Shri Venkatesa Mills Ltd. vs Commissioner of Income Tax

Ismail, J.—The assessee is a public limited company carrying on business of manufacturing of yarn and cloth. The previous year is the

calendar year and in 1959, the assessee spent a sum of about Rs. 12,00,000 for the introduction of the casablanca conversion system in its

spinning plant. It spent more sums of money on the value of conversion materials in the three succeeding years. It also incurred expenditure on

acquiring some other items like spindles, pedestals, etc., in each of these years. For the assessment years 1960-61 to 3963-64, when the Income

Tax Officer computed the profits and gains of the business of the assessee, he allowed development rebate on the cost of all the purchases referred

to above. However, subsequently, the Income Tax Officer purported to reopen the assessments for all the four years u/s 147(b) of the Income Tax

Act, 1961, hereinafter referred to as ""the 1961 Act"". The reason for reopening of the assessments was that the income was under-assessed by

giving deduction for the development rebate in the original assessments, while the assessee was not entitled to such development rebate at all. In

appeals preferred by the assessee to the Appellate Assistant Commissioner, he held in respect of all the four assessment years, that the reopening

of the assessments u/s 147(b) was not legal because it was based on nothing more than the change of opinion on the part of the Income Tax

Officer. On merits, the Appellate Assistant Commissioner held that the assessee was entitled to deduction for the development rebate. In respect

of all these four years, appeals were preferred by the department to the Income Tax Appellate Tribunal against the orders of the Appellate

Assistant Commissioner. When the appeal in respect of the assessment year 1960-61, namely, I.T.A. No. 18964 of 1966-67 came up for hearing

before the Tribunal, the departmental representative agreed, on the authority of the decision of the Supreme Court in Commissioner of Income

Tax, Madras Vs. Mahalakshmi Textile Mills Ltd., , which we shall have occasion to refer to later, that the expenditure on conversion materials

would be treated as admissible as revenue expenditure, subject to the development rebate allowed by the Appellate Assistant Commissioner being

withdrawn. The representative of the assessee conceded the departmental appeal on this basis and as a consequence depreciation as far as the

items of conversion materials were concerned was also withdrawn and the Tribunal passed orders accordingly on November 20, 1968.

The appeals relating to the other three years, namely, 1961-62, 1962-63 and 1963-64, came up for consideration before the Tribunal later.

When those appeals were taken up for hearing as before, the departmental representative indicated that the department was agreeable to orders

being passed similar to the one passed in respect of the assessment year 1960-61 on concession. However, the counsel for the assessee did not

agree to such a suggestion and he wanted the matter to be disposed of on merits. It is thereafter the Tribunal disposed of those appeals on merits.

The Tribunal held that the reopening of the assessment u/s 147(b) of the 1961 Act was proper. At the same time it also held that on the basis of

the decision of the Supreme Court in Commissioner of Income Tax, Madras Vs. Mahalakshmi Textile Mills Ltd., , referred to already, the

conversion materials were not eligible for development rebate, but that the entire expenses could be allowed as admissible deduction and that since

the proceedings were only reassessment proceedings, the total income originally assessed by the Income Tax Officer could not be reduced further

and that, therefore, the effect of the withdrawal of the development rebate which was a smaller sum each year than the cost of the value of the

conversion materials would be offset by the deduction which was admissible. It is on this basis that the Tribunal allowed the appeals preferred by

the department in. part. The allowing of the appeals in part resulted in the Tribunal holding that the assessee was entitled to have the entire

expenses allowed as a deduction and that it was not entitled to the development rebate which was smaller, 25% or 20%, as the case may be, of

the total expenses incurred by the assessee. It is against these orders of the Tribunal that the assessee applied for reference to this court of the

questions of law said to arise out of the said orders and the Income Tax Appellate Tribunal, Madras Bench, u/s 256(1) of the 1961 Act, has

referred the following questions of law for the opinion of this court:

(1) Whether, on the facts and in the circumstances of the case, the initiation of proceedings u/s 147(b) and the reassessment in each of the

assessment years 1961-62 to 1963-64 is justified in law ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in taking notice of a reason for reopening the

assessment u/s 147(b) when that reason had not been referred to by the Income Tax Officer and the Appellate Assistant Commissioner ?

(3) Whether, on the facts and in the circumstances of the case, there was any material to support the finding of the Tribunal that the development

rebate disallowed in the supplementary assessment proceedings was in respect of '' casablanca conversion materials '' ?

(4) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was not entitled to the

development rebate u/s 10(2)(vib) of the Indian Income Tax Act, 1922, on the cost of new machineries installed in each of the years ?

(5) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in not directing the allowance of the entire cost of the

machinery as revenue expenditure ?

Before we deal with the facts bearing on these questions it is desirable to refer to the relevant statutory provisions. We may point out that out of

the three assessment years in question, namely, 1961-62 to 1963-64, the first assessment year would be governed by the provisions of the Indian

Income Tax Act, 1922, hereinafter referred to as ""the 1922 Act"", and the latter two assessment years would be governed by the provisions of the

1961 Act. We are referring to this feature for the simple reason that the fourth question erroneously refers to only Section 10(2)(vib) of the 1922

Act, because that will be relevant only for the first year and with regard to the subsequent years, it is only Section 33 of the 1961 Act that will

apply. Notwithstanding this defect in the fourth question, it is unnecessary to pursue the same further for the simple reason that there is no material

change between the provision in question in the 1922 Act and the 1961 Act as far as this part of the case is concerned. Section 10(2)(vib) of the

1922 Act so far as it is relevant for the purpose of this case is as follows:

10(2)(vib). Such profits or gains shall be computed after making the following allowances, namely :--......

in respect of a new ship acquired or new machinery or plant installed after the 31st day of March, 1954, which is wholly used for the purposes of

the business carried on by the assessor, a sum by way of development rebate in respect of the year of acquisition of the ship or of the installation of

the machinery or plant, equivalent to,--......

