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Commissioner Of Income-Tax v. First Leasing Co. Of India Ltd.
Factual and Procedural Background
For the assessment year 1976–77 the assessee filed a return claiming extra depreciation (an extra allowance equal to one-half of the normal allowance under item No. III, Part I of Appendix I to the Income-tax Rules, 1962) in respect of certain plant and machinery which had been leased out to Spencer and Co., a company running a hotel approved by the Central Government. The Income-tax Officer (ITO), in the original assessment, granted the extra depreciation as claimed.
After the original assessment was completed, an audit party drew the ITO's attention to the provisions of sub-item (iii) of Part I of Appendix I of the Income-tax Rules, indicating that the initial extra depreciation might have been wrongly allowed because the assets were leased out (and therefore not installed in premises used by the assessee as a hotel). On the basis of the audit report the ITO initiated reassessment proceedings under section 147(b) of the Income-tax Act, 1961, heard the assessee's objections, concluded that the assessee was not entitled to the extra depreciation, withdrew the allowance and completed reassessment.
The assessee appealed to the Commissioner of Income-tax (Appeals) who confirmed the reassessment, holding that the assessee was not entitled to extra depreciation because the rules required the machinery to be installed in premises used by the assessee as a hotel, and that the audit party had merely brought the rules to the ITO's attention. The assessee then appealed to the Income-tax Appellate Tribunal (the Tribunal). The Tribunal reversed, holding that the audit party had interpreted the law; relying on the Supreme Court's decision in Indian and Eastern Newspaper Society v. CIT it held that an audit party's interpretation of law does not constitute “information” under section 147(b) and thus cannot justify reopening the assessment. The Tribunal allowed the assessee's appeal and, pursuant to directions in T.C.P. No. 198 of 1984 dated January 29, 1985, referred the question of law to the court under section 256(2) of the Income-tax Act for consideration.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding and had valid materials to hold that the reassessment made under section 147(b) of the Income-tax Act was without jurisdiction and, therefore, invalid?
Arguments of the Parties
Revenue's Arguments (Mr. C.V. Rajan)
- The Appellate Tribunal erred in concluding that the audit party had interpreted the law.
- The audit party merely brought the relevant statutory provision to the ITO's attention and did not interpret it; therefore the audit report amounted to “information” within the meaning of section 147(b), justifying reassessment.
Assessee's Arguments (Mr. Aravind P. Datar)
- The audit party had interpreted the law and, because the original assessment contained a mistake, the ITO could not use reassessment under section 147(b) to correct that mistake.
- The correct course for the Department was to rectify the mistake under section 154 or to initiate revisional proceedings under section 263, not to reopen the assessment under section 147(b).
- Accordingly, the reassessment proceedings initiated under section 147(b) were invalid.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Indian and Eastern Newspaper Society v. CIT, [1979] 119 ITR 996 | The distinction between (a) an auditor/audit party merely bringing a provision of law to the attention of the tax officer (a communication of law) and (b) an auditor/audit party interpreting the law; and the effect of that distinction on whether an audit report can constitute “information” under section 147(b). | The court applied the Supreme Court's distinction to the present facts and concluded that the audit party had only communicated the relevant rule (it had not interpreted a complicated provision). Therefore the audit report constituted “information” for the purposes of section 147(b), and the Tribunal was incorrect to treat it as mere interpretation that could not justify reopening the assessment. |
Court's Reasoning and Analysis
The court began by examining the relevant sub-item (iii) of item No. III, Part I of Appendix I to the Income-tax Rules, 1962, which allows an extra allowance of depreciation equal to one-half of the normal allowance for machinery and plant that is "installed by an assessee, being an Indian company, in premises used by it as a hotel" provided the hotel is Central Government approved. The court read the rule as requiring, as a pre-requisite, installation of the machinery in premises used by the assessee as an approved hotel.
Turning to the facts, the court noted that the assessee had leased out the air-conditioners and other machinery to Spencer & Co., rather than installing and using them in the assessee's own hotel premises. The audit party had drawn the ITO's attention to the statutory provision in sub-item (iii).
The court analysed whether the audit party's report amounted to an interpretation of law (which, under the precedent cited, would not constitute “information” for reopening) or merely a communication/bringing-to-attention of the statutory provision (which could constitute “information”). Relying on the Supreme Court decision in Indian and Eastern Newspaper Society v. CIT, the court emphasized the distinction between interpretation and communication of law. The court concluded that the provision in question was not a complicated provision requiring interpretation; the audit party had not interpreted it but had merely brought the relevant provision to the ITO's attention.
