TMI Blog1993 (7) TMI 37X X X X Extracts X X X X X X X X Extracts X X X X ..... y of the assessment order under section 143(3) or 144 of the Income-tax Act, 1961, did not invalidate the order when the amount of tax was mentioned in the demand notice ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in rejecting the stand of the assessee : (a) That the return of income signed and verified by one of the liquidators was non est in law and the assessment made on that basis was ab initio void ? (b) That the assessee-company, a company in liquidation, had no taxable income within the meaning of section 5 of the Income-tax Act, 1961 ? (c) That there being no rate of tax prescribed for a company in liquidation in any of the relevant Finance Acts, no income of the assessee could be charged to tax under section 5 of the Income-tax Act, 1961?" For assessment years 1972-73, 1976-77 and 1980-81: "(d) That, in view of winding of the assessee-company with effect from February 10, 1970, no capital assets were held by it after December 10, 1970. As such, no capital gains tax could be imposed upon it or the liquidators?" For assessment year 1972-73 : "3. Whether, on the facts and in the circumstances of the case, the Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee was not entitled to deduction of interest paid on debentures out of income by way of interest on fixed deposits assessed under the head 'Income from other sources'?" For assessment year 1974-75 : " 8. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that reference under section 144B was not necessary while making reassessment in compliance with the order of the Commissioner under section 263 of the Income-tax Act, 1961, when the variation in the income was less than Rs. 1 lakh ?" For assessment year 1976-77: " 9. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the initiation of proceeding by the Income-tax Officer under section 147(a) of the Income-tax Act, 1961, was legal ?" For assessment year 1979-80: "10. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessment was not barred by limitation ?" The first question is now concluded by the decision of the Supreme Court in Kalyankumar Ray v. CIT [1991] 191 ITR 634. Following the said decision, we answer the first question in the affirmative and in favour of the Reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the assessee had sold plant and machinery, locomotives, railway engines, permanent railway tracks, wagons, stores and spare parts, stations and buildings, permanent weigh bridges and trees standing on the land belonging to it. There is no dispute as regards the amount of the sale proceeds realised by the sale. The assessee exercised its option under section 55 of the Act and took the services of a valuer, of Messrs. Talbot and Co., recognised approved valuers. The valuer of Talbot and Co. was examined under section 131. It transpired that the said valuer made the valuation on the assumption that all the assets were new as on January 1, 1954, without taking any depreciation into account for their previous use specially when the assets were all acquired much before January 1, 1954, and had been in use of the business for several years. It was further found that the said private valuer gave the report without examining the layout plan of the properties sold and without checking the actual measurement of the buildings and properties involved. It was further found that the valuer did not verify the quantities of all the assets stated in the list supplied to him by the assessee on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reated as closed." In the absence of the report of the Valuation Officers, the Income-tax Officer himself proceeded to estimate the fair market value of the assets as on January 1, 1954. The assets which were sold were partly acquired prior to January 1, 1954, and partly after January 1, 1954. In the books of the assessee, the cost price of the assets of the assessee was entered since, in view of notification dated June 11, 1927, under the Indian Income-tax Act, 1922, no depreciation was allowed on the assets of the railway companies, but the actual expenditure on repairs, replacement and renewal was allowed as revenue deductions. The Income-tax Officer, however, took into account the fact that the use of an asset necessarily led to the depreciation of its value in the commercial sense even though, for income-tax purposes, no depreciation was allowed. However, he assumed that depreciation in the value of the assets because of their long user would be equal to the inflation in the prices and as such the book value of the asset would be their fair market value. He, therefore, setting off the depreciation against the inflation, accepted the book value of the asset as fair market val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the assessee is that the directions of my predecessor-in-office, Sri Narurkar, are binding and I have no jurisdiction. Mr. Narurkar did not give directions for this year and the draft order for this year under consideration, being the first one, is validly referred to me under section 144B. 2. The next contention is that proceedings are not valid as the liquidator is not authorised to sign the return. The matter has been discussed in detail in 1977-78 assessment order. As the Act contemplates taxation of companies in liquidation, return, assessment and tax are inescapable. 