Commissioner Of Income-Tax, Gujarat-Ii v. Sayaji Mills Ltd.

P.D Desai, J.:— This reference arises out of assessments to income-tax made on the assessee for the assessment years 1959–60 and 1960–61, the corresponding accounting years being the financial years ending 31st March, 1959, and 31st March, 1960. Two questions arise for our determination in this reference: first, whether the assessee's claim in each assessment year for allowance of a sum by way of development rebate in respect of the machinery and plant, etc., installed in one of the industrial units run by it was rightly disallowed and, secondly, whether in the facts and circumstances of the case the Income-tax Appellate Tribunal had the power and jurisdiction to direct the Appellate Assistant Commissioner to entertain and take into consideration the assessee's contention that the profits on sale of certain machinery were not taxable since the business was not in existence at any time during the relevant previous years. In order to properly appreciate and determine those questions it would be necessary to set out a few facts and we proceed to do so.

2. The assessee-company runs two textile mills, one at Bombay and the other at Baroda. It also owns another industrial unit at Kathwada which is known by the name of “Maize Products”. During the course of proceedings for assessment to income-tax for the assessment years 1959–60 and 1960–61, the assessee claimed an allowance by way of development rebate in respect of machinery and plant, etc., installed in the textile mill at Bombay. The Income-tax Officer found that the assessee was entitled to an allowance in the sums of Rs. 7,35,533 and Rs. 4,51,104, respectively, by way of development rebate in the concerned assessment years. He, however, observed that since the mill was sold by the assessee some time in 1961, that is, before the expiry of ten years from the end of the relevant accounting periods, the claim for allowance by way of development rebate was not allowable. The contention of the assessee before the Income-tax Officer was that in accordance with the provisions of section 10(2)(vib) of the Indian Income-tax Act, 1922, it was obligatory on the Income-tax Officer to allow the development rebate in the first instance and that if it was ultimately found that the rebate was wrongly allowed in view of the provisions contained in the proviso to section 10(2)(vib), it was open to the Income-tax Officer to rectify the mistake under section 35(11) of the Act. The contention of the assessee was negatived by the Income-tax Officer as well as by the Appellate Assistant Commissioner and also by the Tribunal. These are the facts relevant for the decision of the first question.

3. In the course of the assessment proceedings for the said two assessment years, the other question which was raised by the assessee was with regard to the computation of surplus realised by the assessee on the sale of machinery of artificial silk factory at Kathwada. For these two assessment years, the surplus taxable under section 10(2)(vii) was worked out at Rs. 19,888 and Rs. 2,03,427, respectively, and the said two amounts were included in the total income of the assessee for the respective assessment years. The assessee carried the matter in appeal before the Appellate Assistant Commissioner and one of the contentions raised was that the profits realised on the sale of machinery were not taxable because the business was not in existence at any time during the relevant previous years. The Appellate Assistant Commissioner, however, refused to permit the assessee to challenge the orders of assessment on this ground since, in his opinion, the contention was not raised before the Income-tax Officer and could not be allowed to be raised at the appellate stage since it would involve investigation into new questions of facts. According to the Appellate Assistant Commissioner, the assessee failed to show any convincing or reasonable reason for not raising the contention before the Income-tax Officer and there was, therefore, no ground to allow it to raise the contention before him at the appellate stage. The assessee carried the matter in further appeal before the Tribunal and contended that the Appellate Assistant Commissioner was in error in not permitting the assessee to raise the point in the appeal before him. It was urged that the basic facts necessary for dealing with the contention raised by the assessee were already on record and that it was not necessary for the determination of that question to enter upon any fresh investigation into questions of fact. The Tribunal upheld the argument observing that the contention sought to be raised by the assessee went to the root of the matter and that substantial justice required that the assessee should be given an opportunity to make good his contention. The Tribunal, therefore, directed the Appellate Assistant Commissioner to hear the assessee in regard to the contention sought to be raised by it and decide the matter after hearing both the parties and taking into account such material as may be placed before him. These are the facts material for the decision of the second question.

4. The assessee and the revenue were both aggrieved by the decision of the Tribunal and at their instance the Tribunal has stated a case in respect of the following two questions;

“(1) Whether, on the facts and in the circumstances of the case, the assessee's claim for development rebate was rightly disallowed?

(2) Whether, on the facts and in the circumstances of the case, it was competent for the Tribunal to direct the Appellate Assistant Commissioner to ascertain the assessee's ground in regard to the taxability of the surplus realised on the sale of artificial silk machinery?”

