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Gupta Cold Storage v. Income-Tax Officer, Special Circle, B Ward, Lucknow
Structured Summary of the Opinion (R.M. Sahai, J.)
Factual and Procedural Background
The petitioner commenced construction of a cold storage on 19 August 1960, which was completed in the assessment year 1962-63. For the assessment year 1961-62 the petitioner filed a return under s. 139 stating that no business was carried on in that year and that only installation and construction work took place. The Income Tax Officer (ITO) accepted the petitioner’s claim and passed an assessment order under s. 143(3).
In August 1972 the petitioner’s residential premises were searched under s. 132. During the investigation the valuation of the petitioner’s cold storage was referred to a Valuation Officer, whose report dated 20 February 1975 estimated the investment in the construction of the building portion only for the relevant financial year at Rs. 1,46,530. On the basis of that report the ITO issued a notice under s. 148 stating that he had reason to believe that income chargeable to tax far in excess of Rs. 50,000 had escaped assessment for the assessment year 1961-62 by reason of a failure to disclose material facts. The petitioner challenged that notice by filing the present petition; the notice dated 14 July 1976 (annexure IV) was specifically quashed by the court in this opinion.
Legal Issues Presented
- Whether the petitioner had made a full and true disclosure of the primary facts concerning investment on the construction of the cold storage in the assessment year 1961-62, such that the ITO could not validly reopen the assessment under s. 148.
- Whether the valuation report could properly be treated as showing total investment on the building in a manner that would permit the ITO to form a belief that income in excess of Rs. 50,000 had escaped assessment more than eight years after the assessment year.
- Whether the wooden staging in the cold storage should be regarded as part of the building or as plant/machinery for the purposes of calculating undisclosed investment and escaped income.
- Whether the notice under s. 148 was time-barred (i.e., issued beyond the eight-year period) given the amount of undisclosed investment shown by the valuation officer versus the amount disclosed by the assessee.
Arguments of the Parties
Petitioner's Arguments (Sri K.M.L. Hajela)
- The petitioner had made full and complete disclosure of particulars of income and investment; the ITO had already passed an assessment under s. 143(3) accepting the petitioner’s claim—an attempt to reopen is impermissible merely because the ITO would now draw a different inference from the same material facts.
- The notices under s. 148 were issued without proper application of mind to the material (specifically, the valuation officer’s report), and the valuation report was not relevant such that a reasonable person could form the requisite belief that income far in excess of Rs. 50,000 had escaped assessment.
- The Central Board of Direct Taxes (CBDT) had accorded sanction to reopen the assessment mechanically, without applying mind.
- The notice was barred by time (i.e., beyond the permissible period for reopening, given the amounts involved).
- Substantively, the wooden staging in a cold storage is a part of plant (not building). If the valuation officer’s estimate of Rs. 64,352 for wooden staging is excluded from the valuation officer’s total of Rs. 1,46,530, then the building/site portion would be Rs. 82,178. The petitioner had shown Rs. 54,852 in books; the difference (Rs. 27,322) is below the Rs. 50,000 threshold relied on by the ITO and therefore could not justify reopening after eight years.
Revenue's Arguments (Sri Deokinandan / Standing Counsel)
- The valuation officer’s report established that the petitioner did not disclose the correct investment in the cold storage; consequently the ITO was justified in issuing the notice under s. 148.
