Calcutta High Court
Shahdara (Delhi) Saharanpur Light ... vs Commissioner Of Income-Tax on 9 July, 1993
Equivalent citations: [1994]208ITR882(CAL)
JUDGMENT Ajit Kumar Sengupta, J.
1. This reference under Section 256(1) relates to two series of assessment years, one from 1972-73 to 1974-75, and the other from 1976-77 to 1981-82. Thus there are nine assessment years involved and some of the questions raised are common to all the years and some common to some of the years. We have arranged the questions in the following manner :
Assessment years : 1972-73 to 1974-75 and 1976-77 to 1981-82 :
" 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that non-computation of tax in the body of the assessment order under Section 143(3) or 144 of the Income-tax Act, 1961, did not invalidate the order when the amount of tax was mentioned in the demand notice ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in rejecting the stand of the assessee :
(a) That the return of income signed and verified by one of the liquidators was non est in law and the assessment made on that basis was ab initio void ?
(b) That the assessee-company, a company in liquidation, had no taxable income within the meaning of Section 5 of the Income-tax Act, 1961 ?
(c) That there being no rate of tax prescribed for a company in liquidation in any of the relevant Finance Acts, no income of the assessee could be charged to tax under Section 5 of the Income-tax Act, 1961 ?"
For assessment years 1972-73, 1976-77 and 1980-81 :
"(d) That, in view of winding of the assessee-company with effect from February 10, 1970, no capital assets were held by it after December 10, 1970. As such, no capital gains tax could be imposed upon it or the liquidators ?"
For assessment year 1972-73 :
"3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding :--
(a) That Section 144B was applicable to reassessment proceedings under Section 147 of the Income-tax Act, 1961 ?
(b) That remitting of the draft assessment order by the Inspecting Assistant Commissioner to the Income-tax Officer for further consideration and if necessary for resubmission did not debar the Income-tax Officer from forwarding another draft assessment order to the Inspecting Assistant Commissioner under Section 144B of the Income-tax Act, 1961?
(c) That the second reference under Section 144B by the Income-tax Officer to the Inspecting Assistant Commissioner was valid and as such the time taken in issuing directions under Section 144B(4) was to be excluded under Section 153(3), Explanation 1(iv) of the Income-tax Act, 1961 ? As such, the reassessment was not barred by limitation ?
4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Income-tax Officer was justified in estimating the cost of acquisition of the capital assets even though reference was made to the Valuation Officer under Section 55A of the Income-tax Act, 1961, who did not pass any order and expressed inability to ascertain the market value of the assets ?
5. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding :
(a) That the Income-tax Officer was justified in rejecting the estimate of cost of acquisition of the capital assets made by the approved valuer ?
(b) That the Income-tax Officer correctly estimated the cost of acquisition as on January 1, 1954, by setting off depreciation against inflation in the price and thereby taking the book value (purchase price) of the said assets as their cost of acquisition on January 1, 1954 ?"
For assessment years 1973-74, 1974-75 and 1976-77 to 1981-82 :
"6. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was not entitled to deduction of entire expenses on salaries, audit fees, miscellaneous expenses and bank charges out of income of interest on fixed deposits assessed under the head 'Income from other sources' except the proportionate expenses incurred for earning the income of interest ?"
For assessment years 1973-74 and 1974-75 :
"7. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was not entitled to deduction of interest paid on debentures out of income by way of interest on fixed deposits assessed under the head 'Income from other sources'?"
For assessment year 1974-75 :
"8. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that reference under Section 144B was not necessary while making reassessment in compliance with the order of the Commissioner under Section 263 of the Income-tax Act, 1961, when the variation in the income was less than Rs. 1 lakh ?"
For assessment year 1976-77 :
"9. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the initiation of proceeding by the Income-tax Officer under Section 147(a) of the Income-tax Act, 1961, was legal ?"
For assessment year 1979-80 :
"10. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessment was not barred by limitation ?"
2. The first question is now concluded by the decision of the Supreme Court in Kalyankumar Ray v. CIT [1991] 191 ITR 634. Following the said decision, we answer the first question in the affirmative and in favour of the Revenue.
Question No. (2)(a) is concluded by the decision of a Division Bench of this court in United Provinces Electric Supply Co. Ltd. (In liquidation) v. CIT [1993] 204 ITR 794 (Income-tax Reference No. 393 of 1980), where the judgment was delivered on August 4, 1989. Following the said decision, we answer question No. 2(a) by saying that the Tribunal was right in rejecting the stand of the assessee and the question is answered in the affirmative and against the assessee.
Questions Nos. 2(b), 2(c) and 2(d) are concluded by the decision of this court in Income-tax Reference No. 319 of 1982 (United Provinces Electric Supply Co. Ltd. (In liquidation) v. CIT), where the judgment was delivered on April 4 and 5, 1990. Following the said decision, we answer the aforesaid questions by saying that the Tribunal was right in rejecting the stand of the assessee. Thus the questions are answered in the affirmative and against the assessee.
3. The third and sixth questions are answered in the affirmative and in favour of the Revenue following the judgment delivered by this court on April 7, 1992. Income-tax Reference No. 229 of 1987 (Arrah Sasaram Light Railway Co. Ltd. v. CIT [1993] 204 ITR 807).
4. Questions Nos. 8 and 10 have not been pressed.
5. Thus, we are now left with questions Nos. 4, 5, 7 and 9.
6. The fourth question and the fifth question are inter-related and can be combined into one question : Whether, after reference to the Valuation Officer under Section 55A, the Income-tax Officer could determine the value himself rejecting the assessee's valuer's report and the valuation so made is wrong with regard to quantum.