(ii) in the case of machinery or plant installed before the 1st day of April, 1961, twenty five per cent. and in the case of machinery or plant installed

after the 31st day of March, 1961, twenty per cent. of the actual cost of the machinery or plant to the assessee.

The corresponding section in the 1961 Act is Section 147(b).

Section 33(1)(a) of the 1961 Act is as follows :

In respect of a new ship or new machinery or plant (other than office appliances or road transport vehicles) which is owned by the assessee and is

wholly used for the purposes of the business carried on by him, there shall, in accordance with and subject to the provisions of this section and of

Section 34, be allowed a deduction, in respect of the previous year in which the ship was acquired or the machinery or plant was installed or, if the

ship, machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year, a sum by way of

development rebate as specified in Clause (b).

Clause (b) of Section 33(1) of the 1961 Act refers to the percentage of development rebate to be allowed in respect of various years in relation

to different plant and machinery. The only other statutory provision that requires attention is Section 147(b) of the 1961 Act. That Section 147(b)

is :

If notwithstanding that there has been no omission or failure as mentioned in Clause (a) on the part of the assessee, the Income Tax Officer has in

consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year, he

may, subject to the provisions of Sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance, as the

case may be, for the assessment year concerned (hereafter in Sections 148 to 153 referred to as the relevant assessment year).

It is the power of the Income Tax Officer u/s 147(b) of the 1961 Act that has been invoked in the present case for reopening the assessments

originally completed for the assessment years referred to above.

Though the questions referred to this court are five in number, the material points that arise for consideration are only two, namely, (1) whether

the Income Tax Officer acted within the four corners of Section 147(b) of the 1961 Act when he reopened the assessments for the years 1961-62

to 1963-64? and (2) whether the expenses incurred by the assessee in respect of the three years referred to already were of such a nature as to be

not eligible to obtain development rebate provided for by the statutory provisions referred to above ?

As far, as the first point is concerned, it requires consideration of the statutory requirements contained in Section 147(b) of the 1961 Act itself.

Before that section can be applied and the Income Tax Officer can assume jurisdiction under that Section, (1) the Income Tax Officer must have

reason to believe that the income chargeable to tax has escaped assessment for any assessment year ; (2) that reason must be in consequence of

information in his possession, and (3) it is not disputed that decisions of courts have settled that the information referred to above must come into

the possession of the Income Tax Officer subsequent to the original assessment. Consequently, the question for consideration in the present case

will be, whether these three requirements have been satisfied in the present case or not. As a matter of fact, the crucial point that was urged before

us and which appears to have been argued before the Tribunal as well as the other authorities was that there was no information which the Income

Tax Officer came into possession of subsequent to the original assessments so as to enable him to invoke his powers u/s 147(b) of the 1961 Act

and that all that he did was to have a second look over what had been done previously when the original assessments were made and to form a

different opinion, or, in other words, he merely changed his opinion and there was no information as a consequence of which he had reason to

believe that the income had escaped assessment. Therefore, we shall first consider the question as to whether the Income Tax Officer had come

into possession of information subsequent to the original assessment or not in the present case.

The notice issued by the Income Tax Officer u/s 148 of the 1961 Act for reopening the assessment has not been placed before the court.

Consequently, we can find out only from the order passed by the Income Tax Officer as to what the information was which he came into

possession of subsequent to the passing of the original order of assessment, which could constitute a reason for him to entertain the belief that the

income had escaped assessment. For this purpose, it is absolutely necessary to refer to and extract the material portion of the order passed by the

income tax'' Officer, while he reopened the assessment and passed fresh orders of assessment for all the three years. It is not disputad that though

separate orders were passed, they are more or less in the same terms. Consequently, we extract the order of the Income Tax Officer dated 30th

December, 1966 :

Assessment order

The original assessment in this case for 1961-62 was completed on September 29, 1962, on a total income of Rs. 20,17,837. While completing

the original assessment the assessee was allowed a deduction of Rs. 2,80,832 towards development rebate on new items of machinery claimed to

have been installed. Subsequently, it came to notice that development rebate was wrongly allowed on certain items like conversion materials and

accessories or component parts added to the textile machinery. Since the assessee is not eligible for the development rebate on these items which

do not form machinery as such, the assessment was reopened u/s 147(b) by issue of notice u/s 148, in order to withdraw the development rebate

excessively allowed. In response to this notice the assessee has filed a return repeating the income of Rs. 20,17,837 as determined in the original

assessment.

The case was posted and the assessee''s authorised representative, Shri K.V. Gopala Iyer, chartered accountant, heard.

The as,sessee''s representative raised a preliminary objection that the provisions of Section 147 are not applicable in so far as the reopening was

done on a mere change of opinion in the matter of the grant of development rebate on certain items of capital additions on which such rebate had

already been allowed in the original assessment and that there was no fresh ground or information to invoke the provisions of Section 147. This

argument cannot be accepted. It is not correct to say that the Income Tax Officer had no information to act u/s 147. The awareness that a mistake

was committed in the original assessment order constituted sufficient information to act u/s 147(b). In the case of Salem Provident Fund Society

Ltd. Vs. Commissioner of Income Tax, Madras, , the Madras High Court held that a mistake apparent on the face of the order of assessment

would itself constitute information ; whether someone else gave the information or he informed himself was immaterial. Thus, the discovery of a

mistake committed in the original assessment constituted sufficient information to invoke the provisions of Section 147 and, therefore, this objection

raised by the representative is overruled.

