Kerala H.C : The writ petition challenges the proceeding initiated by the 2nd respondent to reopen the assessment for the year 1989-90 invoking s. 148 of the IT Act, hereinafter referred to as ‘the Act’, on the ground of want of jurisdiction after the prescribed period of limitation.

High Court Of Kerala

Pala Marketing Co-Operative Society Ltd. vs. State Of Kerala & Anr.

Section 147

Asst. Year 1989-90

P. Shanmugam, J.

O.P. No. 13014 of 1998

20th October, 1998

Counsel Appeared

Bechu Kurian Thomas, for the Petitioner : P.K. Ravindranatha Menon & N.R.K. Nair, for the Respondents

JUDGMENT

P. SHANMUGAM, J. :

Petitioner is a society registered under the Co-operative Societies Act. The writ petition challenges the proceeding initiated by the 2nd respondent to reopen the assessment for the year 1989-90 invoking s. 148 of the IT Act, hereinafter referred to as ‘the Act’, on the ground of want of jurisdiction after the prescribed period of limitation.

2. The brief facts are as follows : Petitioner filed the return of income for the year 1989-90 on 30th Oct., 1989 declaring a total income of Rs. 17,30,000. In arriving at the total income the petitioner deducted a sum of Rs. 10,14,837 as depreciation allowance. The depreciation allowance is arrived at as under : .. .Rs. (i) On building & furniture . . . Written down value, i.e. WDV Rs. 9,56,930 10% 95,693 (ii) On plant and machinery WDV Rs. 6,19,558 33-1/3% 2,06,549 (iii) On plant and machinery WDV Rs. 14,25,190 50% 7,12,595 . Total Depreciation . 10,14,837

The assessment under s. 143(3) of the Act was made on 31st July, 1991. On the presumption that there is an apparent mistake from records rectifiable under s. 154 of the Act, an order was passed dt. 27th March, 1996, to rectify the mistake. An appeal was filed inter alia contending that there was no mandatory notice under s. 154(3) of the Act. The CIT(A) allowed the appeal and cancelled the rectification order on 3rd Nov., 1997, on the ground that it was invalid for want of notice and opportunity. Thereafter fresh proceedings were initiated by issuing a notice dt. 16th Jan., 1998, under s. 154 of the Act and again another dt. 24th April, 1998, under s. 148 of the Act proposing to reassess the income on the plea of income chargeable to tax has escaped assessment within the meaning of s. 147 of the Act. Petitioner submitted a reply dt. 13th May, 1998 stating that the proceedings are time-barred and invalid and also this petition under Art. 226 of the Constitution challenging the initiation of proceedings and notice. A statement has been filed on behalf of the 2nd respondent. The case put forward is that the petitioner has claimed excessive depreciation and has omitted/failed to make full and true disclosure. According to the Department the percentage of depreciation claimed is factually incorrect.

I have heard the counsel for the petitioner and learned Senior Standing Counsel for income-tax. Sec. 147 of the Act empowers the AO to assess of reassess income which has escaped assessment. However, no action to reassess the escaped assessment can be taken after the expiry of four years, unless any income chargeable to income-tax has escaped assessment by reason of the failure on the part of the assessee to disclose fully and truly all material fac necessary for their assessment in the return. Therefore, the only question that arises for consideration is whether the petitioner has failed to disclose fully and truly all material facts necessary for their assessment.

The case of the Revenue is that the petitioner had furnished inaccurate particulars by claiming excessive depreciation in respect of certain items of plant and machinery. According to the Department, the assessee ought to have made complete and true disclosure. In that the percentage of depreciation claimed by the petitioner at the rate of 50 per cent is factually incorrect where the claim of depreciation on all those items should be only at the rate of 33-1/3 per cent and not 50 per cent. On this aspect, viz. the failure to disclose full and true material facts the following decisions are cited : In Calcutta Discount Co. vs. ITO (1961) 41 ITR 191 (SC) : AIR 1961 SC 372 : TC 51R.779 a Constitution Bench of the Supreme Court held that there is a duty on every assessee to disclose fully an truly all material facts necessary for his assessment. From the primary facts in the possession of the ITO, whether on disclosure by the assessee, or discovered by him on the basis on the facts disclosed, or otherwise the assessing authority has to draw inferences as regards certain other facts; and ultimately from the primary facts and the further facts inferred from them, the authority has to draw the proper legal inferences. The duty of the assessee does not extend beyond the full and truthful disclosure of all primary facts. Once all the primary facts are before the assessing authority, he requires no further assistance by way of disclosure. It is for him to decide what inferences of facts can be reasonably drawn and what legal inferences have ultimately to be drawn.

In CIT vs. Burlop Dealers Ltd. (1971) 79 ITR 609 (SC) : (1971) 1 SCC 462 : TC 51R.899 following the decision in Calcutta Discount Co. vs. ITO (supra) the Supreme Court held that the assessee had disclosed his books of account and evidence from which material facts could be discovered. It was under no obligation to inform the ITO about the possible inferences which may be raised against him. It was for the ITO to raise such an inference and if he did not do so the income which has escaped assessment cannot be brought to lay under s. 34(1)(a) of the 1922 Act.

