Commissioner of Income Tax vs Standard Motor Products of India Ltd.

V. Balasubrahmanyan, J.—The Standard Motor Products of India Ltd., Madras, which is a public limited company engaged in the

manufacture of automobiles, is the asses-see. The assessee has its factory at Vandalur. In the factory premises the assessee has certain buildings

used for office purposes called the administrative block. Besides, the assessee has a canteen, a fire service station, pump house, overhead tanks

and wells, overhead lines and street lights, new stores, co-operative stores building and industrial housing colony. The assessee has in its factory

two types of machinery categorised as general purpose machinery and precision machinery. Originally, the assessments for the assessment years

1961-62 to 1963-64 were completed. In the said assessment proceedings, the ITO allowed depreciation allowance in respect of the

administrative buildings at 5 percent. As regards precision machinery, the ITO allowed depreciation allowance at the rate of 12 percent and

general purpose machinery at the rate of 10 percent. During the assessment proceedings for the year 1965-66, the ITO discovered that the

assessee had claimed and obtained excess depreciation in respect of administrative buildings. He, therefore, reopened the assessments u/s 147(a)

of the income tax Act, 1961 (''the Act''). In the reassessment proceedings the ITO held that the assessee was entitled to depreciation in respect of

the administrative buildings only at the rate of two-half percent and not at the rate of 5 percent originally allowed on the ground that the

administrative buildings formed part of the factory buildings. Though the assessment was reopened u/s 147(a) on the ground that the assessee had

obtained depreciation allowance in respect of administrative buildings in the reassessment proceedings, the ITO also noticed that the assessee was

not entitled to 10 percent depreciation allowance in respect of general purpose machinery. He accordingly restricted depreciation allowance in

respect of general purpose machinery to 7 percent as against 10 percent originally granted. The income of the assessee was recomputed on the

above basis. For the assessment years 1965-66 to 1970-71, the ITO allowed depreciation allowance in respect of administrative buildings at two-

half percent and for the general purpose machinery at 7 percent in original assessments themselves. The assessee then preferred appeals to the

AAC. Before the AAC it was contended, among others, that the ITO acted in excess of his jurisdiction in reopening the assessments u/s 147(a).

On the merits the AAC upheld the rate of depreciation of two-half percent fixed by the ITO in respect of buildings other than latrines, compound

walls and workers gate. In respect of the latter the AAC held that they were liable to be treated as second class buildings and depreciation

allowance be granted accordingly. As respects general purpose machinery, the AAC upheld the rate of 7 percent depreciation allowance fixed by

the ITO. The assessee carried the matter in appeal before the Tribunal. All the appeals for the assessment years 1961-62 to 1963-64 and 1965-

66 to 1970-71 were disposed of by the Tribunal by a common order dated 26-10-1974. The Tribunal negatived the contention of the assessee

that the reopening of the assessment for the years 1961-62 to 1963-64 was without jurisdiction. In respect of administrative buildings, the Tribunal

classified the buildings as factory buildings and accordingly held that the assessee would be entitled to rebate at the rate of 5 percent as originally

granted by the ITO. With regard to the general purpose machinery, the Tribunal found that the assessee would be entitled only at the rate of 7

percent. However, the Tribunal held that the rate of 7 percent should be applied only with effect from the assessment year 1965-66 onwards. For

the years 1961-62 to 1963-64 the Tribunal held that it would not be open to the ITO to restrict the depreciation allowance to 7 percent instead of

at 10 percent as originally allowed. This was on the ground that the reassessment proceedings were initiated only u/s 147(a) as regards the excess

depreciation obtained by the assessee in respect of the administrative buildings and the revision of the depreciation allowance in respect of the

general purpose machinery was hit by the rule of four years prescribed u/s 149(1)(b). In the background of these facts, the Tribunal has now

referred the following questions of law for our opinion as directed by this Court u/s 256(2) of the Act at the instance of the revenue.

1961-62, 1962-63 and 1963-64 - (1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that

the ''Administrative Buildings'' at Vandalur form part of ''Factory Buildings'' and depreciation at the rate of 5 percent should be allowed thereon?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the provisions of section 147(a)

cannot be invoked for withdrawing the excess depreciation allowed originally on certain machineries for the assessment years 1961-61, 1962-63

and 1963-64?

