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Judgment
Ramanujam, J.—The following two questions have been referred to this court by the Income Tax Appellate Tribunal, Madras, under s.
256(1) of the I.T. Act, 1961, at the instance of the assessee :
(1) Whether the reopening of the assessment u/s 8(a) of the Companies (profits) Surtax Act, 1964, was justified ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal should have considered the contention of the assessee on matters
which have become concluded by the findings in the original assessment and not dealt with the same in the reassessment proceedings ?
The facts and circumstances which gave rise to the above reference may briefly be stated. The companies (profits) surtax assessment in the case
of the assessee for the assessment year 1967-68 was originally completed on August 1, 1970. The ITO reopened the assessment under s. 8(a) of
the Companies (Profits) Surtax Act, hereinafter referred to as the Surtax Act on July 20, 1972, on the ground that the net chargeable profit has
escaped assessment and revised the assessment on March 17, 1973. According to the ITO, the chargeable profits returned by the assessee
originally were understated and that material fact was not placed before the officer at the original stage. The assessee appealed against the said
reopening of the assessment to the AAC contending that there was no basis for reopening the assessment under s. 8(a) of the Surtax Act. The
AAC however, came to the conclusion that s. 8(a) has been properly invoked and in that view upheld the assessment.
The assessee went in appeal before the Income Tax Appellate Tribunal contending that there was no failure on the part of the assessee to
disclose fully and truly all materials facts necessary for the assessment. But the Tribunal also upheld the assessment made under s. 8(b). For the
year 1968-69 also, there was reopening of the surtax assessment invoking s. 8(b) of the Surtax Act and that was under challenge before the
Tribunal. This assessment for the year 1968-69 also has been upheld by the Tribunal. Aggrieved by the view taken by the Tribunal, the assessee
has sought and obtained a reference on the questions set out above.
The first question relates to the jurisdiction of the ITO to reopen the assessment under s. 8(a) of the Surtax Act. The assessee carries on
business in India and in Ceylon. The total income returned for the purpose of Income Tax assessment included substantial income from business in
Ceylon. In converting the Ceylon rupee into Indian rupee, the assessee had adopted the par value. The said par value adopted by the assessee for
conversion of the Ceylon rupee into India rupee was accepted by the ITO and the assessment was completed adopting the par value of exchange.
However, subsequent to the completion of the assessment, the ITO came to know that as a result of the devaluation of the Indian rupee on June 6,
1966, the official rate of exchange was 63.60 Ceylon rupees as against 100 Indian rupees and that neither in the published profit and loss account
and balance-sheet nor in any accompanying statements filed by the assessee in connection with the Income Tax proceedings did the assessee
disclose the correct rate of exchange between Indian and Ceylon rupees. Accordingly to the ITO, by reason of the failure of the assessee to
disclose fully all material facts necessary for the assessment, there was an underassessment of Income. The Income Tax assessment was, therefore,
reopened under s. 147 and the total income was computed at Rs. 23,31,310 by converting Ceylon income at the rate of 63.60 Ceylon rupees for
100 Indian rupees. As a result of the revision of the I.T. assessment, the surtax assessment also required revision. The understatement of income
has resulted in understatement of chargeable profits in the proceeding under the Surtax Act also. Therefore, the ITO invoked his jurisdiction under
s. 8(a) and reopened the assessment for the purpose of bringing to charge the escaped chargeable profits and computed the net chargeable profits
at Rs. 7,65,780 and levied surtax thereon at 35%, which came to Rs. 2,68,023.
According to the learned counsel for the assessee, there was no failure on the part of the assessee to disclose truly and fully all material facts
necessary for the assessment under s. 8(a). The assessee also alternatively contended that even if there is a difference should be taken as an
appreciation of capital and not taxable profits and as such is not includible in the profits returned or the chargeable profits. According to the
assessee, the exchange rate is not primarily a fact which the assessee has to necessarily place before the ITO and whether the assessee gives the
correct exchange rate or not the ITO is under an obligation to himself ascertain the exchange rate before finalising the assessment and the fact that
he failed to inform himself of the correct exchange rate cannot be taken advantage of by him to invoke s. 8(a) of the Surtax Act and reopen the
assessment. Alternatively, the assessee contends that even if a reopening is called for the this case, the assessment should have been reopened only
under s. 8(b) and not under s. 8(a).
