Jeevan Reddy, J.
1. These four writ petitions are filed by K.C.P. Ltd. against notices issued under s. 148 of the I.T. Act proposing to reopen the assessments in respect of certain years. Since the facts in each case are different, we would deal with each of the writ petitions separately.
W.P. No. 6247 of 1979 :
The notice challenged in this writ petition is dated March 29, 1979, issued after obtaining the necessary satisfaction of the Commissioner of Income-tax. By this notice, the ITO, Central Circle, Vijayawada, proposed to reassess the depreciation allowance and certain other items in respect of the assessment year 1970-71. The accounting year of the petitioner commences with the 1st of July and ends with the 30th of June in the following year. The petitioner has questioned the notice on the following grounds - (i) that the ITO has failed to record the reasons, as required by s. 148(2) of the Act, and that, therefore, the approval accorded by the Commissioner is vitiated. The approval has been accorded mechanically and without applying the mind to the relevant facts and circumstances of the case, and (ii) that what is sought to be done is merely to review the orders of assessment passed earlier. There is no allegation that any income has escaped assessment on account of non-disclosure of any material fact on the part of the assessee. The error, if any, was on the part of the assessing authority.
2. In the counter-affidavit filed by the ITO, the details of the income that is said to have escaped assessment and which is sought to be included in the assessment year 1970-71 are furnished. They are - (i) that the assessee has failed to disclose the profit of Rs. 4,687 arising from the sale o :machinery for a sum of Rs. 18, 748, which amount is assessable u/s. 41(2) of the Act; (ii) that the assessee wrongly claimed deduction of Rs. 32,134 on account of depreciation in respect of confectionery plant and old sugar plant, even though the assessee had availed of the full permissible depreciation allowance on the said items. The assessee failed to disclose the fact of full availment of depreciation allowance, and obtained excessive depreciation allowance, which is liable to be reopened; and (iii) that the assessee made a wrong claim of deduction in respect of Rs. 2,32,195 under s. 80-I, in respect of Ramakrishna Cements, a priority industry. The assessee owns another priority industry viz., the Central Workshop Unit. Madras, wherein the assessee suffered a loss of Rs. 97,95,491. Under s. 80-I, an assessee owning more than one priority industry is bound to aggregate the profit and losses of all the priority industries for the purpose of claiming the benefit under s. 80-I. If this principle had been adopted, the assessee would not have been entitled to any benefit or deduction under s. 80-I. The assessee, however, claimed the said benefit showing the profits earned from Ramakrishna Cements only, and obtained the said benefit, which it was not entitled to in law.
3. The notice under s. 148 has been given in this case on the last day of the eighth year from the end of the relevant assessment year. The case must, therefore, fall necessarily under s. 147(a). Action under s. 147(a) be taken either when the assessee omits or fails to make a return under s. 139, or where the assessee fails to disclose fully and truly all necessary facts relevant for the assessment and if, on account of any those reasons, income chargeable to tax has escaped assessment. Now, this is not case of omission or failure to file a return. The only ground, therefore, available to the ITO is the failure on the part of the assessee to disclose fully and truly all necessary facts relevant for assessment, for the year 1970-71, which has led to income chargeable to tax escaping assessment. But, before we examine the facts of this case from this stand-point, it is necessary to deal with the first contention of Mr. S. Parvatha Rao, the learned counsel for the petitioner, viz., that the failure of the ITO to record the reasons as required by s. 148(2) vitiates the notice and that the approval accorded by the Commissioner must also be held to be mechanical which is said to be an equally vitiating factor.
4. Learned standing counsel for the Department, Sri M. S. N. Murthy, has placed the reasons recorded by the ITO before us. It would be appropriate to extract the same in full :
'The assessee M/s. K. C. P. Ltd., is a public limited company carrying on business in the manufacture and sale of sugar, alcohol, cement and heavy machinery meant for cement and sugar plants.
The original assessment of the company was completed on January 25, 1971, on a total income of Rs. 57,62,016 which as a result of rectification passed u/s. 154 finally stands as on today at Rs. 57,59,621.
While examining the accounts for the assessment year 1977-78, it came to light that by reason of failure or omission on the part of the assessee to disclose fully and truly, income to the tune of Rs. 2,69,016, as noted below, escaped assessment :
(1) Profit of Rs. 4,687 arising under 41(2) of the Act as a result of sale of certain machinery for a sum of Rs. 18,748.
(2) Income of Rs. 32,134 as a result of wrong claim under depreciation in that, though the WDV of the confectionery plant and old sugar plant completely got 100% depreciated, still the assessee-company claimed and obtained depreciation of Rs. 32,134.
(3) Income of Rs. 2,32,195 on account of wrong claim u/s. 80-I although the assessee was not entitled for deduction under s. 80-I due to a balance loss of Rs. 68,72,884 suffered in between the income of Rs. 29,02,607 in the cement unit and loss of Rs. 97,75,491 in the Central workshop unit.
In the circumstances, I have reason to believer that by reason of omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment income chargeable to tax in the assessment year 1970-71 has escaped assessment. Commissioner's kind sanction is solicited for initating action under s. 148 of the I.T. Act......'
5. On perusing these reasons, the Commissioner endorsed his apporval saying 'Yes I am aa satisfied'.
'The contention of Sri S. Parvatha Rao, the learned counsel for the petitioner-assessee, is that the reasons recorded by the ITO do not satisfy the requirements of law in s. 148(2). His contention is that the reasons recorded by the ITO must briefly state the facts on the basis of which he has formed the opinion that there was non-disclosure of material facts on the part of the assessee, which has resulted in the income escaping assessment.
He submits that the basic facts constituting the non-disclosure must be stated because, the learned counsel says, the Commissioner has to satisfy himself whether it is a fit case for the issuance of notice u/s. 148 only on the basis of and after perusing such reasons. It is contended that if the reasons recorded are not adequate and do not contain the factual data, fit must be presumed that the Commissioner did not really form the requisite satisfaction, but acted mechanically in allowing the ITO to issue the notice.