1965-66 to 1970-71 - Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the

''Administrative Buildings'' at Vandalur form part of ''Factory Buildings'' and depreciation at the rate of 5 percent should be allowed thereon?

For the assessment year 1964-65 also the ITO reopened the assessment u/s 147(a). He restricted the depreciation allowance in respect of general

purpose machinery to 7 percent and administrative block and other items to two-half percent. The assessee filed IT Appeal No. 321 (Mad.) of

1975-76 and the ITO filed IT Appeal No. 216 (Mad.) of 1975-76. IT Appeal No. 321 (Mad.) of 1975-76 was disposed of by the Tribunal on

5-8-1976. The Tribunal held that inasmuch as the order passed by the ITO for the assessment year 1964-65 was on reassessment, the AAC

erred in restricting it to 7 percent and that the view taken by the AAC was not in accordance with the judgment of the Tribunal for the years 1961-

62 to 1963-64. For the same year, the Tribunal also consider the question of depreciation allowance in respect of the administrative building,

canteen and other items and held that those items should be treated as part of the factory building. In the result, the Tribunal allowed IT Appeal

No. 321 (Mad.) of 1975-76 filed by the asses see. Following the said order, the Tribunal dismissed IT Appeal No. 216 (Mad.) of 1975-76 filed

by the ITO by its order dated 16-7-1976. Consequently, the following two questions of law have been referred for our opinion for the assessment

year 1964-65 at the instance of the revenue.

(4) Whether, on the facts and in the circumstances of the case, the Tribunal was right in deleting the addition of Rs. 55,308 in the reassessment

consequent to recomputation of depreciation on machinery?

(5) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that depreciation at the rate of 5 percent

was admissible in respect of the canteen, the administrative block, the new stores and the co-operative stores buildings.

We shall first take up for consideration the question whether, having found that the assessee would be entitled to depreciation allowance in

respect of the general purpose machinery only at the rate of 7 percent, the Tribunal was justified in not confirming the order of the ITO and the

AAC that even in respect of the years for which the assessment had been reopened, the depreciation allowance in respect of general purpose

machinery should be restricted to 7 percent only. The argument of Mr. Jayaraman, the learned standing counsel for the revenue is that once valid

proceedings are initiated u/s 147(a), the earlier order of assessment must be deemed to have become non est and that the entire assessment must

be deemed to have been laid open. Therefore, it would be open to the ITO to recompute the total taxable income of the assessee including the

entire income that had escaped assessment during that year and pass an order of reassessment. In other words, the contention of the learned

standing counsel is that the ITO is not confined to reassessing only the items thought to have escaped assessment when he issued the notice u/s 148

of the Act. On the other hand, the submission of Mr. Uttam Reddi, the learned counsel for the assessee, is that the provisions u/s 147(a) and (b)

fall under two distinct heads. Separate periods of limitation are prescribed for the reopening of assessments u/s 147(a) and (b). The learned

counsel referred to section 149 of the Act, which prescribes two distinct periods of limitation for cases falling under clause (a) of section 147 and

cases falling under clause (b) of section 147 in respect of which notice may be issued u/s 148. In this connection, the learned counsel laid emphasis

upon the fact that section 147 is subject to sections 148 to 153 of the Act. The learned counsel also referred to the distinct periods of limitation

prescribed for cases falling u/s 147(a) and (b) u/s 153(2). In the present case, according to Mr. Uttam Reddi the assessment regarding general

purpose machinery could not be revised by the ITO as the item fell u/s 147(b) and reassessment of the said item was barred by the operation of

section 149(1)(b) of the Act.

Before considering the question of law mooted for our decision by the standing counsel for the revenue and the counsel for the assessee, we

may observe that the Tribunal has factually found that the assessee would be entitled to depreciation allowance on the general purpose machinery

only at the rate of 7 percent and that has become final. The only question for our consideration therefore is whether even in respect of the earlier

years for which the assessments have been reopened, and reassessments made, the depreciation allowance on general purpose machinery could

be restricted to 7 percent as against 10 percent that was originally granted by the ITO.

Section 147 reads as follows:

If-

(a) the income tax Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return u/s 139 for

any assessment year to the income tax Officer or to disclose fully and truly all material facts, necessary for his assessment for that year, income

chargeable to tax has escaped assessment for that year, 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 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).