- The ITO was entitled to take the difference between the total investment on the cold storage as valued by the valuation officer (Rs. 1,46,530) and the total investment as disclosed by the petitioner (Rs. 54,856) to determine the amount of income which he had reason to believe had escaped assessment; as that difference exceeded Rs. 50,000, the ITO had reason to believe that escaped income exceeded Rs. 50,000 and could therefore reopen the assessment.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| ITO v. Lakhmani Mewal Das, [1976] 103 ITR 437 (SC), 445 | The conditions for the ITO to acquire jurisdiction to issue a notice under s. 148; the assessee's duty is to make true and full disclosure of primary facts and not to advise the ITO about the inferences to be drawn; mere change of opinion by the ITO is not a ground for reopening an assessment. | The court relied on this authority to frame the duty of the assessee and to emphasize that once primary facts are disclosed the ITO must draw correct inferences; a subsequent change of opinion does not justify reopening. This principle underpinned the court’s inquiry into whether the petitioner had made a full disclosure of primary facts. |
| Commissioner of Income-Tax, Lucknow v. Kanodia Cold Storage, [1975] 100 ITR 155 (All) | The freezing chamber containing insulation material like cork to keep it at appropriate temperature should be regarded as "plant" within the meaning of s. 43(3) of the Income Tax Act, 1961. | The court relied on this ruling to support the position that wooden staging (used for stocking perishable goods) is part of plant and not part of the building. That classification was decisive in excluding the valuation officer’s estimate for wooden staging (Rs. 64,352) from the building value for purposes of calculating undisclosed investment relevant to the time-bar question under s. 148. |
Court's Reasoning and Analysis
The court framed the controversy narrowly: whether the petitioner had disclosed fully and truly the particulars of his investment on the building of the cold storage in the assessment year 1961-62, so as to deprive the ITO of jurisdiction to reopen the assessment under s. 148 beyond the statutory eight-year period.
Relevant factual and valuation figures from the record were examined. The valuation officer's report estimated total investment in the cold storage at Rs. 1,46,530 for the relevant year; annexure A to that report showed an itemised abstract consisting of (inter alia) Rs. 62,236 for the main building, Rs. 64,352 for wooden staging (three floors) used for stocking perishable goods (including insulated ceiling and wooden staircase), and Rs. 11,330 for land/boundary walls, yielding the stated total of Rs. 1,46,530.
The court accepted the petitioner’s contention (supported by the precedent Kanodia Cold Storage) that the wooden staging used for stocking perishable goods in a cold storage is part of "plant" and not part of the building. Excluding the valuation officer’s staging figure of Rs. 64,352 from the valuation officer’s total reduced the valuation officer’s building-and-site figure to Rs. 82,178.
The petitioner’s books, however, showed a valuation of buildings and site of Rs. 54,852 for the assessment year 1961-62. Even accepting the valuation officer’s building-and-site valuation (Rs. 82,178), the undisclosed portion (the difference) would be Rs. 27,322 (i.e., Rs. 82,178 minus Rs. 54,852), which is well below the Rs. 50,000 threshold the ITO relied upon to justify reopening after eight years. Given that the excess investment that could arguably be considered undisclosed amounted only to Rs. 27,322, the court concluded there was no reasonable basis for the ITO to form the requisite belief that income in excess of Rs. 50,000 had escaped assessment for the assessment year 1961-62.
The court also reiterated the principle from ITO v. Lakhmani Mewal Das that the assessee's duty is to disclose primary facts; once that duty is performed the ITO must draw proper inferences and cannot validly reopen an assessment merely because of a change of opinion. Applying these premises, and the classification of the wooden staging as plant, the court concluded that the notice under s. 148 was issued beyond time and was invalid.
Holding and Implications
Holding: The petition is allowed and the notice issued under s. 148 of the Income Tax Act, 1961 dated 14 July 1976 (annexure IV) is quashed as being beyond time and invalid.
Implications:
- Direct effect: The s. 148 notice dated 14 July 1976 is quashed; the petition succeeds and the parties are directed to bear their own costs.
- Legal consequence in this case: Because the wooden staging was treated as plant (relying on the cited precedent), the valuation officer’s total could not be used without adjustment to show undisclosed investment exceeding Rs. 50,000; after adjustment the alleged undisclosed amount fell below the threshold necessary to permit reopening after eight years.
- Broader implications: The opinion applies established principles (as stated in ITO v. Lakhmani Mewal Das) about the limited duty of the assessee to disclose primary facts and the impermissibility of reopening assessments based on a mere change of opinion. The text of the opinion does not assert that it establishes a new legal precedent beyond applying these principles to the facts; it addresses the direct effect on the parties in this matter.