5. Turning to the first question, the relevant provisions are to be found in sections 10 and 35 of the Indian Income-tax Act, 1922. Sub-section (1) of section 10 provides that the tax shall be payable by an assessee under the head “profits and gains of business, profession or vocation” in respect of the profits or gains of any business, profession or vocation carried on by him. Sub-section (2) of section 10 provides that such profits or gains shall be computed after making certain allowances and one of them is the allowance of a sum by way of development rebate prescribed in clause (vib) of the said sub-section. According to clause (vib), in so far as it is relevant for the purposes of the present case, an allowance of a sum by way of (sic) new machinery or plant installed after the thirty-first day of March, 1954, which is wholly used for the purpose of the business carried on by the asses-see. This allowance is to be worked out according to the formula set out in clause (vib) and since in the present case nothing turns upon the quantum of development rebate, we need not refer to the said formula. There are two Explanations to clause (vib) and they are also not relevant for the purposes of this case. There is a proviso to clause (vib) which has a direct bearing on the question under consideration and the relevant part of the said proviso read as under at the material time:

“Provided that no allowance under this clause shall be made unless,—….

(b)…. and if any such ship, machinery or plant is sold or otherwise transferred by the assessee to any person other than the Government…. at any time before the expiry of ten years from the end of the year in which it was acquired or installed, any allowance made under this clause shall be deemed to have been wrongly allowed for the purposes of this Act….”

6. Section 35 confers upon the designated authorities the power of rectification of mistake and sub-section (11) thereof, in so far as it is relevant for the purposes of this case, provides that where an allowance by way of development rebate has been made wholly or partly to an assessee in respect of machinery or plant in any year of assessment under clause (vib) of Sub-section (2) of section 10 and subsequently at any time before the expiry of ten years from the end of the year in which the machinery or plant was installed, the machinery or plant is sold or otherwise transferred by the assessee to any person other than the Government, the development rebate originally allowed shall be deemed to have been wrongly allowed and the Income-tax Officer may, notwithstanding anything contained in this Act, proceed to recompute the total income of the assessee for the relevant year as if the recomputation is a rectification of a mistake apparent on the record within the meaning of the said section within the prescribed time limit.

7. It is clear from a combined reading of the relevant part of the proviso to clause (vib) of Sub-section (2) of section 10 and sub-section (11) of section 35 that the legislature clearly intended that no allowance by way of development rebate would be available if the machinery or plant in respect of which it is claimed is sold or otherwise transferred by the assessee to any person other than the Government at any time before the expiry of ten years from the end of the year in which it was acquired or installed. This is apparent, in the first instance, from the fact that the proviso to section 10(2)(vib) enacts a fiction to the effect that even in cases where development rebate has already been allowed in respect of any machinery or plant and such machinery or plant is sold or otherwise transferred at any time before the expiry of ten years from the end of the year in which it was acquired or installed, the development rebate shall be deemed to have been wrongly allowed for the purposes of the Act. Subsection (11) of section 35 then empowers the Income-tax Officer in such a case to recompute the total income of the assessee for the relevant year as if the recomputation is a rectification of a mistake apparent from the record within the meaning of the said section. It would thus appear that, in such cases, even if the assessment proceedings for the relevant year are completed, the law enjoins upon the Income-tax Officer the duty to recompute the total income of the assessee for the relevant year in exercise of his powers of rectification by treating the development rebate as having been wrongly allowed. The question then is whether in a case where the assessment for the relevant year is not completed and the taxing authority comes to know that the machinery or plant in respect of which the development rebate is claimed is sold away by the assessee within the prescribed time limit, the said authority would have power to reject the assessee's claim for allowance of development rebate. It is true that section 10(2)(vib) does not in terms authorise the Income-tax Officer to do so. However, such power in our opinion is necessarily implied having regard to the nature of provisions contained in section 10(2)(vib) and the scope and ambit of power expressly conferred on the Income-tax Officer under section 35(11) of the Act. The assessee's argument that in such a case the Income-tax Officer is bound, in the first instance, to allow the claim and then to resort to the procedure prescribed in section 35(11) is not well founded for two reasons:

first, that it would be necessary to resort to the procedure prescribed in section 35(11) only in cases where development rebate has already been allowed and it is subsequently found that it must be deemed to have been wrongly allowed within the meaning of the Act; and,

secondly, that such a course would result in a needless and futile exercise on the part of the Income-tax Officer requiring him to allow development rebate in the first instance although it would have to be treated ultimately as having been wrongly allowed and then to recompute the income of the assessee for the relevant year in exercise of the powers of rectification.