Explanation 1: For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped

assessment, namely:-

(a) where income chargeable to tax has been under-assessed; or

(b) where such income has been assessed at too low a rate; or

(c) where such income has been made the subject of excessive relief under this Act or under the Indian income tax Act, 1922 (11 of 1922);or

(d) where excessive loss or depreciation allowance has been computed.

Thus section 147 divides cases of escape of assessment into two classes, viz.: (a) those due to the non-submission of return of income or non-

disclosure of true and full facts, and (b) other instances. Explanation 1 defines what constitutes escape of assessment. In order to invoke

jurisdiction under the Act, the ITO must have reason to believe that income chargeable to tax has escaped assessment. He must have also reason

to believe that such income has escaped assessment by reason of the omission or failure on the part of the assessee either to make a return u/s 139

of the Act for the assessment year or to disclose fully and truly material facts necessary for his assessment for that year. Both these conditions must

be present before the ITO could exercise jurisdiction u/s 147(a).

Section 148 reads as follows:

(1) Before making the assessment, reassessment or recomputation u/s 147, the income tax Officer shall serve on the assessee a notice containing

all or any of the requirements which may be included in a notice under sub-section (2) of section 139; and the provisions of this Act shall, so far as

may be, apply accordingly as if the notice were a notice issued under that sub-section.

(2) The income tax Officer shall, before issuing any notice under this section, record his reasons for doing so.

Section 148 enjoins that whenever ITO decides to initiate action u/s 147, he should serve a notice on the assessee. The notice must contain all or

any other requirements which may be included in a notice that is issued u/s 139(2).

Section 139(2) reads as follows:

(2) In the case of any person who, in the income tax Officer''s opinion, is assessable under this Act, whether on his own total income or on the total

income of any other person during the previous year, the income tax Officer may, before the end of the relevant assessment year, issue a notice to

him and serve the same upon him requiring him to furnish, within thirty days from the date of service of the notice, a return of his income or the

income of such other person during the previous year, in the prescribed form and verified in the prescribed manner and setting forth such other

particulars as may be prescribed:

Provided that, on an application made in the prescribed manner, the income tax Officer may, in his discretion, extend the date for furnishing the

return, and, notwithstanding that the date is so extended, interest shall be chargeable in accordance with the provisions of sub-section (8).

From a combined reading of sections 147, 148 and 139(2) the following position emerges. If the ITO has reason to believe that either on account

of the omission or failure on the part of the assessee to make a return u/s 139 for any assessment year or to disclose fully and truly all material facts

necessary for assessment for that year or 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 assess or reassess such income or recompute the loss or depreciation allowance for the

assessment year concerned. However, before proceeding to assess or reassess such income or recompute the loss or depreciation allowance, as

the case may be, the ITO is bound to issue a notice to the assessee. The notice must call upon the assessee to furnish within 30 days from the date

of service of the notice a return of his income during the previous year in the prescribed form and verified in the prescribed manner and setting forth

such other particulars as may be prescribed. The provisions of the Act should be applied as if the notice were a notice issued u/s 139(2). Section

147 of course is subject to sections 148 to 153. The effect would then be that, when once a notice is issued on the above lines u/s 148, the

assessee would be called upon to file a fresh return as if it was a return that would have to be filed in response to a notice u/s 139(2). That in turn

would mean that the assessee would be under an obligation to disclose his total income. It would not be open to him to omit any part of his income

except under peril of being made subject to the penal provisions of the Act for failure to furnish a full and true disclosure of his income. It would

certainly not be open to the assessee to contend that he need only to file a return of such portion of income which was not included in the original

return. In other words, once an assessment is reopened the initial order of assessment stands automatically cancelled. The order of reassessment

will have to take the place of the original order of assessment. The initial order of assessment cannot be said to be operative even for a limited

purpose or with respect to items which had been covered by the initial order of assessment. To express differently, once an assessment is

reopened the ITO will not only have the jurisdiction but it will also be his duty to determine the taxable liability of an assessee and for the said

purpose, he will have necessarily to take into account not only the escaped income in respect of which a notice u/s 147 has been issued but also

the entire income that had escaped assessment during that year. These principles are now well settled by a long catena of decisions.