7. The facts leading to these questions are that the assessee, subsequent to the completion of its assessment for 1972-73 on November 30, 1973, at nil, voluntarily filed a return on March 4, 1976, showing capital gains of Rs. 3,24,931. The return was again revised by filing another return on May 31, 1976, showing the capital gains at a higher figure of Rs. 3,52,931. The Income-tax Officer thereupon reopened the assessment proceedings by issue of a notice under Section 148 which was served on the assessee on March 9, 1976. The assessee informed the Income-tax Officer that the return filed on March 4, 1976, and revised on March 31, 1976, should be treated as the return filed in compliance with the notice under Section 148. The Income-tax Officer found that the assessee had sold plant and machinery, locomotives, railway engines, permanent railway tracks, wagons, stores and spare parts, stations and buildings, permanent weigh bridges and trees standing on the land belonging to it. There is no dispute as regards the amount of the sale proceeds realised by the sale. The assessee exercised its option under Section 55 of the Act and took the services of a valuer, of Messrs. Talbot and Co., recognised approved valuers. The valuer of Talbot and Co. was examined under Section 131. It transpired that the said valuer made the valuation on the assumption that all the assets were new as on January 1, 1954, without taking any depreciation into account for their previous use specially when the assets were all acquired much before January 1, 1954, and had been in use of the business for several years. It was further found that the said private valuer gave the report without examining the layout plan of the properties sold and without checking the actual measurement of the buildings and properties involved. It was further found that the valuer did not verify the quantities of all the assets stated in the list supplied to him by the assessee on the ground that the same was not practicable. This led to the non-acceptance of the valuation report of the registered valuer. The officer referred the question of valuation to the DVO of the locality where the property was situated calling for a report on the market value of the assets as on January 1, 1954. The Valuation Officer could not, however, enquire into the probable market value of the property as they had no opportunity of any inspection of the assets sold as those assets were already despatched from the assessee's workshop to their respective purchasers. The DVO also reported against the assessee not giving the valuation wing access to plans and drawings, relevant particulars and measurements of the property sold. They could not even ascertain the whereabouts of the properties. This fact was intimated to the Assessing Officer by a letter dated August 30, 1978. In a letter, the DVO complained that no records requisite for a proper valuation were available. Thus, the fair market value of the property could not be determined by the DVO, Kanpur. He wrote a letter dated August 30, 1978, reporting as follows :
"It is to intimate that no record required for valuation has been made available to the undersigned by you or by the assessee. Moreover, the property under valuation does not exist at the sight at present. Under these circumstances, it is not possible to give the fair market value of the property and the case referred by you, vide your P. No. 11-30-CQ 1785/ 1972-73/(Cal)/CV(D) dated February 15, 1976, has been closed."
8. The Valuation Officer, Delhi, by his letter dated November 3, 1987, wrote as follows :
"In continuation to my above letter (letter dated September 15, 1978), it is further to intimate that, during my recent visit to Calcutta, I had a discussion with Sri T. V. George, Chief Accounts Officer, Shahdara (Delhi), Sharanpur Light Railway Co. Ltd., on October 24, 1978, on the above subject. It was made clear by Sri George that physical inspection of the plant and machinery was not possible as the entire machinery had been sold out to other firms. You will appreciate that, without physical inspection, it will not be possible to do the valuation. In view of the above, you are requested to advise me as to what steps are considered necessary. In case this office is not intimated about further action within a fortnight, the case will be treated as closed."
9. In the absence of the report of the Valuation Officers, the Income-tax Officer himself proceeded to estimate the fair market value of the assets as on January 1, 1954. The assets which were sold were partly acquired prior to January 1, 1954, and partly after January 1, 1954. In the books of the assessee, the cost price of the assets of the assessee was entered since, in view of notification dated June 11, 1927, under the Indian Income-tax Act, 1922, no depreciation was allowed on the assets of the railway companies, but the actual expenditure on repairs, replacement and renewal was allowed as revenue deductions. The Income-tax Officer, however, took into account the fact that the use of an asset necessarily led to the depreciation of its value in the commercial sense even though, for income-tax purposes, no depreciation was allowed. However, he assumed that depreciation in the value of the assets because of their long user would be equal to the inflation in the prices and as such the book value of the asset would be their fair market value. He, therefore, setting off the depreciation against the inflation, accepted the book value of the asset as fair market value on January 1, 1954. On that basis, the Income-tax Officer prepared a draft assessment order and arrived at a capital gains of Rs. 86,77,433.
10. The draft assessment order was referred by the Income-tax Officer for approval to the Inspecting Assistant Commissioner of Income-tax under Section 144B of the Act on February 7, 1979. The assessee raised a number of objections against the draft assessment order before the Inspecting Assistant Commissioner. However, at that stage, there was no dispute between the assessee and the Income-tax Officer relating to the capital gains arising out of stores and spare parts. The Inspecting Assistant Commissioner, by letter dated March 20, 1979, returned the draft assessment order to the Income-tax Officer with the observation that it would be necessary to get the matter processed by the Valuation Officer. The Inspecting Assistant Commissioner mentioned that the draft assessment order could not, therefore, be further considered at that stage. He further mentioned that the Income-tax Officer should get the valuation of the assets made by the Valuation Officer under Section 55A of the Act and redraft the assessment order suitably after giving adequate opportunity to the assessee. It was also mentioned by the Inspecting Assistant Commissioner in his letter to the Income-tax Officer that a reference might be made to him under Section 144B, if found necessary, at a later stage and the present reference was considered as closed. On receipt of the letter from the Inspecting Assistant Commissioner, the Income-tax Officer proceeded to make the assessment afresh.