Nextly, the representative argued that development rebate is rightly due on the conversion materials and other component parts added to the textile

machinery inasmuch as they have been treated as capital items and depreciation has been granted on those items. In support of his argument the

representative relied on the following decisions of the High Court and the Supreme Court:

(i) Aruna Mills Ltd. Vs. Commissioner of Income Tax, Ahmedabad, .

(ii) COMMISSIONER OF Income Tax, MADRAS Vs. MIR MOHAMMAD ALI. ARUNA MILLS LTD. : INTERVENER., .

(iii) Commissioner of Income Tax, Madras Vs. Raju and Mannar, .

The assessee''s representative also argued that in the alternative the value of the conversion materials or component parts may be allowed as

revenue expenditure in the light of the decision of the Madras High Court in the case of Commissioner of Income Tax, Madras Vs. Mahalakshmi

Textile Mills Ltd., .

The alternative contention cannot be accepted, firstly, for the reason that such a claim was not made at the time of the original assessment and so

cannot be admitted at this stage, and, secondly, for the reason that the department has not accepted the decision of the Madras High Court and the

matter has been taken in appeal before the Supreme Court.

Then, as regards the contention that conversion materials and accessories constitute machinery qualifying for development rebate, it. has to be

stated that they are mere accessories or replacements and not machinery as contemplated u/s 147(b) of the Act. The facts of this case are

distinguishable from the case of Aruna Mills Ltd. Vs. Commissioner of Income Tax, Ahmedabad, . The Supreme Court''s definition of machinery in

the case of COMMISSIONER OF Income Tax, MADRAS Vs. MIR MOHAMMAD ALI. ARUNA MILLS LTD. : INTERVENER., relied

upon by the Gujarat High Court was concerned with the installation of diesel engines in buses which is quite different from conversion materials and

other small parts replaced or fitted to textile machinery. The decision in the case of Commissioner of Income Tax, Madras Vs. Raju and Mannar,

also is on the same point covering diesel engines. In view of these the conversion materials or other component parts added or replaced in the

textile machinery do not constitute machinery within the meaning of Section 147(b) ot the Act.

For the aforesaid reasons, I overrule all the objections raised by the assessee''s representative and proceed to complete this reassessment by

withdrawing the development rebate granted on the following items which, judged by their nature and functions, are only mere components or small

accessories added to the main textile machinery"".

Apart from stating, ""subsequently it came to notice that development rebate was wrongly allowed"", the Income Tax Officer in his order does

not state as to how it came to his notice. On the other hand, the rest of the order of the Income Tax Officer will make it clear that he did not have

any external information and that he came to the conclusion that, the development rebate was wrongly allowed solely on the basis of

reconsideration of the original order made by his predecessor. As a matter of fact, in the forefront of his objections, the assessee represented to

the Income Tax Officer that there was no fresh ground or information to invoke the provisions of Section 147 of the 1961 Act. If there was any

fresh ground or information in the possession of the Income Tax Officer, that was the earliest and most opportune occasion for the Income Tax

Officer to refer to the same by way of negativing the contention of the assessee. On the other hand, the Income Tax Officer based himself

exclusively on the judgment of this court in Salem Provident Fund Society Ltd. Vs. Commissioner of Income Tax, Madras, to which we shall make

a reference a little later. According to the Income Tax Officer, this decision holds that the awareness that a mistake had been committed in the

original assessment order constituted sufficient information to act u/s 147(b) of the 1961 Act. That the Income Tax Officer acted solely on the

basis of bestowing a second thought over the same matter is clear from his other statement, namely :

Thus the discovery of a mistake committed in the original assessment constituted sufficient information to invoke the provisions of Section 147.

Therefore, from this order of the Income Tax Officer, it is indisputably clear that there was no external information whatever which came into his

possession subsequent to the original order of assessment.

The only other question is, whether he had any internal information-in the form of an information or a ground or a fact which he found out or

discovered from the records themselves. It is only in this context that a reference to the decision of this court in Salem Provident Fund Society Ltd.

Vs. Commissioner of Income Tax, Madras, becomes necessary. The very provision of Section 34(1)(b) of the 1922 Act corresponding to Section

147(b) of the 1961 Act itself does not say whether the information should be external or internal. In that context, this court held in the said decision

that the information may be obtained by the Income Tax Officer from his own records and it need not come from outside. Apart from the general

proposition laid down by this court to that effect in the said decision, the facts of that case themselves were peculiar and this court expressly

mentioned in that judgment that the court was not covering a wider ground. In that case, the assessee was a limited company carrying on the

business of insurance under the Provident Fund Societies Act. When the income for the year 1946 had to be assessed in the assessment year

1947-48, the valuation report for 1946, the third valuation report, was available. The actuarial deficiency disclosed by the second report for the

period that ended on December 31, 1945, was Rs. 90,851 and the deficiency at the end of 1946 as disclosed by the third report was Rs. 77,165.