For appreciating the said contention, it is necessary to extract s. 8 of the Surtax Act to consider its scope and ambit. Section 8 is as follows :
Profits escaping assessment. - If -
(a) the Income Tax Officer has reason to believe that by reason of the omission or failure on the part of the assessee to make a return u/s 5 for any
assessment year or to disclose fully and truly all material facts necessary for his assessment for any assessment year, chargeable profits for that year
have escaped assessment or have been underassessed or assessed at too low a rate of have been made the subject of excessive relief under this
Act, or
(b) 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 chargeable profits assessable for any assessment year have escaped
assessment or have been underassessed or assessed at too low a rate or have been the subject of excessive relief under this Act,
He may, in cases falling under clause (a) at any time, and in cases falling under clause (b) at any time within four years of the end of that
assessment year, serve on the assessee a notice containing all or any of the requirements which may be included in a notice u/s 5, and may proceed
to assess or reassess the amount chargeable to surtax, and the provisions of this Act shall, so far as may be, apply as if the notice were notice
issued under that section"".
Section 8(a) comes into play when the ITO has reason to believe that by reason of the omission or failure on the part of the assessee to make a
return under s. 5 for any assessment year or to disclose fully and truly all material facts necessary for his assessment for any assessment year,
chargeable profits for that year have escaped assessment or have been underassessed. Clause (b) stands attracted when the ITO has, in
consequence of information in his possession, reason to believe that chargeable profits assessable for any assessment year have escaped
assessment or have been underassessed or assessed at too low a rate. In this case the assessee had submitted a return showing Ceylon income in
Indian rupees by treating Ceylon currency on a par with Indian currency. It is not in dispute in this case that as a result of the devaluating of the
Indian currency on June 6, 1966, Ceylon rupee is higher in value than Indian rupee. This devaluation has taken place even before the assessee
submitted his return under the I.T. Act and under the Surtax Act. As a result of adoption of the par value by the assessee there is an
understatement of the Ceylon income which was offered for assessment by the assessee. The adoption of par value by the devaluation that has
taken place on June 6, 1966, has resulted in an understatement of the Ceylon income. The assessee who has got business both in Ceylon and in
India should be taken to have been aware of the exchange rate at the time of his return. Therefore, notwithstanding the devaluation, adopting par
value by the assessee while converting Ceylon rupees into Indian rupees, is clearly an omission or failure on the part of the assessee to disclose
fully and truly all material facts necessary for the assessment. Admittedly, the assessee did not bring to the notice of the ITO the correct exchange
rate but he misled him into thinking that there is no difference between the Indian rupee and the Ceylon rupee in the matter of conversion. We are
not inclined to agree with the learned counsel for the assessee that exchange rate is not a primary or material fact, and therefore, the omission or
failure to disclose the exchange rate will not attract clause (a) of s. 8. The section uses the expression ""all material facts necessary for the
assessment"". In this case the assessee filed a balance-sheet as on March 31, 1967, along with the printed profit and loss account. The printed
profit and loss account incorporated all the transaction whether in India or in Ceylon and it is in rupees. There are statements filed along with the
returns showing calculations of profits of the Indian business as well as the foreign business. All the statements show the figures in rupees. There is
nothing in the statement or in the balance-sheet to show that what is shown there, is not in rupees but in Ceylon currency, which is also called
rupee. In the light of this, we are of the opinion that the primary fact, viz., that the correct rate of exchange between the Indian rupee and the
Ceylon rupee has not been furnished at any stage before the ITO both for the purpose of the Income Tax as well as for the purpose of surtax
assessment.
It is no doubt true that prior to devaluation there was no difference in the exchange rate between Indian rupee and Ceylon rupee and, therefore,
the ITO blindly accepted the par value adopted by the assessee. It is only subsequently he found that there is a difference in exchange rate and if
the correct exchange rate had been adopted, it will result in understatement of the chargeable profits. Conversion rate is quite material and
necessary for the purpose of making the assessment. Ceylon income has to be converted into Indian rupees for the purpose of assessment.
