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Ahmedabad Cotton Mfg. Co. Ltd. Vs. Union of India and anr. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberSpecial Civil Application Nos. 517 of 1971 and 218 of 1972
Judge
Reported in[1974]95ITR639(Guj)
ActsIncome Tax Act, 1961 - Sections 34(2), 41(1), 41(2), 45, 142, 147 and 148
AppellantAhmedabad Cotton Mfg. Co. Ltd.
RespondentUnion of India and anr.
Appellant Advocate J.M. Thakore, Adv.
Respondent Advocate K.H. Kaji, Adv.
Cases ReferredHabib Hussein v. Commissioner of Income
Excerpt:
direct taxation - depreciation - section 10 (2) of income tax act, 1922 -obligation on part of assessee company to disclose factum of initial depreciation - duty also cast on income tax officer concerned to see that aggregate of all allowances in respect of depreciation did not exceed original cost to petitioner-company - duty not discharged by income tax officer - ground of income escaping assessment not available to income tax officer so as to reopen assessment. - - the petitioners have been assessed to income-tax under the indian income-tax act, 1922, and after the coming into force of the income-tax act, 1961, under that at as well. the petitioners further contended that no income had escaped assessment by reason of failure or omission on the part of the petitioners to disclose.....divan, c.j.1. the petitioners in each of these two special civil applications are the same, namely, a limited-company, carrying on business of manufacturing textile cloth in ahmedabad. the petitioners, namely, the union of india and a. n. rao, income-tax officer, special investigation circle iii, are respondents in both these special civil applications. the two special civil applications refer to separate notices issued by the second respondent in each of these special civil application under section 147(a) of the income-tax act, 1961, seeking to reopen assessments for different years and the grounds on which the assessments are sought to be re-opened are identical. the petitioners challenge these notices under section 148 of the act of 1961 seeking to re-open assessments under section.....
Judgment:

Divan, C.J.

1. The petitioners in each of these two special civil applications are the same, namely, a limited-company, carrying on business of manufacturing textile cloth in Ahmedabad. The petitioners, namely, the Union of India and A. N. Rao, Income-tax Officer, Special Investigation Circle III, are respondents in both these special civil applications. The two special civil applications refer to separate notices issued by the second respondent in each of these special civil application under section 147(a) of the Income-tax Act, 1961, seeking to reopen assessments for different years and the grounds on which the assessments are sought to be re-opened are identical. The petitioners challenge these notices under section 148 of the Act of 1961 seeking to re-open assessments under section 147. Special Civil Application No. 517 of 1971 refers to notices to re-open assessments for assessments years 1962-63 and 1963-64 whereas notices which are challenged in Special Civil Application No. 218 of 1972 are in connection with re-opening of the assessments for assessment years 1964-65 and 1965-66. Since the notices for these four different reassessment years are being challenged on the same grounds, it will be convenient to dispose of both these special civil application by this common judgment.

