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Shri Venkatesa Mills Ltd. Vs. Commissioner of Income-tax, Madras-ii. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 138 of 1970 (Reference No. 24 of 1970)
Reported in[1978]111ITR562(Mad)
AppellantShri Venkatesa Mills Ltd.
RespondentCommissioner of Income-tax, Madras-ii.
Cases ReferredKalyanji Matji & Co. v. Commissioner of Income
Excerpt:
- ismail j. - the assessee is a public limited company carrying on business of manufacturing of yearn and cloth. the previous year is the calendar year and in 1959, the assessee spent a sum of about rs. 12,00,000 for the introduction of the casablanca conversion system in its spinning plant. it spent more sums of money on the value of conversion materials in the three succeeding years. it also incurred expenditure on acquiring some other items like spindles, pedestals, etc., in each of these years. for the assessment years 1960-61 to 1963-64, when the income-tax officer computed the profits and gains of the business of the assessee, he allowed development rebate on the cost of all the purchases referred to above. however, subsequently, the income-tax officer purported to reopen the.....
Judgment:

ISMAIL J. - The assessee is a public limited company carrying on business of manufacturing of yearn and cloth. The previous year is the calendar year and in 1959, the assessee spent a sum of about Rs. 12,00,000 for the introduction of the casablanca conversion system in its spinning plant. It spent more sums of money on the value of conversion materials in the three succeeding years. It also incurred expenditure on acquiring some other items like spindles, pedestals, etc., in each of these years. For the assessment years 1960-61 to 1963-64, when the Income-tax Officer computed the profits and gains of the business of the assessee, he allowed development rebate on the cost of all the purchases referred to above. However, subsequently, the Income-tax Officer purported to reopen the assessments for all the four years under section 147(b) of the Income-tax Act, 1961, hereinafter referred to as 'the 1961 Act'. The reason for reopening of the assessments was that the income was under-assessed by giving deduction for the development rebate in the original assessments, while the assessee was not entitled to such development rebate at all. In appeals preferred by the assessee to the Appellate Assistant Commissioner, he held in respect of all the four assessment years, that the reopening of the assessments under section 147(b) was not legal because it was based on nothing more than the change of opinion on the part of the Income-tax Officer. On merits, the Appellate Assistant Commissioner held that the assessee was entitled to deduction for the development rebate. In respect of all these four years, appeals were preferred by the department to the Income-tax Appellate Tribunal against the orders of the Appellate Assistant Commissioner. When the appeal in respect of the assessment year 1960-61, namely, I.T.A. No. 18964 of 1966-67 came up for hearing before the Tribunal, the departmental representative agreed, on the authority of the decision of the Supreme Court in Commissioner of Income-tax v. Mahalakshmi Textile Mills Ltd. : [1967]66ITR710(SC) , which we shall have occasion to refer to later, that the expenditure on conversion materials would be treated as admissible as revenue expenditure, subject to the development rebate allowed by the Appellate Assistant Commissioner being withdrawn. The representative of the assessee conceded the departmental appeal on this basis and as a consequence depreciation as far as the items of conversion materials were concerned was also withdrawn and the Tribunal passed orders accordingly on November 20, 1968.

The appeals relating to the other three years, namely, 1961-62, 1962-63 and 1963-64, came up for consideration before the Tribunal later. When those appeals were taken up for hearing as before, the departmental representative indicated that the department was agreeable to orders being passed similar to the one passed in respect of the assessment year 1960-61 on concession. However, the counsel for the assessee did not agree to such a suggestion and he wanted the matter to be disposed of on merits. It is thereafter the Tribunal disposed of those appeals on merits. The Tribunal held that the reopening of the assessment under section 147(b) of the 1961 Act was proper. At the same time it also held that on the basis of the decision of the Supreme Court in Commissioner of Income-tax v. Mahalakshmi Textile Mills Ltd. : [1967]66ITR710(SC) , referred to already, the conversion materials were not eligible for development rebate, but that the entire expenses could be allowed as admissible deduction and that since the proceedings were only reassessment proceedings, the total income originally assessed by the Income-tax Officer could not be reduced further and that, therefore, the effect of the withdrawal of the development rebate which was a smaller sum each year than the cost of the value of the conversion materials would be offset by the deduction which was admissible. It is on this basis that the Tribunal allowed the appeals preferred by the department in part. The allowing of the appeals in part resulted in the Tribunal holding that the assessee was entitled to have the entire expenses allowed as a deduction and that it was not entitled to the development rebate which was smaller, 25% or 20%, as the case any be, of the total expenses incurred by the assessee. It is against these orders of the Tribunal that the assessee applied for reference to this court of the questions of law said to arise out of the said orders and the Income-tax Appellate Tribunal, Madras bench, under section 256(1) of the 1961 Act, has referred the following questions of law for the opinion of this court :

'(1) Whether, on the facts and in the circumstances of the case, the initiation of proceedings under section 147(b) and the reassessment in each of the assessment years 1961-62 to 1963-64 is justified in law ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in taking notice of a reason for reopening the assessment under section 147(b) when that reason had not been referred to by the Income-tax Officer and the Appellate Assistant Commissioner ?

(3) Whether, on the facts and in the circumstances of the case, there was any material to support the finding of the Tribunal that the development rebate disallowed in the supplementary assessment proceeding was in respect of 'casablanca conversion materials' ?

(4) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was not entitled to the development rebate under section 10(2)(vib) of the Indian Income-tax Act, 1922, on the cost of new machineries installed in each of the years ?

(5) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in not directing the allowance of the entire cost of the machinery as revenue expenditure ?'