11. Under the circumstances, the Valuation Officers expressed their inability to submit a valuation report in the absence of actual inspection and non-availability of the material on which the valuation was to be made, the Income-tax Officer reached the conclusion that he himself had to estimate the fair market value as on January 1, 1954, of the assets. He, therefore, prepared a similar draft assessment order dated February 27, 1980, as the earlier one dated February 7, 1979, proposing to assess similar income and sent the case to the Inspecting Assistant Commissioner under Section 144B of the Act. The Inspecting Assistant Commissioner, after considering the objections of the assessee, issued the following direction before July 3, 1980, under Section 144B :
"First contention of the assessee is that the directions of my pre-decessor-in-office, Sri Narurkar, are binding and I have no jurisdiction. Mr. Narurkar did not give directions for this year and the draft order for this year under consideration, being the first one, is validly referred to me under Section 144B.
2. The next contention is that proceedings are not valid as the liquidator is not authorised to sign the return. The matter has been discussed in detail in 1977-78 assessment order. As the Act contemplates taxation of companies in liquidation, return, assessment and tax are inescapable.
3. The third contention is that valuation made by the Company's Valuer, Messrs. Talbot and Co., is binding as the Departmental valuer has declined to make a valuation on the facts and circumstances of the case. The assets in question do not exist now, in any case, they are not in the possession of the assessee. As such, it is not possible for him to inspect and value them. The assessee has not been able to help him in this respect. As regards Talbot's valuation, it is based on conjectures and surmises. It was made without physical inspection. It is based on the hypothesis as if the articles were new as on January 1, 1954, while in fact, they were worn out. Keeping in view depreciation, on the one hand, and appreciation on account of inflation, on the other, as well as the facts of acquisition of a few items after January 1, 1954, the Income-tax Officer has rightly adopted the book value as the prima facie value.
4. The last contention of the assessee is that the sale did not take place during the relevant period. This also has no substance as the agreements for sale are executed during the previous year. Merely because the vendor lifted the goods at their convenience and the sale consideration was paid in instalments, it cannot be said that the sale did not take place during the accounting period."
12. On the basis of the above directions, the Income-tax Officer completed the assessment on total income of Rs. 86,77,433 under the head "Capital gains" for the assessment year 1972-73.
13. The assessee appealed to the Commissioner of Income-tax (Appeals) on the quantum of capital gains. The Commissioner of Income-tax (Appeals) held that the fair market value of the standing trees which existed on January 1, 1954, had some commercial value and he estimated such value at 25 per cent. of their sale proceeds. Accordingly, he directed that the quantum of capital gains should be reduced by 25 per cent. of the sale proceeds of the trees. Aggrieved, the assessee came up in appeal before the Tribunal. Before the Tribunal, a question was raised as to whether the draft order dated February 7, 1979, and not the draft order dated February 27, 1980, was the only operative draft order under Section 144B of the Act. The draft order dated February 27, 1980, could not be a valid draft order in the eye of law. The Tribunal noted that the consequence of the assessee's submission is that if the first draft order is taken as the valid one, the assessment would be barred by limitation because the time taken for making the assessment beyond the date of limitation, i.e., March 31, 1980, was more than the time taken to obtain the instruction on the draft order dated February 7, 1979. On the other hand, in the case of the later draft order, being the operative one, the assessment would be within the time because the time taken for obtaining instructions was of sufficient length to cover the delay in making assessment beyond the ordinary date of limitation, namely, March 31, 1980. In that connection, the Tribunal observed as follows :
"Paragraph 19. We have carefully gone through the letter dated March 20, 1979, of the Inspecting Assistant Commissioner addressed to the Income-tax Officer returning the draft order dated February 7, 1979. In our considered opinion, this is not a direction under Section 144B of the Act. A draft order under Section 144B proposes certain additions and the direction under Section 144B must be confined to either the approval or disapproval of those proposed additions. We find that the letter dated March 20, 1979, is totally silent on the proposed additions. On the contrary, it clearly states that the reference of the draft order dated February 7, 1979, was returned for being sent afresh in future, if necessary, and that the matter was closed at the end of the Inspecting Assistant Commissioner. The tone, tenor, language and contents of the letter show that the Inspecting Assistant Commissioner did not intend thereby to give any valid instructions under Section 144B. Hence, we come to the conclusion that there was no instruction of the Inspecting Assistant Commissioner on the draft order of February 7, 1979. The letter dated March 20, 1979, of Sri Nerurkar (Inspecting Assistant Commissioner) effectively killed the draft order dated February 7, 1979, in the sense that the said draft order became infructuous and non-existent. It was neither an instruction in the way required under Section 144B nor was it kept pending with the Inspecting Assistant Commissioner. Hence, it follows : (1) that there was only one draft order dated February 27, 1980, sent by the Income-tax Officer under Section 144B of the Act, (2) that the assessment made on July 3, 1980, was not barred by limitation, and (3) that the statement of Sri M. P. Agarwal, the Inspecting Assistant Commissioner, was quite correct.
20. We find that the facts in the case of Sudhir Sareen are distinguishable from the facts of this case because no valid direction was given by the Inspecting Assistant Commissioner under Section 144B prior to the sending of the draft order dated February 27, 1980. We do not find any force in the other contentions raised for the assessee. On the other hand, we agree with Sri S. K. Jha that minor discrepancies in the statements, as pointed out by Sri Guha, were of no consequence and had no bearing on the validity of the assessment. For the above reasons, we reject these grounds".