2. The petitioners have their registered office at Commercial Ahmedabad Mills' Premises, near Idga Chawky, Asarwa, Ahmedabad, and the petitioners are owners of two textile units both of which are situate at Ahmedabad. The petitioners have been assessed to Income-tax under the Indian Income-tax Act, 1922, and after the coming into force of the Income-tax Act, 1961, under that At as well. The assessments of the petitioners for the assessment years 1958-59 to 1965-66 were completed in due course. At the time of assessment, according to the petitioners, they had disclosed truly and fully all particulars necessary for the grants of depreciation allowance and had also furnished the relevant particulars of sale of assets, in the respective assessment years as and when such sales took place. It is the case of the petitioners that after verifying the records, the assessments of the petitioners had been completed and in the course of those assessments, the petitioners were granted necessary depreciation allowance while the liability on account of balancing charge on sales of assets was also brought to charge in the respective assessment years 1962-63 to 1964-65. By his letter dated March 18, 1971, the second respondent intimated to the petitioners that he intended to initiate proceedings against the petitioners under section 147(a) of the Act of 1961, in respect of assessment years 1962-63 to 1965-66 the corresponding accounting years being 1961 to 1964. This action was proposed because, according to the second respondent, the petitioners had been granted excessive depreciation allowance in assessment years 1960-61 to 1965-66 and the second respondent further stated in the said letter that certain capital gains arising on transfer of assets had not been assessed in assessment years 1962-63 to 1964-65. By the letter dated March 24, 1971, the petitioners intimated to the second respondent that the action proposed to be taken by the second respondent was without jurisdiction and/or without authority of law. The petitioners further contended that no income had escaped assessment by reason of failure or omission on the part of the petitioners to disclose fully and truly all material facts necessary for the assessments for the relevant years. Thereafter, two notices, both dated March 30, 1971, were issued by the second respondent. Those notices were in respect of assessment years 1962-63 and 1963-64 and they were issued under section 148 of the Income-tax Act 1961. These notices were issued as, according to the second respondent, income chargeable to tax for the said two assessments years had escaped assessment within the meaning of section 147 of the Act and the second respondent proposed to reassess the income for the said assessment years and had called upon the petitioners to submit returns in the prescribed form. These two notices, both dated March 30, 1971, have been challenged in Special Civil Application No. 517 of 1971. Thereafter, on January 17, 1972, two further notices were issued by the second respondent in respect of assessment years 1964-65 and 1965-66 and these notices, exhibit-B collectively to Special Civil Application No. 218 of 1972, have been challenged in that special civil application. As we have mentioned earlier, the grounds of attack against all the four notices are the same and it will, therefore, convenient to dispose of both these matters by this common judgment. In the affidavit-in-reply filed in Special Civil Application No. 517 of 1971, the second respondent has stated in paragraph 3 :

'In the original return of income filed by the petitioner, depreciation was claimed on machineries on the written down value basis and it was accordingly allowed. However, in respect of certain block of machineries initial depreciation was allowed to the extent of Rs. 2,24,764. The total depreciation, which included the aforesaid amount of initial depreciation, allowed up to the assessment years 1958-59 in fact exceeded the total cost of the said machineries. As the total depreciation allowed exceeded the cost of machineries, in view of the provisions of section 34(2) (i), no further depreciation in respect of the said block of machineries was admissible from the assessment year 1959-60 and onwards. The petitioners, however, claimed depreciation on the said block of machineries on the written down value basis without disclosing the initial amount of depreciation, which was allowed to the extent of Rs. 2,24,764 and the subsequent allowance of depreciation. The Petitioner failed to bring to the notice of the Income-tax Officer the fats and figures correctly and made a false claim of depreciation in its return with a view to defraud the revenue. The petitioner also failed to rectify the incorrect figures of written down value supplied by it during the course of the assessment proceedings. Consequently, the petitioner falsely claimed depreciation as allowable though, in fact, it was not due for allowance.'

3. In order to appreciate the rival contentions at this stage, it is necessary to refer to some of the provisions of the Indian Income-tax Act, 1922, hereinafter referred to as 'the Act of 1922'. Under section 10, sub-section (1) of the Act of 1922, the tax was to be payable by an assessee under the head 'Profits and gains of business, profession or vacation' in respect of the profits or gains of any business, profession or vocation carried on by him. Under sub-section (2), such profits or gains were to be computed after making the allowances set out in the different clauses of that sub-section. Under section 10(2) (vi) in respect of depreciation of buildings, machinery, plant or furniture being the property of the assessee, a sum equivalent to such percentage on the original cost thereof to the assessee as may in any case or class of cases be prescribed was to be allowed. Under the second paragraph of clause (vi), where the building have been newly erected, or the machinery or plant being new, has been installed, after the 31st day of March, 1945, and before the first day of April, 1956, a further sum which was however not to be deductible in determining the written down value for the purposes of the clause in respect of the year of erection or installation, was to be allowed. The proviso to section 10(2) (vi) contained three clauses (a), (b) and (c) clause (c) is material for the purpose of this judgment :

'Provided that -..... (c) the aggregate of all allowance in respect of depreciation made under this clause and clause (via) or under any Act repealed hereby, or under the Indian Income-tax Act, 1886 (II of 1886), shall, in no case, exceed the original cost to the assessee of the building, machinery, plant or furniture, as the case may be.'

