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
section T Desai H K Puri and B N Kirpal for the appellant in all the appeals
Sukumar Mitra section C Manchanda R H Dhebar R N Sachthey and B D Sharma for the respondent in all the appeals
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 159151 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 1648053 allowed Rs 259236 as normal depreciation
In so computing the normal depreciation the Income tax Officer apparently lost sight of clause c of the proviso to section 102 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 section 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 section 10 2 vi of the Indian Income tax Act 1922 in the form in which it stood 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 section 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 section 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 section
2 of section 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
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 section 10 2 vi was not modified
The written down value of the machinery of the Company in the year 1956 57 was Rs 1648053 but for the application of cl
c of the proviso to section 102 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 section 102 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 section Pathak I it was contended that the definition of written down value in section 105 b applies wherever the expression is used in section 102 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 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 section 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 section 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 341 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 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 re assessment  Calcutta Discount Co Ltd vs 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


Summary:
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 section 102vi 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
The Company filed returns under protest and thereafter challenged the notices of re assessment by a writ petition under article 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 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
Calcutta Discount Co Ltd vs Income Tax officer Companies District 1 Calcutta and Anr  referred to