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Judgment
M.L. Pendse, J.—The petitioner is a public limited company governed by the Companies Act, 1956, and engaged in the business of manufacture of and dealing in cotton yarn and cloth, rayon, tyrecord, cement, chemicals, etc. The petitioner has been manufacturing rayon and tyrecord at its plants under one of its divisions known as Century Rayon. The said plants were set up in terms of the industrial licences granted to the petitioner by the Union of India under the provisions of the Industries (Development and Regulation) Act, 1951 (''the Industries Act''). The petitioner had applied to the Central Government for grant of an industrial licence under the Industries Act for setting up a plant for the manufacture of 1.6 million lbs. of nylon/perlon per annum. The Central Government, in exercise of the powers conferred by rule 15(2) of the Registration and Licencing of Industrial Undertaking Rules, 1952, granted a conditional industrial licence dated 12-2-1960 to the petitioner to effect substantial expansion of its undertaking. The petitioner did not pay any consideration for acquisition of such licence. The petitioner, being unable to fulfil the onerous conditions attached to the said licence, decided not to implement it and, thus, the licence stood surrendered to and revoked by the Central; Government. The Central Government, there upon, decided to issue similar conditional industrial licence for the manufacture of nylon; yarn to Century Enka Ltd., a newly formed public limited company and instead of drawing up and preparing a fresh letter of licence, the Government availed of the letter of licence originally issued to the petitioner and issued, the same to Century Enka Ltd. by making an endorsement dated 4-8-1966 to the following effect:
Ministry of Industry.
The name of the undertaking has been changed from M/s Century Spinning & Manufacturing Co. Ltd., Bombay, to M/s Century Enka Ltd.
Sd/-V. Prakash Under Secretary to the Government of India 4-8-1966 Seal of the Ministry.
The petitioner had not applied for any permission for effecting the transfer of the licence to Century Enka Ltd. nor had executed any instrument of transfer in this regard. The petitioner received no consideration whatsoever either from the Government or Century Enka Limited in respect of surrender of the licence or subsequent transfer of Century Enka Limited after endorsement. The petitioner claims that it has secured no income or gain in respect of the allotment of licence to Century Enka Ltd. The petitioner filed its return of income for the relevant assessment year 1967-68 on 15-12-1967 showing the total income of Rs. 7,07,79,465. At the stage of the regular assessment, the petitioner had disclosed all the primary and material facts relating to the assessment for the said assessment year. By an order of assessment, dated 30-11-1971, u/s 143(3) of the income tax Act, 1961 (''the Act'') the regular assessment of the petitioner was calculated and the total income was determined at Rs. 7,41,30,864. The total income was reduced in an appeal preferred by the petitioner but it is not necessary to make any reference to those proceedings.
The respondent No. 1, the ITO, issued notice dated 26-2-1975 u/s 148 of the Act for reopening the assessment of the petitioner for the relevant assessment year u/s 147(a) of the Act. The respondent No. 1 stated in the notice that there is reason to believe that the petitioner''s income chargeable to tax at the relevant assessment year, i.e., 1967-68, had escaped assessment, and, there fore, respondent No. 1 proposes to reassess the income for the relevant assessment year and called upon the petitioner to deliver a fresh return of income within 30 days of the date of the service of the notice. The petitioner, by their reply dated 22-4-1975, challenged the action of respondent No. 1 to reopen the assessment and claimed that the show-cause notice was void ab initio, bad in law and without jurisdiction and there was no omission or failure on the part of the petitioner to disclose fully and truly all material facts necessary for the assessment for the concerned assessment year. The petitioner, without prejudice and without admitting the legality of the notice, submitted fresh return of income. The fresh return as well as the original return did not disclose any income under the head ''Capital gains'' because, according to the petitioner, no income was assessable under the head of income. Almost after the expiry of one and half years from the date of the reply, the respondent No. 1 by letter dated 19-10-1976 called upon the petitioner to explain why the provisions of section 52(2) of the Act should not be applied in the petitioner''s assessment for the relevant assessment year for the transfer of the industrial licence dated February 1960 to Century Enka Ltd. in August 1966. The petitioner sent its reply but the respondent No. 1 by order dated 12-3-1979 made u/s 143(3), read with sections 144B and 147(a) of the Act, negatived the petitioner''s contention and proposed to make an addition of Rs. 1,55,90,000 in the petitioner''s total income. The order was served on the petitioner on 22-3-1979 and the petitioner thereafter lodged its objections. There upon respondent No. 1 forwarded the order along with the objections to the respondent No. 2, the IAC, as required by section 144B(4). The petitioner was served with notice for hearing before respondent No. 2, and though the petitioner appeared through a representative, it became clear to the petitioner that respondent No. 2 was inclined not to interfere with the order of respondent No. 1. Thereupon, the petitioner filed the present petition under article 226 of the Constitution of India in this Court on 20-7-1979.