Before we deal with the facts bearing on these questions it is desirable to refer to the relevant statutory provisions. We may point out that out of the three assessment years in question, namely, 1961-62 to 1963-64, the first assessment year would be governed by the provisions of the Indian Income-tax Act, 1922, hereinafter referred to as 'the 1922 Act', and the latter two assessment years would be governed by the provisions of the 1961 Act. We are referring to this feature for the simple reason that the fourth question erroneously refers to only section 10(2)(vib) of the 1922 Act, because that will be relevant only for the first year and with regard to the subsequent years, it is only section 33 of the 1961 Act that will apply. Notwithstanding this defect in the fourth question, it is unnecessary to pursue the same further for the simple reason that there is no material change between the provision in question in the 1922 Act and the 1961 Act as far as this part of the case is concerned. Section 10(2)(vib) of the 1922 Act so far as it is relevant for the purpose of this case is as follows :

'10(2)(vib). Such profits or gains shall be computed after making the following allowances, namely :- .....

in respect of a new ship acquired or new machinery or plant installed after the 31st day of March, 1954, which is wholly used for the purposes of the business carried on by the assessee, a sum by way of development rebate in respect of the year of acquisition of the ship or of the installation of the machinery or plant, equivalent to, -......

(ii) in the case of machinery or plant installed before the 1st day of April, 1961, twenty five per cent. and in the case of machinery or plant installed after the 31st day of March, 1961, twenty per cent. of the actual cost of the machinery or plant to the assessee.'

The corresponding section in the 1961 Act is section 33.

Section 33(1)(a) of the 1961 Act is as follows :

'In respect of a new ship or new machinery or plant (other than office appliances or road transport vehicles) which is owned by the assessee and is wholly used for the purposes of the business carried on by him, there shall, in accordance with and subject to the provisions of this section and of section 34, be allowed a deduction, in respect of the previous year in which the ship was acquired or the machinery or plant was installed or, if the ship, machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year, a sum by way of development rebate as specified in clause (b).'

Clause (b) of section 33(1) of the 1961 Act refers to the percentage of development rebate to be allowed in respect of various years in relation to different plant and machinery. The only other statutory provisions that requires attention in section 147(b) of the 1961 Act. That section 147(b) is :

'If notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of section 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereafter in sections 148 to 153 referred to as the relevant assessment years)'.

It is the power of the Income-tax Officer under section 147(b) of the 1961 Act that has been invoked in the present case for reopening the assessments originally completed for the assessment years referred to above.

Though the questions referred to this court are five in number, the materials points that arise for consideration are only two, namely, (1) whether the Income-tax Officer acted within the four corners of section 147(b) of the 1961 Act when he reopened the assessments for the years 1961-62 to 1963-64 and (2) whether the expenses incurred by the assessee in respect of the three years referred to already were of such a nature as to be not eligible to obtain development rebate provided for by the statutory provisions referred to above ?

As far as the first point is concerned, it requires consideration of statutory requirements contained in section 147(b) of the 1961 Act itself. Before that section can be applied and the Income-tax Officer can assume jurisdiction under that section, (1) the Income-tax Officer must have reason to believe that the income chargeable to tax has escaped assessment for any assessment year; (2) that reason must be in consequence of information in his possession, and (3) it is not disputed that decisions of court have settled that the information referred to above must come into the possession of the Income-tax Officer subsequent to the original assessment. Consequently, the question for consideration in the present case will be, whether these three requirement have been satisfied in the present case or not. As a matter of fact, the crucial point that was urged before us and which appears to have been argued before the Tribunal as well as the other authorities was that there was no information which the Income-tax Officer came into possession of subsequent to the original assessments so as to enable him to invoke his powers under section 147(b) of the 1961 Act and that all that he did was to have a second look over what had been done previously when the original assessments were made and to form a different opinion, or, in other words, he merely changed his opinion and there was no information as a consequence of which he had reason to believe that the income had escaped assessment. Therefore, we shall first consider the question as to whether the Income-tax Officer had come into possession of information subsequent to the original assessment or not in the present case.

The notice issued by the Income-tax Officer under section 148 of the 1961 Act for reopening the assessment has not been placed before the court. Consequently, we can find out only from the order passed by the Income-tax Officer as to what the information was which he came into possession of subsequent to the passing of the original order of assessment, which could constitute a reason for him to entertain the belief that the income had escaped assessment. For this purpose, it is absolutely necessary to refer to the extract the material portion of the order passed by the Income-tax Officer, while he reopened the assessment and passed fresh orders of assessment for all the three years. It is not disputed that though separate orders were passed, they are more or less in the same terms. Consequently, we extract the order of the Income-tax Officer dated 30th December, 1966 :

Assessment order

'The original assessment in this case for 1961-62 was completed on September 29, 1962, on a total income of Rs. 20,17,837. While completing the original assessment the assessee was allowed a deduction of Rs. 2,80,832 towards development rebate on new items of machinery claimed to have been installed. Subsequently, it came to notice that development rebate was wrongly allowed on certain items like conversion materials and accessories or component parts added to the textile machinery. Since the assessee is not eligible for the development rebate on these items which do not form machinery as such, the assessment was reopened under section 147(b) by issue of notice under section 148, in order to withdraw the development rebate excessively allowed. In response to this notice the assessee has filed a return repeating income of Rs. 20,17,837 as determined in the original assessment.

The case was posted and the assessee's authorised representative Shri K. V. Gopala Iyer, chartered accountant, heard.