3. The third contention is that valuation made by the Company's Valuer, Messrs. Talbot and Co., is binding as the Departmental valuer has declined to make a valuation on the facts and circumstances of the case. The assets in question do not exist now, in any case, they are not in the possession of the assessee. As such, it is not possible for him to inspect and value them. The assessee has not been able to help him in this respect. As regards Talbot's valuation, it is based on conjectures and surmises. It was made without physical inspection. It is based on the hypothesis as if the articles were new as o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onnection, the Tribunal observed as follows : "Paragraph 19. We have carefully gone through the letter dated March 20, 1979, of the Inspecting Assistant Commissioner addressed to the Income-tax Officer returning the draft order dated February 7, 1979. In our considered opinion, this is not a direction under section 144B of the Act. A draft order under section 144B proposes certain additions and the direction under section 144B must be confined to either the approval or disapproval of those proposed additions. We find that the letter dated March 20, 1979, is totally silent on the proposed additions. On the contrary, it clearly states that the reference of the draft order dated February 7, 1979, was returned for being sent afresh in future, if necessary, and that the matter was closed at the end of the Inspecting Assistant Commissioner. The tone, tenor, language and contents of the letter show that the Inspecting Assistant Commissioner did not intend thereby to give any valid instructions under section 144B. Hence, we come to the conclusion that there was no instruction of the Inspecting Assistant Commissioner on the draft order of February 7, 1979. The letter dated March 20, 1979, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed March 20, 1979, brought to an end the order of February 7, 1979, in that the order became infructuous and non-existent. It is at any rate neither a direction in the way of a direction within the requirement of section 144B nor could it be the case that the Inspecting Assistant Commissioner meant it to be a direction within the meaning of section 144B. Therefore, the inevitable consequence is that the only draft order on which the directions were issued was the one dated February 27, 1980, in pursuance of which the assessment was completed on July 3, 1980. This also nullifies the assessee's plea that the assessment made on July 3, 1980, was barred by limitation because the normal limitation was to expire on March 31, 1980. But the draft in law, was sent on February 27, 1980, and the direction from the Inspecting Assistant Commissioner was received on July 3, 1980, and the same day the order was finalised. Therefore, the entire period taken in the reference to the Inspecting Assistant Commissioner under section 144B should be the extended period of the limitation and the assessment remains unassailable on the ground of limitation. As for the validity of the reference of the ques ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Revenue that the valuation of a property necessarily postulates the right of inspection of the property by the valuer. The property can be valued only after ascertaining the nature and the extent of the property. This view is correct because the Supreme Court in State of Madras v. Gannon Dunkerley and Co. (Madras) Ltd., AIR 1958 SC 560, has held that, when the Valuation Officer is asked to value an asset, he gets all the powers essential for making the valuation including the power to inspect the asset. The non-incorporation of section 38A of the Wealth-tax Act in section 55A of the Income-tax Act is immaterial because, such power of inspection is inherent in the power to value the property. Therefore, the contention that the DVO has no power of inspection and his abstention from submitting a report on the value of the property on the ground of not having inspection of the property is unlawful, is not valid. The reliance on the decision of the Supreme Court in CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294 is also misplaced. In Srinivasa Setty, the substantive provision for computation of capital gains itself became unworkable in respect of certain assets like goodwill by re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 16A of the Wealth-tax Act, 1957, cannot be an inexorable one. If it is construed rigidly that the binding nature of section 16A(3) shall deter the Assessing Officer from completing the assessment and let the assessment be barred by limitation of time simply because the Valuation Officer, for reasons good or bad, fails or elects to abstain from making a report of valuation, it shall be against the very object of the provisions of the Act. No procedural provision of the Act should be interpreted in a manner to defeat the very goal which the procedure seeks to achieve. The entire procedure of section 16A is to facilitate the determination of the value of various assets to expedite the completion