In V. Jaganmohan Rao and Others Vs. Commissioner of Income Tax and Excess Profits Tax, Andhra Pradesh, the scope of section 34(1)(b) of

the 1922 Act, arose for consideration before the Supreme Court. In that case, the assessee was the karta of a HUF. The assessment related to the

years 1944-45 to 1946-47. In 1941, the assessee had purchased a spinning mill known as Sri Satyanarayana Spinning Mills, Rajahmundry, for a

sum of Rs. 54,731. At the time the purchase was made, there were certain litigations between the sons of the vendor and the vendor in respect of

the spinning mill and certain other properties. Ultimately, the matter went on appeal to the Privy Council. When the appeal was pending, the

assessments were made for the years 1944-45 to 1946-47 and the assessee deposited the amounts for the various years as per the assessment.

Thereafter, the Privy Council disposed of the appeal. Pursuant thereto, the ITO issued a notice to the assessee u/s 34, in respect of a sum of Rs.

1,09,613 received by the assessee as a lease income of the mill. One of the contentions that was raised before the Supreme Court was that at the

time the original order of assessment was passed, the ITO could have legitimately assessed one-third share of the income which was due to the

assessee as per the judgment of this Court, and there was an escape only to the extent of two-third share of the income. Dealing with this

contention, Ramaswami, J. speaking for the Court observed as follows:

...It was stated on behalf of the appellant that in any case the ITO could have legitimately assessed one-third share of the income which was due to

the assessee according to the judgment of the Madras High Court and there was escape only to the extent of two-thirds share of the income. This

argument is not of much avail to the appellant because once proceedings u/s 34 are taken to be validly initiated with regard to two-thirds share of

the income, the jurisdiction of the ITO cannot be confined only to that portion of the income. Section 34 in terms states 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 u/s 22(2) and may proceed to assess or reassess such income, profits or gains. It is, therefore,

manifest that once assessment is reopened by issuing a notice under sub-section (2) of section 22 the previous under-assessment is set aside and

the whole assessment proceedings start afresh. When once valid proceedings are started u/s 34(1)(b), 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.

A similar question arose for consideration in The Commissioner of Sales Tax, Madhya Pradesh Vs. H.M. Esufali, H.M. Abdulali, Siyaganj,

Main Road, Indore, ). The case arose under the M.P. General Sales Tax Act, 1958. The question that arose was whether in reassessment

proceedings initiated u/s 19(1) of the M.P. General Sales Tax Act, 1958, the STO was competent to make a best judgment assessment in the

absence of a specific power conferred on him under the said section. In this context, the Supreme Court speaking through Hegde, J. observed as

follows:

What is true of the assessment must also be true of reassessment because reassessment is nothing but a fresh assessment. When reassessment is

made u/s 19, the former assessment is completely reopened and in its place fresh assessment is made. While reassessing a dealer, the assessing

authority does not merely assess him on the escaped turnover but it assesses him on his total estimated turnover....

In Deputy CCT v. H.R. Sri Ramulu (1977) 39 STC 177 (SC), the question that arose for consideration was as to the starting point for

computing the period of limitation conferred on the Deputy CCT for exercising his suo motu powers of revision of any order passed or proceeding

recorded under the provisions of the Act by a CTO subordinate to him u/s 21(3) of the Mysore Sales Tax Act for exercising power of revision u/s

21(2) of the Act. Khanna, J. posed the question and answered the same thus:

The short question which arises for determination in these appeals is that in the event of an order having been made u/s 12A of the Act, what is the

starting point for computing the period of four years, mentioned in section 21(3), for the exercise of the powers u/s 21(2). Is it the initial assessment

order or is it the order made u/s 12A? In the context of the present case, the question to be answered is as to whether the period of four years is

to be calculated from March 21, 1963, when the initial assessment orders were made, or from June 8, 1966, when the orders u/s 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 u/s 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 the 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. As it is, we find that in the present case the assessment

orders made u/s 12A were comprehensive orders and were not confined merely to matters which had escaped assessment earlier....

The learned Judge followed the decisions in Jaganmohan (supra) and H.M. Esufali (supra).