Sub-section (2) of s. 148 says :
'The Income-tax Officer shall, before issuing any notice under this section, record his reasons for doing so.' Sub-s. (2) of s. 151, which is relevant for the present purposes, states : '(2) No notice shall be issued under section 148 after the expiry of four years from the end of the relevant assessment year, unless the Commissioner is satisfied on the reasons recorded by the Income-tax Officer that it is a fit case for the issue of such notice.'
6. It may be taht it is open to the Commissioner to look into the relevant records, or to call for further reasons or material before being satisfied within the meaning of s. 151(2); but ordinarily, the statute contemplates his forming the requisite satisfaction primarily on the basis of the reasons recorded by the ITO. It is, therefore, necessary that the reasons recorded by the ITO must state the alleged non-disclosure on the part of the assessee and that such non-disclosure has led to escapement of assessable income. The requirements that the Commissioner should be satisfied that it is a fit case for the issuance of a notice before a notice under s. 148 is issued, is conceived as an administrative check upon the power of the ITO to issue such a notice. It is a safeguard designed to check or prevent arbitrary or mechanical issuance of notices, which necessarily means that the function of the Commissioner is not a mechanical one. He has to peruse the reasons and form an opinion that the assessee has failed to disclose fully and truly all material facts necessary for assessment of that year and that the same has led to the income chargeable to tax escaping assessment. Obviously, he cannot form this opinion, or satisfaction, as the case may be, unless the basic facts constituting such non-disclosure are stated in the reasons recorded by the ITO. While it is not necessary that the ITO should elaborately set out all the relevant facts, it is essential that he must indicate broadly the fact or facts, which constitutes non-disclosure and which, in turn, has lead to assessable income escaping assessment. In Chhugamal Rajpal v. S. P. Chaliha : 79ITR603(SC) , the ITO in his report to the Commissioner stated that the creditors mentioned in the return submitted by the assessee were mere name-lenders, that the transactions were bogus and that, therefore, proper investigation regarding the loans taken by the appellant-assessee was necessary. The ITO did not mention in his report the meterial which he had before him, and his reasons for coming to the conclusion that the income chargeable to tax has escaped assessment on account of non-disclosure of material facts on the part of the assessee. On this report the Commissioner merely endorsed 'yes'. It was held by the Supreme Court that, from the above report, it did not appear that the ITO had come at least to a prima facie conclusion that the loan transactions, to which he referred, were not genuine transactions and that the ITO merely appeared to have a vague feeling that they might be bogus transactions. The proposal to further investigate the truth of the alleged transactions was held to be not the same thing as saying that there are reasons for issuing the notice. It was also held that the Commissioner had acted mechanically in according permission. The Supreme Court observed that the important safeguards provided by s. 147 and s. 151 were lightly treated by the ITO as well as the Commissioner and, therefore, the issuance of the notice was bad.
7. Again, in ITO v. Lakhmani Mewal Das : 103ITR437(SC) the Supreme Court held that there must be a reasonable nexus between the material and the formation of the requisite belief. It was held that both the conditions mentioned in s. 147(a), viz, the non-disclosure of material facts fully and truly on the part of the assessee and the escapement of the assessable income on that account must co-exist to confer jurisdiction on the ITO to issue the notice. It was held that it was imperative for the ITO to record his reasons before initiating proceedings and that the Commissioner should also be satisfied on the reasons recorded that it was a fit case for the issuance of such a notice. It was held that the existence of belief on the part of the ITO can be challenged by the assessee, but not the sufficiency of reasons for the belief, and that the reasons must be held in good faith, and should not be a mere pretence. It was also observed that it was open to the court to examine whether the reasons recorded by the ITO have a rational connection with or relevant bearing upon the formation of the belief, and whether they were not extraneous or irrelevant for the formation of the relevant opinion.
8. The same view was again reiterated by the Supreme Court in ITO v. Madnani Engineering Works Ltd. : 118ITR1(SC) , where it was observed that mere disclosure of belief without setting out the material on the basis of which such belief was formed, was not sufficient and that, in such a case, the court would hold the notice to be void.
9. In this context, we must mention that the law with respect to subjective satisfaction is exhaustively stated in the celebrated decision of the Supreme Court in Barium Chemicals Ltd. v. Company Law Board : 1SCR898 where it has been held that, while the formation of the opinion is subjective, the existence of facts upon which the satisfaction is formed is not subjective and that the requisite opinion/satisfaction must be formed on relevant material, and honestly and fairly. So long as that is done, the court cannot interfere with, nor can it go into the adequacy of the material. While a non-existent fact cannot be made a ground for formation of the opinion, the court would not at his stage investigate into the truth or otherwise of the facts, upon which the appropriate authority says that it has formed the satisfaction. Of course, so far as the notice u/s. 148 is concerned, the law expressly requires the reasons to be recorded, stating further that the necessary satisfaction of the Commissioner should be formed on the basis of such reasons.
10. Looked at from the above standpoint, it must be held that the reason No. 1 recorded by the ITO is totally bald and devoid of any facts and/or particulars. All that the ITO says is that the profit of Rs. 4,687 arising u/s. 41(2) of the Act has escaped assessment as a result of sale of certain machinery for a sum of Rs. 18,748. It is not stated that any particular material fact was not disclosed by the assessee. The general averment that the income had escaped assessment by reason of failure or omission on the part of the assessee to disclose fully and truly to the tune of Rs. 2,69,016 is a mere statement of opinion and not a statement of fact which constitutes non-disclosure. Indeed, we have also seen the return submitted by the assessee for the relevant assessment year. The assessee disclosed that it had sold certain machinery for a sum of Rs. 18,748 and then stated that as done in the previous years, it was taking 3/4ths of the same as income. Of course the assessee did not disclose the written down value of the machinery; but, what Mr. Parvatha Rao now contends before us is that, it is not possible for him to disclose the value of the machinery sold, because it was not purchased as a unit but that it formed part of a bigger unit purchased as a unit. Be that as it may, the ITO does not state that the non-disclosure on the part of the assessee lies in not disclosing the written down value. Even in the counter-affidavit, what all the ITO stated with respect to this item, is 'the petitioner did not choose to disclose the factum of profit arising on the sale of machinery and, as such, the profit assessable under s. 41(2) of the Act escaped assessment'. This statement is misleading as a fact. The assessee did disclose the sale price, and also showed 3/4ths thereof as profit. Therefore, there is no non-disclosure of the factum of profit. Of course, the ITO's case is that the full amount constituted profit, whereas the assessee is relying upon certain alleged practice being followed in the previous years. What is relevant for our purposes is that there is no allegation of any non-disclosure of material facts on the part of the assessee, either in the notice issued under s. 148, or in the reasons recorded by the ITO under s. 148(2), or in the counter-affidavit filed in this writ petition. It must, accordingly be held that, on this ground alone, the notice is bad in so far as it relates to the first of the three items.
