Rohtak & Hissar Districts Electric Supply Co. (P.) Ltd. v. Commissioner Of Income-Tax

Avadh Behari Rohatgi, J.:— The Income-tax Appellate Tribunal, Delhi, has referred under s. 256(1) of the I.T Act, 1961, the following questions for the opinion of this court:

“(i) Whether, on the facts and in the circumstances of the case, the Tribunal was legally right in holding that the Income-tax Officer was not justified in recomputing the written down value of the ‘service lines’ for the period up to March 31, 1961, and that the written down value as on March 31, 1961, was to be taken as the written down value as on April 1, 1961?

(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Income-tax Officer was precluded from taking an action under section 154 in respect of the assessment order for the assessment year 1962-63, which had got merged with the order of the Appellate Assistant Commissioner?

(iii) Whether, on the facts and in the circumstances of the case, the ‘actual cost’ of the service lines owned by the assessee-company for the purpose of allowing depreciation and development rebate under the Income-tax Act, 1961, should be determined not in accordance with the provisions of the said Act but in accordance with those of the Indian Electricity Act, 1910, and the Electricity (Supply) Act, 1948?”

2. The first two questions were referred at the instance of the department. Question No. 3 was referred at the instance of the assessee. The assessee is an electric supply company. It used to close its account on the financial year basis. Its accounting year relevant to the assessment year 1962-63, ended on March 31, 1962. For this year an assessment order under s. 143(3) was made on 30th November, 1966, allowing the following amounts of depreciation and development rebate in connection with the service lines which formed part of the company's assets.

Rs. Depreciation 29,133 Development rebate 8,017 Total 37,150

3. On 27th August, 1968, a notice under s. 154 of the I.T Act, 1961, was issued to the assessee proposing to withdraw the depreciation and the development rebate on the service lines. The assessee did not attend the hearing. The ITO presumed that it had no objection to the proposed rectification. Accordingly, he made an order on 31st May, 1969, withdrawing depreciation amounting to Rs. 29,133 and the development rebate amounting to Rs. 8,017. In his order under s. 154 the ITO held that he had wrongly allowed depreciation and development rebate under the provisions of s. 10(5) of the I.T Act, 1922, and that the proper provisions applicable are those in s. 43(1) of the I.T Act of 1961. Under s. 43(1) of the Act of 1961 the term “actual cost” is defined as follows:

“‘Actual cost’ means, the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly, or indirectly by any other person or authority.”

4. On the basis of the balance-sheet of the company he formed the view that as a result of the contribution made by the consumers for the service lines the company had been fully reimbursed and there was no “actual cost” to the company within the meaning of s. 43 of the Act on which it could be allowed depreciation and development rebate. Thus, he withdrew the depreciation and development rebate which he had allowed in his original assessment order dated 30th November, 1966, both on the existing service lines as well as the additions made thereto during the relevant accounting year.

5. The assessee appealed to the AAC and contended that the ITO had no jurisdiction to pass an order under s. 154 of the Act in respect of the assessment made on 30th November, 1966, because an appeal was taken from the order dated 30th November, 1966, and as a result it had merged and fused with the order of the AAC. The AAC did not accept this contention of the assessee because he found that in the appeal against the quantum of income determined originally on 30th November, 1966, the AAC had not given any decision on the correctness or otherwise of the depreciation and the development rebate allowed on the service lines. He, therefore, confirmed the order of the ITO under s. 154.

6. The assessee-company went in appeal to the Tribunal from the order of the AAC. Before the Tribunal the assessee raised three main contentions. The first was that the provisions of s. 43(1) did not apply to its case, and that the written down value as on 31st March, 1961, had to be worked out necessarily on the basis of the provisions of the Act of 1922. On this point the Tribunal came to the conclusion that s. 43(1) of the Act of 1961 had no retrospective application and hence the “actual cost” as defined in s. 10(5): of the Act of 1922 cannot be disturbed by taking recourse to the provisions of s. 43(1). They held that the ITO was not justified in computing the written down value of the service lines as determined for the period up to 31 March, 1961. Their finding was that “in the absence of any provision to the contrary, the written down value as on March 31, 1961, must be taken to be the written down value of the same assets as on April 1, 1961

7. The second point raised before the Tribunal by the assessee was that the Indian Electricity Act, 1910, read with the Electricity (Supply) Act of 1948 provided a special mode of calculating depreciation and written down value of the service lines and those Acts also required the undertaking supplying electricity to set apart the amounts collected from the consumers against the service lines for being handed over to the Government or the Electricity Board which may in future take over the administration of the undertaking. In a word, it was said that the provisions of the I.T Act were not applicable for determining the “actual cost” of the assets and that the aforesaid Electicity Acts applied. This contention of the assessee was rejected. It was held that the Electricity Acts have no relevance for determining an assessee's income-tax liability which had to be determined under the Income-tax Acts.

