Karnataka High Court
Mysore Cements Limited vs Income-Tax Officer on 15 April, 1987
Equivalent citations: (1987)64CTR(KAR)205, [1987]167ITR370(KAR), [1987]167ITR370(KARN), [1987]35TAXMAN40(KAR)
JUDGMENT S.R. Rajasekhara Murthy, J.
1. The petitioner-company, an assessee under the Income-tax Act, 1961 (hereinafter referred to as the "Act"), has challenged the notice issued by the Income-tax Officer under section 148 of the Act, proposing to reopen the assessment for the year 1977-78. The said notice is annexed to the writ petition as annexure-D.
2. The assessee's counsel, Sri G. Sarangan, has raised the following, among other grounds, while challenging the validity of the impugned notice :
(i) the notice purported to be under section 147(b) of the Act is barred by time;
(ii) there was no "information" within the scope of section 147(b) for initiating action to reopen the assessment for the assessment year 1977-78;
(iii) the finding given by the Tribunal in the appeals for the assessment years 1974-75 and 1975-76 cannot constitute "information" for invoking section 147(b) of the Act, and, lastly,
(iv) the action initiated does not fall under section 150(1) of the Act, and hence, the notice is bad.
3. Sri Srinivasan, learned senior standing counsel for the Department, has argued, justifying the notice and has produced the assessment records in which the reasons for reopening the assessment are recorded by the Income-tax Officer. The reasons recorded are reproduced hereinbelow :
"The assessee had incurred expenditure totalling Rs. 4,81,760 during the period relevant to the assessment years 1974-75 and 1975-76 towards installation of ropeway equipment. This was held to be capital expenditure. The Income-tax Officer had allowed depreciation on this amount for the assessment year 1976-77 and on the WDV after deducting the depreciation allowed for 1976-77, depreciation was again allowed for the assessment year 1977-78.
In appeals relating to the assessment years 1974-75 and 1975-76, the Income-tax Appellate Tribunal held that the amount of Rs. 4,81,760 constituted revenue expenditure to be deducted in arriving at the business income of those two years. As regards facts, the Tribunal's decision has become final. In consequence of the finding given by the Tribunal, I have reason to believe that the allowance of depreciation for 1977-78 is excessive. No depreciation was allowable on this item as it has been held to be revenue expenditure and 100% of it has been already allowed by the Tribunal in earlier years. Therefore, the income for 1977-78 has escaped assessment. The 1977-78 assessment in this case has been done within the prescribed time limit. This assessment was pending at the time of making the assessments for 1974-75 and 1975-76. In view of the decision arrived at by the Income-tax Appellate Tribunal in the course of proceedings under the Income-tax Act, as a direct consequence of the findings, I now have information that the 1977-78 assessment has to be reopened. Therefore this is not a case coming under section 150(2).
As the assessment sought to be reopened is beyond 4 years but within 8 years from the end of 1977-78, the permission of the Commissioner of Income-tax is being sought, as required under section 151".
4. The reason for reopening the assessment, as indicated in the assessment file, is to withdraw the depreciation allowed in the previous years.
5. "Information" which formed the basis for the notice is also contained in the he reasons recorded.
6. The petitioner, by his reply to the notice filed before the Income-tax Officer, opposed the initiation of the action taken on several grounds and urged for dropping of the proceedings.
7. An emergent notice re-Rule was issued to the Department and the matter is disposed of on merits since elaborate arguments were advanced by both sides. On the arguments advanced by the learned counsel, the sole point that arises for decision in the writ petition is :
"Whether the notice issued under section 148 of the Act proposing to reopen the assessment for the year 1977-78 is valid in law ?
It is argued by Sri Sarangan elaborating his contentions set out earlier, that keeping in view the principles laid down by the Supreme Court in several decisions and applying them to the facts of the case, the notice impugned in the writ petition should be quashed.
The two aspects of the question that emerge out of the arguments and which are equally important are :
"(i) whether the notice was barred by limitation under section 149 of the Act, or, whether it is saved by the provisions of section 150(1) ? and
(ii) whether the Tribunal's finding in the appeals for the years 1974-75 and 1975-76 constitutes 'information' for purposes of reopening under section 147(b) of the Act ?"
8. The facts relevant for initiating the action to reopen the assessments are set out in the reasons recorded by the Income-tax Officer. The scope of enquiry in this writ petition is to find out whether the two conditions necessary for reopening the assessment under section 147(b) existed on the day the Income-tax Officer initiated action.
9. Before considering whether there was 'information' on the facts of the case as recorded by the Income-tax Officer and whether the action initiated by the Income-tax Officer is saved by the provisions of section 150(1) of the Act, it is necessary to refer to the relevant facts chronologically. They are :
The assessee-company which manufactures cement had incurred expenditure on ropeways during the years 1974-75 and 1975-76 and the total expenditure was Rs. 4,81,757.
