Income-tax---

----Reassessment---Failure to disclose fully and truly all material facts---I. T. O. not accepting assessee's claim for depreciation ---I.T.O. making his own calculation and allowing more depreciation than claimed by assessee---I.T.O. not taking into account initial depreciation allowed to assessee while making original assessment---Initiation of reassessment proceedings---No obligation on assessee to disclose that initial depreciation was granted to it---No failure to disclose fully and truly all material facts---Reassessment not valid.

Mere reason to believe that income has escaped assessment is not enough to give the Income Tax Officer jurisdiction to reopen, and assessment under section 147(a) of the Income Tax Act, 1961. There must also be material to show that the assessee had failed to disclose fully and truly all material facts necessary for the assessment. The duty of the assessee is to disclose only primary facts and it is for the Income Tax Officer to draw correct inferences of facts or law from the primary facts.

While completing the assessments of the assessee for the assessment years 1962-63 to 1970-71, the Income Tax Officer did not accept the assessee's claim for depreciation as such but made his own calculations and allowed depreciation for each of the years which was more than what was claimed by the assessee. Subsequently, the Income Tax Officer found that the assessee was granted depreciation in excess of what was allowable to it under proviso (c) to section 10(2)(vi) of the Indian Income Tax Act, 1922, as the aggregate of all depreciation ought not to, exceed the cost of the plant and machinery and that the Income Tax Officer did not take into account initial depreciation allowed to the assessee under section 10(2)(vi), proviso, clause (c) of the Indian Income Tax Act, 1922, while completing the original assessments. The Income Tax Officer took the view that this resulted in under assessment, which were due to the assessee's failure to disclose fully and truly all material facts necessary for the assessments. The Income Tax Officer, accordingly, reopened the assessments under section 148 read with section 147(a). The appellate Assistant Commissioner found that there was no obligation on the part of the assessee to point out to the Income Tax Officer that the assessee had been granted intial depreciation during the assessment years 1949-50 to 1954-55 and that the aggregate of all depreciation ought not to exceed the cost of the plant and machinery. The Appellate Assistant Commissioner came to the conclusion that the fact that the assessee's claim for depreciation was not accepted by the Income Tax Officer who made his own calculations with reference to the facts on record and allowed higher depreciation to the assessee than what the assessee had claimed, clearly indicated that the assessee was not at fault at all. Accordingly, the Appellate Assistant Commissioner found that the reopening of the assessments was not valid. The Tribunal affirmed the order of the Appellate Assistant Commissioner. On a reference:--

Held, that under clause (c) of the proviso to section 10(2)(vi) of the Indian Income Tax Act, 1922, the depreciation under all heads could not exceed the original cost of the building, plant or machinery. The provision did not spell out any obigation on the part of the assessee to disclose that he had been granted initial depreciation during the relevant assessment years. The assessee had claimed depreciation on the basis of the written down value. The fact that initial depreciation was allowed to it was on the income-tax record. Moreover, the Income Tax Officer did not accept the assessee's claim. He applied his mind, made his own calculations and allowed depreciation at figures more than what the assessee had claimed. Therefore, it could not be said that the assessee had failed to disclose fully and truly all material facts necessary for the assessment. Therefore, the reassessments were not valid.

Calcutta Discount Co. Ltd. v. I.T.O. (1961) 41 I T R 191 (SC), Indo --Aden Salt Mfg. and Trading Co. Pvt. Ltd. v. CIT (1986).159 I T R 624 (SC) and Technocraft Industries v. J.C. Shan Second 1.T.0. (1990) 186 I T R 514 (Bom.) ref.

Dr. v. Balasubramanian with P.S. Jetley, J.P. Devdhar and K.C. Sidhwa for the Commissioner.

K.B. Bhujle with V.H. Patil for the Assessee.

JUDGMENT

T.D. SUGLA, J.---In this departmental reference relating to the assessee's assessment for the assessment years 1962-63 to 1970-71, the Income Tax Appellate Tribunal has referred to this Court the following question of law for its opinion under section 256(1) of the Income Tax Act, 1961:

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that there was no obligation on the part of the assessee to show the initial depreciation in the form of return and, therefore, it cannot be said that the assessee had failed to disclose fully and truly all material facts necessary for its assessment within the meaning of section 147(a) of the Income Tax Act, 1961?"

The assessee had installed items of new machinery during the assessment years 1949-50 to 1954-55 in respect of which it was entitled to and was allowed initial or further depreciation at the rate of 20% of the cost of the new machinery under section 10(2)(vi), proviso, clause (c) of the Indian Income Tax Act, 1922. While completing the assessments under reference under section 143(3), the Income Tax Officer had not accepted the assessee's claim for depreciation as such. He made his own calculations and allowed depreciation for each of the years under reference and that happened to be more than what was claimed by the assessee. Subsequently, some time in March, 1971, the Income Tax Officer felt that the assessee was granted depreciation in excess of what was allowable to it under the Act. He felt so for the reason that proviso (c) to section 10(2)(vi) of the 1922 Act had provided that the aggregate of all allowances in respect of depreciation was in no case to exceed the original cost of the plant and machinery to the assessee. In the present case, the fact that the assessee had been allowed initial depreciation was not taken into account by the Income Tax Officer while completing the assessments originally.

