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Modi Spinning And We... v. Income-Tax Officer, ...

Allahabad High Court

Sep 2, 1965

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Judgment Summary — Writ Petition No. 971 of 1965 (connected: Writ Petition No. 969 of 1965)

Factual and Procedural Background

The petitioner is a textile manufacturer whose accounting year runs from 1 May to 30 April. The petitioner installed plant and machinery in 1948–49 and made annual additions thereafter. For the assessment years 1950–51, 1951–52 and 1952–53 the petitioner was granted initial depreciation under section 10(2)(vi) of the Income-tax Act, 1922. Section 10(2)(vi) contained a provision that initial depreciation would not be deductible in determining the written down value for the purposes of that clause, and a proviso (c) limiting the aggregate of all depreciation allowances under that clause so that they would not exceed the original cost to the assessee.

By the assessment year 1956–57 the cumulative allowances, including the earlier initial depreciation, had effectively reached the original cost for certain plant and machinery. In the return for 1956–57 the petitioner entered a written down value calculated at Rs. 16,48,053 (which did not include initial depreciation of Rs. 15,91,511). The Income-tax Officer allowed depreciation of Rs. 2,59,236 rather than the correct admissible amount of Rs. 56,542 (the latter being the difference between the written down value and the amount of earlier initial depreciation that should have been taken into account). The excess depreciation allowed was Rs. 2,02,694.

On the basis that, by Explanation I to section 147, such an excessive allowance meant that income chargeable to tax had escaped assessment, the Income-tax Officer issued a notice under section 148 of the Income-tax Act, 1961, dated 20 November 1964, for the assessment year 1956–57. The petitioner objected to the notice on limitation grounds (the period of four years having expired). The Income-tax Officer replied asserting that the excessive allowance resulted from the petitioner’s omission or failure to disclose fully and truly all material facts necessary for the assessment and thereby extended the limitation period.

The petitioner filed the present writ petition for prohibition and certiorari challenging the validity of the section 148 notice and the consequent assessment proceedings. Similar notices (and related writ petitions) were issued for assessment years 1957–58 and 1958–59 (Writ Petitions Nos. 970 and 969 of 1965 respectively). The parties agreed proviso (c) to section 10(2)(vi) applied in 1956–57 and that an excessive depreciation allowance had been granted; the sole dispute was whether the excess arose from an omission or failure by the assessee to disclose material facts necessary to assessment of that year.

Legal Issues Presented

Whether the excessive depreciation allowance in the original assessment for 1956–57 was caused by an omission or failure on the part of the assessee to "disclose fully and truly all material facts necessary" for that assessment within the meaning of section 147 (and thus whether the limitation period was extended so that a notice under section 148 was valid).
Whether the petitioner was under a statutory duty, either in the statutory return (Part V column (2)) or during assessment proceedings, to disclose that initial depreciation had been allowed in earlier years (and whether failure to do so amounted to omission/failure to disclose).
Whether the Income-tax Officer can be presumed to have had knowledge of the earlier initial depreciation (so that no omission/failure to disclose could be imputed to the petitioner), or whether absence of proof of such knowledge means the omission/failure rests with the petitioner.
Whether the petitioner’s filling in of the written down value (excluding initial depreciation pursuant to the reservation in section 10(2)(vi)) constituted an error or a permissible entry under the statute.

Arguments of the Parties

Appellant (Petitioner) — Mr. K. N. Rajagopala Shastri

The petitioner filled in the statutory return according to the particulars prescribed and there was no place in the return where it was required to state that initial depreciation had been allowed in an earlier year.
The reservation in section 10(2)(vi) that initial depreciation shall not be deductible in determining written down value meant the petitioner was not at fault in excluding initial depreciation when entering written down value in column (2) of Part V.
An omission or failure to disclose can only be found if the statute places an obligation on the assessee to disclose; such an obligation did not exist in the return in the present form.
If the Income-tax Officer already knew, or can be presumed to have known, that initial depreciation had been allowed earlier, then no omission by the petitioner could be imputed — "disclosure" requires making known what the officer did not already know.
On these grounds, the petitioner contended the case did not fall within section 147(i)(a) and the notice under section 148 was barred by the four-year limitation.