In Deputy CCT v. Indian Refrigeration Industries (P.) Ltd. (1980) 46 STC 264 (Mad.), the question arose whether an assessee could in an

appeal filed u/s 31 of the General Sales Tax Act, 1959 against reassessment order challenge the assessability of a sum which had been included in

the original assessment against which the assessee had not filed any appeal. The assessee was a dealer in electric motors and humidifiers. For the

assessment year 1961-62 in the original assessment proceedings the net taxable turnover was fixed at Rs. 1,86,926.22. Thereafter, on an

inspection by the officers of the Commercial Tax Department, it was found that the assessee had suppressed a turnover of Rs. 22,602.

Accordingly, the assessing authority initiated proceedings for bringing the amount of escaped turnover to tax u/s 16 of the General Sales Tax Act.

It was found that the suppressed turnover only came to Rs. 1,930. On that basis, the net taxable turnover of Rs. 1,86,926.22 as originally

assessed and the sum of Rs. 1,930 discovered to have been suppressed were brought to tax in the reassessment proceedings. The assessee filed

an appeal before the AAC. Before the appellate authority, the assessee apart from challenging the inclusion of a sum of Rs. 1,930 also challenged

the inclusion of Rs. 1,26,778.32 which had been included in the taxable turnover with regard to the sale of humidifiers in the original assessment

proceedings. The appellate authority held that inasmuch as the assessee had not filed an appeal against the original order of assessment, it was not

open to him to contend that the sales of humidifiers were exempt from tax. The assessee took the matter to the Tribunal. The Tribunal held that the

assessee was entitled to exemption in respect of a sum of Rs. 1,19,035.52 towards the sale of humidifiers. Against the order of the Tribunal, the

Deputy Commissioner filed tax revision case before this Court. In this Court, it was contended on behalf of the department that the sum of Rs.

1,19,035.52 realised by the sale of humidifiers had been offered for assessment by the assessee even at the original stage and that the same cannot

now be questioned in an appeal filed against the reassessment proceedings. The learned Additional Pleader relied upon the decisions in State of

Madras v. Mettur Industries Ltd. (1973) 32 STC 239 (Mad.) and State of Tamil Nadu v. CM. Tiles (1976) 38 STC 440 (Mad.). On the other

hand, it was argued on behalf of the assessee that the original assessment order did not survive after the reassessment order was passed and that

the assessee could in an appeal against reassessment take up any objection to any part of the turnover so long as it was included in the

reassessment. One of us (Balasubrahmanyan, J.) after referring to the above contentions of the learned Addl. Govt. Pleader and the two decisions

relied upon by him, observed as follows:

The views expressed by this Court in the two cases, aforesaid, do not seem to reflect the latest learning on the subject. In two recent decisions of

the Supreme Court, it has been held that a reassessment once made no longer leaves the original assessment at large, but altogether supplants it....

After extracting certain passages from the decisions of the Supreme Court in H.R. Sri Ramulu (supra) and CST v. H.M. Esufali H.M. Abdulali

(supra), the learned Judge proceeded to observe as follows:

It seems to me that in the face of these clear enunciations by the Supreme Court of the legal position as to the precise scope and effect of

reassessments the view expressed by this Court in State of Tamil Nadu v. CM. Tiles (1976) 38 STC 440 and State of Madras v. Mettur

Industries Ltd. (1973) 32 STC 239, can no longer be regarded as authoritative. The Bench decisions of this Court were apparently not cited

before the Supreme Court. But it is clear, all the same, that the Supreme Court has rejected outright the argument, which had found favour with this

Court, that a reassessment is a distinct and separate order, that it only covers the amount escaping assessment and that even after a reassessment is

made the original assessment would still retain its distinctive character, identity and operative force. I think that the two Bench decisions of this

Court must be held to have been impliedly overruled by Deputy CCT v. H.R. Sri Ramulu (1977) 39 STC 177 (SC) and CST v. H.M. Esufali

H.M. Abdulali (1973) 32 STC 77 (SC).