The assessee's representative raised a preliminary objection that the provision of section 147 are not applicable in so far as the reopening was done on a mere change of opinion in the matter of the grant of development rebate on certain items of capital additions on which such rebate had already been allowed in the original assessment and that there was no fresh ground or information to invoke the provisions of section 147. This argument cannot be accepted. It is not correct to say that the Income-tax Officer had no information to act under section 147. The awareness that a mistake was committed in the original assessment order constituted sufficient information to act under section 147(b). In the case of Salem Provident Fund Society Ltd. v. Commissioner of Income-tax : [1961]42ITR547(Mad) , the Madras High Court held that a mistake apparent on the face of the order of assessment would itself constitute information; whether someone else gave the information or he informed himself was immaterial. Thus, the discovery of a mistake committed in the original assessment constituted sufficient information to invoke the provisions of section 147 and, therefore, this objection raised by the representative is overruled.

Nextly, the representative argued that development rebate is rightly due on the conversion materials and other component parts added to the textile machinery inasmuch as they have been treated as capital items and depreciation has been granted on those items. In support of his argument the representative relied on the following decisions of the High Court and the Supreme Court :

(i) Aruna Mills Ltd. (Gujarat High Court) : [1966]59ITR507(Guj) Mir Mohammad Ali (Supreme Court) : [1964]53ITR165(SC) Raju and Mannar (Supreme Court) : [1966]60ITR246(SC) .

The assessee's representative also argued that in the alternative the value of the conversion materials or component parts may be allowed as revenue expenditure in the light of the decision of the Madras High Court in the case of Mahalakshmi Textile Mills : [1965]56ITR256(Mad) .

The alternative contention cannot be accepted, firstly, for the reason that such a claim was not made at the time of the original assessment and so cannot be admitted at this stage, and, secondly, for the reason that the department has not accepted the decision of the Madras High Court and the matter has been taken in appeal before the Supreme Court.

Then, as regards the contention that conversion materials and accessories constitute machinery qualifying for development rebate, it has to be stated that they are mere accessories or replacements and not machinery as contemplated under section 33 of the Act. The facts of this case are distinguishable from the case of Aruna Mills Ltd. : [1966]59ITR507(Guj) . The Supreme Court's definition of machinery in the case of Mir Mohammad Ali : [1964]53ITR165(SC) relied upon by the Gujarat High Court was concerned with the installation of diesel engines in buses which is quite different from conversion materials and other small parts replaced or fitted to textile machinery. The decision in the case of Raju and Mannar : [1966]60ITR246(SC) also is on the same point covering diesel engines. In view of these the conversion materials or other component parts added or replaced in the textile machinery do not constitute machinery within the meaning of section 33 of the Act.

For the aforesaid reason, I overrule all the objections raised by the assessee's representative and proceed to complete this reassessment by withdrawing the development rebate granted on the following items which, judged by their nature and functions, are only mere components or small accessories added to the main textile machinery.'

Apart from stating, 'subsequently it came to notice that development rebate was wrongly allowed', the Income-tax Officer in his order does not state as to how it came to his notice. On the other hand, the rest of the Income-tax Officer will make it clear that he did not have any external information and that he came to the conclusion that the development rebate was wrongly allowed solely on the basis of reconsideration of the original order made by his predecessor. As a matter of fact, in the forefront of his objections, the assessee represented to the Income-tax Officer that there was no fresh ground or information to invoke the provisions of section 147 of the 1961 Act. If there was any fresh ground or information in the possession of the Income-tax Officer, that was the earliest and must opportune occasion for the Income-tax Officer to refer to the same by way of negativing the contention of the assessee. On the other hand, the Income-tax Officer based himself exclusively on the judgment of this court in Salem Provident Fund Society Ltd. v. Commissioner of Income-tax : [1961]42ITR547(Mad) to which we shall make a reference a little later. According to the Income-tax Officer, this decision holds that the awareness that a mistake had been committed in the original assessment order constituted sufficient information to act under section 147(b) of the 1961 Act. That the Income-tax Officer acted solely on the basis of bestowing a second thought over the same matter is clear from his other statement, namely : 'Thus the discovery of a mistake committed in the original assessment constituted sufficient information to invoke the provisions of section 147.' Therefore, from this order of the Income-tax Officer, it is indisputably clear that there was no external information whatever which came into his possession subsequent to the original order of assessment.

The only other question is, whether he had any internal information in the form of an information or a ground or a fact which he found out or discovered from the records themselves. It is only in this context that a reference to the decision of this court in Salem Provident Fund Society Ltd. v. Commissioner of Income-tax : [1961]42ITR547(Mad) becomes necessary. The very provision of section 34(1)(b) of the 1922 Act corresponding to section 147(b) of the 1961 Act itself does not say whether the information should be external or internal. In that context, this court held in the said decision that the information may be obtained by the Income-tax Officer from his own records and it need not come from outside. Apart from the general proposition laid down by this court to that effect in the said decision, the facts of that case themselves were peculiar and this court expressly mentioned in that judgment that the court was not covering a wider ground. In that case, the assessee was a limited company carrying on the business of insurance under the Provident Fund Societies Act. When the income for the year 1946 had to be assessed in the assessment year 1947-48, the valuation report for 1946, the third valuation report, was available. The actuarial deficiency disclosed by the second report for the period that ended on December 31, 1945, was Rs. 90,851 and the deficiency at the end of 1946 as disclosed by the this report was Rs. 77,165. Therefore, there was an actuarial surplus of Rs. 13,686 for 1946. When the assessment was first completed in 1949, the Income-tax Officer committed a mistake. Instead of deducting Rs. 77,165 from Rs. 90,851 which would have resulted in an actuarial surplus of Rs. 13,686 for 1946, he added both the sums and arrived at a deficiency of Rs. 1,68,016. The computation of the loss in that manner was more favourable to revenue than a computation under rule 2(a). It was this mistake which was not noticed by the Income-tax Officer subsequently and sought to be rectified by the reopening of the assessment under 34(1)(b) of the 1922 Act. It was accepted in that case that the mistake was patent on the fact of the record and, therefore, could have been rectified under 35 of that Act. One of the arguments advanced before this court was that since the mistake could be rectified under section 35 of that Act, the assessment could not be reopened under section 34(1) (b). This court rejected that argument by holding that it was not a question of whether it was section 35 or section 34(1)(b) of the 1922 Act that applied, but it was a question whether the requirements of section 34(1)(b) of the 1922 Act were satisfied or not. With regard to section 34(1)(b) of the 1922 Act itself, the argument was that there was no information in the possession of the Income-tax Officer which would have enabled him to proceed under section 34(1)(b), because he himself found out the mistake by looking into the records. It is that argument which was rejected by this court. While doing so, this court point out - See : [1961]42ITR547(Mad) :