Therefore, the exchange or conversion rate between Indian rupee and Ceylon rupee has to be taken to be a material fact necessary for the
purpose of assessment. Therefore, on the facts, the ITO was justified in invoking clause (a) of s. 8. However, on the facts, clause (b) could be
invoked if the ITO comes into possession of certain information indicating that the chargeable profits have escaped assessment for any assessment
year. In this case, even if the assessee''s contention that he is not bound to bring to the notice of the ITO the actual conversion rate and it is for the
ITO of find out the exchange rate for converting the Ceylon income which is expressed in Ceylon currency into Indian currency, the information
gathered subsequently by the ITO as to the correct exchange rate applicable to the case which indicated that certain portion of the chargeable
income has escaped assessment by invoking s. 8(b). We are, therefore, of the view that in this case either of the provisions in s. 8 could be
invoked. As a matter of fact, for the assessment year 1966-67, s. 8(a) has been invoked and for the assessment year 1968-69, s. 8(b) has been
invoked and the reopening of the assessment for both the years has, therefore, rightly been upheld by the Tribunal. Coming to the merits of the
reassessment, as already stated, the assessee''s only contention was that the difference in exchange rate should be treated as an appreciation of
capital and not taxable profits. This contention has been rightly rejected by the Tribunal, for the assessee himself has shown in the balance-sheet
and in the profit and loss account the relevant income as Ceylon income as a result of the correct exchange rate being applied cannot be taken to
be an appreciation of capital as contended by the assessee. One of the question that was urged before the Tribunal was that once the reopening is
undertaken under s. 8(a) or s. 8(b) by the ITO, the assessee is entitled to claim relief in respect of certain matters dealt with in the original
assessment and which have become final. The Tribunal took the view that the assessee cannot raise any plea in relation to matters which were
already concluded by the original assessment, in the reopened assessment. This view of the Tribunal has been canvassed in question No. 2.
According to the learned counsel for the assessee, once the original assessment is reopened, the entire matter is at large and, therefore, the
assessee can, notwithstanding the findings rendered in the original assessments as regards certain reliefs refused to him, he can agitate in relating to
the same matters at the stage of the reopening of the assessment. The learned counsel refers to the expression ""may proceed to assess or reassess
the amount chargeable to surtax"" occuring in s. 8 as indicating that at the stage of the reopening under s. 8, there should be a reassessment in
respect of the entire chargeable profits which have escaped assessment. The learned counsel also relies on the fact that the notice issued under s. 8
has to be treated as a notice under s. 5 in support of his plea that the reassessment should be in relation to all matters covered by the original
assessment. The question is how far the said contention of the assessee is tenable.
In V. Jaganmohan Rao and Others Vs. Commissioner of Income Tax and Excess Profits Tax, Andhra Pradesh, , the Supreme Court took the
view that once proceedings under s. 34 of the 1922 Act are validly initiated, the jurisdiction of the ITO is not restricted to the portion of the income
that escapes assessments, that the said section in terms says that once the ITO decides to reopen the assessment he could do so within the period
prescribed by serving on the person liable to pay tax a notice containing all or any of the requirements which may be included in a notice under s.
22(2) and may proceed to assess or reassess such income, profits or gains. Therefore, it is said once an assessment is reopened by issuing a notice
under sub-s. (2) of s. 22, the previous underassessment is set aside and the whole assessment proceedings start afresh. That was a case where the
ITO, after a valid reopening of the original assessments, wanted to bring in itmes which were not referred to in the notice issued for reopening and
the Supreme Court held that the ITO had not only the jurisdiction but it was his duty to levy tax on the entire income that had escaped assessment
during that year and that his jurisdiction is not confined only to those items which have been referred to in the notice.
In Al. Vr. St. Veerappa Chettiar Vs. Commissioner of Income Tax, , a Division Bench of this court to which one of us was a party has laid
down that once reassessment proceedings are validity initiated by the ITO in respect of a particular item of income either under s. 34(1)(a) of the
Indian I.T. Act, 1922, or under s. 34(1)(b) the jurisdiction of the ITO to reassess is not confined to the items of income in respect of which notice
has been issued but extends to all items of income which have escaped assessment and which may fall under those section. In Asa John Devinathan
and Another Vs. Addl. Commissioner of Income Tax, , another Division Bench of this court has upheld the view expressed in the decision in AL.
VR. ST. Veerappa Chettiar v. CIT. The question that arose in all the above cases was whether the ITO, in the reassessment proceedings, could
bring to charge items which are not referred to in the notice proposing to reopen the assessment and reasons or whether his jurisdiction is confined
to the items referred to in the notice and courts have uniformly held that once the assessment is validly reopened, the jurisdiction of the ITO
extends to all items of income which has escaped assessment and which could properly fall within the provision for reopening.