4. Thus under the Act of 1922 depreciation of three kinds could be allowed, namely : (1) ordinary depreciation; (2) initial depreciation which was granted in the first year of installation but which was not to be taken into consideration for the purpose of arriving at the written down value; and (3) additional depreciation which was climbable for a period of five years but which, like ordinary depreciation, was to be taken into consideration for the purpose of working out the written down value. As regards the initial depreciation, it was in terms provided that this initial depreciation was not to be deductible in determining the written down value for the purpose of section 10(2) (vi). Under section 10(5) (b) of the Act of 1922 the written down value in the case of assets acquired before the previous year was to be the actual cost to the assessee less all depreciation actually allowed to him under that Act or any Act repealed thereby, or under executive orders issued when the Indian Income-tax Act, 1886, was in force. But by virtue of the provision in the second paragraph of section 10(2) (vi), initial depreciation was not to be deductible in determining the written down value for the purpose of the clause. The case of the revenue as set out in the letter dated March 18, 1971, was that the petitioner-company had been allowed excess depreciation on the oldest block of machinery as on January 1, 1952. The written down valued of the said block at the end of the assessment years 1958-59 was Rs. 2,46,558 but the initial depreciation allowed on that machinery was Rs. 2,24,764. Hence, in view of the provisions of section 10(2) (vi), proviso clause (c), the allowable depreciation for the assessment year 1959-60 could not have exceeded Rs. 21,724. But the petitioner had been granted depreciation on the said block for the assessment year 1959-60, to the tune of Rs. 36,984. Thus with the depreciation allowance of Rs. 36,984 granted for the assessment year 1959-60, the aggregate of depreciation allowance, whether ordinary or initial granted, in respect of that block of machinery exceeded the original cost to the petitioner-company of that block of machinery and according to the second respondent in that letter of March 18, 1971, excess depreciation was granted to the petitioner-company by Rs. 75,190 in the assessment year 1959-60. It was, therefore, contained that no depreciation was to be available for subsequent years on the said block and it was proposed to withdraw the excess depreciation allowed for the assessment years 1962-63 to 1965-66. It is obvious that since the provisions of section 147(b) could not be invoked because the period of limitation of four years from the assessment years under consideration had expired and since there was a period of eight year even for invoking the provisions of section 147(a) of the Act of 1961, the second respondent proposed to confine his action to the depreciation allowance granted to the petitioner-company during the assessment years 1962-63 to 1965-66, because those four years would be within the period of eight years immediately preceding March 31, 1961.

5. The second ground for which reopening of the assessment was proposed was that some machinery was sold during assessment years 1962-63 to 1964-65, and half of the profits estimated under section 41(2) had been allowed and the sale proceeds had been charged as a balancing charge only to the extent of half instead of full bow there was no written down cost of the oldest machinery and also the said balance of sale price, i.e., half of the said profits was charged as profits under section 41(2) of the Act of 1961 and the second respondent proposed to reopen the assessments for assessment years 1962-63 to 1965-66 for these two purpose, namely, for the excess depreciation allowance allowed during these respective four years and also in connection with the balancing charge of the sale proceeds which were not fully taxed under section 41(2).

6. Section 41(2) of the Act of 1961 provides for what is known as the balancing charge. Under that sub-section where any building, machinery, plant or furniture which is owned by the assessee and which was or has been used for the purpose of business or profession is sold, discarded, demolished or destroyed and the moneys payable in respect of such building, machinery, plant or furniture, as the case may be, together with the amount of scrap value, if any, exceed the written down value, so much of the excess as does not exceed the difference between the actual cost and the written down value shall be chargeable to Income-tax as income of the business of profession of the previous year in which the moneys payable for the building, machinery, plant or furniture became due and if there is any surplus still left, then it would be charged as capital gains under section 45 of the Act of 1961. As Caturvedi and Pithisaria in the Commentaries on Income-tax Law, 1971 edition, have pointed out at page 746 :

'Where any allowance or deduction had earlier been made in respect of any loss, expenditure or trading liability and subsequently the assessee has obtained or realised any amount towards such loss, expenditure or trading liability, section 41(2) deems such realisation, etc., as the assessee's income for the year in which he has realised it.