According to him, this resulted in under-assessments and the under assessments were on account of the assessee's failure to disclose fully and truly all material facts necessary for the assessment. Accordingly, he reopened the assessments under section 148 read with section 147(a) of the Act. Reassessments were made after re-computing depreciation taking into account the initial depreciation granted to the assessee in the earlier years.

There is no dispute that the aggregate of all allowances in respect of a depreciation ought not to have exceeded the original cost of the building machinery or plant to the assessee. The question that arose before the Appellate Assistant Commissioner and the Tribunal was whether under the assessments, i.e. excessive allowance of depreciation, in all these years was on account of the assessee's failure to disclose fully and truly all material facts necessary for the assessment. It is common ground that unless it could be held that the under assessments or excessive allowance of depreciation was due to the assessee's failure to do so the reopening of the assessments would be invalid.

The Appellate Assistant Commissioner and the Tribunal have given a finding that there was no obligation on the part of the assessee to point out to the Income Tax Officer that the assessee had been granted initial depreciations during the assessment years 1949-50 to 1954-55 and that the aggregate of all depreciations ought not to have exceeded the cost of the plant or machinery. They concluded that the fact that the assessee's claim for depreciation was not accepted by the Income Tax Officer who made his own calculations with reference to the facts on record and allowed higher depreciation to the assessee than what the assessee had claimed clearly indicated that the assessee was not at fault at all. Accordingly, they held that the reopening of the assessments under section 147(a) was not valid.

Dr. Balasubranmanian, learned counsel for the Revenue, submitted that the Appellate Assistant Commissioner and the Tribunal have not approached the question correctly. The question is not whether the assessee had any obligation to inform the Income Tax Officer that it was allowed initial depreciation in the earlier years. The pertinent question is whether the assessee was obliged to disclose the correct income by claiming depreciation allowable under the Act. If the answer to the second question is in the affirmative, the assessee could not be said to have disclosed fully and truly particulars of income.

Section 147(a) reads as under:-

Income escaping assessment.-- If--

(a) the Income Tax Officer has reason 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 that year, or..."

It is evident that mere reasons to believe that the income has escaped I assessment is not enough to give the Income Tax Officer jurisdiction to reopen an assessment under section 147(x). There must also be material to show that the assessee failed to disclose fully and truly all material necessary for the assessment. The Supreme Court, in the case of Calcutta Discount Co. Ltd. (1961) 41 I T R 191, has held long back that the duty of the assessee is to disclose primary facts and it is for the Income Tax Officer to draw correct inferences of facts or law from the primary facts. This view has been reaffirmed by the Supreme Court in a number of subsequent cases.

The next provision to be considered is the proviso, clause (c) to section 10(2)(vi) of the 1922 Act, which reads as under:--

"the aggregate of all allowances in respect of depreciation made under this clause and clause (via) or under any Act repealed hereby, or under the Indian Income Tax Act, 1886 (II of 1886), shall, in no case, exceed the original cost to the assessee of the buildings, machinery, plant or furniture, as the case may be;"

It only means that depreciation under all heads cannot exceed the original cost of the building, plant or machinery to the assessee. From the above provision, there is no obligation spelt out on the part of the assessee. The assessee had claimed depreciation on the basis of the written down value. The fact that initial depreciation was allowed to it was in the income-tax record. Moreover, the Income Tax Officer did not accept the assessee's claim. He applied his mind, made his own calculations and allowed depreciation at figures more than what the assessee had claimed. In the circumstances, it is not possible to accept Dr. Balsubramanian's contention that the assessee had failed i to disclose fully and truly all material facts necessary for the assessments.

As regards the Supreme Court decision in the case of Indo Aden Salt Mfg. and Trading Co. P. Ltd. v. C.I.T. (1986) 159 ITR 624, it requires to be noted that the Supreme Court has itself stated in so many words that it is well settled that the obligation on the part of the assessee is to disclose only primary facts and not inferential facts. In that case, the assessee had claimed depreciation on a particular asset the cost of which included earth work and masonary work. The details of the break-up were not given. The Income Tax Officer could have no doubt found the break-up of the cost with a little probe. But it could not be denied that it was primarily for the assessee to give the break-up of the cost. It is in this background that the Supreme Court observed that whether there was non-disclosure of primary facts as to the cost of the assets was basically a question of fact and the Tribunal had found that the assessee had not disclosed primary facts. Likewise our Court's judgment in Technocraft Industries v. J.C. Shan, Second ITO (1990) 186 ITR 514 is also not applicable to the facts of the case.

Having regard to the discussion above, we are in agreement with the Tribunal that there was no failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. Accordingly, we answer the question referred to us in the affirmative and in favour of the assessee.

No order as to costs.

M.BA./1643/TQuestion answered.