'Section 35 permits rectification where the mistake is apparent on the face of the record of assessment. The learned counsel for the department could not challenge the correctness of the plea of the assessee, that the original assessments completed in 1949 for both the assessment years under consideration now could have been rectified under section 35. The mistakes were apparent on the face of the assessment orders themselves. What should have been subtracted was added to ascertain the deficiency disclosed by the actuarial reports. It should be remembered that the Income-tax Officer first contemplated recourse to section 35 but dropped it as the assessee did not agree.'

It is thereafter that this court proceeded to state (page 564) :

'We should like to emphasise even at the outset that we are not dealing with a case of change of opinion on the part of the assessing authority, but with an error in computation obvious on the face of the order of assessment itself. That the real deficiency or surplus in each of the relevant years was to be ascertained by subtraction and not addition of the deficiency for each of the two years could never be challenged. Whether the discovery of such a mistake, which in its turn led to the further discovery of escape from assessment or under-assessment, constitutes information within the meaning of section 34(1) is what we have to decide in this case. We do not propose to cover any wider ground.

We are unable to accept the extreme proposition, that nothing that can be found in the record of assessment, which itself would show escape of assessment or under-assessment, can be viewed as information which led to the belief that there has been escape from assessment or under-assessment. Suppose a mistake in the original order of assessment is not discovered by the Income-tax Officer himself on further scrutiny but it is brought to his notice by another assessee or even by a subordinate or a superior officer, that would appear to be information disclosed to the Income-tax Officer. If the mistake itself is not extraneous to the record and the informant gathered the information from the record, the immediate source of information to the Income-tax Officer in such circumstances is in one sense extraneous to the record. It is difficult to accept the position that while what is seen by another in the record is 'information', what is seen by the Income-tax Officer himself is not information to him. In the latter case he just informs himself. It will be information in his possession with the meaning of section 34. In such cases of obvious mistakes apparent on the face of the record of assessment, that record itself can be a source of information, if that information leads to a discovery or belief that there has been an escape of assessment or under-assessment.'

As a matter of fact, this court reiterated this position when it stated further (page 565) :

'We hold that the mistake apparent on the fact of the order of assessment itself constitutes information : whether someone else gave that information to the Income-tax Officer or whether he informed himself is immaterial.'

Thus, it is clear that the facts of that case were peculiar, namely, instead of subtracting one figure from another, the Income-tax Officer added both the figures in that case. That was a mistake apparent from the record of assessment itself and it is in that context that this court held that that would constitute 'information' within the scope of section 34(1)(b) of the 1922 Act, corresponding to section 147(b) of the 1961 Act. Therefore, that decision can be said to be an authority only for the proposition that the information need not necessarily be extraneous in all cases and that in cases where obvious mistakes are apparent on the face of the record of assessment, that record itself can be a source of information. As a matter of fact, it is this aspect of the judgment of this court which was referred to by the Supreme Court in Anandji Haridas and Co. (P.) Ltd. v. S. P. Kushare, Sales Tax Officer [1968] 21 STC 326. However, as far as the facts of the present case are concerned, it cannot be said that the allowing of development rebate in the original order constituted an obvious mistake apparent on the face of the record. In fact, the development rebate is to be allowed on certain conditions being satisfied. Therefore, the very fact that the development rebate was allowed in the original order would clearly lead to the inference that the Income-tax Officer had applied his mind as to the eligibility for the development rebate under the provisions of section 10(2)(vib) of the 1922 Act in respect of the assessment year 1961-62 and section 33 of the 1961 Act in respect of the assessment years 1962-63 and 1963-64 and that only after applying his mind and coming to the conclusion that the assessee was eligible for the development rebate he had allowed the development rebate. Therefore, when subsequently the Income-tax Officer without any reference whatever to any other information, either external or from the records themselves, was of the opinion that the development rebate was wrongly allowed, it merely constituted a change of opinion and nothing more.