Therefore, there was an actuarial surplus of Rs. 13,686 for 1946. When the assessment was first completed in 1949, the Income Tax Officer

committed a mistake. Instead of deducting Rs. 77,165 from Rs. 90,851 which would have resulted in an actuarial surplus of Rs. 13,686 for 1946,

he added both the sums and arrived at a deficiency of Rs. 1,68,016. The computation of the loss in that manner was more favourable to revenue

than a computation under Rule 2(a). It was this mistake which was noticed by the Income Tax Officer subsequently and sought to be rectified by

the reopening of the assessment u/s 34(1)(b) of the 1922 Act. It was accepted in that case that the mistake was patent on the face of the record

and, therefore, could have been rectified u/s 35 of that Act. One of the arguments advanced before this court was that since the mistake could be

rectified u/s 35 of that Act, the assessment could not be reopened u/s 34(1)b). This court rejected that argument by holding that it w,as not a

question of whether it was Section 35 or sec-tion 34(1)(b) of the 1922 Act that applied, but it was a question whether the requirements of Section

34(1)(b) of the 1922 Act were satisfied or not. With regard to Section 34(1)(b) of the 1922 Act itself, the argument was that there was no

information in the possession of the Income Tax Officer which would have enabled him to proceed u/s 34(1)(b), because he himself found out the

mistake by looking into the records. It is that argument which was rejected by this court. While doing so, this court pointed out--See Salem

Provident Fund Society Ltd. Vs. Commissioner of Income Tax, Madras, :

Section 35 permits rectification where the mistake is apparent on the face of the record of assessment. The learned counsel for the department

could not challenge the correctness of the plea of the assessee, that the original assessments completed in 1949 for both the assessment years

under consideration now could have been rectified u/s 35. The mistakes were apparent on the face of the assessment orders themselves. What

should have been subtracted was added to ascertain the deficiency disclosed by the actuarial reports. It should be remembered that the Income

Tax Officer first contemplated recourse to Section 35 but dropped it as the assessee did not agree.

It is thereafter that this court proceeded to state (page 564):

We should like to emphasise even at the outset that we are not dealing with a case of change of opinion on the part of the assessing authority, but

with an error in computation obvious on the face of the order of assessment itself. That the real deficiency or surplus in each of the relevant years

was to be ascertained by subtraction and not addition of the deficiency for each of the two years could never be challenged. Whether the

discovery of such a mistake, which in its turn led to the further discovery of escape from assessment or under-assessment, constitutes information

within the meaning of Section 34(1) is what we have to decide in this case. We do not propose to cover any wider ground.

We are unable to accept the extreme proposition, that nothing that can be found in the record of assessment, which itself would show escape of

assessment or under-assessment, can be viewed as information which led to the belief that there has been escape from assessment or under-

assessment. Suppose a mistake in the original order of assessment is not discovered by the Income Tax Officer himself on further scrutiny but it is

brought to his notice by another assessee or even by a subordinate or a superior officer, that would appear to be information disclosed to the

Income Tax Officer. If the mistake itself is not extraneous to the record and the informant gathered the information from the record, the immediate

source of information to the Income Tax Officer in Such circumstances is in one sense extraneous to the record. It is difficult to accept the position

that while what is seen by another in the record is ''information'', what is seen by the Income Tax Officer himself is not information to him. In the

latter case he just informs himself. It will be information in his possession within the meaning of Section 34. In such cases of obvious mistakes

apparent on the face of the record of assessment, that record itself can be a source of information, if that information leads to a discovery or belief

that there has been an escape of assessment or under-assessment.

As a matter of fact, this court reiterated this position when it stated further (page 565):

We hold that the mistake apparent on the face of the order of assessment itself constitutes information : whether someone else gave that

information to the Income Tax Officer or whether he informed himself is immaterial.

Thus, it is clear that the facts of that case were peculiar, namely, instead of subtracting one figure from another, the Income Tax Officer added

both the figures in that case. That was a mistake apparent from the record of assessment itself and it is in that context that this court held that that

would constitute ""information"" within the scope of Section 34(1)(b) of the 1922 Act, corresponding to Section 147(b) of the 1961 Act. Therefore,

that decision can be said to be an authority only for the proposition that the information need not necessarily be extraneous in all cases and that in

cases where obvious mistakes are apparent on the face of the record of assessment, that record itself can be a source of information. As a matter

of fact, it is this aspect of the judgment of this court which was referred to by the Supreme Court in Anandji Haridas and Co. (P.) Ltd. v. S.P.

Kushare, Sales Tax Officer [1968] 21 STC 326. However, as far as the facts of the present case are concerned, it cannot be said that the

allowing of development rebate in the original order constituted an obvious mistake apparent on the face of the record. In fact, the development

rebate is to be allowed on certain conditions being satisfied. Therefore, the very fact that the development rebate was allowed in the original order

would clearly lead to the inference that the Income Tax Officer had applied his mind as to the eligibility for the development rebate under the

provisions of Section 10(2)(vib) of the 1922 Act in respect of the assessment year 1961-62 and Section 147(b) of the 1961 Act in respect of the

assessment years 1962-63 and 1963-64 and that only after applying his mind and coming to the conclusion that the assessee was eligible for the

development rebate he had allowed the development rebate. Therefore, when subsequently the Income Tax Officer without any reference

whatever to any other information, either external or from the records, themselves, was of the opinion that the development rebate was wrongly

allowed, it merely constituted a change of opinion and nothing more.

It is well settled that mere change of opinion will not confer jurisdiction on the Income Tax Officer either u/s 34(1)(b) of the 1922 Act or u/s

147(b) of the 1961 Act to reopen the assessment already made. In Income tax Officer, Calcutta and Others Vs. Lakhmani Mewal Das, , the

Supreme Court summarised the legal position in this behalf as follows :

It would appear from the perusal of the provisions reproduced above that two conditions have to be satisfied before an Income Tax Officer

acquires jurisdiction to issue notice u/s 148 in respect of an assessment beyond the period of four years but within a period of eight years from the

end of the relevant year, viz:

(1) the Income Tax Officer must have reason to believe that income chargeable to tax has escaped assessment, and

(2) he must have reason to believe that such income has escaped assessment by reason of the omission or failure on the part of the assessee--

(a) to make a return u/s 139 for the assessment year to the Income Tax Officer, or