However, the question now put forward by the learned counsel for the assessee is somewhat different. Here the assessee sought certain reliefs
at the stage of the original assessment and they were considered and rejected by the assessing authority at that stage, and the matters had become
final. But taking advantage of the reopening of the assessment, the assessee wants to canvass those matters afresh on the ground that the entire
assessment is at large and it is, therefore, open to the assessee to canvass afresh matters which stood concluded by the original assessment. There
appears to be a slight conflict of judicial opinion on this question. The Supreme Court has left the question open in Commissioner of Income Tax,
Bombay City I Vs. Bombay Dyeing and Manufacturing Co. Ltd., . The Calcutta High Court in Commissioner of Income Tax (Central) Vs. Assam
Oil Co. Ltd., , has held that in view of the scheme of the I.T. Act, once a reopening is validly made, the entire assessment is not set aside and in a
case where the assessee is entitled to a deduction which was not granted in the original assessment, the assessment would be granted that
deduction. In Sir Shadi Lal and Sons Vs. Commissioner of Income Tax, , the Allahabad High Court has taken the view that on reassessment, the
entire assessment is not opened, that the claim for expenditure which has been disallowed during the original assessment cannot be reagitated on
the assessment being reopened for bringing to tax income which has escaped assessment, that the controversy on reassessment is confined to
matters which are relevant in respect of the income which had not been brought to tax during the course of the original assessment, and that the
disallowance of the expenditure in the original assessment having become final, it was not open to the assessee to make a claim for those items of
expenditure once again at the stage of reassessment.
However, having regard to the object and the language of s. 34 of the 1922 Act and s. 147 of the 1961 Act and s. 8 of the Surtax Act, we are
of the view that the reopening can only be for the benefit of the Revenue. But this is subject to one exception. Where a particular item is sought to
be brought to charge for the first time in the reassessment proceedings, any allowance, deduction or other relief in relation to that item can be put
forward by the assessee and that has to be necessarily considered by the assessing authority and relief granted if the circumstances warrant. If any
disallowance made during the course of the original assessment, which the assessee wants to be reconsidered during the reassessment, is relevant
or has a nexus with items of income brought to charge by the ITO on reassessment, that can be considered. All other items of disallowance or
relief claimed by the assessee which are not relevant to the items which are the subject-matter of the enquiry during reassessment cannot be
considered again by the ITO at the stage of the reassessment. Therefore, in reassessment proceedings, the assessee cannot regitate questions
which have been decided in the original assessment; nor can the ITO make a reassessment inconsistent with the original assessment in respect of
matters which are not the subject-matter of proceedings under s. 8 of the Surtax Act. Similarly, in the reassessment proceedings, once it is found
that the income has escaped assessment and reopening is justified under that section the assessee cannot resist those proceedings merely by
showing that some other income has erroneously been assessed or as been assessed at too high a figure except in case falling under s. 152(2). In
MADHAVJEE DAMODAR THACKERSAY AND ANOTHER (EXECUTORS) Vs. COMMISSIONER OF INCOME TAX, BOMBAY., ,
Beaumont C.J. had expressed the view :
...... u/s 34 of the (1922) Act it is income which has escaped assessment which can be subsequently charged and that it is not open to an
assessee, when charged in that way to reopen the whole assessment and seek to be allowed credit in respect of some item which has been over
assessed, but on the other hand it is open for an assessee to show that income alleged to have escaped assessment has in truth and in fact not
escaped assessment but has been brought in under some inappropriate head"".
The same view has also been expressed by the Calcutta High Court in Satyendra Mohen Roy Choudhury v. CIT [1930] 4 ITC 447 . For the
reasons stated above, we have to answer question No. 2 also against the assessee. The Revenue will have its costs from the assessee. Counsel''s
fee Rs. 500.
The learned counsel for the assessee makes an oral application for leave to appeal to the Supreme Court against the judgment just now
pronounced. We feel that there is no justification or reasonable grounds for grant of leave against our decision on the first question. So far as the
second question is concerned, as there is conflict of opinion and there is no direct decision of the Supreme Court on that question, and since the
Supreme Court has left the question open in Commissioner of Income Tax, Bombay City I Vs. Bombay Dyeing and Manufacturing Co. Ltd., , we
think that this is a fit case for grant of leaved to appeal to the Supreme Court on the second question.