Respondent (Income-tax Officer) — Mr. R. L. Gulati

When completing the return for 1956–57 the petitioner was obliged to take into account the fact that initial depreciation had been allowed earlier and to reflect that in the written down value entered in column (2) of Part V; failure to do so caused the omission.
Alternatively, at least during the assessment proceedings the petitioner was bound to inform the Income-tax Officer that initial depreciation had been allowed earlier so the claim to depreciation for 1956–57 could be properly considered.
It could not be presumed that the Income-tax Officer was aware that initial depreciation had been allowed in an earlier year; there was no material to show actual knowledge by the officer at the time of the original assessment.
He relied on the definition of "written down value" in section 10(5)(b) (actual cost less all depreciation actually allowed) to argue that written down value should include all depreciation actually allowed, including initial depreciation.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The court examined the competing statutory provisions and the parties' submissions focusing on two main strands: (a) whether the petitioner erred in the return by excluding initial depreciation from the written down value entry in Part V; and (b) whether, even if the return was correctly completed, the petitioner nevertheless omitted or failed to disclose material facts during the assessment proceedings such that section 147 applied.

On the first strand, the court analysed the text and legislative history of the provisions cited by counsel. Section 10(5)(b) (a general definition of "written down value" introduced in 1941) stated that written down value, for assets acquired before the previous year, meant actual cost less all depreciation actually allowed. Section 10(2)(vi), however, which provided for initial depreciation, was inserted later (in 1946) and contained an express reservation that initial depreciation shall not be deductible in determining the written down value for the purposes of that clause. The court applied the ordinary rule that a later, specific provision (section 10(2)(vi) with its reservation) must yield over the earlier general provision (section 10(5)(b)) when there is tension between the two. The court therefore concluded that the reservation in section 10(2)(vi) operates as a proviso to section 10(5)(b) and should be invoked when applying clause (vi) of section 10(2). It further emphasised the difference in function and timing: column (2) of Part V requires the written down value as at the beginning of the accounting period whereas proviso (c) to section 10(2)(vi) governs what is allowable upon the claim for depreciation for the year. For those reasons the court held that the petitioner committed no error in entering the written down value without deducting initial depreciation for the purpose of Part V column (2).

On the second strand, the court considered whether the petitioner failed to disclose material facts during assessment proceedings. The court held that, notwithstanding correctness of the return entry, the assessee had a duty when making a claim for depreciation under section 10(2)(vi) to inform the Income-tax Officer of all material facts necessary to make out that claim. The proviso (c) limiting aggregate allowances meant that the fact of earlier initial depreciation was material to the claim for depreciation in 1956–57. The court reasoned that the statute entitled the assessee only to the allowance permitted by law, and when seeking the benefit of section 10(2)(vi) the obligation to disclose relevant facts (including that initial depreciation had previously been allowed) was necessarily implied. The assessee could not set out only those facts that exaggerated its claim; it was bound to disclose all facts going to the true amount of the allowance.

Finally, the court rejected the submission that the Income-tax Officer must be presumed to have known of the earlier initial depreciation. The court found no foundation for such a presumption and observed that there was no duty necessarily cast on the Income-tax Officer to examine historical assessment records that lay some time back. The petitioner had not shown that the Income-tax Officer, at the time of making the original assessment for 1956–57, was actually aware of the earlier initial depreciation relevant here.

Given these conclusions—(i) that exclusion from the written down value entry was permissible under section 10(2)(vi)'s reservation, but (ii) that the petitioner nonetheless had an affirmative duty during assessment proceedings to disclose the earlier initial depreciation—the court found that the excessive depreciation allowed in the original assessment resulted from the petitioner’s omission or failure to disclose fully and truly all material facts necessary to that assessment. Accordingly, the case fell within Explanation I to section 147 and the notice issued under section 148 was valid.

Holding and Implications

Holding: The writ petition is dismissed. The court held that the excessive depreciation allowance in the original assessment for 1956–57 was computed by reason of the petitioner’s omission or failure to disclose fully and truly all material facts necessary for that assessment, and therefore the notice issued under section 148 was not invalid.