Costs: Each party to bear its own costs (as directed by the court in the opinion).
R.M Sahai, J.:— This petition is directed against the notice issued to the petitioner under s. 148 of the I.T Act. The short facts are as under:
The petitioner started construction of a cold storage from August 19, 1960, which was completed in the assessment year 1962-63. A return under s. 139 was filed by the petitioner for the assessment year 1961-62. It was claimed that no business was done and that only installation and constructions were done in the relevant financial year. The ITO passed an order under s. 143(3) accepting the claim made by the petitioner that no business was made in that year.
2. The residential premises of the petitioner were searched in August, 1972, under s. 132 of the Act and in the course of investigation the valuation of the petitioner's cold storage was referred to the Valuation Officer. His report was submitted on 20th February, 1975, and therein the investment in the construction of the building portion only was estimated at Rs. 1,46,530 during the financial year for the assessment year 1961-62. The ITO, on a perusal of that report, issued a notice to the petitioner under s. 148 stating that he had reason to believe that for the assessment year 1961-62 income chargeable to tax, far in excess of Rs. 50,000, had escaped assessment by reason of failure on the part of the petitioner to disclose fully and truly all material facts necessary for its assessment for that year. Sri K.M.L Hajela, learned counsel for the petitioner, has urged that the aforesaid notice is bad for the following reasons:
(1) The petitioner had made a full and complete disclosure of the particulars of his income and the ITO had passed an assessment order under s. 143(3). If the ITO had not drawn proper inference from the material facts, he cannot now reopen the assessment by merely changing his opinion as to the conclusion to be drawn from those facts.
(2)(a) The notices were issued by the ITO without application of his mind to the material, i.e, the valuation report which was the foundation for formation of his belief that the income has escaped assessment.
(b) The valuation report was not a relevant material and no reasonable person could have formed the belief that income far in excess of Rs. 50,000 has escaped assessment.
(3) The CBDT has accorded sanction to reopen the assessment mechanically without applying its mind.
(4) The notice was barred by time.
3. Sri Deokinandan, learned counsel for the revenue, has refuted the arguments of Sri Hajela and has urged that the valuation report clearly established that the petitioner did not show the correct investment in the cold storage. He has urged that the argument raised on behalf of the petitioner that the building, plant and machinery should be considered as separate items of investment was misconceived and that the notice issued, in the circumstances, was justified and was in accordance with the law.
4. The conditions on the fulfilment of which the ITO acquires jurisdiction to issue a notice under s. 148 have been pointed out by the Supreme Court in a very recent decision in ITO v. Lakhmani Mewal Das, [1976] 103 ITR 437, 445. The court, after pointing out the necessary conditions, proceeded to add:
“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 ITO of the account books or other evidence from which material evidence could with due diligence have been discovered by the ITO will not necessarily amount to disclosure contemplated 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 ITO to draw the correct inference from the primary facts. It is no responsibility of the assessee to advise the ITO with regard to the inference which he should draw from the primary facts. If an ITO 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.”
5. The ITO has issued the notice under s. 148 on the ground of failure on the part of the petitioner to furnish full particulars about the investment on the construction of the building of the cold storage. The controversy, therefore, centres round a very short question, namely, whether the petitioner had disclosed fully and truly the particulars of his investment on the building of the cold storage in the assessment year 1961-62.
6. It is admitted that the valuation of building as shown in the books of account for the assessment year is Rs. 54,864. The valuation officer's conclusion in his report reads:
“Thus on considering the local P.W.D rates pertaining to that period, type of construction, method of construction, design, etc., I estimate the investment in the construction of the building portion only for the assessment year 1961-62 at Rs. 1,46,530.”
7. Annexure A to the report is the abstract of cost. The relevant portion of it reads as follows:
Rs. 1. Cold storage main building, two chambers including insulation of walls and A.C sheet roof, etc., all complete 62,236 2. Wooden staging (three floors) for stocking perishable including insulated ceiling, wooden staircase, etc., all complete for storage. 64,352 3. Land including boundary walls. 11,330 Total 1,46,530
8. Out of the total value of the investment of Rs. 1,46,530 on the cold storage, as estimated by the valuation officer, the sum of Rs. 64,352 was the investment on the wooden staging and deducting this amount of Rs. 64,352, the total investment on buildings and the site, according to the valuation officer, was Rs. 82,178.