On that basis, the court held that the audit report constituted "information" within the meaning of section 147(b). The court expressly rejected the Tribunal's conclusion that the audit party had interpreted the law and therefore that the ITO lacked jurisdiction to reopen the assessment. The court also rejected the assessee's submission that the Department was obliged to proceed only under section 154 or section 263; the court observed that if the statutory conditions of section 147(b) are satisfied, the Department may validly invoke reassessment notwithstanding the availability of other remedies.
Because the court did not uphold the Tribunal's view that the ITO lacked jurisdiction, it directed that the matter be remitted to the Appellate Tribunal to decide the question on the merits of the case.
Holding and Implications
The Appellate Tribunal was not justified in holding that the reassessment under section 147(b) of the Income-tax Act was without jurisdiction; the question of law is answered in the negative and in favour of the Revenue.
Implications:
- The court concluded that the audit party's report in this case constituted "information" under section 147(b), thereby permitting reassessment proceedings to be initiated by the ITO on that basis.
- The matter was remitted to the Income-tax Appellate Tribunal for decision on the merits of the reassessment (i.e., the substantive question whether the assessee was entitled to extra depreciation), rather than being disposed of on the jurisdiction point.
- There will be no order as to costs in the proceedings before this court.
- The opinion does not purport to set out any broader new precedent beyond applying the Supreme Court's established distinction between communication and interpretation of law; the direct effect is to uphold the Department's jurisdiction to reopen the assessment in the circumstances found in this case and to send the matter back for adjudication on merits.
1. In pursuance of the directions of this court in T.C.P No. 198 of 1984 dated January 29, 1985, the Income-tax Appellate Tribunal has referred the following question of law for our consideration under section 256(2) of the Income-tax Act, 1961:
“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding and had valid materials to hold that the reassessment made under section 147(b) of the Income-tax Act was without jurisdiction and, therefore, invalid?”
2. The assessee filed its return for the assessment year 1976–77 and claimed extra depreciation in respect of certain plant and machinery which were leased out to Spencer and Co., which is running a hotel, approved by the Central Government. The assessee claimed extra depreciation allowance at 50 per cent, of the normal depreciation under item No. Ill, Part I of Appendix I to the Income-tax Rules, 1962. The Income-tax Officer in the original assessment for the year 1976–77 granted the extra depreciation as claimed by the assessee. Subsequent to the completion of the original assessment, the audit party had drawn to the attention of the Income-tax Officer that the initial depreciation was wrongly allowed as the assessee has only leased out the assets belonging to it and the same was neither installed nor used in the assessee's business premises for its business. It seems that the audit party brought to the attention of the Income-tax Officer, the relevant provisions of sub-item (iii) of Part I of Appendix I of the Income-tax Rules. The Income-tax Officer on the basis of the report of the audit initiated proceedings for reassessment under section 147(b) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), and after hearing the objections of the assessee, held that the assessee was not entitled to extra depreciation allowance as the assessee was not using the machinery in the hotel business run by the assessee, and accordingly he withdrew the extra depreciation allowance granted earlier and completed the reassessment.
3. The assessee filed an appeal before the Commissioner of Income-tax Appeals-I, Madras, against the order of reassessment and the Commissioner (Appeals) held that under the relevant rules, the assessee is not entitled to extra depreciation as the rules make it clear that the building should be used by the assessee as hotel and since that condition was not satisfied, the withdrawal of extra depreciation was in order. He also held that the audit party has not interpreted any provisions of the law and the audit party has only brought to the attention of the Income-tax Officer the relevant rules for the grant of extra depreciation. The Commissioner of Income-tax (Appeals-I), confirmed the order of reassessment made by the Income-tax Officer and dismissed the appeal preferred by the assessee. Aggrieved by the order of the Commissioner of Income-tax (Appeals), the assessee carried the matter in appeal before the Income-tax Appellate Tribunal and the Appellate Tribunal held that the audit party has interpreted the law and since there was an expression of an opinion of the law by the audit party, the opinion expressed by the audit party would not constitute “information” within the meaning of section 147(b) of the Income-tax Act, and placing reliance on the decision of the Supreme Court in the case of Indian and Eastern Newspaper Society v. CIT, [1979] 119 ITR 996, the Tribunal held that the report of the audit party cannot form the basis for reopening the assessment and in this view of the matter, the Tribunal allowed the appeal preferred by the assessee.,
4. Mr. C.V Rajan, learned counsel for the Revenue, submitted that the order of the Appellate Tribunal is erroneous in point of law as the Tribunal proceeded on an erroneous basis that the audit party has interpreted the provisions of the law and according to learned counsel for the Revenue, the audit party has merely brought to the attention of the Income-tax Officer the provisions of law and there is no question of interpretation of law involved by the audit party.