10. The assessee did not claim this expenditure during the relevant assessment years in the course of assessments nor was depreciation claimed on the said amount treating it as capital expenditure. For the first time, the petitioner claimed depreciation on Rs. 4,81,757 for the assessment year 1976-77 and the Income-tax Officer allowed depreciation on a part of the capitalised value and part of it was allowed as depreciation on the written down value for the year 1977-78.
11. But, the petitioner, in the appeal filed before the Commissioner of Income-tax (Appeals) for the assessment year 1977-78, claimed deduction of the entire sum of Rs. 4,81,760 as revenue expenditure. This was not allowed by the Commissioner of Income-tax (Appeals) and his view was also affirmed by the Income-tax Appellate Tribunal.
12. Thereafter, the petitioner filed an application under section 154 of the Act and sought rectification of the assessment order for the year 1975-76 and to allow a sum of Rs. 4,51,111.09 as revenue expenditure. The Income-tax Officer treated the application for rectification for the year 1975-76 as an application for rectification for the assessment year 1974-75 and dismissed the same. This order was upheld by the Commissioner of Income-tax (Appeals) also. Thereafter, the petitioner further appealed to the Income-tax Appellate Tribunal against the order of the Commissioner of Income-tax (Appeals). The Tribunal, by its order dated November 15, 1984 (annexure B-6 to the statement of objections), allowed the assessee's appeal.
13. After the Tribunal's order, the Income-tax Officer initiated reassessment proceedings for the assessment year 1977-78 under section 148 by issue of a notice dated January 6, 1986, which is impugned in this writ petition.
14. It is brought to my notice that similar action is proposed to be taken for the assessment year 1976-77 also and the matter is referred to the Central Board of Direct Taxes for sanction.
15. It is, therefore, necessary to set out the relevant portion from the order of the Tribunal which gave rise to the notice under section 148 of the Act :
"It is not denied that the ropeways were constructed to bring ores and raw materials to the factory premises. The ropeways were constructed to facilitate the business of the company. The business was already in existence. The interest on guarantee commission and loans undertaken to improve the existing business or making additions to it was an allowable expenditure in the light of the Supreme Court decision in India Cements Ltd. v. CIT . Since the Supreme Court lays down the law of the land, any decision in an assessment contrary to the Supreme Court's decision will be a mistake apparent from the record and has to be rectified. It is to be noted that the assessments for the two years in question had been completed on July 22, 1977, and June 30, 1978. The appellate order for the year 1976-77 was passed on March 31, 1980. The application for rectification was also made on August 5, 1980.
Having come to the conclusion that there was an error in the assessment order, it remains to be seen whether the finding in a subsequent assessment year can lead to a rectification of the earlier assessment order. The authority for this proposition is the Supreme Court's decision in the case of Mahendra Mills Ltd. v. P. B. Desai, AAC [1975] 99 ITR 135. In that case, additions were made to the (vale of) closing stock in one year. Consequently the Income-tax Officer had enhanced the (vale of) opening stock for the next year. When the addition to the closing stock was deleted, the Income-tax Officer applied to the Appellate Assistant Commissioner to rectify the proceedings of the subsequent year for reducing the opening stock. The Supreme Court held that the Appellate Assistant Commissioner was justified in reducing the opening stock of the subsequent year by rectification proceedings. When the assessee claimed deduction of Rs. 4,81,760 in 1976-77 and the Commissioner (Appeals) held that the deduction was allowable in principle but part of the claim related to earlier years, it is logical that the earlier years' assessments should be rectified correspondingly particularly when the deduction in principle is justified by the Supreme Court's decision. In this case, that decision of the Supreme Court was rendered in India Cements' case . Nothing turns on the fact that actual details were not filed before the Income-tax Officer or that a claim was not made in that behalf in the earlier years, for, at that time the assessee was under the impression that no claim need be made in that year.... The mistake was that expenditure which should have been allowed according to the Supreme Court decision, was not so allowed.".
16. The contentions put forward by the petitioner are, therefore, to be examined in the light of the law on the point as well as facts set out above.
17. Before dealing with the case law, it may be useful to extract the provisions of the Act which have a bearing on the case.
18. Section 147 of the Act deals with income escaping assessment and to assessee or reassess such income under two circumstances. They are : sections 147(a) and (b) :
"147. If -
(a) the Income-tax Officer has reasons to believe that, by reason of the omission or failure on the part of an assessee to make a return under section 139 for any assessment year to the Income-tax Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for the year, or
(b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Income-tax Officer has, in consequence of information in his possession, reason to believe that income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereinafter in sections 148 to 153 referred to as the relevant assessment year)".