The learned Judge, after noticing the fact that modern taxes, where taxable subject or event may be income, wealth, gifts or sales, are recurring

annual levies and adhere to the principle of aggregation, observed as follows:

This basic characteristic of the tax being a recurring annual tax on aggregate turnover cannot, in our opinion, be lost sight of in any discussion about

the nature and purpose of the process of assessment and reassessment. When the assessing authority computes the aggregate amounts for which a

dealer sells goods during a year, he does so for making an assessment of the taxable turnover. If, in the process, he subsequently discovers that

some items of sales had escaped his notice he is enabled by the statute to reopen the assessment if it has already been made. And, when he

thereafter proceeds to make a reassessment, he does so for the purpose of redetermining the annual taxable turnover as a whole. To say in such

cases that the assessing authority merely brings to charge certain stray or individual items of sales, that had previously escaped charge would be to

mistake the trees for the wood, and to get the reassessment process completely out of focus.... Over the years, sales tax authorities have, perhaps

unconsciously, subserved this principle of one year, one assessment...

Since Sethuraman, J. took a different view, the case came up for opinion before a third Judge. Ramaprasada Rao, CJ. The learned Chief Justice

observed as follows:

...It is no doubt true that in the subterranean hierarchy of statutory Tribunals set up under the Tamil Nadu General Sales Tax Act starting from the

assessment officer and ending with the Sales Tax Appellate Tribunal, which is invariably tested at the High Court level and at the Supreme Court

level, a procedural distinction is maintained between the original assessment and an assessment reopened u/s 16 of the Act. The reopening of an

assessment is occasioned because the initial order of assessment projects a mistake which is apparent on record. Even while issuing a notice of

reassessment, it is not in dispute that a reference has to be made to the original order and the word ''reassessment'' by itself suggests that there is an

effacement by necessity of the original assessment order. It is in this sense the Supreme Court in Deputy Commissioner of Commercial Taxes v.

H.R. Sri Ramulu (1977) 39 STC 177, categorically said that if reassessment is made, the original order ceases to be operative. The excerpt cited

above from Deputy Commissioner of Commercial Taxes v. H.R. Sri Ramulu [1977] 39 STC 177, in my view, is the latest pronouncement on this

subject which is directly in conflict with the opinion expressed by our Court in State of Madras v. Mettur Industries Ltd. (1973) 32 STC 239 and

State of Tamil Nadu v. CM. Tiles [1976] 38 STC 440. Even more distinctive and conspicuous is the opinion expressed by the Supreme Court

again in Commissioner of Sales Tax, Madhya Pradesh v. H.M. Esufali H.M. Abdulali (1973) 32 STC 77. The Supreme Court has said that when

a former assessment is reopened though it has become final, technically the assessing authority cannot be said to be merely assessing the assessee

on the escaped turnover, but it assesses on his total estimated turnover. In this view, therefore, the attempt of the compartmentalisation by the

learned Government Pleader of the original assessment order which has become technically final, and the reassessment order as if they are distinct

and separate, is no longer a plea which is open to the revenue.... It would be a travesty of accepted procedure, if it is accepted that the assessing

authority, while acting u/s 16, is merely expected to concentrate his attention on the escaped turnover and bring to tax such of those items which

have so escaped and conclude the issue. As it is an accepted canon in tax law that for a given year there can be only one assessment, which

determines the taxable turnover of the assessee, the dichotomy thought of by Sethuraman, J., as if there could be two distinct and separate

assessments for a particular assessable year does not appear to me to be an acceptable proposition in the light of the pronouncements made by the

Supreme Court.

In Commissioner of Income Tax, Gujarat III Vs. Mankeklal Harilal Spg. and Mfg. Co. Ltd., , the Bench of the Gujarat High Court speaking

through Devan, C.J. observed that ""once reassessment proceedings are validly started the ITO is not confined merely to the item in respect of

which or on the basis of which he had initiated reassessment proceedings. The ITO has not only the jurisdiction but it is also his duty to levy tax on

the entire income that had escaped assessment during the relevant assessment year when the original assessment was done."" This decision was

followed by the same High Court in Commissioner of Income Tax, Gujarat I Vs. Ahmedabad Manufacturing and Calico Printing Co. Ltd., . In that

case it was held that while reassessment proceedings had been validly initiated but the grounds on which they were initiated, were subsequently

found to be non-existent on the position of law as subsequently expounded and hence that particular point regarding which the notice of

reassessment was issued had to be decided in favour of the assessee, it is open to the ITO to consider other items and passed reassessment orders

regarding these other items even though they were not included in the notice u/s 148.