5. Mr. Aravind P. Datar, learned counsel for the assessee, has contended that the audit party has, interpreted the law and as there was a mistake in the order of the original assessment made by the Income-tax Officer, it is not open to the Income-tax Officer to resort to reassessment proceedings. According to learned counsel, the only course open), to the Income-tax Officer was to rectify the mistake under section 154 of the Income-tax Act or the Commissioner of Income-tax could have initiated proceedings under section 263 of the Income-tax Act to revise the order. Since the Department has not taken the proceedings either for rectification, or for revision but resorted to proceedings under section 147(b) of the Act, the proceedings initiated were not valid in law and, therefore, there is no basis for interference in the order of the Tribunal.
6. We carefully considered the submissions made by learned counsel for the assessee. We have set out the facts earlier and it is seen that after the completion of the original assessment by the Income-tax Officer, the audit party has informed the Income-tax Officer about the provisions of law in sub-item (iii) of item No. III of Part I of Appendix I of the Income-tax Rules, 1962, which grants extra depreciation allowance for approved hotels and the provision reads as under:
“An extra allowance of depreciation of an amount equal to one-half of the normal allowance shall be allowed in the case of machinery and plant installed by an assessee, being an Indian company, in premises used by it as a hotel where such hotel is for the time being approved by the Central Government for the purposes of section 33 of the Act.
Explanation— For the purposes of this sub-item and sub-item (iv), ‘normal allowance’ means the amount of depreciation allowance [other than the extra depreciation allowance under this sub-item or the extra shift depreciation allowance under sub-item (iv)] which is allowable under rule 5.”
7. The extra allowance of depreciation of an amount equal to the amount of normal allowance is allowable in the case of machinery and plant installed by the assessee, being an Indian company in the premises used by it as a hotel, provided such a hotel is approved by the Central Government for the provisions under section 33 of the Income-tax Act. A fair reading of the rule shows that to be eligible for extra depreciation allowance, the assessee must be an Indian company and the machinery and plant should be installed in the premises used by the assessee as an approved hotel. Therefore, the pre-requisite condition is that the installation of the machinery should be in the premises used by the assessee as a hotel.
8. It is seen from the facts that the assessee had leased out the air-conditioners and certain other machinery to Spencer and Co. Ltd., and a fair reading of the rules indicates that unless the assessee uses the plant and machinery in the premises used by it as a hotel and such hotel is approved by the Government and then only the assessee is entitled to extra depreciation. The audit party has brought to the attention of the Income-tax Officer the relevant provision of the law, but has not interpreted the said provisions as the said provision is not a complicated provision of law as a careful reading of the rule shows that the assessee is not entitled to extra depreciation. In our View, there is no question of any interpretation of law involved in the audit report and the report of the audit has to be construed as if the audit has brought to the attention of the Income-tax Officer the relevant provision of law. Since the audit party has not interpreted the law but has merely brought to the attention of the Income-tax Officer the provisions of law, the report of the audit party in our opinion constitutes “information” within the meaning of section 147(b) of the Act. The Supreme Court in Indian and Eastern Newspaper Society v. CIT, [1979] 119 ITR 996, has made a distinction between the interpretation of the law and bringing to the attention of the Income-tax Officer the relevant provision of law and if the audit party interpreted the law, then the report by the audit party cannot be regarded as “information” for the purpose of reopening an assessment under section 147(b) of the Act. However, if the audit party has merely drawn the attention of the Income-tax Officer to the existence of the law, the opinion of the audit party would be regarded as information and the Supreme Court has made a distinction between the communication of law and interpretation of law. In our view, as the facts of the case the audit report should be regarded as a communication of law and there is no interpretation of law involved in the matter. Applying the principles of law laid down by the Supreme Court in Indian and Eastern Newspaper Society v. CIT, [1979] 119 ITR 996, we are of the view that the Tribunal was not correct in holding that the audit party has interpreted the relevant provisions relating to the granting of extra depreciation allowance, and erred in holding that the Income-tax Officer has no jurisdiction under section 147(b) of the Act to reopen the assessment. We are also not able to accept the contention of learned counsel for the assessee that the Department should have resorted to either rectification proceedings or revisional proceedings. If the statutory conditions prescribed under section 147(b) are satisfied, it is permissible for the Department to invoke the reassessment proceedings, notwithstanding the fact that other remedies are available to the Department under other provisions of the statute. Since we are not able to uphold the view of the Tribunal that the Income-tax Officer has no jurisdiction to reopen the assessment necessarily the matter will have to go before the Appellate Tribunal to decide the question on the merits of the case. Accordingly, we hold that the Tribunal was not correct in holding that the officer has no jurisdiction to reopen the assessment under section 147(b) of the Act and the reassessment consequently made was invalid.
9. Accordingly, we answer the question of law referred to us in the negative and in favour of the Revenue. However, in the circumstances of the case, there will be no order as to costs.
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