Commissioner Of Income-Tax v. Lucas T.V.S Ltd.

The Judgment of the Court was delivered by

K.A Thanikkachalam, J.:— As per the direction of this court, dated March 23, 1983, in T.C.P Nos. 449 and 450 of 1982, the Tribunal referred the following two questions, for the opinion of this court under section 256(2) of the Income-Tax Act, 1961, hereinafter referred to as the Act:

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the reopening of the assessment for the year 1972-73 under section 147(b) was invalid?

2. Whether the Tribunal was right in dismissing the Departmental appeal as infructuous?”

2. Subsequent to the completion of the original assessment in the assessment year 1972-73 on March 12, 1973, the Income-Tax Officer reopened the assessment on the basis of information received in the form of audit objection. In the original assessment a sum of Rs. 6,37,003 was claimed and allowed as deduction as capital expenditure on scientific research under section 35(2) of the Act. Out of this, a sum of Rs. 6,03,632 related to the laboratory building, the construction of which was started during the accounting year relevant to the assessment year 1970-71 and completed during the accounting year ended March 31, 1972, relevant to the assessment year 1972-73, and the balance of Rs. 33,371 related to the cost of plant and machinery. Out of the total expenditure of Rs. 6,03,632 incurred for the building construction, only a sum of Rs. 2,95,135 was incurred during the accounting year, relevant to the assessment year 1972-73 and the balance related to the earlier accounting years. The Income-Tax Officer, in the reassessment made by him, held that under section 35(2) of the Act, only a sum of Rs. 2,95,135 out of the total expenditure of Rs. 6,03,632 should be allowed as deduction. The Income-Tax Officer disallowed the balance, rejecting the assessee's contention that since the accounts were maintained on the mercantile basis, the cost of the building should be capitalised only after the building was completed in all respects and fit for occupation. In the reassesment, the Income-Tax Officer also further disallowed (1) surtax payment; (2) under section 40(c) in respect of the remuneration paid to Mr. J. Wood. Aggrieved the assessee filed an appeal before the Commissioner of Income-Tax (Appeals). The Commissioner of Income-Tax (Appeals) upheld the validity of the reopening of the assessment, following the decision of the Supreme Court in R.K Malhotra, ITO v. Kasturbhai Lalbhai, [1977] 109 ITR 537. On the merits, while deleting the disallowance under section 40(c), the Commissioner of Income-Tax (Appeals) upheld the other additions.

3. Aggrieved, both the Revenue and the assessee appealed to the Tribunal. The Tribunal went through the reasons recorded by the Income-Tax Officer for reopening the assessment under section 147(b) dated January 7, 1977. The Tribunal has also seen the Income-Tax records shown by the Department. According to the Tribunal construction of the building though started in 1969-70 was in fact completed only during the year of account. The new building was thus made fit for occupation only during the year of account. Hence, according to the Tribunal, the entire expenditure of Rs. 6,03,632 could be said to have been incurred only during the year of account and, therefore, the entire amount is allowable as expenditure incurred within the meaning of section 35(1)(iv) of the Act. The Tribunal also pointed out that even at the time of the original assessment, the assesee had furnished the full information regarding the construction of the building. The assessee has shown that though the building was started in 1969-70, it was completed only during the year of account and the new building was made fit for occupation only during the year of account. The Revenue audit objection relates only to the extent of admissible quantum for the year, on an interpretation of the provisions of section 35 as per the view of the Tribunal. Following the decision of the Supreme Court in Indian and Eastern Newspaper Society v. CIT, [1979] 119 ITR 996, the Tribunal held that an audit opinion in regard to the application or interpretation of law cannot be treated by the Income-Tax Officer as information for reopening the assessment under section 147(b) is not valid (sic). The reassessment was cancelled. Thus, the asses-see's appeal was allowed.

4. In so far as the Departmental appeal was concerned, the Tribunal held that the Departmental appeal has become infructuous, since the Tribunal cancelled the very reassessment itself.

5. Learned standing counsel appearing for the Department submitted that what was pointed out by the audit party is not amounting to interpretation of law, but only the attention of the Income-Tax Officer was drawn to a particular provision under which expenditure incurred under section 35(2) should be allowed. Therefore, it cannot be said that the audit party's interpretation of section 35(2) forms information in the hands of the Income-Tax Officer for reopening the assessment under section 147(b) of the Act. In order to support this contention, learned standing counsel relied upon the decision of the Orissa High Court in Belpa-har Refractories Ltd. v. CIT, [1994] 207 ITR 144, wherein it was held that the words “incurred in any previous year” in clause (ia) of section 35(2) categorically laid down that the entire capital expenditure incurred in any previous year can be deducted for that previous year only. If the Legislature had intended that the capital expenditure on a capital asset could be carried forward to a subsequent year when the capital asset was finally brought into existence, there was no necessity for the use of the expressions “in any previous year” and “for that previous year”. This decision was rendered while considering the provisions of section 35(2)(ia) of the Act. According to the Orissa High Court, the entire capital expenditure incurred in any previous year can be deducted for that previous year only and it cannot be carried forward. On the basis of this decision, learned standing counsel for the Department submitted that in the original assessment in the present case, the Income-Tax Officer was not correct in allowing the entire expenditure incurred by the assessee, which related to not only the assessment year under consideration and also it related to the previous assessment years. According to learned standing counsel, the audit party merely drew the attention of the Income-Tax Officer to the provisions contained in section 35(1)(iv) and there is no interpretation of law as suggested by the Tribunal.