Shri Mehta, the learned counsel appearing in support of the petition, challenged the jurisdiction of the respondent No. 1 to initiate reassessment proceedings u/s 147(a) and urged that the necessary condition precedent for the assumption of such jurisdiction and the issue of notice did not exist. The learned counsel further urged that the respondents have failed to establish that the provisions of section 52(2) have been validly attracted. The submission of the learned counsel is correct and deserves acceptance. The order, dated 12-3-1979, passed by the respondent No. 1 recites that the industrial licence was transferred by the petitioner in favour of Century Enka Ltd. in August 1966 and the licence is clearly an asset in terms of section 2(4) of the Act. The respondent No. 1 has observed that the company has spent money and effort in acquiring it and the transfer of the licence took place without any consideration. The respondent No. 1 held that since the assessee received nil consideration for the transfer of this industrial licence in spite of the market value of the said licence being substantial on the date of transfer, the provisions of section 52(2) are clearly attracted. The respondent No. 1 assessed the value of the licence at Rs. 1,55,90,000 and applying the provisions of section 52(2), recomputed the total income of the assessee after including the capital gains as Rs. 8,90,35,540. Shri Mehta is right in his submission that the petitioner had not transferred the licence in favour of Century Enka Ltd. but had surrendered the same to the Government and the endorsement on the licence clearly indicates that it was not the transaction of transfer from the petitioner to the Century Enka Ltd. and, therefore, the provisions of section 52(2) are not attracted. Shri Mehta is also right in his submission that the escapement of income, if at all, has not occurred by reason of any omission or failure on the part of the petitioner to disclose fully and truly all material and primary facts necessary for the assessment.
The reliance by Shri Mehta on the decision of the Supreme Court in the case of K.P. Varghese Vs. Income Tax Officer, Ernakulam and Another, in this connection is very appropriate. The Supreme Court observed:
Sub-section (2) of section 52 of the income tax Act, 1961, can be invoked only where the consideration for the transfer of a capital asset has been understated by the assessee, or, in other words, the full value of the consideration in respect of the transfer is shown at a lesser figure than that actually received by the assessee, and the burden of proving such understatement or concealment is on the revenue. The subsection has no application in the case of an honest and bona fide transaction where the consideration received by the assessee has been correctly declared or disclosed by him." (p. 597)
It was further observed:
It is, therefore, clear that sub-section (2) cannot be invoked by the revenue unless there is understatement of the consideration in respect of the transfer and the burden of showing that there is such understatement is on the revenue..." (p. 616)
It is obvious from the decision of the Supreme Court that to attract sub-section (2) of section 52, firstly, there must be a transfer of capital asset and secondly, the consideration for such transfer must be understated by the assessee. In my judgment, both these conditions are absent in the present case and, therefore, the action of the ITO to reopen the assessment was clearly erroneous. The respondent No. 1 had also no jurisdiction to reopen the assessment as the petitioner was not guilty of any understatement or deliberate suppression of any relevant facts. In these circumstances, the order of the respondent No. 1 cannot be sustained.
Shri Joshi, the learned counsel appearing on behalf of the revenue, raised a preliminary objection to the maintainability of the petition on the ground that the notice u/s 148 was issued by the respondent No. 1 on 26-2-1975, while the petitioner has approached this Court in July 1979, i.e., more than four years after the service of the notice. Shri Joshi submits that the petitioner should be non suited on the ground of delay and laches. I am not inclined to accede to the submission of the learned counsel for more than one reason. In the first instance, the petitioner resisted the proceedings before the respondent No. 1 by challenging the jurisdiction to issue the notice and filed a fresh return. The petitioner had never submitted to the jurisdiction of the respondent No. 1. Secondly, the petition is pending in this Court for over five years and no purpose would be served by compelling the petitioner to approach the respondent No. 1. Thirdly, the Supreme Court has concluded the controversy by the judgment referred to hereinabove and in these circumstances, it would be futile to drive the petitioner back to the respondent No. 2. In my judgment, the preliminary objection raised by Shri Joshi deserves to be repelled. Accordingly, the petition succeeds and the rule is made absolute in terms of prayer (a). In the circumstances of the case, there will be no order as to costs.