In ITO vs. Lakhmani Mewal Das 1976 CTR (SC) 220 : (1976) 3 SCC 757 : TC 51R.598 it was held by the Supreme Court in reference to the notice issued under s. 148 that the duty which is cast upon the assessee is to make a true and full disclosure of the primary facts at the time of the original assessment. Production before the ITO of the account books or other evidence from which material evidence could with due diligence have been discovered by the ITO will not necessarily amount to disclosure contemplated by law. The duty of the assessee in any case does not extend beyond making a true and full disclosure of primary facts. It is no responsibility of the assessee to advise the ITO with regard to the inference which he should draw from the primary facts. Parashuram Pottery Works Co. Ltd. vs. ITO 1977 CTR (SC) 32 : (1977) 1 SCC 408 : TC 51R.1141 is a case of escaped assessment on the basis of excessive depreciation allowance allowed. The Supreme Court held as follows : “The case of the appellant is that in determining the amount of depreciation at the time of the original assessment for the two assessment years in question, the ITO relied upon the written-down value of the various capital assets as obtaining in the records of the Department. This stand has not been controverted. When an ITO relies upon his own records for determining the amount of depreciation and makes a mistake in doing so, we fail to understand as to how responsibility for that mistake can be ascribed to an omission or failure on the part of the assessee. It also cannot be disposed that initial depreciation in respect of items of capital assets in the shape of new machinery, plant and building installed or erected after the 31st day of March, 1945 and before the 1st day of April, 1956 is normally claimed and allowed. It seems that the ITO in working the figures of depreciation for certain items of capital assets lost sight of the fact that the aggregate of the depreciation, including the initial depreciation, allowed under different heads could not exceed the original cost to the assessee of those items of capital assets. The appellant cannot be held liable because of this remissness on the part of the ITO in not applying the law contained in cl. (c) of the proviso to s. 10(2)(vi) of the Act of 1922. As observed by Shah J. in CIT vs. Bhanji Lavji (1971) 79 ITR 582 (SC) : TC 51R.802, s. 34(1)(a) of the Act of 1922 corresponding to s. 147(a) of the Act of 1961 does not cast a duty upon the assessee to instruct the ITO on questions of law.” (Emphasis, italicised in print, added)

10. In Indian Oil Corpn. vs. ITO (1986) 58 CTR (SC) 83 : (1986) 3 SCC 409 : TC 51R.811 the Supreme Court reiterating the settled position on this aspect held as follows : “As is well settled now by the several authorities of this Court and of several High Courts, that there must be materials to come to the conclusion that there was omission or failure to disclose fully and truly all material facts necessary for the assessment of the year’. It postulates a duty on every assessee to disclose fully and truly all material facts necessary for the assessment. Therefore, an obligation is to disclose facts; secondly those which are material; thirdly the disclosure must be full and fourthly true. What facts are material and necessary for assessment will differ from case to case. In every assessment proceedings, for computing or determining the proper tax due from the assessee, it is necessary to know all the facts which help the assessing authority in coming to the correct conclusion. From the primary facts in his possession, whether on disclosure by the assessee, or discovered by him on the basis of the facts disclosed, or otherwise, the assessing authority has to draw inferences as to certain other facts. But one of the primary facts (sic—tasks), of the taxing authority to draw inferences. It is not necessary for the assessee to draw inferences for him. See in this connection the observations in Calcutta Discount Co. Ltd. vs. ITO (1961) 41 ITR 191 (SC) : AIR 1961 SC 372 : TC 51R.779″. (Emphasis, italicised in print, added)