of the assessment. The said provision cannot be interpreted in a negative manner so that the provision becomes counter-productive and a clog in the proceeding. Far from promoting and advancing the cause of a speedy and just manner of completion of assessment, it cannot stall the proceeding of assessment. Therefore, we are not impressed with the argument advanced by learned counsel for the assessee that, once having referred the case of valuation of an asset to the Departmental Valuation Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as made under section 55A of the Act cannot operate as a bar against the estimation of the value by the Income-tax Officer himself when the report of the DVO was not forthcoming. Question No. 5 relates to the quantum of the cost of acquisition of the asset as on January 1, 1954, as determined by the Income-tax Officer. The question has two parts, the first part challenges the rejection of the valuation report of the assessee's approved valuer. The second part is on the quantum that has been determined by the Income-tax Officer and the method of such determination. The Income-tax Officer rejected the valuation made by Talbot and Co. for the defects already stated earlier and proceeded to estimate the value of the assets on January 1, 1954, and arrived at the figure of Rs. 68,41,397. The first question that has to be settled is whether the report of Talbot and Co. the assessee's valuer, was correct in estimating the value at Rs. 1,90,63,250 as on January 1, 1954. The first aspect that was pointed out to us, as has also been observed by the Tribunal, is that the actual value of the sale of the asset which took place in 1970 was Rs. 1,46,30,900. The value determined as on January 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts as on January 1, 1954, on the basis of the price of the new assets on that date because the assessee maintained all its assets in an ideal condition and all renewals and repairs had been carried out and the assets were as good as new. It was only in the later years that the plant and machines deteriorated and the value in 1970 became lesser. It was further submitted that the method adopted by the Income-tax Officer was wrong because it cannot be said that the depreciation and the rise in the value for inflation exactly offset each other both being on an even rate ; it was further submitted on behalf of the assessee that, where, in the absence of details for determination of the value as on January 1, 1954, the market value is not ordinarily ascertainable, the Income-tax Officer could not determine the value except by application of mind to the particulars furnished by the assessee and in such a situation the burden is on the Income-tax Officer to prove that whatever is determined as market value is correctly determined as such. Reference was invited by learned counsel for the Revenue to the decision in CWT v. Tungabhadra Industries Ltd. [1970] 75 ITR 196 (SC) in support of his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee, if the value of the assets were actually ascertained in 1970 at the time of their sale, there is no reason that could bar the ascertainment of this value as on January 1, 1954. Section (ii)(42A) (sic) refers to works of arts, antiques, curios, etc., to which no norm or fixed commercial value attaches. Any way, the absurdity of the valuation of the assessee's value is palpable. As a matter of fact, the period of 1970 was a period marked by a general trend of rising prices of building materials, iron scrap, etc. There being no dispute about the fairness of the price of Rs. 1,46,30,900 in 1970 a process of back-tracking the inflation rate year by year would quite probably show the same figure as adopted by the Income-tax Officer for the value as on January 1, 1954. The Income-tax Officer has adopted the value in 1954 as Rs. 68,41,397. Thus there is an increase in the value between the years 1954 and 1970 by Rs. 77,89,503. This would give the average rate of inflation at 4.5 per cent. The rate of inflation cannot be said to be unreasonably reckoned. In any case we fail to be persuaded by the submissions of learned counsel for the assessee that the Income-tax Officer commit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roducts (P) Ltd. v. CIT [1979] 116 ITR 473 (All) and CIT v. Upper Doab Sugar Mills [1979] 116 ITR 240 (All). We, therefore, answer question No. 4 and question No. 5 as a whole in the affirmative and against the assessee. The seventh question relates to the assessee's entitlement to deduction of interest income from fixed deposits. The facts leading to the question are as follows : "Before the Income-tax Officer, the assessee claimed that the expenses incurred by the liquidators on salaries, debenture interest, bank charges, miscellaneous expenses and audit fees should have been allowed either as a business loss or as a deduction against the interest received by the assessee on the fixed deposit with the bank which has been assessed under the head 'Income from other sources'. The Income-tax Officer did not agree. He stated that the assessee had stopped the business by passing a resolution and had gone into liquidation voluntarily. Hence, the assessee did not have any income from