Calcutta H.C : The reassessment proceedings under s. 147(b) of the IT Act, 1961, were infructuous and invalid

Counsel Appeared

B.K. Bagchi & B.K. Naha, for the Revenue : A.K. Roy Chowdhury, for the Assessee

AJIT K. SENGUPTA, J.

At the instance of the CIT, the following two questions of law have been referred to this Court under s. 256(2) of the IT Act, 1961, for the asst. yr. 1959-60 :

” Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the reassessment proceedings under s. 147(b) of the IT Act, 1961, were infructuous and invalid ?

Whether, on the facts and in the circumstances of the case, the sum of Rs. 2,21,331 paid by the assessee for purchase of loom hours was a revenue expenditure deductible in the computation of the assessee’s busi- ness income ? “

2. The facts of the case are that the assessee-company, Lansdowne Jute Company Ltd., was originally assessed to income-tax for the asst. yr. 1959-60. Later on, the ITO believed that the assessee had wrongly claimed and been wrongly allowed depreciation and extra-shift allowance on the entire complement of the looms. In fact, a certain number of looms being actually sealed did not work during the relevant year. The ITO also found that the amount of Rs. 2,21,331 representing purchase price of loom hours, though in the nature of a capital expenditure, was wrongly allowed in the original assessment as a revenue expenditure. Accordingly, the relevant assessment was reopened under s. 147(b) of the IT Act, 1961. It was contended before the ITO that the looms were included in machinery purchased prior to April 1, 1949, and the break-up figures for looms could not be made available. The ITO, however, disallowed a portion, that is, Rs. 476, out of the original amount of Rs. 7,616, allowed as depreciation. The ground for disallowance was that 12.5 per cent of the looms were sealed and as such 1/8th of the depreciation was withdrawn after making certain calculation for non-availability of details. As regards the purchase of loom hours, the ITO found it to be of a capital nature on the ground that the loom hours, though an intangible asset, formed part of the profit-making apparatus of the assessee-company. He further observed that the right to use the loom hours was a capital advantage, brought in by purchasing rights of an enduring character. It was also held by him that the loom hours constituted fixed capital assets of the business of the assessee-company and not circulating capital. It was also mentioned that the payment made in consideration of acquiring an opportunity to earn profits was not expenditure of a revenue nature. As a result, the sum of Rs. 2,21,331 was included in the reassessment order.

3. Being aggrieved, the matter was taken up in appeal before the AAC challenging the legality and the propriety of the reassessment proceedings on the ground that all the material facts required for raising an assessment were placed before the ITO at the time of the original assessment. On his scrutiny of the records, the AAC found in the director’s report relating to the assessment year that there was a mention of certain percentage of looms having been kept sealed in accordance with the working time agreement and the printed account submitted disclosed the purchase of loom hours claimed as a revenue expenditure. As the assessee-company claimed full depreciation in respect of its looms, though a certain percentage thereof was sealed, the AAC upheld the ITO’s action in reopening the assessment. But as regards the withdrawal of depreciation allowance originally allowed, he could not sustain the ITO’s action in view of a circular dated May 28, 1948, issued by the Central Board of Revenue. As regards the purchase of loom hours, he held that the addition was made on a mere change of opinion. As a result, the reassessment made under s. 147(b) was annulled by him as being infructuous and invalid.

4. The Department became dissatisfied with the AAC’s decision and preferred an appeal to the Tribunal. After hearing both sides, the Tribunal upheld the AAC’s decision. Since the question, on merits, is concluded by the decision of the Supreme Court, it is not necessary for us to decide whether the proceeding under section 147 was validly initiated or not. This question is, however, linked with the merits of the case. If the expenditure for purchase of loom hours is on revenue account, the ITO had no jurisdiction to initiate proceedings under s.147.

5. In view of the judgment of the Supreme Court in Empire jute Co. Ltd. v. CIT (1980) 17 CTR (SC) 113 : (1980) 124 ITR 1, the second question is answered in the affirmative and in favour of the assessee and against the Revenue.

In view of the answer to the second question, which is on the merits of reassessment, it is not necessary for us to answer the first question on the validity of the initiation of the reassessment proceeding. We, therefore, decline to answer the first question.

There will be no order as to costs.

K. M. YUSUF, J.

I agree.

[Citation : 175 ITR 110]