11. We shall now take take up the third item, in the reasons recorded by the ITO. The allegation is that the assessee made a wrong claim of deduction under s. 80-I, in a sum of Rs. 2,32, 195. The contention is that the assessee owns two priority industries, viz., Ramakrishna Cements and Central workshop; that, for the purpose of claiming deduction u/s. 80-I, the assessee ought to aggregate the profits and losses of all the priority industries held by him and that, if this principle were adopted, the assessee would not have been entitled to any deduction on this account. It is stated that, in the Central Workshop, the assessee suffered a loss of Rs. 97,75,491, whereas the profit earned in the Ramakrishna Cements is far lower. Thus, there was no profit at all from the priority industries as a whole, and, therefore, no question of claiming any deduction under s. 80-I, which provides for deduction being claimed only out of profits made from the priority industries.
12. Now, it is not alleged or stated by the ITO that the assessee failed to disclose that it had suffered a loss of Rs. 97,75,491 in the Central Workshop unit. Indeed, the return which is placed before us clearly shows that this fact was disclosed as such; but, of course, the assessee did not, while claiming the benefit under s. 80-I, aggregate the profits and losses of both these industries. The contention of Sri S. Parvatha Rao is that, he need not so aggregate the profits and losses for the purposes of s. 80-I, inasmuch as what is relevant under and for the purpose of claiming deduction under s. 80-I is only 'profits and gains', arising from a priority industry, and not 'profits and losses' arising therefrom. Section 80-I prima facie supports the contention of the learned counsel, though we must hasten to add, we do not propose to express any definite opinion on this question. Sub-section (1) of s. 80-I says 'where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent. thereof'. (It appears that the percentage of deduction has been varying from time to time). The emphasis of the learned counsel for the assessees is upon the words 'any profits and gains', and also upon the words 'an', 'a', and 'a' which occur while referring to industrial undertaking, ship or hotel, as the case may be. But, as we said earlier, we do not propose to, nor is it necessary for the purpose of the present writ petition, to decide whether the assessee was bound to aggregate the profits and losses of the two priority industries held/owned by it, or not. It is sufficient for our purposes to hold that there is no allegation of non-disclosure of the loss arising from the Central Workshop Unit. On the first page of annexure to the return where the total income of the assessee is shown, the loss arising from the Central Workshop Unit is disclosed, as also the profits derived from Ramakrishna Cements, under separate items; and where the benefit under s. 80-I is claimed only the profit from Ramkrishna Cements was shown. In the circumstances it cannot be said that the assessee was under an obligation to show the losses suffered in the Central Workshop Unit in that part of the return where it claimed the benefit u/s. 80-I of the Act. The law did not oblige the assessee to do so, nor did the prescribed form say that it must also indicate the losses, it any, suffered from another priority industry. On the relevant date, and indeed even today, the law does not appear to be clear and definite that for the purpose of claiming benefit under s. 80-I, the profits and losses arising from all the priority industries held by an assessee ought to be aggregated. Thus, it is clear that, even with respect to this item, it is not a case of non-disclosure. Indeed, the proposed action appears to be more in the nature of a review, or change of opinion. While the ITO who made the initial assessment, accepted the assumption of the assessee that only profits and gains of a priority industry are relevant for the purpose of s. 80-I, the subsequent ITO who issued the impugned notice appears to hold a different view. Such change of opinion is not a sufficient ground for the issuance of a notice under s. 148. Thus, the notice must be held to be bad even with respect to the third item.
13. Now remains the second item in the reasons recorded by the ITO, upon which there was a good amount of controversy between both the counsel before us. With respect to this item, the ITO has alleged that though the written down value of the confectionery plant and old sugar plant completely got 100% depreciated, still the assessee wrongly claimed and obtained depreciation of Rs. 32,134. It is necessary to briefly refer to the context for appreciating this statement of the ITO.
14. The I.T. Act provides for intitial depreciation apart from normal depreciation, on machinery and certain other items. The initial depreciation is allowed only in the first year. The Act provides that, for the purpose of determining the written down value, the initial depreciation allowed shall not be taken into account. At the same time, however, the Act prescribes a ceiling on the claim for depreciation. It says that the normal depreciation coupled with the initial depreciation should not exceed the actual cost of the machinery. Now, the case of the ITO is that for the relevant assessment year, the assessee claimed the normal depreciation in a sum of Rs. 32,134 without disclosing the fact that it had already obtained initial depreciation and that, if the initial depreciation is taken into account, the total depreciation availed of by the assessee prior to the relevant assessment year, exceeds the ceiling. In other words, according to the ITO, the non-disclosure on the part of the assessee lies in the fact that it did not disclose the fact of availment of initial depreciation which, according to him, is a material fact for the purpose of claiming and working out the depreciation, and, therefore, it is a case of non-disclosure of a material fact on the part of the assessee. On the other hand, the contention of the assessee is that there is no obligation upon the assessee to disclose the factum of the availment of initial depreciation and that the form prescribed for filing return did not contain any column requiring the assessee to state the initial depreciation, if any, availed of. The contention is that the record of assessment for the previous years which is available with the ITO, does show that the assessee had availed of the initial depreciation, and it was the look out and duty of the ITO to have looked into the said record while allowing the depreciation claimed by the assessee. The omission on the part of the ITO to look into that record is an error on his part, and cannot constitute non-disclosure on the part of the assessee. A mere wrong claim for depreciation, it is contended, does not amount to a non-disclosure of a material fact, nor does it amount to a failure on the part of the assessee to disclose fully and truly all the material facts. Before we refer to the decisions relied upon by both parties on this question, it is well to notice the language of s. 147(a). It speaks of 'omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment for that year......'. Section 139 requires every person whose income exceeds the prescribed limit, to 'furnish a return of his income...... during the previous year in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed.........'.