Section 41(2) is a necessary corollary to section 41(1) in respect of allowed depreciation, if, in respect has been building, machinery, plant or furniture, any depreciation has been allowed had subsequently such building, etc., is sold, discarded, demolished or destroyed, the assessee may get some value either as a result of the sale or from insurance or from salvage or compensation thereabout.'

7. The authors illustrated the problem in this manner :

'Let the original cost of the building be taken as X and depreciation already allowed in respect thereof be taken as Y. On sale, etc., the assessee realise a total sub, Z, when the written down value was X - Y. If Z is greater than X - Y, the balancing charge, viz., treated, by virtue of section 41(2), as the assessee's income for the year in which Z becomes payable.

The necessity to keep section 41(2) as a provision in addition to section 41(1) arises from the fact that, in its very nature depreciation is neither loss nor expenditure nor a trading, which are the subject-matter of section 41(1).'

8. He has also been pointed out :

'There may be cases where the moneys payable in respect of sale, etc., of the asset are grater than the written down value plus the depreciation actually allowed. In such a case, the gross surplus (that is sale price minus the written down value) will be bifurcated into (i) depreciation actually allowed, and (ii) further surplus. The depreciation actually allowed shall be includible in the total income as balancing charge under section 41(2), and the further surplus shall be treated as capital gains (if a transfer' of the asset is involved) under section 45.

Suppose, A imported a machine at a cost of Rs. 1,00,000. During the years A used it for his business, he had been allowed a depreciation totaling to Rs. 36,000. Its written down value of Rs. 64,000. At such a time, A sell it for Rs. 1,60,000. The gross surplus, Rs. 1,60,000, minus Rs. 64,000, i.e., Rs. 96,000, is bifurcated into (i) depreciation actually allowed, Rs. 36,000, and (ii) the further surplus, Rs. 60,000. Thus, Rs. 36,000, shall be includible in A's total income as balancing large under section 41(2) and Rs. 60,000 shall be includible as capital gains under section 45.'

9. It is against this background of the provisions of law that we have to consider the validity of the notices issued under section 148 of the Act of 1961. We may point out that in Special Civil Application No. 218 of 1972, the petitioners has annexed to the petition the different assessment order for assessment years 1963-64 to 1965-66 together with the annexures to those assessment order for the relevant years. There annexures to the assessment orders set out the working made by the Income-tax Officer concerned in arriving at the written down value of each of the different pieces of machinery, etc. In each of these three years for which consideration of section 41(2) arises, the Income-tax Officer has indicated in the assessment order how the amount was charged under section 41(2). In the assessment years 1962-63, sale proceeds of machinery sole in the course of the assessment year came to Rs. 68,314 and one-half of that amount of sale proceeds, namely, Rs. 34,157, was included under section 41(2) or under section 10(2) (vii) which was the equivalent section of the Act of 1922. In the assessment year 1963-64, the total amount of sale proceeds was Rs. 1,16,840 and one-half of those sale proceeds, namely, Rs. 58,420, was included as profit under section 41(2). Similarly, for the assessment year 1964-65, the total amount of sale proceeds was Rs. 4,350 and the profit Income-tax Officer included the whole amount of Rs. 4,350 as profit under section 41(2) but subsequently the Appellate Assistant Commissioner had reduced it by half and had only included the amount of Rs. 2,175 as profit under section 41(2). In the annexures to the assessment orders for the relevant years which are to be found annexed to the petition in Special Civil Application No. 218 of 1972, the reason why one-half of the amount of sale proceeds was included has been given. In the annexure to the assessment order for the assessment years 1965-66 in paragraph 12 it has been mentioned as follows :

'During the year the assessee has sold off certain machineries worth Rs. 1,16,201. The machineries sold were old ones. Following the practice adopted in the past, 50% of it is considered as profit under section 41(2) of the Act, i.e., Rs. 58,540.'