8. The third objection raised by the assessee was about the jurisdiction of the ITO to rectify his original order of assessment dated 30th November, 1966, under s. 154. It was contended and the revenue did not dispute it, that the assessee in his appeal from the original assessment order did take in the grounds of appeal before the AAC the question of determination of depreciation and development rebate. The Tribunal took the view that once the grounds of objection were taken in appeal, the operative order was that of the AAC on the issues raised. The Tribunal observed that though it is true that the AAC did not pass any order in respect of the items of depreciation and development rebate his “silence” meant that he had confirmed the order of the ITO on these two items. Therefore, it was held that the operative order was that of the AAC. The Tribunal in the result held that the ITO's action in rectifying the depreciation and development rebate in respect of service lines was without jurisdiction.

9. The questions set forth above arising out of the order of the Tribunal have been referred to us for our opinion, as we have said.

Question No. 1.

10. On the first question we think the ITO was right and the Tribunal was wrong. The assessment year in question is 1962-63. The written down value had to be found as on April 1, 1961. The Tribunal thought that s. 10(5) of the Act of 1922 applied because the new I.T Act of 1961 came into force with effect from 1st April, 1962. This was their first conclusion.

11. Secondly, they concluded that the written down value as on 31st March, 1961, must be taken to be the written down value of the same assets on 1st April, 1961.

12. In both these conclusions the Tribunal was wrong. Under s. 297(1)(b): “Where a return of income is filed after the commencement of this Act otherwise than in pursuance of a notice under section 34 of the repealed act by any person for the assessment year ending on the 31st day of March, 1962, or any earlier year, the assessment of that person for that year shall be made in accordance with the procedure specified in this Act”.

13. The return of income for 1962-63 was filed after the commencement of the new Act of 1961 and, therefore, the I.T Act of 1961 applied. The “actual cost” had to be determined under s. 43(1) of the new Act. The written down value could not be determined under the old Act of 1922 for the assessment year 1962-63. This is the view which the ITO took in his order under s. 154 and we think he was right.

14. It will also be wrong to say that the written down value as on 31st March, 1961, was the same as on 1st April, 1961. For the assessment year 1961-62, the written down value as on April 1, 1960, had to be determined and depreciation allowed thereon under s. 10(5) of the Act of 1922, which was applicable at that time. The written down value thus reduced would be the written down value of the assets, as on March 31, 1961, and would also have been taken as the written down value, on April 1, 1961, had the 1922 Act continued in force unamended. However, the position changed for the assessment year 1962-63, for which the previous year was the financial year 1961-62. On 1st April, 1962, the new Act of 1961 came into force and the “actual cost” under s. 43(1) ought to be determined after deducting the contributions received from the consumers. The contributions received from the consumers could not be deducted from, the “actual cost” under s. 10(5) of the Act of 1922. That is what the House of Lords have held in Corporation of Birmingham v. Barnes, [1935] 19 TC 195 (HL). The “actual cost” under s. 10(5), as under the English law, means “the cost, the whole cost and nothing but the cost” to use the words of Lord Atkin. But on 1st April, 1961, the actual cost had to be determined under s. 43(1) after deducting the contributions received from the consumers. [See CIT v. Hides & Leather Products P. Ltd., [1975] 101 ITR 61 (Guj)].

15. The Tribunal was not right in holding that the written down value on 1st April, 1961, was the same as on 31st March, 1961. Nor was the Tribunal right in holding that the Act of 1922 applied. Subject to what we have to say on question No. 2 our answer to question No. 1 is in favour of the department.

Question No. 2

16. On this question we think the Tribunal was right in holding that the ITO had no jurisdiction under s. 154 to revise the original assessment order dated 30th November, 1966, because that order had merged and fused with the order of the AAC. In this connection, the following dates will clarify the issue at a glance:

30-11-66 Date of original order. 23-1-68 Date of the order of the AAC in appeal from the original assessment order dated 30th November, 1966. 27-8-68 Notice under s. 154. 31-3-1969 Order of the-ITO under s. 154.