8. It would not be reasonable to attribute to the legislature the intention that the Income-tax Officer should resort to such circumambulatory procedure in order to disallow an obviously untenable claim for development rebate. In our opinion, therefore, the Tribunal was right in taking the view that the assessee's claim for development rebate was rightly disallowed.

9. That takes us to the consideration of the second question referred by the Tribunal. As stated earlier the Appellate Assistant Commissioner, for reasons recorded by him, did not allow the assessee to raise before him for the first time a contention to the effect that the profits realised on sale of the artificial silk mill machinery were not taxable since the business was not in existence at any time during the relevant previous years. In appeal before the Tribunal, the assessee urged that the basic facts necessary and relevant for deciding the contention raised by it were already on record and, therefore, the Appellate Assistant Commissioner should have entertained and pronounced upon the validity of the contention advanced by it. In support of this submission, the assessee drew the attention of the Tribunal to two sets of documents:

firstly, statements claiming depreciation for the machinery in question produced by the assessee along with his returns of income for the assessment years 1957–58, 1958–59 and 1959–60, which showed that so far as the assessment year 1957–58 was concerned the depreciation was claimed only for a period of five months and so far as the other two assessment years were concerned, no depreciation whatever was claimed, and,

secondly, notices given by the assessee to the employees working in the silk factory intimating that the factory was closed down on and with effect from 24th August, 1956.

10. The Tribunal, in these circumstances, upheld the contention of the assessee and directed the Appellate Assistant Commissioner to rehear the parties in regard to the additional point sought to be raised by the assessee. The question is whether the Tribunal was, in the facts and circumstances of the case, competent to give such a direction to the Appellate Assistant Commissioner.

11. The determination of the question depends upon the construction of sub-section (4) of section 33 which confers upon the Tribunal in the widest possible terms power in dealing with appeals preferred to it. Section 33(4) reads as follows:

“33. (4) The Appellate Tribunal may, after giving both parties to the appeal an opportunity of being heard pass such orders thereon as it thinks fit, and shall communicate any such orders to the assessee and to the Commissioner.”

12. In Hukumchand Mills Ltd. v. Commissioner of Income-tax [1967] 63 I.T.R 232 the Supreme Court had an occasion to deal with the question of the ambit and scope of the powers of the Appellate Tribunal and having noted the aforesaid provision, Ramaswami J., speaking for the court, made the following observations at page 237 of the report:

“The word ‘thereon’, of course, restricts the jurisdiction of the Tribunal to the subject-matter of the appeal. The words ‘pass such orders as the Tribunal thinks fit’ include all the powers (except possibly the power of enhancement) which are conferred upon the Appellate Assistant Commissioner by section 31 of the Act. Consequently, the Tribunal has authority under this section to direct the Appellate Assistant Commissioner or the Income-tax Officer to hold a further enquiry and dispose of the case on the basis of such enquiry.”

13. It would appear from the provisions of section 33(4), as construed by the Supreme Court, that the legislature has conferred upon the Appellate Tribunal wide powers in dealing with appeals preferred to it. The jurisdiction of the Tribunal is undoubtedly restricted to the subject-matter of the appeal but once it is shown that a particular claim or contention was the subject-matter of the appeal before the Tribunal, the law authorises the Tribunal to pass such orders in relation to such claim or contention as it thinks fit. In the present case, the claim of the assessee that the profits realised by it on the sale of artificial silk machinery was not taxable undoubtedly formed the subject-matter of the appeals preferred by it. The assessee had in fact raised the contention even before the Appellate Assistant Commissioner and it was indeed the duty of the Appellate Assistant Commissioner, in the circumstances of the case, to entertain and pronounce upon the validity or otherwise of the said contention. All questions, whether of law or of fact, which relate to the assessment of the assessee may ordinarily be allowed to be raised by him in appeal even though they may not have been raised before the Income-tax Officer, if grant of relief to him would be available on the determination of such questions. The Tribunal rightly felt that substantial justice required in the present case that the claim of the assessee, although it was advanced for the first time before the Appellate Assistant Commissioner, should be investigated into by the Appellate Assistant Commissioner and accordingly directed the Appellate Assistant Commissioner to rehear the parties and record a fresh finding on the contention raised by the assessee. There is no manner of doubt that the Tribunal was well within its jurisdiction in giving the aforesaid direction and we are of the opinion that it was competent to the Tribunal to give such a direction in the facts and circumstances of the case. We, accordingly, answer both the questions referred to us in the affirmative. Each party will bear its own costs of the reference in the circumstances of the case.

14. Questions answered in the affirmative.