15. The form which was prescribed for the relevant assessment year, undoubtedly, did not contain any column requiring the assessee to state whether it had availed of the initial depreciation in respect of the machinery for which it is claiming normal depreciation in that year. But, we are not prepared to hold that the non-disclosure must be confined only to failure to fill up the columns contained in the form of return prescribed by the Rules. We find no reason to give such restricted meaning. Section 147 speaks of omission or failure to disclose fully and truly all material facts necessary for the assessment for that year. Which fact, or facts, are material for assessment for that year is a question of fact to be decided in each case, and it is not possible to lay down any hard and fast rule. Take the case of an assessee who deliberately makes a false statement. Can it be said that making a deliberately false statement does not amount to omission or failure to disclose fully and truly all facts material for the assessment, merely because that false statement is made in the appropriate column of the return Now, looked at from this angle, the assessee in this case, a substantially big company whose assessable income runs into crores of rupees, is expected to know the law that it is not entitled to claim normal depreciation above the ceiling, which is made up of normal depreciation coupled with the initial depreciation. If the assessee claims depreciation above the ceiling without disclosing the fact that it has already crossed the ceiling (by virtue of availing of the initaial depreciation), can it not be said that the assessee has omitted, or failed, as the case may be to disclose fully and truly all material facts necessary for his assessment for that year The assessee cannot reasonably say that while completing the assessment for that year, the ITO must look into all the previous assessment orders, including the appellate orders, if any, with respect to each year, on every relevant aspect. It must be remembered that the depreciation allowance is not the only question to be looked into or considered in the relevant assessment year. There are any number of items which have to be looked into, and determined. Would it be reasonable to say that, on each item, the ITO is bound to look into the previous returns, nor is it possible to lay down that the ITO is bound to look into the previous assessments for a certain number of years, say, 5 years, 10 years or 15 years While it is not necessary for our purpose to hold that the assessee is guilty of a deliberately false statement in this case, it is sufficient for us to hold that there has been omission or failure, as the case may be, on the part of the assessee to disclose fully and truly all material facts necessary for assessment for that year, inasmuch as it has failed to disclose the fact that it had availed of the initial depreciation and had thus crossed the permissible ceiling, even before the said assessment year. This claim for normal depreciation, in the circumstances, necessarily implies concealment of a material fact viz., the fact of availment of initial depreciation. That fact is material because if that fact were known, the assessee would not have been allowed the normal depreciation.
16. We shall now refere to the decisions upon which reliance is placed by the counsel for the petitioner. The first case relied upon is in Modi Spinning and Weaving Mills Co. Ltd. v. ITO : 75ITR367(SC) , a decision of the Supreme Court. That was also a case where the assessee had availed of the initial depreciation and, in spite of crossing the 'ceiling', it claimed and obtained the normal depreciation. The fact of availing of the initial depreciation was not disclosed by the assessee. Four years after the expiry of the assessment year in question, notice under s. 148 was issued, which was challenged by way of a writ petition in the High Court. A learned single judge of the Allahabad High Court, R. S. Pathak J. (Modi Spinning & Wvg. Mills Co. Ltd. v. ITO : 59ITR401(All) ), dismissed the writ petition holding that the Act imposed upon the assessee a duty to disclose all material facts which go to show what was the true amount of the allowance to which it was entitled; that, by failing to disclose that initial depreciation had been allowed in the earlier years, the company had failed to disclose fully and truly all material facts necessary for assessment and that, in such a case, the notice under s. 148 was properly issued. On appeal, a Division Bench observed that the only question for consideration before it was, whether the ITO was justified in issuing the notice. After stating that there was apparently' a mistake and error on the side of the company as well as the Income-tax Officer', the Bench observed that the ITO 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 ITO, which resulted in escapement of the income. It then observed (p. 371 of 75 ITR) : It is difficult to hold that the ITO while issuing the notices under s. 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 accordingly, dismissed the appeal. Then when the matter came up before the Supreme Court, it held (p. 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.'
17. Accordingly,. the Supreme Court allowed the appeal an remanded the matter to the High Court 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'. After the matter went back to the High Court (the High Court's decision is reported in : 101ITR637(All) ) the High Court purporting to follow the decision of the Supreme Court in Muthiah Chettiar v. CIT : 74ITR183(SC) , held that as per the columns in Part V of the return, the assessee was not bound to disclose the fact of availment of initial depreciation and that all that it was required to state was the amount of depreciation which, according to it, is claimable under law. It was observed that, even if it is found that a claim for depreciation is erroneous or exaggerated for some reason, it cannot be said that the assessee had furnished inaccurate particulars of its income for assessment. The Bench also observed that there was no failure or omission on the part of the assessee in disclosing fully and truly all material facts necessary for its assessment and in disclosing the written down value of the machinery and plant at the beginning of the accounting period under column 2 of Part V of the return. The main reasoning of the Bench is to be found in the following para. (p. 653 of 101ITR) :
'The claim of depreciation is to be made by an assessee under column 9. Under that cloumn the assessee is not reuired to disclose any facts or particulars necessary for his assessment. All that he is required to do is to state the amount of depreciation which according to him is claimable under the law. Accordingly, if a claim mentioned in column 9 of the return is for some reason found to be erroneous or exaggerated, it cannot be said that the assessee has furnished inaccurate particulars of its income or that he had omitted or failed to truly and fully disclose particulars material for its assessment.'
18. The Bench rejected the argument of the Department that under col. 6 Part V of the return, the assessee was required to state 'the amount on which the depreciation is now allowable' and that, in that column, the assessee was required to state the fact of availing of initial depreciation. With great respect to the learned judges who decided the case, we are unable to agree with their reasoning. In our opinion, the view taken by R. S. Pathak J. (Modi Spg. & Wvg. Mills Co. Ltd. v. ITO : 59ITR401(All) ) on the earlier occasion, was the correct one viz., that the Act imposed upon the assessee a duty to disclose all material facts which went to show the true amount of the allowance to which it was entitled and that, by failing to disclose that initial depreciation had been allowed in the earlier years, the company had failed to disclose that initial depreciation had been allowed in the earlier years, the company had failed to disclose fully and truly all material facts necessary for its assessment, and which attracted the provisions of s. 147(a).