10. Thus, it appears that the usual practice of this department was, at the time of applying section 41(2), to take one-half of the sale proceeds as profits under section 41(2) and not work out the actual figures as contemplated by section 41(2) and the method which the passage which we have quoted from Chaturvedi and Pithisaria requires the Income-tax Officer to do.

11. The question, therefore, that we have to consider is whether there was any escapement of income from assessment by reason of any failure or omission on the part of the assessee to disclose fully and truly all material facts necessary for the assessment of the petitioner for the relevant year. This will apply both to the question of depreciation allowance and also to the question of profits under section 41(2). As regards the question under section 41(2), it obvious that it is because the old practice which was being followed by the Income-tax department for several years in connection with the computation of the profit under section 41(2) was discontinued that the second respondent proposed to reopen the assessment regarding the profits under section 41(2) in these three years. The written down value of each piece of machinery which was sold was apparently disclosed by the petitioner-company but, following the usual practice, the Income-tax Officer, in two of the three years under consideration, and the Appellate Assistant Commissioner in the third year, had treated one-half of the sale proceeds as the profits under section 41(2). Merely because the Income-tax authorities changed their practice or started applying the provisions of section 41(2) in full force, it cannot be said that that part of the sale proceeds, which was deemed income as profit under section 41(2), escaped assessment by reason of any omission or failure on the part of the assessee, that it, the petitioner, to disclose fully and truly all material facts necessary for the assessment for the assessment year under consideration.

12. The question, therefore, remains whether failure on the part of the petitioner to mention the amount of initial depreciation that had been allowed to the petitioner-company under the provision of section 10(2) (vi), second paragraph, in the earlier years, amounted to failure or omission on its part to disclose fully and truly all material fats necessary for the assessment in the years under consideration. It is true that excess depreciation had been allowed to the petitioner-company, that is, depreciation allowance in excess of what was permissible to it in view of the provisions of section 10(2) (vi), proviso, clause (c), inasmuch as the aggregate of all depreciation allowance (ordinary allowance plus initial depreciation allowance) was in excess of the original cost and, therefore, it cannot be gainsaid that by virtue of excess depreciation allowance having been granted, income chargeable to tax had escaped assessment. The question, however, is whether there was any omission of failure on the part of the petitioner to disclose fully and truly all material facts necessary for its assessments inasmuch as the amount of initial depreciation was not disclosed by it to the Income-tax Officer at the time of the assessment for the relevant year and, secondly, whether the income had escaped assessment by reason of such omission or failure on the part of the petitioner-company because it is only if the income has escaped assessment by reason of such omission or failure on the part of the petitioner-company that the Income-tax Officer can have reason to believe that by reason of such omission of failure on the part of the petitioner-company income chargeable to tax had escaped assessment and then only the Income-tax Officer, the second respondent herein, would get jurisdiction to proceed under section 147(a).

13. The position under section 34 of the Act of 1922 and section 147 of the Act of 1961, which are identical provision, has been explained in several decision of the of the Supreme Court. We may only refer to Modi Spinning & Weaving Mills Co. Ltd. v. Income-tax Officer. At page 371 Shah J., as he then was, delivering the judgment of the Supreme Court, has pointed out :

'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 years, 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' has 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 fats necessary for his assessment for that year. These conditions are cumulative and precedent to the exercise of jurisdiction to issue a notice of reassessment.'

14. We are in the present case concerned with the second condition, namely, that the Income-tax Officer must have reason to believe that income escaped assessment or there was under-assessment by reason of omission of failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that year. It is no doubt true that if the Income-tax Officer had consulted his own records, he could have found out without the least trouble as to what initial depreciation had been allowed in respect of the different items of machinery and what depreciation had been allowed from year to year in respect of that piece of machinery and thus by looking at his own records for the previous years, the Income-tax Officer could very easily have ascertained whether the aggregate of all depreciation, whether initial or ordinary or additional, allowed in respect of that particular piece of machinery. Apparently, the Income-tax Officer had not consulted his own records and had not checked up whether the aggregate of all depreciation, ordinary, initial or additional, when combined together, exceeded the original cost of the piece of machinery to the petitioner-company.

