1. As a result of a difference of opinion between the Members of the Allahabad Bench "A", who heard this appeal, the following question has been referred to me as third member, under Section 255(4) of the Income-tax Act, 1961 ("the Act"): Whether, on the facts and in the circumstances of the case, the Appellate Assistant Commissioner was justified in confirming the order of the Income-tax Officer reopening the case under Section 147(a) of the Income-tax Act, 1961 for the assessment year 1958-59 2. The facts and material, which are relevant for this controversy, have been set out at very great length in the order of the Accountant Member as also that of the Judicial Member. It is, therefore, not necessary for me to repeat these, again, at any great length. Briefly stated, these facts are as follows: 3. The assessee, which is a limited company engaged in the manufacture of jute products, purchased certain items of machinery from a German firm of the name of Spinbau GMBH in 1957 for a price, whose rupee equivalent was Rs. 4,89,318. The machinery was delivered to the assessee on 7-6-1957 and the entire purchase price was also paid by the assessee to the suppliers. It claimed depreciation and development rebate in respect of this machinery for the assessment year 1958-59, which was duly allowed by the ITO.4. In February 1958, dispute arose between the assessee and the suppliers about the unsatisfactory performance of some of the items of machinery, referred to above, as a result of which the assessee's production was seriously affected. The assessee called upon the suppliers to set right the machinery so that it could meet the assessee's requirements of production. The supplier was also informed that if it failed to carry out the necessary modifications, the supplier would be liable to pay compensation for losses incurred by the assessee due to the suppliers, failure to carry out its contractual obligations (vide assessee's letter dated 1-2-1958 to the suppliers).
The assessee also filed a suit in Kanpur (India) and in Germany, making claims upon the suppliers towards breach of warranty. On 17-5-1961, a settlement was reached between the assessee and the suppliers out of court, according to which the suppliers agreed to pay the assessee a sum of D.M. 2,50,000, the rupee equivalent of which was Rs. 2,69,433 (vide Spinbau's letter dated 17-5-1961). It was also agreed that the assessee will withdraw the legal proceedings instituted against the suppliers and each party will bear its own cost for their attorneys and court fees. It was further provided that the settlement would be considered as final and will not be subject to any modifications or other further measures of any kind and that it would settle all mutual claims arising out of the contract concluded between the parties, in respect of the supply of the abovementioned machinery. The stipulated amount of Rs. 2,69,433 was received in the following manner : 1962-Rs. 92,102 and 1963-Rs. 1,77,331.
The assessee credited the above amounts to the "machinery account". For the assessment years 1963-64 and 1964-65, it claimed depreciation and development rebate on such reduced value of the machinery.
5. The ITO was of the view that as the assessee had got back Rs. 2,69,433 from the suppliers of the machinery, it should have reduced that amount from the original price of Rs. 4,89,318 and should have claimed depreciation and development rebate only on such reduced amount for the assessment year 1958-59. According to him, the settlement was arrived at between the parties during the pendency of the 1958-59 assessment and it was obligatory for the assessee to have brought these facts to the notice of the ITO when he completed the original assessment for 1958-59. As this was not done, the ITO observed, the assessee was given depreciation and development rebate on the original price of Rs. 4,89,318, which represented excessive allowance. In this view of the matter, he reopened the assessment under Section 147(a) of the Act, treating the amount of Rs. 2,69,433 received by the assessee as a reduction in price of the machinery, given by the suppliers. He also completed the reassessment on the above basis.
6. On appeal by the assessee, the AAC confirmed the action of the ITO.Thereupon, it filed a second appeal before the Tribunal.
7. The Tribunal originally disposed of the appeal by its order dated 14-12-1977 dismissing the appeal. However, on an application filed by the assessee, the Bench, by its order dated 26-9-1978, restored the appeal to its file for fresh hearing and disposal. Pursuant to that order, the 'A' Bench of the Tribunal of Allahabad reheard the appeal and it is in the course of passing order, in pursuance of such rehearing, that the difference of opinion has arisen between the two members.
8. The learned Accountant Member, in his order dated 20-6-1979, running to 71 pages, has set out at very great length, all the material facts, the arguments advanced by the assessee and by the department and his reasons for not accepting the assessee's appeal. The learned Judicial Member, in a much shorter order running to about 8 pages, has, also, briefly stated the facts and the arguments, from either side, and has given his reasons as to why the assessee is entitled to succeed in its contention that the action under Section 147(a), taken by the ITO for this year, was misconceived.
9. In advancing arguments before me, Shri N.K.P. Salve, the learned representative of the assessee, after referring to the facts of the case, attached the initiation of proceedings under Section 147(a) on the following grounds, namely, that the reasons given by the ITO, in his report to the Commissioner for reopening the assessment, were factually incorrect, that his crucial assumptions as to fact and law are wholly incorrect and untenable ; that there was no omission or failure on the part of the asses-see to disclose fully and truly all material facts and that assumption that the assessee's income chargeable to tax for the assessment year 1958-59 has escaped assessment is wholly untenable on facts and on law. In support of these contentions, he submitted that what the assessee received from the suppliers, as a result of the settlement dated 17-5-1961, was not a reduction in price of machinery, but was compensation for the loss of production incurred by the assessee, as a result of the faulty functioning of the machinery supplied by the suppliers. He invited my attention to the correspondence between the assessee and the suppliers, in this respect, as also to the correspondence between the assessee and the ITO, with regard to the initiation of the proceedings under Section 147(a). He further referred to the provisions of Section 59(1)(a) of the Sales of Goods Act and pointed out that, having paid the full price of the machinery supplied, it was not open to the purchaser (the assessee) to demand from the sellers a diminution in the price of the machinery, but it could claim only compensation for breach of warranty.
He also referred to the decision of the Supreme Court in Union of India v. Raman Iron Foundry AIR 1974 SC 1265, and submitted that the claim for damages would accrue only when it is finally settled. In this case, he pointed out, the claim for damages, made by the assessee, was settled only on 17-5-1961 and there was no question of treating this as accruing to the assessee in the year 1957, as a reduction in the price of the machinery. In the circumstances, he submitted that the reopening of the assessment under Section 147(a) was illegal and unwarranted as the assessee has not withheld any material particulars relevant for the assessment year 1958-59.
10. On behalf of the revenue, the learned departmental representative relied strongly on the order, dated 20-6-1979, of the learned Accountant Member, with which the learned Judicial Member is in disagreement.
11. I have considered the rival submissions and I find myself in complete agreement with the findings of the learned Judicial Member, on this point. I agree with him, in his finding, that the amount received by the assessee, as a result of the settlement dated 17-5-1961, was not of the nature of a reduction in price of the machinery, accruing to the assessee in 1957, but is of the nature of damages agreed to be paid by the suppliers, to the assessee, as a compensation for breach of warranty, and this accrued to the assessee only on 17-5-1961, when the matter was settled between the parties. Accordingly, there was no question of the assessee reducing this amount from the original purchase price for purposes of claiming depreciation and development rebate for the assessment year 1958-59. It cannot be said that the assessee, either furnished inaccurate particulars of its income or withheld material particulars, so far as the claim of depreciation and development rebate for the assessment year 1958-59 is concerned. In the result, I would answer the question referred to me, in the negative, agreeing with the view expressed by the learned Judicial Member.
12. The case will now go back to the Bench, which heard the appeal, for final disposal in the light of the above discussion and conclusion.