19. As pointed out by us earlier, there is no reason for restricting or curtailing the meaning of the words 'omission or failure on the part of the assessee..... to disclose fully and truly all material facts necessary for his assessment for that year.........' in the light of the pro forma of the return presribed by the Rules. Doing so would amount to defining the material facts as those facts which are required to be stated by the return, and none else. This, in our opinion, would be an unwarranted cutting, down of the natural and reasonable ambit and field of the said words.
20. We must also mention here that, according to the learned counsel for the assessee the decision of the Supreme Court in Modi Spinning & Weaving Mill's case : 75ITR367(SC) , itself lays down that mere failure to mention the fact of availment of initial depreciation does not amount to omission or failure of the kind contemplated by s. 147(a). We are unable to agree. The decision of the Supreme Court is to be found in the penultimate paragraph, which we have extracted hereinbefore. The judgment of the Division Bench, which was the subject-matter of appeal before the Supreme Court, had not considered the question whether the escapement of income was on account of omission or failure on the part of the company to disclose fully and truly all material facts necessary for assessment. The Bench merely observed that the income escaped assessment and that it cannot be said that the ITO was not acting reasonably in holding the view that the assessee was responsible for income escaping assessment. That was not a finding sufficient to sustain a notice under s. 148, and it is for that reason that the matter was remitted back to find out whether the escapement of income was on account of omission or failure on the part of the assessee.
21. The next decision relied upon is Parashuram Pottery Works Co. Ltd. v. ITO : 106ITR1(SC) . For understanding the principle of the said decision, it is necessary to appreciate the relevant facts of the case which are to be found in the following passage (p. 8) :
'Form C under rule 19 of the Indian Income-tax Rules, 1922, at the relevant time gives the form of return which had to be filed by the companies. Part V of that form deals with depreciation. The said part requires a number of columns to be filled in by the assessee. It has not been suggested that any of the information furnished or any of the particulars given in those columns by the appellant-company were factually incorrect. Nor is it the case of the revenue that the appellant failed to furnish the particulars required to be inserted in those columns. Indeed, the copy of the return has not been filed and consequently no argument on that score could be or has been addressed before us. Part V of the form no doubt requires the assessee to state the written down value in column No. (2). Such written down value had to be specified without taking into account the initial depreciation because such depreciation in terms of clause (vi) of section 10(2) of the Act of 1922 could not be deducted in determining the written down value for the purpose of that clause. The case of the appellant is that in determining the amount of depreciation at the time of the original assessment for the two assessment years in question, the Income-tax Officer relied upon the written down value of the various capital assets as obtaining in the records of the Department. This stand has not been controverted. When an Income-tax Officer relies upon his own records for determining the amount of depreciation and makes a mistake in doing so, we fail to understand as to how responsibility for that mistake can be ascribed to an omission or failure on the part of the assessee. It also cannot be disputed that initial depreciation in respect of items of capital assets in the shape of new machinery, plant and building installed or erected after the 31st day of March, 1945, and before the 1st day of April, 1956, is normally claimed and allowed. It seems that the Income-tax Officer in working the figures of depreciation for certain items of capital assets lost sight of the fact that the aggregate of the depreciation, including the initial depreciation, allowed under different heads could not exceed the original cost to the assessee of those items of capital assets. The appellant cannot be held liable because of this remisseness on the part of the Income-tax Officer in not applying the law contained in clause (c) of the proviso to section 10(2) (vi) of the Act of 1922. As observed by Shah J. in Commissioner of Income-tax v. Bhanji Lavji : 79ITR582(SC) , section 34(1)(a) of the Act of 1922 (corresponding to section 147(a) of the Act of 1961) does not cast a duty upon the assessee to instruct the Income-tax Officer on question of law.'
22. Thus, it was a case where the depreciation was worked out by the ITO on the basis of his own record and, therefore, the error or omission, if any, was attributable to him, and could not be attributed to the assessee. This decision cannot be understood as saying that once the requisite columns in the return are filed, no more material facts remain to be stated or disclosed. In other words, it cannot be said that all the material facts which an assessee has to state, are exhausted by filling up the columns in the return.
23. Now, a word about Muthiah Chettiar's case : 74ITR183(SC) , upon the principle whereof substantial reliance is placed by the counsel for the assessee. That was a case where the assessee failed to disclose that the income was received by his wife or minor child admitted to the benefits of the partnership in a firm of which he was a partner.
24. The question was, whether on that account he can be held to be guilty of omission or failure, contemplated by s. 147(a). The Supreme Court held that - (i) in the form of return prescibed under r. 19 of the Indian I.T. Rules, 1922, framed under s. 59 of the Indian I.T. Act, 1922, there was no clause which required disclosure of the income of any person other than the income of the assessee, which was liable to be included in his total income, nor did s. 22(5) create any obligation upon the assessee to disclose the income derived by his wife or minor child. It, therefore, cannot be held that the assessee had failed to disclose fully and truly all material facts necessary for his assessment; (ii) that s. 16(3) of the Act imposes an obligation upon the ITO to compute the total income of an individual for the purposes of assessment by including the items of income set out in cls. (a)(i) to (vi) and (b); but thereby no obligation was imposed upon the taxpayer to disclose the income liable to be included in his assessment u/s. 16(3). This decision must be understood in the light of the fact that the law only obliges the assessee to disclose his income, but does not oblige him to disclose the income of others and, therefore, such non-disclosure cannot be said to be non-disclosure of a material fact. The principle of the said decision can have no application to the facts of the present case, where the fact of initial depreciation related to the income and the assessment of the assessee himself. Another important circumstances in this decision is the court's observation that s. 16 casts an obligations on the ITO to include the income of the wife and minor children in the income of the assessee, but no obligation is cast upon the assessee to disclose any such income derived by his wife or minor children. It is in that context that the Supreme Court held that the assessee cannot be said to have been under an obligation to disclose the income of his wife and minor children, and the same cannot be said to be necessary for his assessment.
