclose fully and truly all material facts necessary for assessment. There also there was a question of initial depreciation in respect of certain machinery and the aggregate of depreciation allowances ..... X X X X Extracts X X X X X X X X Extracts X X X X
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