14. The arguments as urged before the Tribunal were reiterated before us. We quite agree that the facts in the case are quite distinguishable from the facts of Sudhir Sareen v. ITO because it could not be said that the Inspecting Assistant Commissioner issued any directions which could be directions within the meaning of Section 144B in pursuance of the draft order dated February 7, 1979. It is a fact that the directions which the Inspecting Assistant Commissioner issued on the draft order dated February 7, 1979, did not at all consider any of the additions proposed in the said draft. The letter which the Inspecting Assistant Commissioner addressed to the Assessing Officer in pursuance of the draft order dated February 7, 1979, merely returned the draft order for being sent afresh at a future date if necessary and that the matter was closed for the time being at the Inspecting Assistant Commissioner's end. The drift and tenor of the letter clearly shows that the Inspecting Assistant Commissioner did not intend thereby to issue any instructions under Section 144B. True, the said letter dated March 20, 1979, brought to an end the order of February 7, 1979, in that the order became infructuous and non-existent. It is at any rate neither a direction in the way of a direction within the requirement of Section 144B nor could it be the case that the Inspecting Assistant Commissioner meant it to be a direction within the meaning of Section 144B. Therefore, the inevitable consequence is that the only draft order on which the directions were issued was the one dated February 27, 1980, in pursuance of which the assessment was completed on July 3, 1980, This also nullifies the assessee's plea that the assessment made on July 3, 1980, was barred by limitation because the normal limitation was to expire on March 31, 1980. But the draft in law, was sent on February 27, 1980, and the direction from the Inspecting Assistant Commissioner was received on July 3, 1980, and the same day the order was finalised. Therefore, the entire period taken in the reference to the Inspecting Assistant Commissioner under Section 144B should be the extended period of the limitation and the assessment remains unassailable on the ground of limitation.
15. As for the validity of the reference of the question of valuation of the property sold and the advancing of the cost of acquisition as on January 1, 1954, on the basis of the market value, the argument as urged before the Tribunal was that, in view of the reference made by the Income-tax Officer under Section 55A, it was the DVO alone who had the jurisdiction to value the asset and the Income-tax Officer became functus officio. Therefore, after a reference to the DVO, the Income-tax Officer is barred from adopting his own estimation of the market value. The only course open to him is to accept the value given by the assessee's valuer. It is further urged that the Income-tax Officer did not follow the scheme laid down in Section 144B because he acted contrary to the instruction given by the Inspecting Assistant Commissioner under Section 144B in the aforesaid letter dated March 20, 1979. Because he did not have the value determined by the DVO. The Income-tax Officer, instead of accepting the value submitted by the assessee, resumed his jurisdiction for estimating the asset himself. This is not permitted. Once he refers the question of value to the DVO, he relinquishes his power to estimate the value on his own.
16. It is further urged that the refusal of the DVO to value the property on the ground of lack of opportunity of inspection is not valid. It is urged that the DVO did not have any power to inspect the asset because Section 38A of the Wealth-tax Act has not been incorporated in Section 55A of the Income-tax Act. It is the contention made on behalf of the assessee that the DVO himself should have estimated the value of the asset instead of declining to do so. Reference was made to the case of M.C. Khunnah v. Union of India for the proposition that only the DVO has the jurisdiction to value the assets once the reference is made under Section 16A of the Wealth-tax Act or Section 55A of the Income-tax Act.
17. It has also been urged that, where the cost of acquisition of an asset is incapable of determination, the entire legislative machinery under Section 45 breaks down and there could not be any charge on capital gains even though such gains may arise in the transfer. If the DVO finds that the cost of acquisition is not determinable, the only valid act on the part of the Assessing Officer would be to compute no capital gains at all.
18. It was contended by learned counsel for the Revenue that the valuation of a property necessarily postulates the right of inspection of the property by the valuer. The property can be valued only after ascertaining the nature and the extent of the property. This view is correct because the Supreme Court in State of Madras v. Gannon Dunkerley and Co. (Madras) Ltd., , has held that, when the Valuation Officer is asked to value an asset, he gets all the powers essential for making the valuation including the power to inspect the asset. The non-incorporation of Section 38A of the Wealth-tax Act in Section 55A of the Income-tax Act is immaterial because, such power of inspection is inherent in the power to value the property.
19. Therefore, the contention that the DVO has no power of inspection and his abstention from submitting a report on the value of the property on the ground of not having inspection of the property is unlawful, is not valid.
20. The reliance on the decision of the Supreme Court in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 is also misplaced. In Srinivasa Setty, the substantive provision for computation of capital gains itself became unworkable in respect of certain assets like goodwill by reason of such asset not having any cost of acquisition. There, the provision did not contemplate a situation where the capital asset transferred may be an asset that has, by its very nature, no acquisition value. That is not the case before us. Here, a practical difficulty arose that had prevented the Valuation Officer from having inspection of the asset which is a prerequisite for valuation. No valuer can value a property unless he has the sight of the property for comprehension of its nature, condition, state of repair, functional capacity and so on. It is not the case that the property, namely, plant and machinery, did not have a cost of acquisition or that they were self-generated assets like goodwill. Therefore, the contention urged on behalf of the assessee that the capital gains could not be computed in a transfer of plant and machinery, if the plant and machinery are removed from the scope of inspection or are not accessible to the valuer for inspection. The assets here are tangible assets and they are neither free commodity nor are they generated on their own as in the case of goodwill. In such a case, a mere practical obstacle to the valuation cannot defeat the charge of tax in respect of the gains arising. If valuation by inspection and empirical examination is not possible, other methods of valuation have to be admitted. One has then to go by the book value or go by the market value as on the date of acquisition with such adjustments as the circumstances of the case may call for. Therefore, the assessee cannot get away with not paying any tax on the capital gains taking advantage of the DVO's practical barrier to reporting the value.