It is settled that mere change of opinion will not confer jurisdiction on the Income-tax Officer either under section 34(1)(b) of the 1922 Act or under section 147(b) of the 1961 Act to reopen the assessment already made. In Income-tax Officer v. Lakhmani Mewal Das : [1976]103ITR437(SC) , the Supreme Court summarised the legal position in this behalf as follows :

'It would appear from the perusal of the provisions reproduced above that two conditions have to be satisfied before an Income-tax Officer acquires jurisdiction to issue notice under section 148 in respect of an assessment beyond the period of four years but within a period of eight years from the end of the relevant year, viz :

(1) the Income-tax Officer must have reason to believe that income chargeable to tax has escaped assessment, and

(2) he must have reason to believe that such income has escaped assessment by reason of the omission or failure on the part of the assessee -

(a) to make a return under section 139 for the assessment year to the Income-tax Officer, or

(b) to disclose fully and truly material facts necessary for his assessment for that year. Both these conditions must co-exist in order to confer jurisdiction on the Income-tax Officer. It is also imperative for the Income-tax Officer to record his reasons before initiating proceedings as required by section 148(2). Another requirement is that before notice is issued after the expiry of four years from the end of the relevant assessment years, the Commissioner should be satisfied on the reasons recorded by the Income-tax Officer that it is a fit case for the issue of such notice. We may add that the duty which is cast upon the assessee is to make a true and full disclosure of the primary facts at the time of the original assessment. Production before the Income-tax Officer of the account books or other evidence from which material evidence could with due diligence have been discovered by the Income-tax Officer will not necessarily amount to disclosure comtemplated by law. The duty of the assessee in any case does not extend beyond making a true and full disclosure of primary facts. Once he has done that his duty ends. It is for the Income-tax Officer to draw the correct inference from the primary facts. It is no responsibility of the assessee to advise the Income-tax Officer with regard to the inference which he should draw from the primary facts. If an Income-tax Officer draws an inference which appears subsequently to be erroneous, mere change of opinion with regard to that inference would not justify initiation of action for reopening assessment.'

That mere change of opinion is not sufficient to confer jurisdiction on the Income-tax Officer to reopen an assessment is so well settled that the Supreme Court in Commissioner of Income-tax v. Dinesh Chandra H. Shah : [1971]82ITR367(SC) stated :

'It is well settled by now, and Mr. Desai quite rightly does not dispute the proposition, that mere change of opinion could not be a valid ground for reopening the assessment under section 34(1)(b) of the Act.'

It is unnecessary to multiply authorities in this behalf in view of the legal position being so well settled and not being controverted before us.

However, it would appear that an argument was advanced on behalf of the revenue before the Tribunal for the first time that the information which the Income-tax Officer had for reopening the assessment was not internal from the records, but external in the form of an audit note which he received. The order of the Tribunal states :

'The learned departmental representative has pointed out that an objection or observation dated October 22, 1964, was received by the Income-tax Officer from the revenue audit department that in the case of the assessee, among other cases, development rebate could not be allowed on the cost of acquisition of conversion materials as these items did not constitute 'new plant and machinery' and were mainly parts thereof or accessories thereto. The note specifically referred to the decision of the Supreme Court in the case of Mr. Mad. Ali (a mistake for Mir. Mohammad Ali) : [1964]53ITR165(SC) with regard to the deduction for `additional depreciation' and suggested that it would not be applicable in the present case where the question is deduction for ` development rebate'. It was suggested in the note that `the withdrawal of the development rebate in the instant cases may kindly be considered'.

The argument of Sri Cherian (representative for the revenue) is that the receipt of the note and the ideas contained therein is the 'information' which justify (sic) the reopening of the assessment under section 147(b). He has supplied us with a copy of the audit objection dated October 22, 1964, and has also shown us the notes recorded by the Income-tax Officers on March 24, 1966, in respect of the assessment year 1961-62 and on September 1, 1966, for the assessment years 1962-63 and 1963-64 while directing the issue of a notice under section 148.'

The Tribunal further points out :

'Now though it is true that the receipt of the audit objection has not been referred to at any earlier stage, the fact remains that there was such an objection and that the Income-tax Officer decided to reopen the assessments only at that stage.'

Though the Tribunal does not record a specific finding that it is the receipt of the audit note which constituted the 'information' contemplated by section 147(b) of the 1961 Act, still the way in which the Tribunal has referred to the submissions made on behalf of the revenue would appear to indicate that it had accepted that contention. However, we are unable to hold that any such information constituted the motivation for issuing the notice under section 148 of the 1961 Act. In the first place, neither the audit note nor the reasons recorded by the Income-tax Officers on the respective dates referred to already were placed before the court and, therefore, this court has no opportunity to test the validity of the argument with reference to the contents of the note as well as the reasons recorded by the Income-tax Officers. Secondly, if the department or the Tribunal relied upon this audit note, it was totally unnecessary to rely upon the decision of this court in Salem Provident Fund Society Ltd. v. Commissioner of Income-tax : [1961]42ITR547(Mad) in support of the action taken by the Income-tax Officer. Thirdly, even the said audit objection could not have constituted a ground to make the Income-tax Officer entertain a belief that the income had escaped assessment. We shall now explain our reasons for taking this view.

We have already extracted the portion of the order of the Tribunal dealing with the submission made on behalf of the revenue which referred to the audit note. That audit note itself in its turn is stated to have specifically referred to the decision of the Supreme Court in Commissioner of Income-tax v. Mir Mohammad Ali : [1964]53ITR165(SC) . While referring to that case the audit note itself would appear to have pointed out that that decision would not be applicable to the present case because that decision dealt with additional depreciation and the present case dealt and development rebate and that notwithstanding that the audit note would appear to have suggested that the withdrawal of the development rebate in the instant case might kindly be considered. We are of the opinion that the reference to the decision of the Supreme Court in Commissioner of Income-tax v. Mir Mohammad Ali : [1964]53ITR165(SC) cannot constitute any information whatever for entertainment of a belief on the part of the Income-tax Officer that income had escaped assessment in the present case. Commissioner of Income-tax v. Mir Mohammad Ali : [1964]53ITR165(SC) dealt with eligibility for additional depreciation allowance under section 10(2)(via) of the 1922 Act, where a petrol engine of a bus was replaced by a diesel engine. The question for consideration in that case was, whether the replacement of the petrol engine by a diesel engine could be said to be installation of a machinery as contemplated by section 10(2)(via) of the 1922 Act. In that context, the Supreme Court referred to the provisions contained in section 10(2)(iv), (v), (vi) and (via) and observed (page 170) :

