1973 (12) TMI 8 - HC - Income Tax

Excess depreciation was allowed due to non-disclosure by assessee of initial depreciation - income chargeable to tax escaping assessment - Whether it can be said that there is under-assessment due to default of the assessee - petitioners challenge these notices under section 148 of the Act of 1961 seeking to re-open assessments under section 147.

Issues Involved:
1. Validity of notices issued under Section 148 of the Income-tax Act, 1961.
2. Excessive depreciation allowance.
3. Balancing charge under Section 41(2) of the Income-tax Act, 1961.
4. Failure to disclose material facts.

Issue-wise Detailed Analysis:

1. Validity of Notices Issued Under Section 148 of the Income-tax Act, 1961:
The petitioners challenged the notices issued under Section 148 by the Income-tax Officer (ITO) for assessment years 1962-63 to 1965-66. The court examined whether the conditions precedent for the exercise of jurisdiction under Section 147(a) existed. It was determined that the ITO must have "reason to believe" that income had escaped assessment due to the taxpayer's omission or failure to disclose fully and truly all material facts necessary for the assessment. The court found that the ITO had not followed the prescribed method to ascertain the written down value for depreciation, which contributed to the alleged escape of income. Thus, the court concluded that the conditions for invoking Section 147(a) were not met, and the notices were quashed.

2. Excessive Depreciation Allowance:
The ITO claimed that the petitioner had been granted excessive depreciation allowance for the years in question. The petitioners argued that they had disclosed all necessary particulars for the grant of depreciation allowance. The court noted that the ITO had failed to consider the initial depreciation allowed in previous years, which led to the excessive depreciation allowance. The court emphasized that it was the ITO's duty to ensure that the aggregate of all depreciation allowances did not exceed the original cost of the assets. The failure to do so was partly due to the ITO's dereliction of duty.

3. Balancing Charge Under Section 41(2) of the Income-tax Act, 1961:
The ITO also sought to reopen assessments on the grounds that certain capital gains arising from the transfer of assets had not been fully assessed. The court explained the provisions of Section 41(2), which deals with the balancing charge when the sale proceeds of depreciable assets exceed their written down value. The court found that the ITO had followed a practice of including only half of the sale proceeds as profit under Section 41(2), which was later changed. The court held that the change in practice did not constitute a failure on the part of the petitioners to disclose material facts.

4. Failure to Disclose Material Facts:
The court examined whether the petitioners had failed to disclose fully and truly all material facts necessary for their assessment. It was found that the petitioners had not disclosed the initial depreciation allowed in previous years, which was a material fact. However, the court also noted that the ITO had not performed his duty of verifying the aggregate depreciation allowances. The court concluded that the income had not escaped assessment solely due to the petitioners' omission but also due to the ITO's failure to follow the prescribed method for calculating depreciation.

Conclusion:
The court allowed the petitions and quashed the notices issued under Section 148. The court held that the conditions precedent for invoking Section 147(a) were not satisfied, as the escape of income was not solely due to the petitioners' failure to disclose material facts but also due to the ITO's failure to perform his duty. The respondents were ordered to pay the costs of the petitioners.

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