21. On the contention as regards the Assessing Officer becoming functus officio, it can be said that this effect of being shorn of his power in the matter of valuation emerges only where the Valuation Officer makes a report of the valuation. If the Valuation Officer does not submit his report, it cannot be said that the fetter of Sub-section (6) of Section 16A shall still be operating. This is very clear from Sub-section (6) of Section 16A because it clearly says that the Wealth-tax Officer shall take the value as determined by the Valuation Officer in his report when the Valuation Officer passes an order of valuation under Sub-section (3) of Section 16A. The limitation power of the Assessing Officer as we find in Section 16A of the Wealth-tax Act, 1957, cannot be an inexorable one. If it is construed rigidly that the binding nature of Section 16A(3) shall deter the Assessing Officer from completing the assessment and let the assessment" be barred by limitation of time simply because the Valuation Officer, for reasons good or bad, fails or elects to abstain from making a report of valuation, it shall be against the very object of the provisions of the Act. No procedural provision of the Act should be interpreted in a manner to defeat the very goal which the procedure seeks to achieve. The entire procedure of Section 16A is to facilitate the determination of the value of various assets to expedite the completion of the assessment. The said provision cannot be interpreted in a negative manner so that the provision becomes counterproductive and a clog in the proceeding. Far from promoting and advancing the cause of a speedy and just manner of completion of assessment, it cannot stall the proceeding of assessment. Therefore, we are not impressed with the argument advanced by learned counsel for the assessee that, once having referred the case of valuation of an asset to the Departmental Valuation Officer, the Assessing Officer is totally robbed of his jurisdiction even on the brink of limitation for failure on the part of the Departmental Valuation Officer either to report or not being enabled to report on the value of the asset referred to him. As an alternative, in such contingencies, the power of valuation has to revert to the Assessing Officer. Unless the Valuation Officer sends his report, there is no bar to the Assessing Officer's completing the assessments taking the value of the asset referred for valuation in the best possible method he can take in the limiting circumstances of the situation. So, if, till the expiry date of the limitation, no report of valuation comes from the DVO, the original power of the Assessing Officer to value the asset himself revives. Therefore, in this case, the Income-tax Officer was right in valuing the property in the best manner possible on the facts of the case to save the case from limitation because the ultimate statutory duty to complete assessment before the expiry of the limitation period rests with the Assessing Officer and not with the Valuation Officer.
22. We have already seen that in the present case, there was no direction received by the Income-tax Officer on the first draft order made and forwarded to the assessee. The Inspecting Assistant Commissioner merely intimated his intention not to issue any direction in his letter dated March 20, 1979, addressed to the Income-tax Officer. He merely gave administrative instructions as a superior officer so as to guide the Income-tax Officer as to the future course of action that would be proper to take. That was not a statutory direction under Section 144B but merely an administrative instruction. It has been also argued before the Tribunal that the Assessing Officer should not have taken upon himself the duty of valuing the property when he found that the report from the DVO would not be forthcoming. In that situation, it was the report of the assessee's valuer which should have been taken by him as the proper guide and he should not have ventured out to make any valuation. We are not impressed by this reasoning ; the Income-tax Officer has taken the value on a basis which cannot be said to be arbitrary or impractical. We hold that the Income-tax Officer had no alternative other than estimating the cost of the asset himself and the mere fact that a reference was made under Section 55A of the Act cannot operate as a bar against the estimation of the value by the Income-tax Officer himself when the report of the DVO was not forthcoming.
23. Question No. 5 relates to the quantum of the cost of acquisition of the asset as on January 1, 1954, as determined by the Income-tax Officer. The question has two parts, the first part challenges the rejection of the valuation report of the assessee's approved valuer. The second part is on the quantum that has been determined by the Income-tax Officer and the method of such determination.
24. The Income-tax Officer rejected the valuation made by Talbot and Co. for the defects already stated earlier and proceeded to estimate the value of the assets on January 1, 1954, and arrived at the figure of Rs. 68,41,397. The first question that has to be settled is whether the report of Talbot and Co. the assessee's valuer, was correct in estimating the value at Rs. 1,90,63,250 as on January 1, 1954. The first aspect that was pointed out to us, as has also been observed by the Tribunal, is that the actual value of the sale of the asset which took place in 1970 was Rs. 1,46,30,900. The value determined as on January 1, 1954, at a higher figure than the figure of actual sale value in 1970 was considered by the Revenue as patently anomalous. It has been urged before us on behalf of the Revenue that the replacement value of plant and machinery could not be lower than its value in 1954. Again, it is not that the assets were new as on January 1, 1954, so as to be valued at that high figure. On January 1, 1954, the assets had already been in use for several years and their life expectancy got substantially reduced. Therefore, the original cost which is also the book value as on January 1, 1954, could, by no means, be the cost of acquisition on the basis of the market value as on January 1, 1954, as it does not take into account the depreciation. There ought to have been reduction in the original cost of acquisition by the depreciation which was not charged in the books. Besides that, as already mentioned, the inflationary impact since acquisition till January 1, 1954, and the resultant appreciation should also be given due consideration and thus both discount in depreciation and appreciation for inflationary trends are to be factors to play a substantial role in the fixation of the price as both the factors must have worked on the market value of the assets as on January 1, 1954. The Income-tax Officer, however, considered that the offsetting forces working in opposite directions must have due place in value determination though there could be no workable criteria to ascertain the precise offset effect, the Income-tax Officer adopted the book value as on January 1, 1954, to be the fair market value as on that date taking as a rational hypothesis that the effects of depreciation and price appreciation are equally counter-balancing.
25. The matter of valuation is quite complicated because the total assets include those assets which were acquired after indexation date, namely, January 1, 1954, yet the Income-tax Officer, to avoid complexity, adopted their book value to be the fair market value as on January 1, 1954. The Commissioner of Income-tax (Appeals) confirmed the method as already stated and included the consideration only in respect of the fair market value of the standing trees as on January 1, 1954.
26. It is also urged before us that the registered valuer's estimate should not have been rejected by the Income-tax Officer. The valuers rightly estimated the value of the assets as on January 1, 1954, on the basis of the price of the new assets on that date because the assessee maintained all its assets in an ideal condition and all renewals and repairs had been carried out and the assets were as good as new. It was only in the later years that the plant and machines deteriorated and the value in 1970 became lesser. It was further submitted that the method adopted by the Income-tax Officer was wrong because it cannot be said that the depreciation and the rise in the value for inflation exactly offset each other both being on an even rate ; it was further submitted on behalf of the assessee that, where, in the absence of details for determination of the value as on January 1, 1954, the market value is not ordinarily ascertainable, the Income-tax Officer could not determine the value except by application of mind to the particulars furnished by the assessee and in such a situation the burden is on the Income-tax Officer to prove that whatever is determined as market value is correctly determined as such.