15. A similar case came up for consideration before this High Court in Special Civil Application No. 545 of 1966, decided by a Division Bench on August 31, 1970. There Bhagwati, C.J. and P. D. Desai J. were concerned with the following facts. The petitioner was a public limited company carrying on business of manufacturing pottery and sanitary were and, in respect of assessment year 1957-58, the petitioner filed its return of income before the Income-tax Officer. The petitioner put in a claim for Rs. 3,58,325 as depreciation allowance in respect of its capital assets. The Income-tax Officer allowed depreciation to the the tune of Rs. 5,05,487. The order was rectified under section 35 of the Act of 1922 and the total income of the petitioner was redetermined and in spite of all ratification, appeals, etc., the depreciation allowance to the tune of Rs. 5,05,487 was not disturbed and it remained unchanged. Similarly, in respect of assessment year 1959-60 the Income-tax Officer concerned has allowed depreciation and development rebate to the tune of Rs. 3,87,926. It was subsequently realised that because of the omission to take into consideration the initial depreciation, excess depreciation allowance had been granted to the assessee for assessment years 1957-58 and 1959-60 and the Income-tax Officer started reassessment proceedings under section 147(a) and at that stage the Special Civil Application was filed in this court.

16. Two contentions were urged before the Division Bench, namely : (1) whether the assessee was bound during the course of the Previous assessment proceeding to disclose fully and truly all material facts necessary for its assessment for the relevant years to the assessing authority although such material was admittedly on the record of the department and it was not exclusively within the knowledge of the assessee; and (2) whether, on a true and proper interpretation of section 147(a) of the 1961 Act, the jurisdiction of the Income-tax Officer to reassess income that had escaped assessment or to recompute loss or depreciation allowance, was affected in case where the material necessary for the assessment in respect of which the alleged omission or failure to disclose had occurred, is such as could have been gathered by him from an investigation into the records of the department. On both these points the Division Bench decided against the assessee. The Division Bench observed :

'Since the fact that initial depreciation allowance was granted to the petitioner in respect of certain items of its capital assets is admittedly a material fact for the purpose of the assessment of the petitioner, it was bound to disclose the said fact to the Income-tax Officer during the course of the previous assessment proceedings to enable the assessing authority to determine the true amount of the allowance to which it was entitled..... Even if the material necessary for the assessment in respect of which the alleged omission or failure to disclose has occurred is such as could have been verified or obtained by an investigation of the material on the record or the facts disclosed thereby or from other inquiries or search into the records of the previous assessment proceedings but which was not in fact so obtained, the jurisdiction of the Income-tax Officer to proceed under section 142 is not affected.'

17. The Division Bench, therefore, rejected the submission made on behalf of the petitioner that, since the fact that initial depreciation in respect of certain items of the capital assets of the petitioner was granted to the petitioner under section 10(2) (vi) of the 1922 Act was already on the record of the department and could have been found out by the Income-tax Officer during the course of the previous assessment proceeding by investigation of the record, there was no obligation on the part of the petitioner to disclose the said material in the course of its previous assessment proceedings and there was, therefore, no failure or omission on the part of the petitioner to disclose fully and truly all material necessary for his assessment for the relevant years within the meaning of section 147(a) of the Act.

18. In view of this Division Bench judgment, with which we are in agreement, it is obvious that the petitioner in the present case must be held to have omitted or to have failed to disclose fully and truly all material facts necessary for the assessment of the petitioner-company for assessment years 1962-63 to 1965-66 by failing to refer to the grant of initial depreciation that had been granted to it in the past and we well proceed in the course of this judgment on the footing that at least as regards the excess of depreciation allowance granted to it in the past, such excess depreciation was allowed and, therefore, income had escaped assessment for these different years under consideration but the question that still remains to be considered is whether the income chargeable to tax so far as the petitioner was concerned had escaped assessment by reason of the omission or failure on the part of the petitioner to disclose fully and truly such material facts.