6. Learned standing counsel further relying upon the decision of the Supreme Court in Indian and Eastern Newspaper Society v. CIT, [1979] 119 ITR 996, pointed out that law is one thing and its communication is another. If the distinction between the source of the law and the communication of the law is carefully maintained, the confusion which often results in applying section 147(b) may be avoided. In the present case, the opinion of the audit party on a point of law could not be regarded as information enabling the Income-Tax Officer to initiate reassessment proceedings under section 147(b) of the Act. Therefore, it is not correct on the part of the Tribunal to say that the audit party interpreted the law and, therefore, that would not constitute information for reopening the assessment under section 147(b) of the Act.

7. On the other hand, learned counsel appearing for the assessee, while supporting the order passed by the Tribunal, submitted that when the original assessment was made, the assessee submitted all the informations with regard to the construction of the building in 1969-70 to 1972-73. It is only after looking into the information furnished by the assessee, the Income-Tax Officer allowed deduction under section 35(1)(iv) read with section 35(2) of the Act. Pointing out the provisions contained in section 35 by the audit party would amount to suggesting to the Income-Tax Officer that under section 35(1)(iv) only the expenditure incurred for that year alone is admissible in that year, was brought to his notice. Therefore, this would amount to interpretation of the provisions contained in section 35 of the Act, which the audit party cannot do. Inasmuch as the Income-Tax Officer has no valid information, it is not possible for him to reopen the assessment under section 147(b) of the Act. According to learned counsel, in view of the decision of the Supreme Court in Indian and Eastern Newspaper Society v. CIT, [1979] 119 ITR 996, an audit party's opinion in regard to the application or interpretation of law cannot be treated by the Income-Tax Officer as information for reopening the assessment under section 147(b) of the Act.

8. We have heard both the learned standing counsel appearing for the Department as well as learned counsel appearing for the assessee. The fact remains that the assessee constructed a building and the construction was started in the year 1969-70 and it was completed only during the accounting year, relevant to the assessment year 1972-73. The assessee claimed the entire expenditure of Rs. 6,03,632 as having been incurred only during the accounting year, since the building was made fit for occupation only in the accounting year under consideration. Therefore, the assessee claimed deduction under section 35(1)(iv) with regard to the entire expenditure amounting to Rs. 6,03,632. In the original assessment, the Income-Tax Officer allowed the entire expenditure, as though it was incurred only during the assessment year under consideration. The audit party pointed out that under section 35(1)(iv) read with section 35(2), only the expenditure incurred for the construction of the building in that assessment year alone can be allowed as deduction and the expenditure incurred in the previous assessment year cannot be allowed in the present assessment year. As per the decision of the Supreme Court in Indian and Eastern Newspaper Society v. CIT, [1979] 119 ITR 996, an audit opinion in regard to the application or interpretation of law cannot be treated by the Income-Tax Officer as information for reopening the assessment under section 147(b) of the Act. Apart from the information furnished by the audit party, the Income-Tax Officer has no other information for reopening the assessment as can be seen from the reasons recorded by him for reopening the assessment under section 147(b) of the Act. The opinion expressed by the audit party would go to show that they have pointed out to the Income-Tax Officer that he failed to apply the provisions contained in section 35 of the Act to the facts arising in this case. This would amount to pointing out the law and the interpretation of the provisions contained in section 35, which is clearly barred by the decision of the Supreme Court in Indian and Eastern Newspaper Society v. CIT, [1979] 119 ITR 996, for reopening the assessment under section 147(b) of the Act. The conclusion arrived at by the Tribunal that the reopening of the assessment under section 147(b) of the Act by the Income-Tax Officer is bad in view of the decision of the Supreme Court, cited supra, appears to be in order. Accordingly, we answer question No. 1 referred to us in the affirmative and against the Department.

9. In so far as question No. 2 is concerned, it relates to dismissing the Departmental appeal as infructuous. Inasmuch as the reassessment was set aside by the Tribunal, it was of the opinion that there is no necessity to consider the disallowance made under section 40(c) of the Act and, therefore, the Tribunal held that the Departmental appeal has become infructuous. Accordingly, we answer question No. 2 also in the affirmative and against the Department. No costs.