25. We must also make it clear that at this stage we are only concerned with the question whether the ITO had, before issuing the notice, formed the opinion on relevant material that income had escaped assessment by reason of omission or failure on the part of the assessee to disclose fully and truly all material facts relevant for its assessment. We are not concerned with the merits of the issue. In other words, it may be that, ultimately, it may be proved that no income had escaped assessment. But, that is a stage which would arrive after the enquiry is over in pursuance of the impugned notice. We are only concerned with the validity of the notice, and not with the correctness of the grounds upon which the assessment is sought to be reopened. That will be decided, as stated above, in the enquiry which will be held in pursuance of the notice.
26. Lastly, we must refer to an argument of Mr. S. Parvatha Rao that, according to the decision in Maharana Mills (P.) Ltd. v. ITO : 36ITR350(SC) , 'record' means record of assessment proceedings for all the previous years and that, therefore, while working out, or allowing the depreciation, the ITO ought to have looked into the records, i.e., into the assessment proceedings for all the relevant previous years. The Supreme Court in that case was considering the meaning of the word 'record' occurring in s. 35 of the 1922 Act. In a proceeding for rectification it was argued that the written down value determined for the earlier years having become final, the same cannot be reopened. In that context, the court considered the meaning of the expression 'record' occurring in s. 35(1). Section 35(1) reads as follows : 'The Commissioner or Appellate Assistant Commissioner may, at any time within four years from the date of any order passed by him in appeal or, in the case of the Commissioner, in revision under s. 33A and the ITO may, at any time within four years from the date of any assessment order or refund order passed by him on his own motion rectify any mistake apparent from the record of the appeal, revision, assessment or refund, as the case may be, and shall within the like period rectify any such mistake which has been brought to his notice by an assessee......... '). The court observed (p. 357) :
'The words used in the section are 'apparent from the record' and the record does not mean only the order of assessment but it comprises all proceedings on which the assessment order is based and the Income-tax Officer is entitled for the purpose of exercising his jurisdiction under section 35 to look into the whole evidence and the law applicable to ascertain whether there was an error. If he doubts the written down value of the previous year it is open to him to check up the previous calculations and if he finds any mistake it is open to him to make fresh calculations in accordance with the law applicable including the rules made thereunder.'
27. The said decision cannot be read, or understood as saying that at the time of each assessment, the ITO must keep the assessment record and orders of all previous years, or of a particular number of previous years before him and must peruse all of them before finalising the assessment.
28. For the above reasons, W. P. No. 6247 of 1979 is allowed in part. The impugned notice is quashed in so far as items Nos. (1) and (3) in the reasons recorded by the ITO, extracted by us hereinabove, are concerned. But, the writ petition is dismissed in so far as item No. (2) is concerned. It is open to the ITO to proceed further in respect of item No. (2) in accordance with law. No costs.
W. P. No. 6276 of 1979 :
The facts of this writ petiton are identical with the facts in W. P. No. 6247/1979, with the only difference that this writ petition relates to the assessment year 1974-75. Indeed, we find that by this year the proforma of the return was amended, and note 5 was added in the relevant part. Note 5 reads : 'Indicate in column 19 the amount of initial depreciation or development rebate allowed in respect of any asset in an earlier year.'
29. Column 19 in term contains a reference to note 5. Thus, even on the restricted view contended for by the assessee in this case, it must be held that there was an obligation upon the assessee to disclose the initial depreciation availed of by him. In other words, because of the said note, it was obligatory upon the assessee to state in col. 19 that it had availed of the initial depreciation. The failure of the assessee to do so amounts to failure to disclose the material facts.
30. We must mention that in this writ petition the assessment is sought to be reopened within four years and, therefore, it was not necessary for the ITO to obtain the sanction of the Commissioner.
For these reasons, the writ petition fails and is, accordingly, dismissed. No costs.
W. P. No. 6248 of 1979 :
In this writ petition the notice proposing to reopen the assessment for the assessment year 1972-73 is being challenged. By virtue of the impugned notice, reassessment is sought to be made in respect of three items. The first relates to an amount of Rs. 14,96,130 which the assessee claimed, at the time of assessment proceedings, was kept in suspense account and on that basis, not included in the assessable income. The second item pertains to an amount of Rs. 64,286 which was climed by the assessee by way of deduction under s. 35A of the Act, and was granted. The Department now says that the said claim is patently untenable under s. 35A and that the relevant amount has to be included in the assessable income. The third item relates to a sum of Rs. 11,000 which the assessee claimed as having been paid towards the perquisities to the mananging director and because of the wrong calculations, it was allowed. The same has to be included in the assessable income. We will deal with these three items separately.
31. So far as the first item is concerned, what appears to have happened is that the assessee along with certain other sugar factories filed writ petitions in this court, questioning the validity of the notification issued by the Government fixing the levy price of sugar. By virtue of the interim orders granted by this court the petitioners was permitted to sell sugar at the rate fixed by the previous notification. The amount representing the difference of price between the previous notification (higher rate) and the notification impugned in that writ petition (lower rate) was said to have been kept in suspense account, by the assessee. Though that writ petition was dismissed, the matter is said to be now pending in the Supreme Court. Meanwhile, the assessee filed another writ petition questioning the Levy Sugar Price Equalisation Fund Act, 1976, and in the affidavit filed in support of the said writ petition, the following statement occurs (the affidavit was sworn to by Sri C. Radhakrishnan Rao, Chief Accountant of the petitioner-company) :
'There was also no claim by any person whatsoever regarding the excess price and, under these circumstances, the petitioner was led to believe that it would treat the excess realisation as its own. Accordingly, the petitioner in working out its profit and loss for the year took the entire figure as its realisation and, based thereupon, the accounts were closed and taxes were paid. In fact, when returns were submitted and taxes were paid to the respondent even though to a different wing of the respondent, the respondent took no objection thereto...'
32. This averment in writ affidavit (in W. P. No. 1535 of 1976) is made the basis for issuing the reopening notice with respect to this item. The contention of the Department is that, according to the subsequent affidavit filed by the petitioner-company itself, it is clear that the claim of the assessee during the assessment proceedings that the said amount was kept in suspense account, is wrong and untrue and, therefore, the notice under s. 148 was proper and justified.