19. Under section 10(2) (vi), proviso, clause (c), as we have noticed, the aggregate of all allowances in respect of depreciation made under section 10(2) (vi) of the Act of 1922, and under clause (via) or under any Act repealed thereby, or under the Indian Income-tax Act, 1886, was, in no case, to exceed the original cost to the assessee of the buildings, machinery, plant or furniture, as the case may be. Therefore, it was the duty of the Income-tax Officer concerned who was assessing the income of the petitioner-company in the years 1962-63 to 1965-66 to see to it that the aggregate of all depreciation allowances, ordinary depreciation allowance or initial depreciation allowance or additional depreciation allowance, allowed under the provisions of section 10(2) (vi) or section 10(2) (via) did not exceed the original cost to the petitioner-company. Just as there was an obligation on the part of the petitioner-company to see to it that the factum of initial depreciation was disclosed by it, there was also a duty on the part of the Income-tax Officer concerned to see to that the aggregate of all allowances in respect of depreciation made under section 10(2) (vi) of the Act of 1922 did not exceed the original cost to the petitioner-company. If that duty had been properly discharged by the Income-tax Officer, it is obvious that no excess depreciation would have been allowed in the assessment years 1962-63 to 1965-66. The fact remains that such excess depreciation allowance was allowed and two factors apparently were responsible for such granting of excess depreciation : the failure or omission on the part of the petitioner-company to mention in its return or in the papers filed along with the return or in the course of the assessment proceedings the fact that initial depreciation has been allowed in respect of certain pieces of machinery and to disclose the quantum of that initial depreciation. However, the other factor which led to such excess depreciation allowance being allowed was the dereliction of duty on the part of the Income-tax Officer himself. He failed to notice that the aggregate of all allowances in respect of depreciation made under section 10(2) (vi) had exceeded the original cost to the assessee of the relevant pieces of machinery. It is because of the combined operation of the omission or failure on the part of the petitioner-company to disclose these material fats to the Officer in failing to see that the aggregate of all allowances in respect of depreciation under section 10(2) (vi) had exceeded the original cost to the petitioner-company that the situation came about under which the petitioner-company was in fact allowed excess depreciation in the assessment years under consideration. It is, therefore, not possible for us to say that it was by reason of the omission or failure on the part of the petitioner-company to disclose fully and truly all material fats necessary for its assessment for the relevant years that the income chargeable to tax escaped assessment for those years.

20. It may be pointed out that the Supreme Court has emphasised the duty of the Income-tax Officer in determining what the correct amount of depreciation is. In Maharana Mills (Private) Ltd. v. Income-tax Officer, at pate 356 Kapur J., delivering the judgment of the Supreme Court, approved of the decision of the Calcutta High Court in Karnani Industrial Bank v. Commissioner of Income-tax and observed :

'It was next argued by the learned Attorney-General that the written down values determined under section 35 are not final and can be redetermined in the following assessment years and in support he referred to Karnani Industrial Bank v. Commissioner of Income-tax, where the original cost of the machinery purchased, Rs. 3,40,000, was accepted in the successive assessment years till it was doubted in the assessment year 1946-47 and was determined at Rs. 2,80,000 and it was contended that the Income-tax Officer had to take the written down value of the previous year as correct. Thus, the question there raised was whether the Income-tax predecessor ever since the assessment year 1939-40. It was held that neither the principle of res judicata nor estoppel nor the terms of section 10(2) (vi) of the Act prevented prevented the Income-tax Officer from determining for himself what the actual cost of the machinery had been and that depreciation had to be calculated for every year and it was open to the Income-tax Officer not merely to perform 'a mathematical operation, on the basis of the written down value of the previous year, but one of determining the written down value himself.''

21. It was also observed at page 357 :

'The limit to which the Income-tax Officer can go back does not stop at the written down value of the previous year by extends up to the figure of the original cost, and the method enjoined by section 10(5) (b) is not that the Income-tax Officer should merely sale down the written down value of the previous year but that he should take into consideration the actual cost, determining it for himself, if necessary, take also into consideration the allowances granted in the past and then make his own computation as to the write down value for the assessment year with which he is concerned. Thus, it cannot be said that merely because under section 35 some written down value and the depreciation amount have been determined they are a final determination binding for all times to come nor does the determination operate as estoppel or res judicata for the following years.'