'It is then pertinent to point out that the word 'machinery' occurs in clauses (iv), (v), (vi) and (via) of section 10(2). Prima facie the same meaning must be given to the word 'machinery' in all these clauses. If a machine is machinery for purpose of giving an allowance in respect of insurance or for repairs or in respect of normal depreciation or for the purpose of paragraph one of clause (vi), it must also be machinery for the purpose of the second paragraph of clause (vi) and clause (via).'

Thus, in that case what was held was that the cost of a diesel engine which replaced the petrol engine was entitled to additional depreciation allowance under the provisions of section 10(2)(via) of the 1922 Act. What relevance that decision can ever have to the case of withdrawal of development rebate already granted passes one's comprehension. If that decision can have any relevance at all, it can be only in the form of justification of the grant of development rebate already allowed. As a matter of fact, the Supreme Court in a subsequent decision in Commissioner of Income-tax v. Raju and Mannar : [1966]60ITR246(SC) simply followed the decision in Commissioner of Income-tax v. Mir Mohammad Ali : [1964]53ITR165(SC) in relation to the claim for development rebate allowed under section 10(2)(vib) of the 1922 Act. Therefore, we are unable to hold that the reference in the audit note to the decision of the Supreme Court in Commissioner of Income-tax v. Mir Mohammad Ali : [1964]53ITR165(SC) could ever have constituted 'information' as contemplated by section 147(b) of the 1961 Act. Lastly, if that was the information on which the Income-tax Officer acted, nothing prevented him from referring to the same in his assessment order for rejecting the contention of the assessee that there was no new information or ground and that there was only a change of opinion. As a matter of fact, even before the Appellate Assistant Commissioner this audit report was not put forward as the information which enabled the Income-tax Officer to take action under section 147(b) of the 1961 Act. All these things make it absolutely clear that the Income-tax Officer did not act on the basis of any information which came into his possession subsequent to the original assessment either from outside or from the records themselves, but acted solely on the basis of this change of opinion brought about by having a second look on the very same materials and facts.

Mr. A. N. Rangaswami, learned counsel for the revenue, very strongly relied on certain observations of the Supreme Court contained in Kalyanji Mavji & Co. V. Commissioner of Income-tax : [1976]102ITR287(SC) . This judgment elaborately referred to the provisions of section 34 of the 1922 Act and the decisions of the High Courts as well as the Supreme Court having a bearing thereon.

The Supreme Court observed :

'An analysis of this case [A. Raman and Co.'s case : [1968]67ITR11(SC) would clearly show that the information as contained in section 34(1)(b) must fulfil the following conditions :

(1) the information may be derived from an external source concerning facts or particulars as to law relating to a matter bearing on the assessment;

(2) that the information must come after the previous or the original assessment was made. In fact, the words 'in consequence of information' as used in section 34(1)(b) clearly postulate that the information must be subsequent to the original assessment sought to be reopened; and

(3) that the information may be obtained even on the basis of the record of the previous assessment from an investigation of the materials on the record, or the facts disclosed thereby or from other enquiry or research into facts or law.

These categories are in addition to the categories laid down by this court in Maharaj Kumar kamal Singh's case : [1959]35ITR1(SC) , which has been consistently followed in several decisions of this court as shown above.

On a combined review of the decision of this court the following tests and principles would apply to determine the applicability of section 34(1)(b) to the following categories of cases :

(1) where the information is as to the true and correct state of the law derived from relevant judicial decisions;

(2) where in the original assessment the income liable to tax has escaped assessment due to oversight, inadvertence or a mistake committed by the Income-tax Officer. This is obviously based on the principle that the taxpayer would not be allowed to take advantage of an oversight or mistake committed by the taxing authority;

(3) where the information is derived from an external source of any kind. Such external source would include discovery of new and important matters or knowledge of fresh facts which were not present at the time of the original assessment.

(4) where the information may be obtained even from the record of the original assessment from an investigation of the materials on the record, or the facts disclosed thereby or from other enquiry or research into facts or law.

If these conditions are satisfied then the Income-tax Officer would have complete jurisdiction to reopen the original assessment. It is obvious that where the Income-tax Officer gets no subsequent information, but merely proceeds to reopen the original assessment without any fresh facts or materials or without any enquiry into the materials which form part of the original assessment, section 34(1)(b) would have no application.'

We are unable to hold that this decision is of any assistance to the revenue, having regard to the facts of this case. As a matter of fact, the last sentence in the above extract which we have underlined will clearly apply to the facts of the present case and thereby deny the jurisdiction of the Income-tax Officer to proceed under section 147(b) of the 1961 Act corresponding to section 34(1)(b) of the 1922 Act.