Implications:

The direct effect is that the Income-tax Officer’s notice under section 148 (Income-tax Act, 1961) for assessment year 1956–57 was valid and the assessment proceedings consequent to that notice may continue.
The petitioner’s writ was dismissed with costs of Rs. 150 (in Writ Petition No. 971 of 1965). The connected petition mentioned (Writ Petition No. 969 of 1965) was also dismissed (for reasons given in the main judgment) with no order as to costs.
The opinion does not purport to lay down any broader new legal principle beyond the application of the statutory text to the facts; no new precedent beyond the decision in the present proceedings is stated in the judgment.

End of summary based exclusively on the provided opinion.

Show all summary ...

WRIT PETITION NO. 971 OF 1965

1. The petitioner manufactures and sells textiles. Its year of account commences on May 1 and ends on April 30 next.

2. The petitioner installed plant and machinery in the accounting year 1948-49 and thereafter has made additions to its plant and machinery annually. For the assessment years 1950-51, 1951-52 and 1952-53, the petitioner was allowed initial depreciation at the rate of 20% on the plant and machinery which being new had been installed during the relevant year. This initial depreciation was allowed under section 10(2)(vi) of the Income-tax Act, 1922. The written down value of plant and machinery at the commencement of the following year did not take into account the initial depreciation so allowed because section 10(2)(vi) contains a provision which declares that initial depreciation shall not be deductible in determining the written down value for the purposes of section 10(2)(vi). The petitioner entered the written down value, as reduced from year to year, in its returns while claiming depreciation on its plant and machinery, and depreciation was allowed year after year. Now there is proviso (c) to section 10(2)(vi) which says that the aggregate of all allowances in respect of depreciation made under that clause shall in no case exceed the original cost to the assessee of the plant and machinery. There comes a time when all the allowances in respect of depreciation, and this would include initial depreciation allowed to the petitioner, almost equals the original cost to him on the plant and machinery. The first assessment year, for which this period arrived, was the assessment year 1956-57. The petitioner, in its return for that assessment year, entered at a certain figure the written down value of its plant and machinery at the beginning of the accounting period, and this figure did not include the initial depreciation of Rs. 15,91,511, allowed in the assessment years 1950-51, 1951-52 and 1952-53. The written down value was calculated at Rs. 16,48,053 and depreciation was allowed by the Income-tax Officer to the extent of Rs. 2,59,236. It was overlooked that regard being had to proviso (c) to section 10(2)(vi), if the initial depreciation was taken into account, depreciation should have been allowed to the extent of the difference between Rs. 16,48,053 and Rs. 15,91,511, i.e, Rs. 56,542. This was the extent of depreciation admissible to the petitioner in that assessment year and as it had been allowed depreciation in the sum of Rs. 2,59,236 it is clear that the depreciation allowed to it in excess was Rs. 2,02,694. As excessive depreciation allowance had been computed, it must be deemed to be a case where income chargeable to tax had escaped assessment (Explanation I to section 147), and, consequently, the Income-tax Officer issued a notice under section 148 of the Income-tax Act, 1961, on November 20, 1964, for the assessment year 1956-57. The petitioner objected to the issue of the notice on the ground that the period of four years from the end of the relevant assessment year 1956-57 had expired. By his letter of February 18, 1965, the Income-tax Officer explained how the excessive depreciation had been computed and pointed out that this had resulted because of the omission or failure on the part of the petitioner to disclose fuly and truly all material facts necessary for its assessment for that year, and that, therefore, the period of limitation was not four years.

3. The petitioner then filed the instant petition for prohibition and certiorari challenging the validity of the notice under section 148 and the assessment proceedings which are being taken consequent to it.

4. Similar notices under section 148, and for the same reasons, were issued by the Income-tax Officer for the assessment years 1957-58 and 1958-59. Writ Petition No. 970 of 1965 relates to the proceedings for the assessment year 1957-58, and Writ Petition No. 969 of 1965 relates to the proceeding for the assessment year 1958-59.