19. Section 148 provides for issue of notice where income has escaped assessment before assessing or reassessing such income;
"Section 148(1) : Before making the assessment, reassessment, or recomputation under section 147, the Income-tax Officer shall serve on the assessee a notice containing all or any of the requirements which may be included in a notice under sub-section (2) of section 139; and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section.."
"Section 148(2) : The Income-tax Officer shall, before issuing any notice under this section, record his reasons for doing so."
20. Section 149 imposes a time limit for issuing notice under section 148.
21. Section 150 provides for sanction for the issue of notice under section 148 in case where assessment is done in pursuance of an order on appeal, etc.
22. Section 151 provides for sanction for the issue of notice after a lapse of 4 years or 8 years from the end of the relevant assessment year, as the case may be.
23. Section 153(1) imposes a time limit for completion of assessment and reassessment envisaged under section 143 or 144.
24. Section 153(2) imposes a time limit to complete the assessment or reassessment or recomputation envisaged under section 147.
25. Section 153(3) exempts application of limitation prescribed under clauses (i) and (ii), under certain circumstances.
26. Clause (ii) of section 153(3) is relevant for this case, which reads :
"Section 153(3)(ii) : Where the assessment, reassessment or recomputation is made on the assessee or any person is consequence of or to give effect to any finding or direction contained in an order under sections 250, 254,260,262,263 or 264 or an order of any court in a proceeding otherwise than by way of appeal or reference under this Act."
27. It may be seen from the above provisions of the Act that the Department is relying upon the provisions of section 150(1) of the Act in support of their case whereas the petitioner's attempt is to take it out of those provisions and to show that the proceedings are barred by limitation.
28. The enquiry that is, therefore, necessary to be made in these proceedings is : whether the finding of the Tribunal given for the assessment years 1974-75 and 1975-76 amounts to "information" within the meaning of that term occurring in section 147(b) of the Act, and whether that part of the order of the Tribunal can be construed as a "finding" for purposes of section 150(1) of the Act and reassessment for the year 1977-78 can be done without bar of limitation.
29. It is argued by Sri Srinivasan for the Department that as a result of the rectification allowed for the assessment years 1974-75 and 1975-76 treating the expenditure of Rs. 4,81,760 as revenue expenditure by the Income-tax Appellate Tribunal, it follows, as a consequence, that the Department is justified in reopening the assessment for 1977-78. It is argued that having regard to the fact that the assessee claimed deduction of this sum as a revenue expenditure for the earlier years, no depreciation can be allowed capitalising the said expenditure in the assessment for the subsequent years. It is, therefore, urged that the assessee cannot be permitted to resist the reopening of the assessment having had the benefit of its deduction as revenue expenditure for the years 1974-75 and 1975-76.
30. In the statement of objections, it is further pointed out that the petitioner did claim depreciation on the said value as capital expenditure for the assessment years 1976-77 and 1977-78. The issue of notice to reopen the assessment and to withdraw the depreciation allowed for the year 1977-78 is, therefore, sought to be justified by the learned counsel. The impugned notice is issued after obtaining the permission of the Commissioner, as required under section 151 of the Act. It is also brought to my notice that so fat as the assessment year 1976-77 is concerned, the permission of the Central Board is sought for reopening the assessment.
31. Sri Sarangan has, in support of his contention opposing the reopening, relied upon several decisions of the Supreme Court. They are :
1. ITO v. Murlidhar Bhagwan Das [1964] 52 ITR 335,
2. N. K. T. Sivalingam Chettiar v. CIT [1967] 66 ITR 586 and
3. Rajinder Nath v. CIT [1979] 120 ITR 14.
32. It is argued on the strength of the ratio laid down by the Supreme Court in the above cases that the finding of the Tribunal in the appeals relating to the assessment years 1974-75 and 1975-76 cannot be made use of for justifying the action under section 150(1) of the Act. It is the contention of the learned counsel that the said finding cannot be construed as "information" for the purpose of reopening the assessment under section 147(b) of the Act. It is, therefore, vehemently argued that the notice issued under section 148 of the Act is without jurisdiction and is, therefore, liable to be quashed in exercise of this court's power under article 226 of the Constitution.
33. In the light of the wrong reliance placed by the petitioner's counsel on the decisions of the Supreme Court, it is necessary to refer, in brief, to the principles laid down by the Supreme Court (by Subba Rao J., as he then was), in the case of Murlidhar Bhagwandas .