27. Reference was invited by learned counsel for the Revenue to the decision in CWT v. Tungabhadra Industries Ltd. in support of his contention that the onus of proof is on the assessee who has to produce reliable material to show that the written down value of the assets and not the book figure is the true value of the assets. In that case, while estimating the value of the assets of the assessee under Section 7 of the Wealth-tax Act, the Wealth-tax Officer took the value shown by the assessee in the balance-sheet to be the fair market value. The assessee claimed that the market value should be the written down value as per the income-tax records. The Supreme Court held that Section 7(2) of the Wealth-tax Act applies to the assessee carrying on business and maintaining accounts regularly. In such case, the Income-tax Officer has the option of valuing the assets of the business as a whole having regard to the balance-sheet of such business as on the valuation date. If the assessee insists on the adoption of some other figures, then the assessee has to prove that the figures stated in its own balance-sheet were not true. Reference was also made to the decision in Mahmudabad Properties (P.) Ltd. v. CIT , where the same principle was initiated that, in a wealth-tax assessment, the assessee will be bound by the figures shown in its books unless the assessee discharges the burden which lay on him to show that the figures shown in its books were not the correct value. In the same decision, it has also been laid down that the expert's valuation is not decisive specially where it suffers from material defects.
28. In any case, in the present case, there is no evidence brought to us to show that the assets were really brand new assets on January 1, 1954, as claimed by the assessee. Repairs and renewals appear to have been effected as evident from the revenue expenditure incurred. But that cannot lead one to the conclusion that the assets were in a condition comparable to brand new assets. In point of fact, it has not been contested that a large part of the assets have been in use since 1937 and in 1954, the addition was only to the extent of Rs. 9,54,654 as against old assets worth Rs. 51,77,936. It could be said that only 20 per cent. of the assets in question could be said to be new assets in 1954. The rest 80 per cent. of the assets were in use prior to 1954.
29. As per the contention of the assessee, the provision of Section 2(42A)(ii) does not apply to the assets sold by the assessee, if the value of the assets were actually ascertained in 1970 at the time of their sale, there is no reason that could bar the ascertainment of this value as on January 1, 1954. Section (ii)(42A) (sic) refers to works of arts, antiques, curios, etc., to which no norm or fixed commercial value attaches. Any way, the absurdity of the valuation of the assessee's value is palpable. As a matter of fact, the period of 1970 was a period marked by a general trend of rising prices of building materials, iron scrap, etc. There being no dispute about the fairness of the price of Rs. 1,46,30,900 in 1970 a process of backtracking the inflation rate year by year would quite probably show the same figure as adopted by the Income-tax Officer for the value as on January 1, 1954. The Income-tax Officer has adopted the value in 1954 as Rs. 68,41,397. Thus there is an increase in the value between the years 1954 and 1970 by Rs. 77,89,503. This would give the average rate of inflation at 4.5 per cent. The rate of inflation cannot be said to be unreasonably reckoned. In any case we fail to be persuaded by the submissions of learned counsel for the assessee that the Income-tax Officer committed an error in rejecting the report of the assessee's valuer, Talbot and Co. There are sufficient reasons for rejecting the said report. As we have already said that the determination of the value of the assets as on January 1, 1954, at a figure higher than the sale proceeds of the year 1970 is unsupportable. In fact, if the cost of acquisition would have to be taken on the basis that the assets are subjected to depreciation, in that case, the cost of acquisition of the assets as reduced by the annual depreciation since the date of acquisition or, in other words, the written down value of the assets as on January 1, 1954, and not the price of the assets as brand new assets would be the cost of acquisition. We have also seen that the basis that the Income-tax Officer has taken is a reasonable basis not assailable as unrealistic or totally opposed to the economic realities. Even the fact that the assets were kept in an excellent state of repair as claimed by learned counsel for the assessee is not of much consequence so long as it cannot be denied that, by the user of the assets for about 80 years, the longevity or effective life of the assets got materially exhausted. Of course, there were some machineries which were new in 1954, but they accounted for a mere 20 per cent. of the total assets. So, that fact is also of little consequence and does not detract from the merits of the estimate adopted by the Assessing Officer. There is also the question of inflation and the contrary force of depreciation, the two opposites pulling on the price of the assets were quite reasonably assumed to be neutralising in effect. So the adoption of the book value as on January 1, 1954, was quite a rational approach. In fact, if the assets were really subjected to depreciation, in that event, we would have directed the Assessing Officer to adopt the written down value of the assets as on January 1, 1954, as the value of the assets on that date. In fact, there are decisions to the effect that, in the case of determining the capital gains of a depreciable asset, in the event of its transfer, the cost of acquisition when requiring advancement to the date as on January 1, 1954, it is the written down value of the assets on that date which is to be taken and not the market value of the same assets as new assets could be such value. We notice in that connection the decision in Prime Products (P) Ltd. v. CIT and CIT v. Upper Doab Sugar Mills .
30. We, therefore, answer question No. 4 and question No. 5 as a whole in the affirmative and against the assessee.
31. The seventh question relates to the assessee's entitlement to deduction of interest income from fixed deposits. The facts leading to the question are as follows :
"Before the Income-tax Officer, the assessee claimed that the expenses incurred by the liquidators on salaries, debenture interest, bank charges, miscellaneous expenses and audit fees should have been allowed either as a business loss or as a deduction against the interest received by the assessee on the fixed deposit with the bank which has been assessed under the head 'Income from other sources'. The Income-tax Officer did not agree. He stated that the assessee had stopped the business by passing a resolution and had gone into liquidation voluntarily. Hence, the assessee did not have any income from business. Consequently, the expenses claimed by the assessee could not be allowed under the business head. Coming to the claim for deduction under Section 57 of the Act, he observed that there was no provision for allowing these expenses against the income from interest because none of these expenses can be said to have been incurred wholly and exclusively for the purpose of earning the interest income. In so far as the argument of the assessee regarding the claim of debenture interest against the income from other sources was concerned, the Income-tax Officer observed that the debenture funds were not directly invested in the fixed deposits because they were already utilised in acquiring business assets long back. Hence, there was no direct and immediate nexus between the payment of the debenture interest and the earning of the interest from the bank on fixed deposits. In this view of the matter, the Income-tax Officer rejected the claim of the assessee.