33. Counsel for the assessee, Mr. s. Parvatha Rao, contends that the statment made in the writ affidavit in W. P. No. 1535/76, is wrong and that the earlier statement made during the assessment proceedings that the said amount was kept in suspense account, is a true and correct statement.
34. We are not concerned at this stage with the question as to which of the statements of the assessee is correct. We are only concerned with the validity of the notice at this stage. The reasons recorded by the ITO with respect to this item clearly refer to all the basic facts and the Commissioner has also endorsed thereon that he has studied the facts and that it is a fit case for issuing the notice. Once the facts which are said to constitute the basis of the impugned notice, as stated by the ITO, are taken as true, it would follow that the assessee has failed to fully and truly disclose all material facts relating to its assessment for the relevant assessment year.
35. Which of the statements of the assessee is true and whether this amount was in fact kept in suspense account, or was indeed included in the income of the assessee, is a matter which can be determined only after holding an enquiry in pursuance of the impugned notice. The notice is, accordingly, held to be unexceptionable in so far as this item is concerned. In this connection, the learned standing counsel for the Department relies upon the decision of the Supreme Court in Chowringhee Sales Bureau v. CIT : 87ITR542(SC) , wherein it has been held that, where an auctioneer collects sales tax from the purchaser of goods but does not credit the same to the Government, the amount of sales tax so retained is his trading receipt and is liable to be included in his business income.
36. Now, coming to items (2) and (3), it is really unnecessary for us to deal with the contentions of the petitioner on merits in view of the following circumstances. The assessee in its letter dated August 14, 1978, addressed to the ITO, A-Ward, Central Circle, Vijayawada, has admitted both these items. A copy of the letter has been furnished to us by way of material papers by the learned standing counsel for the Department. With respect to the claim under section 35A of the Act, the assessee stated in its letter : 'the assessee has no objection for the disallowance of the claim under section 35A of Rs. 64,286'. Similarly, with respect to the third item, the assessee submitted :
'The assessee has no objection for the disallowance of Rs. 7,500 being the provision for gratuity made in the books of account in the year 1970-71 since the was not apporved in that year. It was claimed as deduction in that year under an impression that the gratuity fund will be approved with restrospective effect. In this connection, we further state that the provision for gratuity made in the year 1970-71 in respect of all units was disallowed in the assessment year 1972-73, but the same has been allowed in the assessment year 1973-74 as the gratuity funds has been an approved fund with effect from July 1, 1971. But the provision for gratuity made in respect of the managing director was neither disallowed in the assessment year 1972-73 nor allowed in the assessment year 1973-74. Therefore, if the said gratuity of Rs. 7,500 is going to be disallowed in the assessment year 1972-73, the same has to be allowed in the assessment year 1973-74. In any case, we submit that as the assessee is a company which is taxable at a flat rate of tax for both 1972-73 and 1973-74 assessment years, it makes no difference whether the amount is allowed in any of those two years.
Regarding disallowance of Rs. 3,600, being the value of perquisites provided to the managing director, we submit that the same, i.e., the value of perquisites was not included and the assessee-company has no objection for the same.'
37. The assessee having itself conceded the Department's claim, cannot be allowed to question the same. It must be noticed that while the letter is dated August 14, 1978, the present writ petition was filed on September 14, 1979, i.e., more than one year later. In any event in exercise of the discretionary jurisdiction of this court, under art. 226 of the Constitution of India, we are not inclined to allow the petitioner to question the impugned notice with respect to items (2) and (3).
38. This writ petition, accordingly, fails and is dismissed. No costs.
W. P. No. 6275 of 1979 :
Under the impugned notice, the assessment for the assessment year 1969-70 is sought to be reopened on two counts, viz., (1) that the assessee wrongly claimed excess development rebate without disclosing the factum of devaluation of pound-sterling, and thereby an amount of Rs. 1,52,935 has escaped assessment; and (ii) that the petitioner undervalued the closing stock of sugar for the relevant accounting year which has resulted in undervaluation of the closing stock in a sum of Rs. 5,90,810 and, further, that the assessee had also deducted Rs. 2,16,291 from the total value of the closing stock on the ground that the loss was suffered in export quota, though no such loss was suffered on or before June 30, 1968, which is the last day of the relevant accounting year for the assessment year in question. It is stated that there has been total undervaluation of Rs. 8.23 lakhs in all. We will take up the first item now.
39. For the assessment year 1969-70, the accounting year is July 1, 1967, to June 30, 1968. In the reasons recorded by the ITO, it is stated : 'during the course of the assessment proceedings for the assessment year 1976-77, it came to light that the assessee had made a wrong claim of development rebate amounting to Rs. 1,52,935. It transpired that the assessee received devaluation profit of Rs. 4,35,872 in respect of machinery purchased from foreign countires due to devaluation of 'sterling'. Development rebate on this profit of Rs. 4,36,872 should not have been allowed and the same had, therefore, escaped assessment........'
40. In the counter affidavit filed by the ITO, it is stated that 'the petitioners as usual claimed development rebate on the same amount as was claimed for the previous year without disclosing the factum of devaluation of pound sterling and consequent scaling down of the amount of instalment of deferred payment in rupees. The cost of the machinery to that extent is reduced and, as such, the development rebate also has to be reduced correspondingly'. In the reply affidavit filed by the assessee, it is stated that in the period year, relevant for the assessment year 1969-70, the assessee did not claim any development rebate respect on the machinery, the value whereof got reduced on account of the devalution of the pound. It is stated that the development rebate in respect of the machinery in question was claimed in the previous year relevant for the assessment year 1968-69. The devaluation took place on November 19, 1967, i.e., during the period relevant for the assessment year 1969-70.
41. From the above material, and particularly from the averments in the counter-affidavit that the machinery in question was purchased, as contended by the learned counsel for the petitoner, during the accounting year July 1, 1966, to June 30, 1967, Mr. S. Parvatha Rao contended that the machinery was purchased during the period July 1, 1966, to June 30, 1967; that development rebate was claimed for the assessment year relevant thereto and that no such rebate was claimed for the assessment year 1969-70. He argued, relying upon sub-s. (2) of s. 43A, that development rebate once granted cannot be revised or reopened for the subsequents assessment year, on the ground of devaluation of the currency. He explained that the machinery was purchased agreeing to pay its price in instalments, that, in the second year, the instalment, in terms of rupees, came to a lesser amount and that the Department is seeking to revise and reduce the development rebate granted in the assessment year 1968-69 in the next assessment year, on the ground that the cost of the machinery in terms of rupees got reduced. For appreciating this arguments it would be necessary to notice the relevant provisions of law.