(b) to disclose fully and truly material facts necessary for his assess ment for that year. Both these conditions must co-exist in order to confer

jurisdiction on the Income Tax Officer. It is also imperative for the Income- tax Officer to record his reasons before initiating proceedings as

required by Section 148(2). Another requirement is that before notice is issued after the expiry of four years from the end of the relevant

assessment years, the Commissioner should be satisfied on the reasons recorded by the income tax Officer that it is a fit case for the issue of such

notice. We may add 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 Income Tax Officer of the account books or other evidence from which material evidence could with due

diligence have been discovered by the Income Tax Officer will not necessarily amount to disclo sure contemplated by law. The duty of the

assessee in any case does not extend beyond making a true and full disclosure of primary facts. Once he has done that his duty ends. It is for the

Income Tax Officer to draw the correct inference from the primary facts, It is no responsibility of the assessee to advise the Income Tax Officer

with regard to the inference which he should draw from the primary facts. If an Income Tax Officer draws an inference which appears

subsequently to be erroneous, mere change of opinion with regard to that inference would not justify initiation of action for reopening assessment.

That mere change of opinion is not sufficient to confer jurisdiction on the Income Tax Officer to reopen an assessment is so well settled that the

Supreme Court in Commissioner of Income Tax, West Bengal II Vs. Dinesh Chandra H. Shah and Others, stated:

It is well settled by now, and Mr. Desai quite rightly does not dispute the proposition, that mere change of opinion could not be a valid ground for

reopening the assessment u/s 34(1)(b) of the Act.

It is unnecessary to multiply authorities in this behalf in view of the legal position being so well settled and not being controverted before us.

However, it would appear that an argument was advanced on behalf of the revenue before the Tribunal for the first time that the information

which the Income Tax Officer had for reopening the assessment was not internal from the records, but external in the form of an audit note which

he received. The order of the Tribunal states :

The learned departmental representative has pointed out that an objection or observation dated October 22, 1964, was received by the Income

Tax Officer from the revenue audit department that in the case of the assesses, among other cases, development rebate could not be allowed on

the cost of acquisition of conversion materials as these items did not constitute new plant and machinery'' and were mainly parts thereof or

accessories thereto. The note specifically referred to the decision of the Supreme Court in the case of COMMISSIONER OF Income Tax,

MADRAS Vs. MIR MOHAMMAD ALI. ARUNA MILLS LTD. : INTERVENER., with regard to the deduction for additional depreciation

''and suggested that it would not be applicable in the present case where the question is deduction for ''development rebate''. It was suggested in

the note that'' the withdrawal of the development rebate in the instant cases may kindly be considered ''.

The argument of Sri Cherian (representative for the revenue) is that the receipt of the note and the ideas contained therein is the ''information''

which justify (sic) the reopening of the assessment u/s 147(b). He has supplied us with a copy of the audit objection dated October 22, 1964, and

has also shown us the notes recorded by the Income Tax Officers on March 24, 1966, in respect of the assessment year 1961-62 and on

September 1, 1966, for the assessment years 1962-63 and 1963-64 whil''e directing the issue of a notice u/s 148.

The Tribunal further points out :

Now though it is true that the receipt of the audit objection has not been referred to at any earlier stage, the fact remains that there was such an

objection and that the Income Tax Officer decided to reopen the assessments only at that stage.

Though the Tribunal does not record.a specific finding that it is the receipt of the audit note which constituted the ''information'' contemplated

by Section 147(b) of the 1961 Act, still the way in which the Tribunal has referred to the submissions made on behalf of the revenue would appear

to indicate that it had accepted that contention. However, we are unable to hold that any such information constituted the motivation for issuing the

notice u/s 148 of the 1961 Act. In the first place, neither the audit note nor the reasons recorded by the Income Tax Officers on the respective

dates referred to already were placed before the court and, therefore, this court has no opportunity to test the validity of the argument with

reference to the contents of the note as well as the reasons recorded by the Income Tax Officers. Secondly, if the department or the Tribunal relied

upon this audit note, it was totally unnecessary to rely upon the decision of this court in Salem Provident Fund Society Ltd. Vs. Commissioner of

Income Tax, Madras, in support of the action taken by the Income Tax Officer. Thirdly, even the said audit objection could not have constituted a

ground to make the Income Tax Officer entertain a belief that the income had escaped assessment. We shall now explain our reasons for taking

this view.

We have already extracted the portion of the order of the Tribunal dealing with the submission, made on behalf of the revenue which referred

to the audit note. That audit note itself in its turn is stated to have specifically referred to the decision of the Supreme Court in COMMISSIONER

OF Income Tax, MADRAS Vs. MIR MOHAMMAD ALI. ARUNA MILLS LTD. : INTERVENER., . While referring to that case the audit

note itself would appear to have pointed out that that decision would not be applicable to the present case because that decision dealt with

additional depreciation and the present case dealt with development rebate and that notwithstanding that the audit note would appear to have

suggested that the withdrawal of the development rebate in the instant case might kindly be considered. We are of the opinion that the reference to

the decision of the Supreme Court in COMMISSIONER OF Income Tax, MADRAS Vs. MIR MOHAMMAD ALI. ARUNA MILLS LTD. :

INTERVENER., cannot constitute any information whatever for entertainment of a belief on the part of the Income Tax Officer that income had

escaped assessment in the present case. COMMISSIONER OF Income Tax, MADRAS Vs. MIR MOHAMMAD ALI. ARUNA MILLS LTD.

