Nagrath Chemicals Works (P) Ltd. vs Commissioner of Income Tax

This is a reference u/s 256(1) of the IT Act in which the following questions have been referred to us for our opinion :

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the audit report amounted to ''information'' within the meaning of Section 147(b) of the IT Act, 1961, on the basis of which the assessment could be validly reopened by the ITO ?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the loss of Rs. 84,261 on the sale of brick kiln was a capital loss and that it could not be set off against the business income but only against capital gains and that it had to be carried forward ?"

The assessee is a company registered under the Indian Companies Act and the relevant assessment year is 1975-76. It had a bichromate plant installed in asst. yr. 1972-73 of which a furnace in the form of a kiln was a part. Depreciation was being allowed on the assets of the plant including kiln. A part of the plant was dismantled in asst. yr. 1973-74 and the assets were sold piecemeal. During the asst. yr. 1973-74 the ITO allowed loss on sale of certain machinery but refused to allow loss on sale of the kiln on the ground that the same will be allowed when the sale was completed. In the asst. yr. 1975-76 (the relevant assessment year) the ITO computed the loss on the sale of the kiln at Rs. 34,261 being difference between the sale price and its written down value. The assessment was completed on 28th Dec., 1976. Subsequently, the assessment was reopened u/s 147(b) of the IT Act, and ITO held that the loss on the sale of the kiln cannot be allowed, as it was capital loss and not a revenue loss. Aggrieved, the assessee filed an appeal before the CIT(A), and the said authority held that the reassessment was on the basis of the report of the audit party and hence in view of the judgment of the Supreme Court in Indian and Eastern Newspaper Society, New Delhi Vs. Commissioner of Income Tax, New Delhi, , this could not be regarded as information u/s 147(b). Hence the reassessment was set aside. In further appeal the Tribunal set aside the order of the CIT(A).

The Tribunal held that what the audit party pointed out to the ITO was that the kiln was not used at all in the accounting year, and the loss had been set off on the basis as if the kiln was used. The Tribunal was of the view that the ITO was not aware of the factual aspects about which the audit gave information and hence it was not a case for mere change of opinion.

As regards the first question referred to us, we are of the opinion that there is no infirmity in the Tribunal''s order. The decision of, the Supreme Court in Indian and Eastern Newspaper Society (supra) only states that opinion on points of law of the audit party cannot be information within the meaning of 147(b) of the IT Act. However, if the audit points out certain facts which were not in the knowledge of the ITO when he made the original assessment it would constitute information u/s 147(b) vide Zoraster and Co. Vs. Commissioner of Income Tax, Labella Construction Company Vs. Commissioner of Income Tax, , R. Madhavan Nair Vs. Commissioner of Income Tax, , Claridges Hotel P. Ltd. and another Vs. Income Tax Officer, Company Circle X, New Delhi and another, , Raja Jagdambika Pratap Narain Singh Vs. Commissioner of Income Tax, , etc.

Similarly, the communication of the law by the audit to the ITO is also information vide Commissioner of Income Tax Vs. Abhoji Rao Phalke, , Bharat Plywood and Timber Products Ltd. Vs. Commissioner of Income Tax, , etc. Since the audit only brought certain facts to the knowledge of the ITO, it was certainly an information u/s 147(b). Hence, the question referred to us has to be answered in the affirmative.

As regards the second question, we are of the opinion that this question has also to be answered in the affirmative as the loss in the sale of the brick kiln was certainly a capital loss and hence it could not be set off against the business income but only against the capital gains. A brick kiln is a capital asset and the loss in the sale of it is a capital loss. Hence, both the questions referred are answered in the affirmative i.e., in favour of the Department and against the assessee.