Case: Modi Spinning & Weaving Mills Co. Ltd Vs. Income-Tax Officer, Special Investigationcircle (B), Meeru

Shah, J.1. M/s. Modi Spinning and Weaving Mills Co. Ltd., hereinafter called the Company- was incorporated in 1946. From time to time the Company purchased and installed machinery 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.15,91,511/- in respect of new machinery installed in the relevant previous years. The Company was also allowed "normal depreciation" at the appropriate rates. In 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. 16,48,053/- allowed Rs. 2,59,236/as normal depreciation. In so computing the normal depreciation the Income-tax Officer apparently lost sight of clause (c) of the proviso to Section 10 (2) (vi) of the Income-tax Act, 1922. Depreciation allowance was also allowed in e 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.2. The Company also moved petitions in the High Court of Allahabad or 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 found that by virtue of Clause (c) to Explanation 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 Act, 1922, and the forms of returns prescribed under the rules did not require the assessee to disclose that initial depreciation had been allowed in their 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 1952-53.3. R. S. 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 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 passe by Pathak, J., was confirmed in appeal under the Letters Patent.4. By clause (vi) of sub-sec. (2) of Sec. 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 allowance not only of normal depreciation but also initial depreciation at the rates set out in clauses (a), (b) and (c) in respect of buildings which had been newly erected, or the machinery or plant being new had been installed after the 31st 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. (vi). 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 than account proviso (c) to Section 10 (2) (vi) was not modified.5. The written down value of the machinery of the Company in the year 1956-57 was Rs. 16,48,053/- but for the application of cl. (c) of the proviso to Section 10 (2) (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 195657 in excess of the amount permissible under proviso (c) to S. 10 (2)(vi) The Income-tax Officer later sought to rectify the error and to bring to tax the income which had escaped tax.6. Before R. S. Pathak, J., it was contended that the definition of "written down value" in Section 10 (5) (b) applies wherever the expression is used in Section 10 (2) and on that account the Company in setting 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 of 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 S. 147(1) (a) was attracted and the notice was properly issued.7. 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 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. The High Court then observed:"It is difficult to hold that the Income-tax Officer while issuing the notice under Section 148 of the new Act could not reasonably hold the view that prima facie the assessee was responsible for the escape in the assessment." and held that the notices were not liable to be quashed.8. Section 34 (1) (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, 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 Act, or excessive loss or depreciation allowance has been computed, or* * * * *he may . . . . . . .. proceed to assess or reassess such income, profits or gains or recompute 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 reasonof 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: Calcutta Discount Co. Ltd. v. Income-tax Officer, Companies District I. Calcutta, 41 ITR 191 = (AIR 1961 SC 372 ).9. 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.

Decision reasoning: 0[ds]High Court ofBy clause (vi) of(2) of Sec. 10 of theIncome-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 allowance not only of normal depreciation but also initial depreciation at the rates set out in clauses (a), (b) and (c) in respect of buildings which had been newly erected, or the machinery or plant being new had been installed after the 31st 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. (vi). 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 than account proviso (c) to Section 10 (2) (vi) was not modified.5. The written down value of the machinery of the Company in the yearbut for the application of cl. (c) of the proviso to Section 10 (2)the initial depreciationallowed in the years1950-51, 1951-52 and 1952-53had to be taken into account. Ther inadvertently failed to take into accountand the Company was allowed normal depreciation in the year 195657 in excess of the amount permissible under proviso (c) to S. 10 (2)(vi) Ther later sought to rectify the error and to bring to tax the income which had escaped tax.6. Before R. S. Pathak, J., it was contended that the definition of "written down value" in Section 10 (5) (b) applies wherever the expression is used in Section 10 (2) and on that account the Company in setting 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 includingthe initial depreciationand as the Company computed the written down value only by deducting the normal depreciation and notit failed to disclose fully and truly all material facts necessary for the purpose of assessment. This argument was not accepted of 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 S. 147(1) (a) was attracted and the notice was properly issued.7. In appeal, the High Court observed that the "only question for consideration".was whether ther was justified in issuing a notice under Section 148 ofx Act, 1961.After stating that there was apparently "a mistake and error on the side of the Company as well as the, the Court observed that ther 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 ther as a result of which some income had escaped assessment. The High Court thens difficult to hold that ther while issuing the notice under Section 148 of the new Act could not reasonably hold the view that prima facie the assessee was responsible for the escape in the assessment." and held that the notices were not liable to be4 confers jurisdiction upon ther 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) that ther has reason to believe that income, profits or gains chargeable toincome-tax had beenand (2) that he has also reason to believe that suchd occurred by reasonof 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: Calcutta Discount Co. Ltd. v., Companies District I. Calcutta, 41 ITR 191  = (AIR 1961 SC 372 ).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.