Case ID: 2575

Judgment:
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. 15	91	51 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. 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 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. 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 1956 57 in excess of the amount permissible under proviso (c) to section 10(2) (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 10(5) (b) applies wherever the expression is used in section 10(2) 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 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	 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 10(2)(vi) 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.