A direct answer to the poser raised by Mr. Uttam Reddi that once an assessment is validly reopened u/s 147(a), items that would fall u/s

147(b) and which will be barred by limitation, could not be reopened in the assessment proceedings is found in PULAVARTHI

VISWANADHAM Vs. COMMISSIONER OF Income Tax, ANDHRA PRADESH., . The decision of the Andhra Pradesh High Court turned

upon the interpretation to be placed on section 34(1)(a) and (b) of the 1922 Act. There, the ITO initiated proceedings u/s 34(1)(a) of the 1922

Act as it came to light that the assessee was indulging in money-lending and other business activities without disclosing them to the department. On

behalf of the assessee it was contended that a particular item should not be included in the revised assessment as it was barred by the limitation.

The contention was rejected by the Bench. After referring to sections 34 and 22 of the 1922 Act, Chandra Reddy, CJ. observed as follows:

...The question that falls to be decided on the language of these two sections is whether after notice is issued u/s 34(1)(a), the assessment should

be limited to items which escaped assessment by reason of the failure on the part of the assessee to disclose all his income, profits or gains which

are subject to tax. The contention of learned counsel for the assessee is that having regard to the terms of clause (b), it was not within the powers

of the income tax Officer to bring to charge such of the items as have escaped from being tax without any remissness on his part. It is only items

that escaped assessment due to omission or failure of the assessee that come within the range and sweep of section 34, continues learned counsel

for the assessee. We do not think that we can accede to this proposition. When once the assessment is reopened, no distinction could be made

between items falling under clause (a) and those coming within the pale of clause (b)....

After referring to a passage from the judgment in PARIMISETTI SEETHARAMAMMA Vs. COMMISSIONER OF Income Tax, ANDHRA

PRADESH., and section 22(2) of the 1922 Act, the learned Chief Justice observed as follows:

...It [section 22(2)] lays down in unambiguous term that the assessee is under an obligation to disclose his total income and it is not open to him to

omit any part of his income. If he does so, he does at his peril of attracting section 23(4). In that situation, it is futile to contend that it is only such

portion of the income which was not included in the original return that would be liable to tax in the reassessment proceedings. The position

obtaining after invoking section 34(1)(a) is the same as it obtained prior to the completion of the original assessment. In that situation, it was open

to the department to subject the above-said shares of income to tax...

A Bench of the Calcutta High Court took the same view in Commissioner of Income Tax Vs. Ramsevak Paul and Others, where Dev, J.

following the decision of the Supreme Court in V. Jaganmohan Rao (supra), observed as follows:

...once a reassessment proceeding has started, it is the duty of the income tax Officer to levy tax on the entire income that has escaped assessment

during that year. Therefore, the income tax Officer was entitled to recompute the business income of the assessee, though the reassessment

proceedings had been validly initiated to include property income that had escaped assessment..."".

Mr. Uttam Reddi very heavily realised on the decision in Al. Vr. St. Veerappa Chettiar v. CIT (1973) 91 ITR 116 (Mad.). In that case, the

assessee was originally assessed in the status of a HUF for the year 1953-54 on a total turnover of Rs. 4,915 and for the year 1954-55 on a total

loss of Rs. 4,087. In the original assessment, the assessee had claimed losses of Rs. 9,167 and Rs. 19,283 for the assessment years 1953-54 and

1954-55, respectively, from its Thachanallur Sugar Mill business. These losses were allowed as claimed in the original assessment. Further, in the

original assessment the interest received by the assessee from one of the debtors, Sri AR. AR. RM. Ramanathan Chettiar, had not been disclosed

and the assessments were completed without including these interest receipts. Thereafter, in the course of the assessment for the year 1955-56, it

was found that one of the debtors, the said Ramanathan Chettiar, had credited the assessee with Rs. 24,165 as interest for a number of years.