As a matter of fact in Commissioner of Income-tax v. H. Holck Larsen : [1972]85ITR467(Bom) , Chandrachud J., as he then was, speaking on behalf of the Bombay High Court, expressed as follows :

'What is obligatory in order to apply section 34(1)(b) is that he must have `information' in his possession in consequence of which he has reason to believe that the income has escaped assessment or is under-assessed, etc. The distinction really consists in a change of opinion unsupported by subsequent information on the one hand and a change of opinion based on information subsequently obtained, on the other. In the former class of cases, the assessment proceedings are attempted to be reopened without the discovery of an error and without receiving any information as to fact or law. The Income-tax Officer, has a fresh look at the earlier assessment order and he decides to adopt a different approach to the matter. Such a reopening is based on a `mere' change of opinion and is without jurisdiction. The Income-tax Officer cannot reopen an assessment at his `sweet will and pleasure'. In the latter class of cases, the reopening is based on information leading to the requisite belief and is, therefore, within the jurisdiction of the officer.'

It is this passage which has been extracted by the Supreme Court in Kalyanji Matji & Co. v. Commissioner of Income-tax : [1976]102ITR287(SC) with which the Supreme Court stated that it was inclined to agree.

Under these circumstances we are clearly of the opinion that in this case the conditions precedent for the assumption of jurisdiction under section 147(b) of the 1961 Act on the part of the Income-tax Officer were not satisfied and that, therefore, the reassessment proceedings were illegal.

This conclusion of ours will be sufficient to dispose of this reference. However, questions have been referred on the merits of the case, namely, in respect of the machinery involved in this case whether the development rebate was allowable or not. For this purpose, reliance was placed on a decision of this court in Commissioner of Income-tax v. Mahalakshmi Textile Mills Ltd. : [1965]56ITR256(Mad) as affirmed by the Supreme Court in Commissioner of Income-tax v. Mahalakshmi Textile Mills Ltd. : [1967]66ITR710(SC) . In that case, in respect of certain machinery purchased for the purpose of installing what is called casablanca conversion system, the assessee was claiming before the Income-tax Officer as well as the Appellate Assistant Commissioner that it was entitled to development rebate. But when that claim was rejected and when the matter was before the Tribunal, the assessee in the alternative claimed that the entire expenses constituted revenue expenditure and that, therefore, the whole of it would have to be allowed. The Tribunal found as a fact that the expenditure was only revenue in nature and, therefore, the whole of it had to be allowed. When the matter was taken up on reference to this court, this court held that there were materials before the Tribunal for coming to the conclusion that the expenditure was only revenue in nature. When the matter was taken up further to the Supreme Court, the Supreme Court affirmed the decision of this court by observing - See : [1967]66ITR710(SC)

'The High Court accepted the finding recorded by the Tribunal that by the introduction of the casablanca conversion system no new machinery or plant was installed but the introduction of the system amounted `to fitting of improved versions of certain minor parts' and expenditure in that behalf was of revenue nature. The High Court also held that the Tribunal had jurisdiction to permit the assessee to raise a new contention which was not raised before the departmental authorities. The Commissioner has appealed to this court, with special leave.

The Tribunal had evidence before it from which it could be concluded that by introducing the casablanca conversion system the assessee made current repairs to the machinery bad plant. The High Court observed that certain moving parts of the machinery had because of 'wear and tear' to be periodically replaced, and when it was found that the old type of replacement parts were not available in the market, the assessee introduced the casablanca conversion system, but thereby there was merely replacement of certain parts which were a modified version of the older parts. Counsel for the Commissioner has not challenged these findings and the answer to the second question recorded in the affirmative by the High Court, must be accepted.'

As far as that case was concerned, the members of the Tribunal inspected the working of the machinery and they had before them the literature of the manufacturer as to the nature of the machinery which they were producing and the purposes for which the assessee acquired the same. It is with reference to these facts only that this court observed in Commissioner of Income-tax v. Mahalakshmi Textile Mills Ltd. : [1965]56ITR256(Mad) :

'The Tribunal pointed out that the only substantial difference between this system and the old system was that the roller stands in the new system were placed at a slight inclination with the additional use of a leather apron attached to the roller stands. The claim to increased efficiency was no doubt put forward by the manufactures. But the Tribunal pointed out that even assuming that there was some improvement in the component parts and the improvement of these parts was boosted by the manufacturers, it did not necessarily follow that any enduring advantage or a new asset had been brought into existence. The need for going in for these casablanca parts arose, for the old parts were no longer available. That statement was accepted by the Tribunal and was not contradicted by the department. The result was that only the original assets was held to have been preserved and maintained. As we said, on a question of fact, the Tribunal found that the fitting of these minor parts had no effect upon the machinery as a whole. In a reference under section 66 of the Act, we are bound by this decision on a question of fact.'

Thus, it is clear that neither this court nor the Supreme Court had occasion to pronounce any opinion on the nature of the machinery involved in that case. All that they pointed out was that the Tribunal as a fact found that no enduring asset was brought into existence and that what actually happened was that the old asset was maintained and preserved by the replacement of certain minor parts. We are of the opinion that that decision itself cannot be said to be an authority for holding that the machinery involved in the present case did not come within the scope of section 10(2)(vib) of the 1922 Act or section 33 of the 1961 Act. If the Income-tax Officer wanted to reassess the assessee, he must find as a fact that the machinery in the present case did not satisfy the requirement of section 10(2)(vib) of the 1922 Act or section 33 of the 1961 Act and cannot merely rely upon the decision of this court in Commissioner of Income-tax v. Mahalakshmi Textile Mills Ltd. : [1965]56ITR256(Mad) and that of the Supreme Court in Commissioner of Income-tax v. Mahalakshmi Textile Mills Ltd. : [1967]66ITR710(SC) as if those decisions laid down any general principle of law applicable to all conversion materials in respect of casablanca conversion system. As a matter of fact, there appears to be one basic difference in this behalf. The decision in the case of Mahalakshmi Textile Mills Ltd. : [1967]66ITR710(SC) , referred to above, was concerned only with the materials acquired and installed in one year, while, in the present case, as we have pointed out already, the conversion in question had been going on for a period of four years, namely, from 1960-61 to 1963-64. Under such circumstances, in the absence of a definite and clear finding by the Tribunal that the machinery installed during the course of the year relevant to these assessment years did not satisfy the requirements of section 10(2)(vib) of the 1922 Act or section 33 of the 1961 Act, as the case may be, it cannot be held that there was any escapement of income from tax.

