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TMI Blog1981 (9) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... ture were claimed. The ITO did not agree with this computation of income as he felt that a claim both for repairs and depreciation was not justified. Since a composite sum of Rs. 3,75,000 bad been paid for the building, machinery and furniture of the cinema he allocated Rs. 3,40,200, Rs. 15,000 and Rs. 20,000 towards the value of the building, machinery and furniture, respectively. As the rental recovery was, again, a composite sum of Rs. 3,000 per month totalling Rs. 36,000 per year, he apportioned this income allocating Rs. 24,600 towards rent of the building and Rs. 11,400 as hire charges of the machinery and furniture. From the rental income of the building he allowed deductions for repairs and other charges such as interest, thereby arriving at a net income of Rs. 6,786 on this score. With regard to the sums received as hire charges for machinery and furniture he permitted deduction for depreciation, resulting in this income being computed at Rs. 7,200. The assessee accepted this basis of allocation of property income and other sources for all the subsequent years including the assessment years under consideration and filed his returns accordingly. The ITO completed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the date of the original assessment orders 4. Since the lease deed provided for the lease of the cinema building as also the machinery and furniture, the income from the letting of the building had to be assessed under the head " Property " and as such no provision could be made for the allowance of depreciation on the building which had been illegally granted by the ITO; 5. there being no mention in the lease agreement with regard to the hiring out of the machinery and furniture, the ITO erred in coming to the conclusion that the building, machinery and furniture were let out together and inseparably ; 6. the bifurcation made by the ITO for the assessment year 1950-51 which was the basis for the allocation was without material and erroneous ; 7. that the question whether the income should be assessed under the head " Property " or under the head " Other sources " was debatable and not a matter for rectification, especially as the assessee had all along returned the income from the building under the head " Property " ; and 8. in any case, the depreciation could only be allowed if certain prescribed particulars had been furnished, which provisions apparently had no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibed, and the Commissioner of Income-tax was not justified in cancelling them under section 263 on the ground of limitation. (2) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in vacating the orders passed by the Commissioner of Income-tax under section 263 of the Income-tax Act, 1961, on the ground that the orders passed by the Income-tax Officer were not erroneous or prejudicial to the interests of the Revenue ?" After the draft statement had been circulated the departmental representative submitted by a letter dated March 4, 1972, that the following two questions had been omitted by inadvertence: " 3. Whether the Tribunal was correct in law in holding that in computing income from house property the allowance for repairs has to be given irrespective of whether the owner in this case, the assessee or the tenant, bears the burden of repairs despite the provisions of section 9(1)(ii) of the old Act or section 24(1)(i)(b) of the new Act ? 4. Whether the Tribunal was correct in law in holding that with the making of reassessment, the original assessment order ceased to operate ?" The Tribunal, however, clarified that questio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... composite letting of a building, machinery and furniture for the purpose of running a cinema. The facts appear to be on all fours. The Supreme Court held in that case that when a building, plant and machinery or furniture are inseparably let, the Act contemplates that the rent from the building be assessed under the residuary head of income. Further, all that s. 12(4) of the 1922 Act requires is that since the letting of plant and machinery or furniture should be inseparable from the letting of the building, what is pertinent is the intention of the parties and not whether the building was the primary or subsidiary letting. Of the other three contentions referred to above, the third will answer itself, once an answer to the first two is found. Learned counsel for the assessee attempted to meet the principal point of limitation raised by the Revenue by contending that, once there is a reassessment under s. 147 in any case, the original assessment no longer holds the field and that any rectification thereafter sought to be made can only be to the order of reassessment. He first tried to support this contention by extending, to the content of reassessments, a doctrine of merger, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted from March 21, 1963, when the initial assessment orders were made, or from June 8, 1966, when the orders under section 12A of the Act were made. So far as this question is concerned, we are of the opinion that the period of four years should be calculated from June 8, 1966, i.e., the date on which orders under section 12A of the Act were made. The reason for that is that once an assessment is reopened, the initial order for assessment ceases to be operative. The effect of reopening the assessment is to vacate or set aside the initial order for assessment and to substitute in its place the order made on reassessment. The initial order for reassessment cannot be said to survive, even partially, although the justification for reassessment arises because of turnover escaping assessment in a limited field or only with respect to a part of the matter covered by the initial assessment order. The result of reopening the assessment is that a fresh order for reassessment would have to be made including for those matters in respect of which there is no allegation of the turnover escaping assessment. " In coming to the above conclusion the Supreme Court relied, inter alia, upon its earlier ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of that order, would not only be out of time but also patently incorrect. Since it is very elementary that property assessed under s. 9 is not and cannot be entitled to depreciation it is obvious that it could not have been the intention of the ITO to rectify that order. Indeed, there can be no doubt that the rectification would not have been attempted at all but for the modifications introduced in the original assessments by the orders of reassessment. What the officer is really seeking to do is only to rectify a mistake allegedly made at the time of the reassessments, viz., withdrawing the deduction for repairs but omitting to grant depreciation : it was this that was pointed out by the audit objection and all that we have to see, therefore, is whether there is any mistake in the orders of reassessment and whether the impugned action is justified vis-a-vis those orders of reassessment. It is, therefore, crystal clear that the rectification is not of the original assessment orders but only of the orders of reassessment and that the point of limitation raised by the Department cannot be upheld. Turning now to the reassessment orders, the Department's suggestion is that the action ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld not be withdrawn. Indeed, the audit objection, on the basis of which the Income-tax Officer proceeded to rectify these assessments, pointed out that the income from this cinema hall should be assessed under the head Other sources . The assessee is also under the same misapprehension and no one had referred to the correct section, but we have to see what in law is the correct position and the authority must be traced to that section which authorises the course adopted by the Income-tax Officer and not to the section which renders it nugatory. Once we reach this conclusion it becomes clear that the error committed by the Income-tax Officer was traceable to the reassessments under section 147 and not to the original assessments ...... .." It is seen from this paragraph that, before the Tribunal, it was conceded for the Revenue that the withdrawal of the allowance for repairs was consistent only with the treatment of the income as assessable under the head " Other sources " and that it is on this basis that the officer proceeded under s. 147 even though he did not also, while doing so, change the head of assessment from " property " to " other sources " as he should have done. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even the income from the building has to be processed only under ss. 56 and 57. The fact that the notices under s. 147 were formally issued and the reassessment acquiesced in by the assessee also clearly show that both the assessee and the Department proceeded only on this footing. Had the idea that the income was assessable under the head " Property " persisted, the assessee would in all probability have resisted action under s. 147 ; it seems a fair inference to say that the assessee did not protest because there was really no doubt that the income was being processed under ss. 56 and 57 and the decision in Sultan Brothers P. Ltd left no room at all for the assessee to protest. It is also seen from the passage from the Tribunal's order that we have extracted earlier, that the audit objection also proceeded on the same understanding of the earlier orders. We could perhaps bring out the purport of the audit note very clearly, if we attempt to portray it in the form of an oral instruction given by the internal auditor to the ITO. It must have gone thus: " You no doubt computed the income under the head.'Property' originally. Subsequently, however, on the strength of Sultan Brother ..... X X X X Extracts X X X X X X X X Extracts X X X X
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