34. The facts in brief which gave rise to notice under section 34(1) of the 1922 Act in that case were :
"Certain interest income was brought to tax for the assessment year 1949-50. The assessee appealed and the Appellate Assistant Commissioner held that the said income was received in the previous accounting year and directed that the amount should be deleted from the assessment for the year 1949-50 and included in the assessment year 1948-49. Pursuant to this direction, the Income-tax Officer initiated reassessment proceedings under section 34(1) of the Indian Income-tax Act, 1922, in respect of the year 1948-49. The question that arose was, whether the second proviso under section 34(3) applied to the facts of the case and saved the notice which was served beyond the time prescribed by section 34(1) of the Act."
35. The Supreme Court held that the finding of the Appellate Assistant Commissioner that the income did not belong to the relevant year was an incidental finding and was not a finding necessary for the disposal of the appeal in respect of the year of assessment in question, i.e., assessment year 1948-49. The Supreme Court observed that the expressions "finding" and "direction" in the second proviso to section 34(3) of the Act meant respectively a finding necessary for giving relief in respect of the assessment for the year in question and a direction by which the appellate or revisional authority, as the case may be, was empowered to give under the sections mentioned in that proviso. It was, therefore, held that the second proviso to section 34(3) of the Act did not save the time limit prescribed under section 34(1) and accordingly, the notice issued under section 34(1)(a) of the Act was barred by limitation.
36. Elaborating the discussion as to the connotation of the expression "finding" and "direction", the Supreme Court observed at pages 344 and 345 (of 52 ITR), thus :
"The word 'finding', interpreted in the sense indicated by us above will only cover material questions which arise in a particular case for decision by the authority hearing the case or the appeal which, being necessary for passing the final order or giving the final decision in the appeal, has been the subject of controversy between the interested parties or on which the parties concerned have been given a hearing....... A 'finding', therefore, can be only that which is necessary for the disposal of an appeal in respect of an assessment of a particular year. The Appellate Assistant Commissioner may hold, on the evidence, that the income shown by the assessee is not the income for the relevant year and thereby exclude that income from the assessment of the year under appeal. The finding in that context is that income does not belong to the relevant year. He may incidentally find that the income belongs to another year, but that is not a finding necessary for the disposal of an appeal in respect of the year of assessment in question. The expression 'direction' cannot be construed in vacuum, but must be collated to the directions which the Appellate Assistant Commissioner can give under section 31. ... Therefore, the expression 'finding' as well as the expression 'direction' can be given full meaning, namely, that the finding is a finding necessary for giving relief in respect of the assessment of the year in question and the direction is a direction which the appellate or revisional authority, as the case may be, is empowered to give under the sections mentioned therein. The words 'in consequence of or to give effect to' do not create any difficulty, for they have to be collated with, and cannot enlarge, the scope of the finding or direction under the proviso. If the scope is limited as aforesaid, the said words also must be related to the scope of the findings and directions".
37. So holding, the Supreme Court dismissed the appeal filed by the Income-tax Officer.
38. In Shivalingam Chettiar's case , the Supreme Court reiterated what was laid down in Murlidhar Bagavandas case . This was again followed by the Supreme Court in Rajendranaths' case [1979] 120 ITR 14. Sri Pathak J. (as he then was), explained while allowing the assessee's appeal thus (vide headnote) :
"To be a necessary finding, it must be directly involved in the disposal of the case. It is possible in certain cases that in order to render a finding in respect of A, a finding in respect of B may be called for.....
As regards the expression "direction" in section 153(3)(ii) of the Act, it is now well-settled that it must be an express direction necessary for the disposal of the case before the authority or court. It must also be a direction which the authority or court is empowered to give while deciding the case before it. The expressions "finding" and "direction" in section 153(3)(ii) must be accordingly confined.
Having regard to the facts of the present case and applying the law laid down by the Supreme Court, the question that falls for consideration is :
"Whether the finding of the Appellate Tribunal while disposing of the appeals for 1974-75 and 1975-76 (relating to rectification), can be construed as a finding which can give rise to an action to reopen the assessment for the year 1977-78 without attracting the bar of limitation ?"
39. The reasons recorded by the Income-tax Officer for reopening the assessment disclose that the petitioner sought for rectification of the assessments and succeeded in having an order allowing the expenditure incurred on ropeways as revenue expenditure.
40. The consequence of this finding is that the assessee cannot have the benefit of both the allowances on the same count both as revenue expenditure and depreciation treating it as capital expenditure.
41. The finding of the Tribunal while allowing the assessee's claim as revenue expenditure, was a finding which could rightly be construed as a finding to give effect to which the Income-tax Officer took action to withdraw the depreciation to which the assessee was not entitled and which was wrongly allowed.
42. The notice, therefore, does not suffer from any illegality and the action of the Income-tax Officer is saved under the provisions of section 150(1) of the Act.
43. For the reasons stated above, I dismiss the writ petition. Petitioner is permitted to file return within 8 weeks from today.