17. Once the assessment order of 30th November, 1966, is challenged in appeal before the AAC, the order of the ITO dated 30th November, 1966, merges in the order of the AAC dated 23rd January, 1968. The doctrine of merger ought to apply. It is undisputed that in the grounds of appeal before the AAC the assessee took, amongst other grounds, the question of the determination of depreciation and development rebate. It is true that the AAC's order in respect of’ depreciation and rebate is silent. But nevertheless the basic general principle embedded in the doctrine of res judicata will apply. If the AAC did not modify Or reverse the order of the ITO on these two items it means that he confirmed the decision of the ITO. The operative order in the field was the order of the AAC and not of the ITO, After the order of the AAC dated 23rd January, 1968, the ITO had no jurisdiction to issue a notice under s. 154.

18. Counsel for the department referred us to s. 154(1A), which says:

“Where any matter has been considered and decided in any proceeding by way of appeal or revision relating to an order referred to in sub-section (1), the authority passing such order may, notwithstanding anything contained in any law for the time being in force, amend the order under that sub-section in relation to any matter other than the matter which has been so considered and decided.”

19. This amendment was made on 6th October, 1964. Even before the amendment numerous decisions took the view that even after an appeal from an order has been preferred iand decided, a mistake in that part of the order which was not the subject-matter of the appeal and was left untouched by the appellate authority can be rectified by the authority which passed the order. [See Karsondas Bhagwandas Patel v. G.V Shah, ITO, [1975] 98 ITR 255, 262 (Guj)]. This principle is now given statutory recognition by sub-s. (1A) of s. 154.

20. The question is: What is meant by the words “considered and decided” which are used twice in the sub-section. In the present case, the question of depreciation and development rebate was taken as a specific ground in the memorandum of appeal before the AAC. Whether this ground was argued before the appellate authority or was abandoned or was not pressed we do not know. All that we know is that the AAC did not pass any order in respect of depreciation and development rebate. Can it be said on these facts that he did not consider and decide the two items? We are clearly of the opinion that these two items will be deemed to have been considered and decided in the order of the AAC dated 23rd January, 1968. Was it the subject-matter of an appeal?

21. This is the question. If the answer is “yes” the matter ought to be held as having been considered and decided. The expression “considered and decided” used in the I.T Act, 1961, is as old as the hills. It was used in the Civil Procedure Code (Act V of 1908) in a slightly different form. There the expression is “heard and decided”, which means much the same thing as “considered and decided”.

22. The matter can also be looked at from this point of view. If it is said that the AAC had not considered and decided this ground, it would be open to the assessee (and even the department, for, the AAC has powers of enhancement) to move him under s. 154 and request him to deal with this ground. That would result in the position that both the I.T Dept, and the AAC could rectify ‘the position in regard to the same matter, which was exactly the position which sub-s. (1A) was intended to obviate. It appears to us that the order of the ITO dated 30th November, 1966, merged in the order of the AAC dated 23rd January, 1968, and thereafter, the ITO lost jurisdiction to rectify any error apparent on its face under s. 154.

23. We do not doubt that the mistake made by the ITO in his original assessment order dated 30th November, 1966, in the matter of depreciation and development rebate was a mistake apparent on the face of the record. Clearly the new Act applied. Erroneously the ITO had applied the old Act. Under s. 154 the ITO can recompute the correct amount of depreciation allowance after checking up the previous calculations: See Mahqrana Mills v. ITO, [1959] 36 ITR 350 (SC). The application of wrong statutory provisions is a mistake apparent on the face of the record. But fortunately for the assessee the ITO discovered the mistake too late. He discovered it after an appeal had been taken from his original assessment order and decided by the AAC. It is the order of the AAC dated 23rd January, 1968, which is the determining factor in the matter of jurisdiction of the ITO. After this order he did not have any jurisdiction to act under s. 154. This question is answered in favour of the assessee and against the department. Question No. 3 In our opinion, the Tribunal was right in holding that the Electricity Acts of 1910 and 1948 had no application for the purpose of allowing depreciation and development rebate. These had to be determined under the I.T Act of 1961. The reason is simple. The assessee asked for these reliefs under the I.T Act. Therefore, the I.T Act governs. The Electricity Acts have no relevance for the purpose of computation of income. The question is answered in favour of the department.

24. In view of the fact that the assessee has partially succeeded and so has the revenue, we make no order as to costs.