9. Sri Hajela submitted that wooden staging in a cold storage is regarded as part of plant and not of building and that if the investment of Rs. 64,352 cm wooden staging, as estimated by the valuation officer, is deducted from the total investment of Rs. 1,46,530 on the cold storage, as valued by the valuation officer, the investment on land and building in the assessment year 1961-62, according to the valuation officer, would be only Rs. 82,178. Shri Hajela added that the assessee had shown an investment of Rs. 54,852 on land and buildings in the assessment year 1961-62 and the excess of investment on buildings in that year, even accepting the valuation by the valuation officer, which could be said to have been not disclosed by the petitioner in the assessment year 1961-62 would be only Rs. 27,322. It was further contended by Sri Hajela that even if such excess of investment of Rs. 27,322 could be taken to be undisclosed income of the petitioner for the assessment year 1961-62 it would fall very much short of Rs. 50,000, and, hence, the ITO could not reopen the assessment after a lapse of 8 years from the close of the assessment year 1961-62.
10. On the other hand, the learned standing counsel contended that in determining the total amount of income which the ITO had reason to believe to have escaped assessment, he was entitled to take into consideration the difference between the total investment on the cold storage in the assessment year 1961-62 as valued by the valuation officer and the total investment as disclosed by the petitioner during the assessment for that year, that as such difference exceeded Rs. 50,000, the ITO had reason to believe that the income which had escaped assessment for the assessment year 1961-62 exceeded Rs. 50,000.
11. In reply, Shri Hajela pointed out that in his report to the CBDT setting out the reasons for initiating proceedings under s. 148 of the I.T Act, 1961 (produced as annexure C to the counter-affidavit), the ITO had stated that the reason for his belief that income had escaped assessment was that the valuation officer had worked out the investment in cold storage at Rs. 1,46,530 as against the disclosed investment of Rs. 54,856. Shri Hajela argued that the petitioner had disclosed in the assessment for the year 1961-62 an investment of Rs. 54,856 only on the construction of the buildings and that the ITO had in mind only the investment by the petitioner on buildings and not on plant or machinery, that the ITO had proceeded on an erroneous basis that the report of the valuation officer disclosed an investment of Rs. 1,46,530 on buildings, and that the ITO was clearly in error in regarding the investment on wooden staging valued by the valuation officer at Rs. 64,352 as a part of the building.
12. Shri Hajela maintained that the wooden staging in a cold storage should be regarded as a part of the plant and not the building. In support of his contention he relied on the ruling of this court in Commissioner Of Income-Tax, Lucknow v. Kanodia Cold Storage., [1975] 100 ITR 155 (All) that the freezing chamber containing insulation material like cork to keep it at appropriate temperature should be regarded as coming within the meaning of “plant” as used in s. 43(3) of the I.T Act, 1961.
13. Shri Hajela is right, in our opinion, that the wooden staging in the petitioner's cold storage (valued by the valuation officer at Rs. 64,352) cannot be regarded as a part of the building. If the value of wooden staging estimated by the valuation officer at Rs. 64,352 is excluded, the total investment on the buildings of the cold storage, even according to the valuation officer, would be only Rs. 82,178. Hence, there was no basis for any reasonable belief by the ITO that the petitioner's investment on buildings during the assessment year 1961-62 exceeded the amount shown by him, i.e, Rs. 54,852, by more than Rs. 50,000. Hence, he could not issue a notice under s. 148 of the I.T Act, 1961, beyond 8 years from the date of the close of the assessment year 1961-62. That notice is clearly beyond time and invalid. Hence, we allow this petition and quash the notice dated July 14, 1976, (annexure IV to the writ petition).
14. In the circumstances of the case, we direct the parties to bear their own costs.
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