business. Consequently, the expenses claimed by the assessee could not be allowed under the business head. Coming to the claim for deduction under section 57 of the Act, he observed that there was no p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany to the extent of the debenture interest payable was diverted at source before it reached the assessee-company as its income. In this connection, paragraph 8 of the trust dated May 4, 1986, was referred to. Learned counsel for the Revenue, however, submitted that the decision of the Madras High Court in South Arcot Electricity Distribution Co. Ltd. v. CIT [1974] 94 ITR 469 is the ratio directly on the issue. In that case, the business of the company was taken over by the Madras State Government and the assessee was not carrying on any business. However, some income from interest on deposits with bank arose to the company against which expenses were claimed. The Madras High Court held that the expenses were not admissible as deduction as they were not incurred solely for the purpose of earning the interest income and the nexus with earning is too remote for consideration. After the company stopped its business, expenses could not be allowed under the head "business". The position, however, will be different if the company does not go into liquidation but there is merely a temporary stoppage of the business. In that case, it cannot be said that the business was terminated. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal are as follows : "The assessee filed a return on July 29, 1976, showing a loss. It filed a revised return on September 14, 1977, showing capital gains of Rs. 36,625. This amount represented capital gains arising to the assessee on the sale of trees. The assessee had sold other capital assets also. But the capital gains thereon was not shown in the revised return. Shri D. K. Guha pointed out that the Income-tax Officer made out a draft assessment order on February 7, 1979, proposing to assess the capital gains on the sale of trees as shown in the revised return on a protective basis. This draft assessment order was dated February 7, 1979. Then he took us through the papers relating to the proceedings under section 144B of the Act for the assessment years 1972-73 to 1976-77 contained at pages 59, 60, 62, 76, 79, 3, 9 and 4 of the assessee's paper book No. 1. He stated that the Income-tax Officer dropped the proceedings on March 26, 1979, on the basis of the directions received from the Inspecting Assistant Commissioner on the draft assessment order sent by him on February 7, 1979. On March 30, 1979, the Income-tax Officer issued a notice under section 148 to reopen the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, the draft assessment as forwarded to him under section 143(3)/144B cannot be considered at his end. This is because, according to the provision of section 140(c) of the Act, the return in the assessee's case is required to be signed and verified by the managing director. As, in this case, the return is signed by the liquidator, no valid assessment can be made on the basis of that return. (2) It is further found from the records that no notice under section 139(2) was issued and served on the assessee. Thus it appears that neither any notice under section 139(2) was issued nor any valid return was filed by the assessee. So, for statistical purposes, the proceedings were filed on March 26, 1979. (3) It will be found from the draft of the assessment order that the assessee's total income was estimated at Rs. 4,47,819. This income has escaped assessment by reason of omission or failure on the part of the assessee-company to make a valid return under section 139 for the assessment year 1976-77 within the meaning of section 147(a) of the Act. (4) In view of the aforesaid facts, I have reason to believe that, by reason of omission or failure on the part of the assessee to make a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eedings cannot absolve the assessee of his duty to disclose truly and fully is an established principle. Reference may be made to Malegaon Electricity Co. P. Ltd. v. CIT [1970] 78 ITR 466 (SC). The assessee also raised certain issues regarding the validity of the return it had originally filed but the question of invalidity does not appeal to us. If the returns were invalid and non est that would recoil on the assessee. In that event, the assessee has to be taken to have filed no return at all which will strengthen the case for initiating proceedings for assessment. The assessee's counsel also raised the question of absence of fresh information, the proceeding thereby attracting an infirmity in the very initiation. This approach is also misconceived because the Income-tax Officer in the case took resort to section 147(a). The question of fresh information coming into possession of the Income-tax Officer subsequent to the completion of the assessment arises only where the reassessment is proposed to be made under section 147(b). That is the provision which entitles the Income-tax Officer to commence reassessment proceeding simply by reason of the information in his possession, regar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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