: INTERVENER., dealt with eligibility for additional depreciation allowance u/s 10(2)(via) of the 1922 Act, where a petrol engine of a bus was

replaced by a diesel engine. The question for consideration in that case was, whether the replacement of the petrol engine by a diesel engine could

be said to be installation of a machinery as contemplated by Section 10(2)(via) of the 1922 Act. In that context, the Supreme Court referred to the

provisions contained in Section 10(2)(iv), (v), (vi) and (via) and observed (page 170) :

It is then pertinent to point out that the word ''machinery'' occurs in Clauses (iv), (v), (vi) and (via) of Section 10(2). Prima facie the same meaning

must be given to the word ''''machinery'' in all these clauses. If a machine is machinery for purposes of giving an allowance in respect of insurance

or for repairs or in respect of normal depreciation or for the purpose of paragraph one of Clause (vi), it must also be machinery for the purpose of

the second paragraph of Clause (vi) and Clause (via).

Thus, in that case what was held was that the cost of a diesel engine which replaced the petrol engine was entitled to additional depreciation

allowance under the provisions of Section 10(2)(via) of the 1922 Act. What relevance that decision can ever have to the case of withdrawal of

development rebate already granted passes one''s comprehension. If that decision can have any relevance at all, it can be only in the form of

justification of the grant of development rebate already allowed. As a matter of fact, the Supreme Court in a subsequent decision in Commissioner

of Income Tax, Madras Vs. Raju and Mannar, simply followed the decision in COMMISSIONER OF Income Tax, MADRAS Vs. MIR

MOHAMMAD ALI. ARUNA MILLS LTD. : INTERVENER., in relation to the claim for development rebate allowed u/s 10(2)(vib) of the

1922 Act. Therefore, we are unable to hold that the reference in the audit note to the decision of the Supreme Court in COMMISSIONER OF

Income Tax, MADRAS Vs. MIR MOHAMMAD ALI. ARUNA MILLS LTD. : INTERVENER., could ever have constituted ""information"" as

contemplated by Section 147(b) of the 1961 Act. Lastly, if that was the information on which the Income Tax Officer acted, nothing prevented him

from referring to the same in his assessment order for rejecting the contention of the assessee that there was no new information or ground and that

there was only a change of opinion. As a matter of fact, even before the Appellate Assistant Commissioner this audit report was not put forward as

the information which enabled the Income Tax Officer to take action u/s 147(b) of the 1961 Act. All these things make it absolutely clear that the

Income Tax Officer did not act on the basis of any information which came into his possession subsequent to the original assessment either from

outside or from the records themselves, but acted solely on the basis of his change of opinion brought about by having a second look on the very

same materials and facts.

Mr. A.N. Rangaswami, learned counsel for the revenue, very strongly relied on certain observations of the Supreme Court contained in

Kalyanji Mavji & Co. v. Commissioner of Income Tax [1916] 102 ITR 287. This judgment elaborately referred to the provisions of Section 34 of

the 1922 Act and the decisions of the High Courts as well as the Supreme Court having a bearing thereon.

The Supreme Court observed :

An analysis of this case, Commissioner of Income Tax, Gujarat Vs. A. Raman and Company, would clearly show that the information as

contained in Section 34(1)(b) must fulfil the following conditions :

(1) the information may be derived from an external source concerning facts or particulars as to law relating to a matter beating on the assessment;

(2) that the information must come after the previous or the original assessment was made. In fact, the words ''in consequence of information'' as

used in Section 34(1)(b) clearly postulate that the information must be subsequent to the original assessment sought to be reopened ; and

(3) that the information may be obtained even on the basis of the record of the previous assessment from an investigation of the materials on the

record, or the facts disclosed thereby or from other enquiry or research into facts or law.

These categories are in addition to the categories laid down by this court in Maharaj Kumar Kamal Singh Vs. The Commissioner of Income Tax,

Bihar and Orissa, , which has been consistently followed in several decisions of this court as shown above.

On a combined review of the decisions of this court the following tests and principles would apply to determine the applicability of Section 34(1)

(b) to the following categories of cases :

(1) where the information is as to the true and correct state of the law derived from relevant judicial decisions ;

(2) where in the original assessment the income liable to tax has escaped assessment due to oversight, inadvertence or a mistake committed by the

Income Tax Officer. This is obviously based on the principle that the taxpayer would not be allowed to take advantage of an oversight or mistake

committed by the taxing authority;

(3) where the information is derived from an external source of any kind. Such external source would include discovery of new and important

matters or knowledge of fresh facts which were not present at the time of the original assessment.

(4) where the information may be obtained even from the record of the original assessment from an investigation of the materials on the record, or

the facts disclosed thereby or from other enquiry or research into facts or law.

If these conditions are satisfied then the Income Tax Officer would have complete jurisdiction to reopen the original assessment. It is obvious that

where the Income Tax Officer gets no subsequent information, but merely proceeds to reopen the original assessment without any fresh facts or

materials or without any enquiry into the materials which form part of the original assessment, Section 34(1)(b) would have no application.

(Underlining* is ours).

We are unable to hold that this decision is of any assistance to the revenue, having regard to the facts of this case. As a matter of fact, the last

sentence in the above extract which we have underlined will clearly apply to the facts of the present case and thereby deny the jurisdiction of the

Income Tax Officer to proceed u/s 147(b) of the 1961 Act corresponding to Section 34(1)(b) of the 1922 Act.

As a matter of fact in Commissioner of Income Tax, Bombay City-II Vs. H. Holck Larsen, , Chandrachud J., as he then was, speaking, on behalf

of the Bombay High Court, expressed as follows :

What is obligatory in order to apply Section 34(1)(b) is that he must have ''information'' in his possession in consequence of which he has reason

to believe that the income has escaped assessment or is under-assessed, etc. The distinction really consists in a change of opinion unsupported by

subsequent information on the one hand and a change of opinion based on information subsequently obtained, on the other. In the former class of

cases, the assessment proceedings are attempted to be reopened without the discovery of an error and without receiving any information as to fact

or law. The Income Tax Officer, has a fresh look at the earlier assessment order and he decides to adopt a different approach to the matter. Such

a reopening is based on a ''mere'' change of opinion and is without jurisdiction. The Income Tax Officer cannot reopen an assessment at his ''

sweet will and pleasure ''. In the latter class of cases, the reopening is based on information leading to the requisite belief and is, therefore, within

the jurisdiction of the officer.