As a matter of fact, we have asked the learned counsel for the revenue to draw our attention to any portion of the order of the Tribunal where it is held that the machinery in the present case did not satisfy the requirements of section 10(2)(vib) of the 1922 Act or section 33 of the 1961 Act, as the case may be, and all that the learned counsel did was to invite our attention to the following sentence occurring towards the end of paragraph 20 of the order of the Tribunal :

'We hold that the facts of the case so far as conversion materials are concerned for the three years under appeal are the same as the facts of the case of Mahalakshmi Mills Ltd. decided in turn by the Madras High Court : [1965]56ITR256(Mad) and Supreme Court : [1967]66ITR710(SC) .'

On the face of it, such a statement cannot be correct. We have already pointed out that Mahalakshmi Textile Mills' case : [1967]66ITR710(SC) was decided with reference to a personal inspection by the members of the Tribunal as to the working of the mills as well as the reports obtained with regard to the nature, character and function of the machinery in question. No such enquiry whatever has been made in the present case. In addition, in Mahalakshmi Textile Mills' case : [1967]66ITR710(SC) the judgment of the Supreme Court itself refers to the actual materials involved therein and the Supreme Court pointed out in Commissioner of Income-tax v. Mahalakshmi Textile Mills Ltd. - See : [1967]66ITR710(SC) .

'Substantially, this (casablanca conversion system) involved replacement of certain roller stands and fluted rollers fitted with rubber aprons to the spinning machinery, removal of ring-frames from certain existing parts, introduction, inter alia,. of ball-bearing jockey-pulleys for converting the original band-drivers to tape-drivers and other additions and alterations in the drafting mechanism.'

In this case, the Income-tax Officer has given particulars of the machinery relevant to the three assessment years in question in his orders dated December 30, 1966, and December 31, 1966, annexed as annexures A-1 to A-3 to the statement of the case before this court. It is admitted that a comparison of these items showed that they did not actually tally with the items enumerated in the judgment of the Supreme Court referred to above. Therefore, we are of the opinion that the conclusion of the Tribunal extracted above in relation to the facts of the present case being the same as those of Mahalakshmi Textile Mills' case : [1967]66ITR710(SC) is not supported by any materials on record.

Mr. A. N. Rangaswami, learned counsel for the revenue, contended that both the parties proceeded before the Tribunal that the facts in relation to all the four assessment years were common, that in respect of the earliest assessment year, namely, 1960-61, the matter was settled on the basis of Mahalakshmi Textile Mills' case : [1967]66ITR710(SC) and that, therefore, it must be held that with regard to the other three years also the facts are the same. We are unable to accept this argument. We have already referred to the fact that the appeal before the Tribunal in respect of the assessment year 1960-61 was disposed of on the basis of a concession made by the department. Simply because the assessee accepted that concession and on that basis consented to the said appeal being disposed of, it does not follow that with regard to the other three years also the assessee either admitted or stated that the facts were the same as those involved in Mahalakshmi Textile Mills' case : [1967]66ITR710(SC) .

In the alternative, Mr. A. N. Rangaswami requested this court to remit the matter to the Tribunal for recording such a finding. We are unable to accede to any such request for more than one reason. In the first place, once we have held that the Income-tax Officer had no jurisdiction to reopen the assessment at all, it is not necessary to call upon the Tribunal to probe into the matter further. Secondly, this is a reference at the instance of the assessee and, therefore, the assessee is entitled to point out the failure on the part of the Tribunal to record a finding on a vital matter and argue on that basis that the final conclusion of the Tribunal could not be sustained and in such a situation certainly we shall not be justified in acceding to the request of the department to give a fresh opportunity to the department to place further materials before the Tribunal to enable it to arrive at a conclusion on a question of fact. Therefore, we are of the opinion that the Tribunal had no material to find that the development rebate disallowed in supplementary assessment proceedings was in respect of casablanca conversion materials covered by the decision the Mahalakshmi Textile Mills' case : [1967]66ITR710(SC) , referred to already.

Under these circumstances, we answer the first question, namely, 'whether, on the facts and in the circumstances of the case, the initiation of proceedings under section 147(b) and the assessments in each of the assessment years 1961-62 to 1963-64 is justified in law ?' in the negative and in favour of the assessee. We answer the second question, namely, 'whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in taking notice of a reason for reopening the assessment under section 147(b) when that reason had not been referred to by the Income-tax Officer and the Appellate Assistant Commissioner ?' again in the negative and in favour of the assessee. As regards the third question, namely, 'whether, on the facts and in the circumstances of the case, there was any materials to support the finding of the Tribunal that the development rebate disallowed in the supplementary assessment proceedings was in respect of 'casablanca conversion materials ?', we answer the same again in the negative and in favour of the assessee. Our answer to question No. 3 will govern question No. 4 also and, therefore, we answer the forth question also in the negative and in favour of the assessee. In view of our answers to questions Nos. 1 to 4, it is unnecessary to answer the fifth question which has arisen only on the basis of an alternative argument. The reference is answered accordingly. The assessee will be entitled to its costs of this reference. Counsel's fee fixed at Rs. 500 (Rs. Five hundred only).


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