The assessee appealed to the Commissioner of Income-tax (Appeals) and contended that the Income-tax Officer erred in his decision. The Commissioner of Income-tax (Appeals) confirmed the action of the Income-tax Officer and dismissed the appeal. He observed that the liquidators were not carrying on any business but were engaged only in releasing the assets in the course of liquidation proceedings. Hence, the expenses under consideration could not be allowed for the non-existent business. Further, Section 57 allows a deduction only if the expenses are incurred wholly and exclusively for the purpose of earning the income. As it cannot be said that the debenture funds were raised for being deposited in the bank as fixed deposits, the said expenses could not be allowed under the head 'Other sources'."
32. It has been urged before us that expenses necessary for keeping the corporate status intact are allowable. The specific item in dispute before us is the interest paid on debentures. It is claimed to be a revenue deduction. Learned counsel for the assessee relied on the decision in CIT v. Crawford Bayley and Co. [1977] 106 ITR 884 (Bom) to impress that the interest payable to the debenture-holders involves the application of the rule of diversion of income, by overriding charge. He further cited the decisions of the Supreme Court in CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 and Raja Bejoy Singh Dudhuria v. CIT [1933] 1 ITR 135 (PC). The contention is that the debenture-holders had a charge over the assets of the company and, by virtue of the trust deed in favour of the debenture-holders, the income of the company to the extent of the debenture interest payable was diverted at source before it reached the assessee-company as its income.
33. In this connection, paragraph 8 of the trust dated May 4, 1986, was referred to. Learned counsel for the Revenue, however, submitted that the decision of the Madras High Court in South Arcot Electricity Distribution Co. Ltd. v. CIT [1974] 94 ITR 469 is the ratio directly on the issue. In that case, the business of the company was taken over by the Madras State Government and the assessee was not carrying on any business. However, some income from interest on deposits with bank arose to the company against which expenses were claimed. The Madras High Court held that the expenses were not admissible as deduction as they were not incurred solely for the purpose of earning the interest income and the nexus with earning is too remote for consideration.
34. After the company stopped its business, expenses could not be allowed under the head "business". The position, however, will be different if the company does not go into liquidation but there is merely a temporary stoppage of the business. In that case, it cannot be said that the business was terminated. Therefore, the Allahabad High Court in CIT v. Rampur Timber and Turnery Co. Ltd. [1973] 89 ITR 150, in such circumstances, held that expenses necessary to keep the corporate existence intact would be business expenditure.
35. We have heard the rival contentions, we are in agreement with the Tribunal's view that the assessee's case is distinguishable from that of Rampur Timber . Here the assessee is a company in liquidation, its business is terminated. In the teeth of total stoppage, the claim for business expenditure is unsupportable. At the same time, it cannot also be said that any expenditure was incurred for earning the interest income because the company had willy-nilly some deposit in bank which fetched interest income. The argument that payment to the debenture-holders is supposed to be a diversion of the interest income arising from the deposit in the bank is not tenable. There is no link between the debenture interest liability and the interest income on deposits received from the bank. The principle of diversion applies only in a case where the Income-tax Officer brings to tax a certain income as income of the assessee which is really diverted to other destinations before the same could become the assessee's income. That is not the case here. It is not that the debenture interest has been brought to tax. Here the debenture interest is a payment by the assessee and not a receipt. Therefore, the doctrine of diversion is altogether a misconception as diversion can be only of certain sum which is a receipt. It is a far-fetched argument that the interest income from bank has to be taken as diverted before it could become the assessee's income. The real position with regard to the interest income is that it became the interest of the assessee all right and also remained an income of the assessee. On the other hand, the assessee incurred liability on account of debenture interest. The two factors are absolutely unrelated.
36. Therefore, we find that the Tribunal was correct in the view it has taken about the inadmissibility of the debenture interest as a deduction from income. Therefore, the seventh question is answered in the affirmative and against the assessee.
37. The ninth question is about the validity of the initiation of proceedings under Section 147(a) of the Income-tax Act, 1961. The facts relating to the question as found by the Tribunal are as follows :
"The assessee filed a return on July 29, 1976, showing a loss. It filed a revised return on September 14, 1977, showing capital gains of Rs. 36,625. This amount represented capital gains arising to the assessee on the sale of trees. The assessee had sold other capital assets also. But the capital gains thereon was not shown in the revised return. Shri D. K. Guha pointed out that the Income-tax Officer made out a draft assessment order on February 7, 1979, proposing to assess the capital gains on the sale of trees as shown in the revised return on a protective basis. This draft assessment order was dated February 7, 1979. Then he took us through the papers relating to the proceedings under Section 144B of the Act for the assessment years 1972-73 to 1976-77 contained at pages 59, 60, 62, 76, 79, 3, 9 and 4 of the assessee's paper book No. 1. He stated that the Income-tax Officer dropped the proceedings on March 26, 1979, on the basis of the directions received from the Inspecting Assistant Commissioner on the draft assessment order sent by him on February 7, 1979. On March 30, 1979, the Income-tax Officer issued a notice under Section 148 to reopen the assessment under Section 147(a) of the Act. According to him, the Income-tax Officer did not have any valid reason to reopen the assessment because he had dropped the proceedings only four days before. He stated that an assessment cannot be reopened merely on a change of opinion. He pointed out that a provisional assessment was made in this case and the assessee paid the tax. But, when the Income-tax Officer proposed rectification, the assessee resisted the same. He strongly urged that the assessee did not conceal any particulars necessary for making its assessment. He referred to page 28 of the assessee's paper book No. 1 wherein all the particulars relating to sale of all the assets have been disclosed. The draft assessment order dated February 7, 1979, also recognises this fact, though it relates to the assessment year 1972-73. He also stated that the return filed earlier was invalid and if the assessment had to be dropped on that ground, the reassessment was not justified on the basis of an equally invalid return. Shri D. K. Guha further stated that the assessee was not supplied with a copy of the reasons recorded by the Income-tax Officer for reopening the assessment."