11. Reliance was placed by learned Senior Standing Counsel on behalf of the Revenue on the Supreme Court decision in Indo-Aden Salt Mfg. & Trading Co. (P) Ltd. vs. CIT (1986) 58 CTR (SC) 9 : (1986) 159 ITR 624 : TC 51R.858 wherein the Supreme Court held that since excess depreciation had been allowed, the ITO could reasonably be said to have material to form the belief that there was under-assessment owing to the failure or omission on the part of the appellant to disclose fully and truly all material facts and that the fact that the ITO could have in the original assessment proceedings found out the correct position by further probing did not exonerate the appellant from the duty to make a full and true disclosure of material facts. From the facts of the said case it is clear that there was a claim of depreciation at 6 per cent which was available only in respect of such assets constructed of masonry and not earth-work. The question was whether the excessive depreciation had been allowed and income had escaped assessment for those years owing to the failure on the part of the appellant to disclose fully and truly all material facts necessary for assessment. In that context the Supreme Court held that if some material for the assessment lay embedded in the evidence which the Revenue could have uncovered but did not, then it is the duty of the assessee to bring it to the notice of the assessing authority. The assessee knows all the material and relevant facts-the assessing authority might not. In respect of the failure to disclose, the omission to disclose may be deliberate or inadvertent, but that was immaterial. The Supreme Court found on the facts of the case as follows : “It is the admitted position that the assessee had not disclosed either by a valuation report or by a statement before the ITO as to what portion consisted of earth work and what portion or proportion consisted of masonry work. For the purpose of calculating depreciation, that indubitably was a material fact. If excess depreciation has been allowed on that basis, i.e. that the entirety of the work consisted of masonry work, income might have been under-assessed. The ITO can reasonably be said to have material to form that belief. That position is also well-settled by the scheme of the section and concluded by the authorities of this Court.” This judgment is distinguishable on facts and cannot apply to the case on hand. In Renusagar Power Co. Ltd. vs. ITO (1979) 117 ITR 719 (All) : TC 51R.922 a Division Bench of the Allahabad High Court relying on Kantamani Venkata Narayana & Sons vs. Addl. ITO (1967) 63 ITR 638 (SC) : TC 51R.655 held that even though an enquiry had been made by the ITO at the time of the original assessment, still s. 147(a) can be invoked if materials coming subsequently to the possession of the Revenue showed that the disclosure made by the petitioner was neither full nor true. Even in cases where the ITO, if he had been circumspect, could have found out the truth from the books and other documents produced, he is not precluded from exercising the power to assess the income which has escaped assessment. It could not, therefore, be held that the nondisclosure of primary facts by the petitioner was not responsible for allowance of the rebate. In that case the claim of development rebate at the rate of 35 per cent was held to be not justified. Admittedly the petitioner in that case was not engaged in any manufacturing business and hence the allowance of rebate at 35 per cent was not justified. However, the claim of the assessee that it was due to the wrong appreciation of law and not by reason of non-disclosure of primary facts by the assessee was not accepted. This judgment is also in my view is distinguishable on the facts of the case.

In Bengal Luxmi Cotton Mills Ltd. vs. ITO (1973) 87 ITR 618 (Cal) : TC 51R.929 learned Judge of the Calcutta High Court took a view that anything that requires to be proved by evidence is not necessarily an inferential facts. Whether a particular machinery was there or not, whether the petitioner has brought into use any machinery in a particular year is a primary fact. The existence or non-existence of a primary fact may be required to be proved by evidence. It was further held that the High Court in exercise of writ jurisdiction was concerned to see whether in fact there were some reasonable grounds for thinking that there had been any non-disclosure as regards any primary fact, which could have a material bearing on the question of under-assessment.

In East India Hotels Ltd. vs. Dy. CIT (1993) 204 ITR 435 (Cal) : TC 51R.1148 another learned Judge of the Calcutta High Court while holding that notice issued under s. 148 of the Act beyond four years of the assessment held that if the assessee wrongly understood the implication of the notification, then at the highest it might be said that there was a wrong understanding and it could be said that the assessee had erred in law in claiming depreciation in the manner it did but that is not a case of omission or failure on the part of the assessee to disclose also material facts.

In Kantamani Venkata Narayana & Sons vs. Addl. ITO (supra) the Supreme Court held that on the facts of the case the ITO had, prima facie, reason to believe that the assessee had omitted to disclose fully and truly all material facts and that in consequence of such non-disclosure income had escaped assessment. In that case ITO was found to have prima facie reason to believe that the material information had been withheld, and that on account of withholding of that information there is an escaped assessment. Applying the principles as laid down by the Supreme Court and other High Courts it could be seen in this case that the petitioner had filed a depreciation statement even though no prescribed form is provided to be filed. Petitioner had claimed depreciation on plant and machinery. On eight items they have claimed depreciation at the rate of 33-1/3 per cent. In reference to 12 other items they have claimed at the rate of 50 percent. The written down value as on 31st March, 1988, and the WDV as on 31st March, 1989, after claiming depreciation at the rate satisfied were given in the statement. Therefore, the primary facts in support of their claim of WDV, have been furnished. However, while working the depreciation rate instead of 33.33 per cent for all items they have made a claim of 50 per cent in reference to 12 items. This claim on the rate of depreciation cannot be held to be failure to disclose full and true material facts necessary for assessing. It cannot be stated that this is the duty of the assessee to point out that he had made a wrong claim in the rate of depreciation. The claim was made as the assessee understood as leviable, according to law. The material facts having been placed before the AO it is the duty of the officer to draw inference from those material facts disclosed, on his failure the burden cannot be shifted to the assessee to hold that there is a failure to disclose the material facts. This provision is a special or extraordinary nature since it empowers reopening of an assessment after the period of limitation of four years and hence must satisfy the test strictly.

For the above reasons the impugned notice Ext. 27 is illegal inasmuch as it does not satisfy the requirement of s. 147 of the Act. Hence Ext. 27 notice is quashed. The original petition is allowed.

[Citation: 236 ITR 604]

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