22. It is thus clear that according to the Supreme Court the method enjoined for the purpose of ascertaining the written down value while granting depreciation allowance was that the Income-tax Officer should take into consideration the actual cost determining it for himself, if necessary, take into consideration the allowance granted in the past and then make his own computation as to the written down value for the assessment year with which he was concerned. Hence, it is obvious that if the Income-tax Officer who passed the assessment orders in the case of the petitioner-company at the time of the original assessments for the assessment years 1962-63 to 1964-65 had followed this method which is enjoined upon him and had taken into consideration the actual cost determining it for himself if necessary and had taken also into consideration the allowances granted in the past (inclusive of the initial allowance) and then had made his own computation as to the write down value for the assessment year with which he was concerned, it is obvious that no excess depreciation allowance would have been granted for assessment years 1962-63 to 1965-66, though no doubt true, chargeable income escaped assessment in the case of excess depreciation allowance, and though there was failure or omission on the part of the assessee, namely, the petitioner-company before us, in not disclosing fully and truly all material fats which were necessary for the assessment for those four years, still it is not possible for us to say that it was only by reason of such omission or failure on the part of the assessee that the income chargeable to tax had escaped assessment. The income escaped assessment also by reason of the fact that the Income-tax Officer concerned in the relevant year had not followed the method enjoined upon him for the purposes of calculating depreciation allowance and not taking into consideration all allowances granted in the past in respect of these different pieces of machinery.

23. We may point out that in Modi Spinning Weaving Mills Co. Ltd. v. Income-tax Officer, Meerut, the Supreme Court remanded the matter back to the High Court because the High Court did not consider whether the income escaped assessment by reason of the omission or failure on the part of the company to disclose fully and truly all material facts necessary for assessment. There also there was a question of initial depreciation in respect of certain machinery and the aggregate of depreciation allowances including initial depreciation on the machinery exceeding the ordinal cost, but merely because of the failure on the part of the assessee-company to mention the amount of initial depreciation, it was not held by the Supreme Court that income had escaped assessment by reason of the omission or failure on the part of the company to disclose fully and truly all material facts necessary for the assessment.

24. In our opinion, therefore, sine it is not possible to say that income had escaped assessment by reason of the failure or omission on the part of the petitioner-company to disclose fully and truly all material facts necessary for the assessments for the years under consideration, the Income-tax Officer cannot be said to have reason to believe as had been set out in section 147(a) of the Act of 1961.

25. We may point out that in Habib Hussein v. Commissioner of Income-tax, a Division Bench of the Bombay High Court, following the decision in Karnani Industrial Bank Ltd. v. commissioner of Income-tax, has held that it is open to the Income-tax Officer to determine afresh for himself the original cost of the depreciable asset in the assessment of each year. Therefore, it can be now treated as well-settled law that the method of arriving at the amount of depreciation in each assessment year which the Income-tax Officer allows in the case of any assessee must be arrived at by him by following the above mentioned method and while following that method it is incumbent upon him to take into consideration the actual cost and also the allowances granted in the past. That being the law, the conclusion we have reached would necessarily follow and, therefore, the income chargeable to tax cannot be said to have escaped assessment by reason of the omission or failure on the part of the petitioner-company to disclose fully and truly all material facts necessary for its assessment.

26. Under these circumstances neither of the grounds on which the Income-tax Officer, the second respondent herein, proposed to initiate reassessment proceedings against the petitioner-company survives. Because on neither of these two grounds can it be said that by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment, income chargeable to tax had escaped assessment, the conditions precedent for the exercise of the jurisdiction under section 147(a) cannot be said to exist so far as the present cases are concerned.

27. Under these circumstances we allow both these Special Civil Application and quash and set aside the notices issue under section 148 by the second respondent. The two notices which we are quashing in Special Civil Application No. 517 of 1971 are annexure 'D' to the petition each dated March 30, 1971, and in Special Civil Application No. 218 of 1972 they are annexure 'E' date January 17, 1972. The respondents will pay the costs of the petitioner in each of these Special Civil Applications. Rule is made absolute accordingly.


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