38. The reasons recorded by the Income-tax Officer before issuing the notice under Section 148 are in the following terms :
"Grounds for reopening under Section 147(a) of the Income-tax Act. For this year, a return was filed on July 29, 1976, in the name of the assessee but signed and verified by the liquidator. Thereafter, a revised return was filed on September 14, 1977, signed and verified by the liquidator. A draft of the proposed assessment order for this year was forwarded to the assessee under Section 144B of the Income-tax Act. While arguing the case before the Inspecting Assistant Commissioner, Range XXIV, Calcutta, with reference to this draft assessment order, the assessee submitted a written statement dated March 1/2, 1979, where it had claimed that the return having been signed and verified by the liquidator is non est in law and, upon such return, no valid proceedings can be or could have been initiated and no lawful demand can be made on the basis thereof. The Inspecting Assistant Commissioner, Range XXIV, by his communication No. R.XXIV/1-A/218/78-78/3040, dated March 19/20, 1979, informed this office that, in the light of the provisions of Section 140(c) of the Income-tax Act, the draft assessment as forwarded to him under Section 143(3)/144B cannot be considered at his end. This is because, according to the provision of Section 140(c) of the Act, the return in the assessee's case is required to be signed and verified by the managing director. As, in this case, the return is signed by the liquidator, no valid assessment can be made on the basis of that return.
(2) It is further found from the records that no notice under Section 139(2) was issued and served on the assessee. Thus it appears that neither any notice under Section 139(2) was issued nor any valid return was filed by the assessee. So, for statistical purposes, the proceedings were filed on March 26, 1979.
(3) It will be found from the draft of the assessment order that the assessee's total income was estimated at Rs. 4,47,819. This income has escaped assessment by reason of omission or failure on the part of the assessee-company to make a valid return under Section 139 for the assessment year 1976-77 within the meaning of Section 147(a) of the Act.
(4) In view of the aforesaid facts, I have reason to believe that, by reason of omission or failure on the part of the assessee to make a valid return under Section 139 of the Act for the said assessment year, the assessee-company's income chargeable to tax has escaped assessment for this year. So, I reopen the assessment proceedings under the provisions of Section 147(a) of the Income-tax Act.
Issue notice under Section 148."
39. The Tribunal upheld the initiation of the proceedings observing as follows :
"We have gone through the reasons for reopening the assessment recorded by the Income-tax Officer, as reproduced above. In our opinion, the Income-tax Officer could have reasonably entertained an honest belief that the income had escaped assessment on the basis of the reasons recorded by him. Thus, we find that there was a direct nexus or a live link between the reasons recorded and the formation of a reasonable belief of the Income-tax Officer to the effect that income assessable during this year had escaped assessment. It is evident from the above that the test laid down by the Supreme Court in the case of ITO v. Ldkhmani Mewal Das [1976] 103 ITR 437 is fully satisfied in this case. We, therefore, uphold the reopening of the assessment. For the above reasons, we reject these grounds."
40. We have heard the rival contentions. We have also examined the facts which are as follows. The assessee had sold certain assets to the Railway Board and the sale was effected on April 21, 1977. We also find that the assessee declared a capital gain only with respect to one asset, the trees, while filing its return for the assessment year 1976-77. No other capital gains were declared in the return arising out of sale of other assets. The Department's case is that, to the extent capital gains are attributable to the sale of assets other than the trees were not declared in the return and, to that extent, there was non-disclosure of all materials necessary for making the assessment.
41. This position is very plain from the facts. It is not in dispute that the sale of assets and the capital gain therefrom have not been fully and truly disclosed in the return. The fact that the same sales were disclosed in connection with other proceedings would not efface and detract from the fact that there was failure to disclose fully and truly necessary material for making the assessment and such non-disclosure also resulted in escapement of assessment. That disclosure in an indirect and incidental manner in some other proceedings cannot absolve the assessee of his duty to disclose truly and fully is an established principle. Reference may be made to Malegaon Electricity Co. P. Ltd. v. CIT . The assessee also raised certain issues regarding the validity of the return it had originally filed but the question of invalidity does not appeal to us. If the returns were invalid and non est that would recoil on the assessee. In that event, the assessee has to be taken to have filed no return at all which will strengthen the case for initiating proceedings for assessment. The assessee's counsel also raised the question of absence of fresh information, the proceeding thereby attracting an infirmity in the very initiation. This approach is also misconceived because the Income-tax Officer in the case took resort to Section 147(a). The question of fresh information coming into possession of the Income-tax Officer subsequent to the completion of the assessment arises only where the reassessment is proposed to be made under Section 147(b). That is the provision which entitles the Income-tax Officer to commence reassessment proceeding simply by reason of the information in his possession, regardless of the fact that there was no default or failure on the part of the assessee. Therefore, this contention against the validity of the proceeding under Section 148 for the purpose of reassessment of the escaped income also fails.
42. For the reasons aforesaid, we answer the ninth question as well in the affirmative and against the assessee.
43. There will be no order as to costs.
Shyamal Kumar Sen, J.
I agree.