42. Section 33 of the Act provides for the development rebate. Sub-section (1) says that in respect of new machinery or plant, a deduction by way of development rebate shall be granted, provided the machinery or plant was installed during the previous year. The rate of rebate is 35% in the case of machinery or plant installed before April 1, 1970, and 25% in the case of machinery installed after March 31, 1970. Sub-section (3) of s. 34 prescribes certain conditions which must be satisfied for availing of the development rebate. Since development rebate under s. 33 has to be calculated on the 'actual cost', it is necessary to refer to s. 43, which defines the expression 'actual cost'. It says that in ss. 28 to 41, 'actual cost' means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. (It is not necessary to refer to the various explanations in the section for the purpose of this writ petition). Section 43A is a special provisions providing consequences to changes in the rate of exchange of currency.
43. It says that, where an assessee has acquired any asset from a country outside India for the purpose of his business or profession, and in consequence of a change in the rate of exchange at any time after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency for making payment towards the whole or a part of the cost of the asset, the amount by which the liability aforesaid is so increased or reduced during the previous year shall be added to, or as the case may be, deducted from the actual cost of the asset as definded in s. 43(1), and for certain other purposes specified therein. Sub-section (2) says that 'the provisions of sub-section (1) shall not be taken into account in computing the actual cost of an asset for the purpose of the deduction on account of development rebate under section 33.'
44. We agree with Sri S. Parvatha Rao that, by virtue of sub-s. (2) it is not open to the Department to say in the subsequent year (year subsequent to the year in which the machinery was purchased) that, because of the change in the rate of exchange, the actual cost has gone down and, therefore, the development rebate must be revised. In our opinion, the correct position appears to be this : the development rebate under s. 33 is granted only for the year in which the machinery or plant is installed. No development rebate can be claimed or granted, in the subsequent assessment year. In other words, if in this case the machinery was installed during the accounting year July 1, 1966, to June 30, 1967, the development rebate could have been granted only in the assessment year 19068-69. Admittedly, no devaluation took place during the period July 1, 1966, to June 30, 1967. The devaluation took place only during the next accounting year, i.e., between July 1, 1967, and June 30, 1968. Even in a case the assessee had purchased the machinery agreeing to pay its price in instalments, it could have claimed the development rebate on the total cost of the machinery only in the assessment year 1968-69. The development rebate cannot be claimed in more than one year merely because the price is paid in so many instalments. Once the development rebate has been worked out and allowed in a particular assessment year, sub-s. (2) of s. 43A prohibits its reopening or revision in any subsequent assessment year, on the ground of change in rate of exchange. In other words, the development rebate granted in a particular assessment year cannot be reduced or revised in the subsequent assessment year on the ground that, on account of the devaluation during the period relevant to the subsequent assessment year, a lesser amount was paid towards the instalment, or instalments payable during the period relevant to the subsequent assessment year. If, of course, the change in the rate of exchange takes place in the same accounting year in which the machinery is installed, then the actual cost will be worked out having regard to the change in rate of exchange, and in such a case there will be no occasion for sub-s. 92) of s. 43A to come into play. Sub-section (2) merely prohibits the rate of exchange be taken into account in computing the actual cost of an asset for the purpose of deducting the development rebate under s. 33. We shall now refer to certain decisions relied upon by Sri. M. S. N. Murthy, the learned standing counsel for the Department, in support of his contention that sub-s. (2) of s. 43A does not prohibit the reopening of the development rebate in a subsequent year.
45. The cases relied upon are in Arvind Mills Ltd. v. CIT : 112ITR64(Guj) , Addl. CIT v. Kwality Spinning Mills (P.) Ltd. : 109ITR646(Mad) and CIT v. Arun Spinning Mills . In the case in Addl. CIT v. Kwality Spinning Mills (P.) Ltd., the machinery was acquired in the year in which the Russian currency was revalued. Accordingly, it was held that sub-section (2) of section 43A has no application. Similarly, in Arvind Mills case, the increased liability was incurred prior to the acquisition of machinery. Obviously, in such a case section 43A(2) can have no application. Same is the position with respect to the decision in CIT v. Arun Spinning Mills . These cases, therefore, do not in any manner support the respondent's contention.
46. For the above reasons we hold that the impugned notice is bad in so far as it seeks to reopen the deduction already granted under section 33.
47. Now, coming to the second aspect, the main complaint of the Department is that instead of valuing the closing stock with reference to the prices prevailing on June 30, 1968, the assessee adopted the prices prevailing at a later date. Similarly, it is complained that the loss suffered on account of export quota subsequent to June 30, 1968, was taken into account for the purpose of the accounting year July 1, 1967, to June 30, 1968. It is, however, explained by Mr. S. Parvatha Rao for the assessee that, according to the method of accounting and the accounting practice followed by the assessee, and which is consistent with the practice followed both in India and abroad, the closing stocks are valued with reference to their cost, or net realisable value, whichever is lower. He contended that the events taking place after the date of balance-sheet resulting in reduction of sale price, should be taken into account, while valuing the closing stock as on the date of balance-sheet. It is, however, unnecessary for us to go into the correctness or otherwise of the accounting practice followed by the assessee.
48. What is relevant for our purposes is that there is no allegation of non-disclosure or suppression of material facts. We have seen the return for the relevant year, and find that the assessee has clearly mentioned the rates at which is has valued the closing stocks, and has also mentioned the dates on which the respective rates had come into vogue. In such a situation, the assessee cannot be blamed for the income escaping assessment, even if any. The ITO ought to have questioned the assessee even at the time of initial assessment as to why and on what basis is the assessee adopting the rates prevailing subsequent to June 30, 1968. That error cannot be cured by resorting to section 148. Accordingly, we hold that the impugned notice is bad even with respect to the second item.
49. W.P. No. 6275/1979 is accordingly allowed. No costs.