5. It is admitted between the parties that the rule contained in proviso (c) to section 10(2)(vi) came into play during the assessment year 1956-57, and that because the rule was not applied the petitioner was allowed excessive depreciation allowance. It cannot also be disputed that a case where excessive depreciation allowance has been computed must be deemed, by Explanation I to section 147, to be a case where income chargeable to tax has escaped assessment. The only dispute before ???e is whether income can be said to have escaped assessment by reason of the omission or failure of the assessee to disclose fully and truly all material facts necessary for the assessment for that year.

6. Mr. K.N Rajagopala Shastri, who appears on behalf of the petitioner, contends that no default can be ascribed to the petitioner, that it filled in the statutory return according to the particulars mentioned in it, and that the petitioner was never required by the statutory return to enter anywhere that initial depreciation had been allowed in an earlier assessment year. He also urges that the petitioner could be said to have been guilty of an omission or failure to disclose to the Income-tax Officer the fact that initial depreciation had been allowed only if the statute placed an obligation or cast a duty upon it to do so. Further he points out, if the Income-tax Officer could be said to have had knowledge, or could be presumed to have had knowledge, of the fact that initial depreciation had been allowed, then, even if there was such statutory obligation or duty upon the petitioner, income cannot be said to have escaped assessment because of any omission or-failure to “disclose” that fact. “Disclosure”, he urges, must imply making known to the Income-tax Officer that which he did not know. Upon these submissions, Mr. Shastri contends that the case does not fall within the provisions of section 147(i)(a) and, therefore, the issue of notice under section 148 was barred by limitation.

7. Mr. R.L Gulati, appearing for the Income-tax Officer, contends that when filling up the return for the assessment year 1956-57, the petitioner was bound to take into account the fact that initial depreciation had been allowed and this should have been reflected in the written down value entered in column (2) of Part V of the return. The petitioner did not do so, and was, therefore, responsible for the omission in applying proviso (c) to section 10(2)(vi). In the alternative, it is urged that the petitioner was bound, during the assessment proceedings, to disclose to the Income-tax Officer that initial depreciation had been allowed and that its claim to depreciation allowance should be considered accordingly. He also contends that it cannot be presumed that the Income-tax Officer, when he made the original assessment, was aware of the fact that initial depreciation had been allowed to the petitioner earlier and, he says, there is no material to show that he was actually possessed of that knowledge.

8. Section 10(2)(vi) provides:

“10. (2) Such profits or gains shall be computed after making the following allowances, namely:—…:

(vi) in respect of depreciation of such buildings, machinery, plant or furniture being the property of the assessee, a sum equivalent……to such percentage on the written down value thereof as may in any case or class of cases be prescribed;

and where the buildings have been newly erected, or the machinery or plant being new,… has been installed, after the 31st day of March, 1945, and before the 1st day of April, 1956, a further sum (which shall however not be deductible in determining the written down value for the purposes of this clause) in respect of the year of erection or installation equivalent,—…………

Provided that—……….

(c) the aggregate of all allowances in respect of depreciation made under this clause……shall, in no case, exceed the original cost to the assessee of the buildings, machinery, plant or furniture, as the case may be.”

9. Mr. Shastri points out that because of the express reservation that initial depreciation shall not be deductible in determining the written down value for the purposes of the clause, the petitioner was not at fault when, while entering the written down value in column 2 of Part V of the return, he did not take into account the initial depreciation. Mr. Gulati, however, relies upon section 10(5)(b) where “written down value” for the purposes of sub-section (2) of section 10 has been declared to mean,

“(b) in the case of assets acquired before the previous year the actual cost to the assessee less all depreciation actually allowed to him under this Act……”