It is this passage which has been extracted by the Supreme Court in (1976) 102 ITR 287 (SC) with which the Supreme Court stated that it

was, inclined to agree.

Under these circumstances we are clearly of the opinion that in this case the conditions precedent for the assumption of jurisdiction u/s 147(b)

of the 1961 Act on the part of the Income Tax Officer were not satisfied and that, therefore, the reassessment proceedings were illegal.

This conclusion of ours will be sufficient to dispose of this reference. However, questions have been referred on the merits of the case, namely,

in respect of the machinery involved in this case whether the development rebate was allowable or not. For this purpose, reliance was placed on a

decision of this court in Commissioner of Income Tax, Madras Vs. Mahalakshmi Textile Mills Ltd., as affirmed by the Supreme Court in

Commissioner of Income Tax, Madras Vs. Mahalakshmi Textile Mills Ltd., . In that case, in respect of certain machinery purchased for the

purpose of installing what is called casablanca conversion system, the assessee was claiming before the Income Tax Officer as well as the

Appellate Assistant Commissioner that it was entitled to development rebate. But when that claim was rejected and when the matter was before

the Tribunal, the assessee in the alternative claimed that the entire expenses constituted revenue expenditure and that, therefore, the whole of it

would have to be allowed. The Tribunal found as a fact that the expenditure was only revenue in nature and, therefore, the whole of it had to be

allowed. When the matter was taken up on reference to this court, this court held that there were materials before the Tribunal for coming to the

conclusion that the expenditure was only revenue in nature. When the matter was taken up further to the Supreme Court, the Supreme Court

affirmed the decision of this court by observing--See Commissioner of Income Tax, Madras Vs. Mahalakshmi Textile Mills Ltd.,

The High Court accepted the finding recorded by the Tribunal that by the introduction of the casablanca conversion system no new machinery or

plant was installed but the introduction of the system amounted '' to fitting of improved versions of certain minor parts'' and expenditure in that

behalf was of revenue nature. The High Court also held that the Tribunal had jurisdiction to permit the assessee to raise a new contention which

was not raised before the departmental authorities. The Commissioner has appealed to this court, with special leave.

The Tribunal had evidence before it from which it could be concluded that by introducing the casablanca conversion system the assessee made

current repairs to the machinery and plant. The High Court observed that certain moving parts of the machinery had because of ''wear and tear'' to

he periodically replaced, and when it was found that the old type of replacement parts were not available in the market, the assessee introduced

the casablanca conversion system, but thereby there was merely replacement of certain parts which were a modified version of the older parts.

Counsel for the Commissioner has not challenged these findings and the answer to the second question recorded in the affirmative by the High

Court, must be accepted.

As far as that case was concerned, the members of the Tribunal inspected the working of the machinery and they had before them the literature

of the manufacturer as to the nature of the machinery which they were producing and the purposes for which the assessee acquired the same. It is

with reference to these facts only that this court observed in Commissioner of Income Tax, Madras Vs. Mahalakshmi Textile Mills Ltd., :

The Tribunal pointed out that the only substantial difference between this system and the old system was that the roller stands in the new system

were placed at a slight inclination with the additional use of a leather apron attached to the roller stands. The claim to increased efficiency was no

doubt put forward by the manufactures. But the Tribunal pointed out that even assuming that there was some improvement in the component parts

and the improvement of these parts was boosted by the manufacturers, it did not necessarily follow that any enduring advantage or a new asset had

been brought into existence. The need for going in for these casablanca parts arose, for the old parts were no longer available. That statement was

accepted by the Tribunal and was not contradicted by the department. The result was that only the original asset was held to have been preserved

and maintained. As we said, on a question of fact, the Tribunal found that the fitting of these minor parts had no effect upon the machinery as a

whole. In a reference u/s 66 of the Act, we are bound by this decision on a question of fact.

Thus, it is clear that neither this court nor the Supreme Court had occasion to pronounce any opinion on the nature of the machinery involved in

that case. All that they pointed out was that the Tribunal as a fact found that no enduring asset was brought into existence and that what actually

happened was that the old asset was maintained and preserved by the replacement of certain minor parts. We are of the opinion that that decision

itself cannot be said to be an authority for holding that the machinery involved in the present case did not come within the scope of Section 10(2)

(vib) of the 1922 Act or Section 147(b) of the 1961 Act. If the Income Tax Officer wanted to reassess the assessee, he must find as a fact that the

machinery in the present case did not satisfy the requirement of Section 10(2)(vib) of the 1922 Act or Section 147(b) of the 1961 Act and cannot

merely rely upon the decision of this court in Commissioner of Income Tax, Madras Vs. Mahalakshmi Textile Mills Ltd., and that of the Supreme

Court in Commissioner of Income Tax, Madras Vs. Mahalakshmi Textile Mills Ltd., as if those decisions laid down any general principle of law

applicable to all conversion materials in respect of casablanca conversion system. As a matter of fact, there appears to be one basic difference in

this behalf. The decision in the case of Commissioner of Income Tax, Madras Vs. Mahalakshmi Textile Mills Ltd., , referred to above, was

concerned only with the materials acquired and installed in one year, while, in the present case, as we have pointed out already, the conversion in

question had been going on for a period of four years, namely, from 1960-61 to 1963-64. Under such circumstances, in the absence of a definite

and clear finding by the Tribunal that the machinery installed during the course of the year relevant to these assessment years did not satisfy the

requirements of Section 10(2)(vib) of the 1922 Act or Section 147(b) of the 1961 Act, as the case may be, it cannot be held that there was any

escapement of income from tax.