10. Mr. Gulati says that this definition of “written down value” applies throughout whenever the expression has been used in section 10(2), and therefore when setting out the written down value in column (2) of Part V of the return, the petitioner was bound to take into account all the depreciation actually allowed to it, and this would include initial depreciation. I find it difficult to accept the submission of Mr. Gulati. Clause (b) of section 10(5), on which he relies, was brought into the Income-tax Act in 1941, while the provision in section 10(2)(vi) providing for initial depreciation was inserted in the Act in 1946. Clause (b) of section 10(5) is a general provision, applicable generally to the provisions of section 10(2), and must yield to the special provision in section 10(2)(vi) introduced subsequently which declares that initial depreciation shall not be deductible in determining the written down value for the purpose of that clause. Reading the provisions in harmony, what they say is that wherever you find the expression “written down value”in the several clauses of section 10(2), you must understand it to mean what is contained in section 10(5)(b), but when you come to clause (vi) of section 10(2), then, for the purposes of that clause, you shall not deduct initial depreciation when deducting depreciation from the actual cost in order to determine the “written down value”. In other words, the reservation in section 10(2)(vi) against the deduction of initial depreciation is a proviso to section 10(5)(b), to be invoked only when applying section 10(2)(vi). It must be remembered that column (2) of Part V requires the entry of the written down value as at the beginning of the accounting period, while proviso (c) to section 10(2)(vi) speaks of what is to be allowed upon the claim for depreciation. Not only is the nature of the determination different, but two distinct points in time also are involved. Accordingly, in my judgment, the petitioner, when it did not take into account the initial depreciation while entering the written down value in column (2) of Part V of the return, committed no error.

11. But even if the petitioner correctly filled up Part V of the return, and there is no provision in the return requiring the petitioner to mention that initial depreciation had been allowed, the question still remains whether the petitioner omitted or failed to disclose fully and truly all the material facts necessary for its assessment for the year. While an omission or failure may not take place in relation to the return, it may yet take place in the assessment proceedings before the Income-tax Officer. The petitioner, as an assessee, made a claim to depreciation allowance under section 10(2)(vi). It was incumbent upon it to inform the Income-tax Officer of all material facts necessary to make out its claim. It was not open to it to set out only those facts which exaggerated its claim. It was bound to disclose all material facts which went to show what was the true amount of the allowance to which it was entitled. It was entitled to only such allowance as the law permitted it. The statute declared it entitled to the allowance under section 10(2)(vi), but also by proviso (c) of that clause declared that it was entitled to only so much depreciation allowance as did not exceed the aggregate of all the allowances in respect of depreciation made under that clause. The fact that it had been allowed initial depreciation earlier was material for the consideration of its claim to depreciation allowance in the assessment year 1956-57. It was a material fact necessary for its assessment for that year, and it was bound to disclose all material facts necessary for its assessment for that year. It was bound to inform the Income-tax Officer of this fact when establishing its claim to the allowance under section 10(2)(vi). The obligation was necessarily implied when it sought the benefit of section 10(2)(vi).

12. I am also of opinion that it cannot be said that the Income-tax Officer must be presumed to have known that initial depreciation had been allowed in an earlier year. No foundation has been laid for that presumption. It has not been shown that the law casts a duty upon the Income-tax Officer to examine the assessment records of an assessee which are removed by a fairly long period of time from the year of assessment. No such obligation can be necessarily implied from the nature of his functions. It is also not possible to say that in the instant case the Income-tax Officer was in fact aware that initial depreciation had been allowed in those earlier assessment years. Mr. Shastri refers to material showing that the Income-tax Officer was aware of the existence of proviso (c) to section 10(2)(vi), and that he actually applied that proviso when he took into account the initial depreciation allowed prior to 1950-51 in the rectification, under section 35 of the Act of 1922, of the assessment order for 1956-57. But Mr. Shastri has been unable to show that the Income-tax Officer, when he made the original assessment, was possessed of the fact that the initial depreciation under consideration in the instant case had been allowed.

13. In my judgment, upon the facts before me, the excessive depreciation allowance was computed in the original assessment by reason of the omission or failure of the petitioner to disclose fully and truly all material facts necessary for that assessment. The notice issued under section 148 by the Income-tax Officer cannot be declared invalid.

14. In this view of the matter it is not necessary to consider the submission of the respondent that the petitioner should be denied relief because of the existence of an alternative remedy. The petition fails, and is dismissed with costs, which I assess at Rs. 150.

Writ Petition No. 969 of 1965.

15. For reasons given in my judgment in the connected Writ Petition No. 971 of 1965, the instant petition is dismissed. There is no order as to costs.