As a matter of fact, we have asked the learned counsel for the revenue to draw our attention to any portion of the order of the Tribunal where

it is held that the machinery in the present case did not satisfy the requirements of Section 10(2)(vib) of the 1922 Act or Section 147(b) of the

1961 Act, as the case may be, and all that the learned counsel did was to invite our attention to the following sentence occurring towards the end

of paragraph 20 of the order of the Tribunal :

We hold that the facts of the case so far as conversion materials are concerned for the three years under appeal are the same as the facts of the

case of Mahalakshmi Mills Ltd, decided in turn by the Madras High Court Commissioner of Income Tax, Madras Vs. Mahalakshmi Textile Mills

Ltd., and Supreme Court Commissioner of Income Tax, Madras Vs. Mahalakshmi Textile Mills Ltd., .

On the face of it, such a statement cannot be correct. We have already pointed out that Commissioner of Income Tax, Madras Vs.

Mahalakshmi Textile Mills Ltd., was decided with reference to a personal inspection by the members of the Tribunal as to the working of the mills

as well as the reports obtained with regard to the nature, character and function of the machinery in question. No such enquiry whatever has been

made in the present case. In addition, in Commissioner of Income Tax, Madras Vs. Mahalakshmi Textile Mills Ltd., the judgment of the Supreme

Court itself refers to the actual materials involved therein and the Supreme Court pointed out in Commissioner of Income Tax, Madras Vs.

Mahalakshmi Textile Mills Ltd., .

Substantially, this (casablanca conversion system) involved replacement of certain roller stands and fluted rollers fitted with rubber aprons to the

spinning machinery, removal of ring-frames from certain existing parts, introduction, inter alia, of ball-bearing jockey-pulleys for converting the

original band-drivers to tape-drivers and other additions and alterations in the drafting mechanism.

In this case, the Income Tax Officer has given particulars of the machinery relevant to the three assessment years in question in his orders dated

December 30, 1966, and December 31, 1966, annexed as annexures A-1 to A-3 to the statement of the case before this court. It is admitted that

a comparison of these items showed that they did not actually tally with the items enumerated in the judgment of the Supreme Court referred to

above. Therefore, we are of the opinion that the conclusion of the Tribunal extracted above in relation to the facts of the present case being the

same as those of Commissioner of Income Tax, Madras Vs. Mahalakshmi Textile Mills Ltd., is not supported by any material on record.

Mr. A.N. Rangaswami, learned counsel for the revenue, contended that both the parties proceeded before the Tribunal that the facts in relation

to all the four assessment years were common, that in respect of the earliest assessment year, namely, 1960-61, the matter was settled on the basis

of Commissioner of Income Tax, Madras Vs. Mahalakshmi Textile Mills Ltd., and that, therefore, it must be held that with regard to the other

three years also the facts are the same. We are unable to accept this argument. We have already referred to the fact that the appeal before the

Tribunal in respect of the assessment year 1960-61 was disposed of on the basis of a concession made by the department. Simply because the

assessee accepted that concession and on that basis consented to the said appeal being disposed of, it does not follow that with regard to the other

three years also the assessee either admitted or stated that the facts were the same as those involved in Commissioner of Income Tax, Madras Vs.

Mahalakshmi Textile Mills Ltd., .

In the alternative, Mr. A.N. Rangaswami requested this court to remit the matter to the Tribunal for recording such a finding. We are unable to

accede to any such request for more than one reason. In the first place, once we have held that the Income Tax Officer had no jurisdiction to

reopen the assessment at all, it is not necessary to call upon the Tribunal to probe into the matter further. Secondly, this is a reference at the

instance of the assessee and, therefore, the assessee is entitled to point out the failure on the part of the Tribunal to record a finding on a vital

matter arid argue on that basis that the final conclusion of the Tribunal could not be sustained and in such a situation certainly we shall not be

justified in acceding to the request of the department to give a fresh opportunity to the department to place further materials before the Tribunal to

enable it to arrive at a conclusion on a question of fact. Therefore, we are of the opinion that the Tribunal had no material to find that the

development rebate disallowed in supplementary assessment proceedings was in respect of casablanca conversion materials covered by the

decision in the Commissioner of Income Tax, Madras Vs. Mahalakshmi Textile Mills Ltd., , referred to already.

Under these circumstances, we answer the first question, namely, ""whether, on the facts and in the circumstances of the case, the initiation of

proceedings u/s 147(b) and the assessments in each of the assessment years 1961-62 to (963-64 is justified in law ?"" in the negative and in favour

of the assessee. We answer the second question, namely, ""whether, on the facts and in the circumstances of the case, the Tribunal was justified in

law in taking notice of a reason for reopening the assessment u/s 147(b) when that reason had not been referred to by the Income Tax Officer and

the Appellate Assistant Commissioner ?"" again in the negative and in favour of the assessee. As regards the third question, namely, ""whether, on

the facts and in the circumstances of the case, there was any material to support the finding of the Tribunal that the development rebate disallowed

in the supplementary assessment proceedings was in respect of ""casablanca conversion materials?"", we answer the same again in the negative and

in favour of the assessee. Our answer to question No. 3 will govern question No. 4 also and, therefore, we answer the fourth question also in the

negative and in favour of the assessee. In view of our answers to questions Nos. 1 to 4, it is unnecessary to answer the fifth question which has

arisen only on the basis of an alternative argument. The reference is answered accordingly. The assessee will be entitled to its costs of this

reference. Counsel''s fee fixed at Rs. 500 (Rs. Five hundred only).