Similarly, during the assessment proceedings for the year 1957-58, the ITO found that the loss claimed by the assessee from the sugar mill could

not be allowed as that business had become defunct even prior to the assessment year 1953-54. In these circumstances, the ITO reopened the

assessment for 1953-54 and 1954-55 by issuing notice u/s 22(2) read with section 34(1)(a) of the 1922 Act. The assessee admitted in the revised

returns, the interest income of Rs. 4,412 during the assessment year 1953-54 and Rs. 3,037 during the assessment year 1954-55. He objected to

the reopening of the assessment in respect of the loss from the sugar mills on the ground that four years had already expired. This claim was not

accepted by the ITO but was upheld by the AAC. The Tribunal followed the decision of the Andhra Pradesh High Court in Pulavarthi

Viswanadham (supra) and held that since the original assessment had been reopened validly u/s 34(1)(a) on the ground of non-disclosure of

interest received, the ITO had acted well within his powers to make the assessment for these two years de novo including therein such items of

income, as in his opinion, had wrongly escaped assessment at the time of the original assessments. The matter came to this Court on a reference u/s

66(1) of the 1922 Act. After referring to certain decisions of different High Courts and after extracting a passage from V. Jaganmohan Rao (supra)

the learned Judges have observed as follows:

From the above decisions it is clear that once the reassessment proceedings are validly initiated by the income tax Officer in respect of an item of

income either u/s 34(1)(a) or u/s 34(1)(b), the jurisdiction of the income tax Officer 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 either u/s 34(1)(a) or section

34(1)(b).

At this stage it may be observed that before the learned Judges, on behalf of the assessee, it was conceded that the ITO had power to bring in

items of income falling u/s 34(1)(b) to charge in proceedings validly initiated by him in respect of items coming u/s 34(1)(a). However, it was

further contended that this power of the ITO to bring to charge items falling u/s 34(1)(b)in reassessment proceedings could not be validly exercised

after the period of four years prescribed for items falling u/s 34(1)(b). This was upheld by the learned Judges. We are unable to agree with the

conclusion reached by the learned Judges. The learned Judges have followed the Supreme Court decision in V. Jaganmohan Rao (supra) and laid

down the ratio as already quoted that when once reassessment proceedings are validly initiated by the ITO either u/s 34(1)(a) or u/s 34(1)(b), his

jurisdiction is not confined to 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 either u/s 34(1)(a) or 34(1)(b). It may be mentioned that the learned Judges have noticed the principle laid down by

the Supreme Court in V. Jaganmohan Rao (supra), to the effect that once an assessment is reopened by issuing the notice u/s 22(2), the provisions

under assessment is set aside and the whole assessment proceedings start afresh and the ITO had not only the jurisdiction, but it was his duty to

levy tax on the entire income that had escaped assessment during the previous years. In the light of the above ratio of the Supreme Court decision,

it is not open to the Court to go beyond the scope of the said decision and hold that notwithstanding the fact that the entire original assessment is

set aside and the whole assessment proceeding started afresh, the jurisdiction of the ITO to bring to charge items falling u/s 34(1)(b) in

reassessment proceedings validly initiated u/s 34(1)(a) is subject to the limitation of the period of four years prescribed for items falling u/s 34(1)

(b). The learned Judges failed to note that the period of limitation prescribed u/s 34 of the 1922 Act or u/s 149 of the 1961 Act, is only for the

purpose of conferring jurisdiction on the ITO to initiate reassessment proceedings. Otherwise, there would be no justification at all for the ratio laid

down by the learned Judges at page 123, that once reassessment proceedings are validly initiated by the ITO in respect of an item of income either

u/s 34(1)(a) or u/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 either u/s 34(1)(a) or section34(1)(b). The learned

Judges also brushed aside the decision of the Andhra Pradesh High Court in Pulavarthi Viswanadham (supra), on the ground that the question of

limitation with regard to the reopening of items falling u/s 34(1)(b) did not arise for consideration before the Andhra Pradesh High Court.

This case has been followed by a Bench of this Court in Asa John Devinathan and Another Vs. Addl. Commissioner of Income Tax, . But the

Bench did not consider the scope and ambit of the ratio of the Supreme Court in the case of H.M. Esufali (supra), and Sri Ramulu (supra) and

Indian Refrigeration (supra). Naturally, there fore, this Court had no opportunity to test whether the ratio in Veerappa Chettiar''s case (supra) was

inconsistent with the ratio of the Supreme Court in the above cases.

A question similar to the one that arose in Veerappa Chettiar (supra) arose before the Andhra Pradesh High Court in Commissioner of

Wealth-tax Vs. Subakaran Gangabhishan, That was a case u/s 17(1) of the Wealth-tax Act, 1957. The question that arose for determination was

whether the WTO was competent to revise the value of house property in the reassessment for the years 1963-64 to 1967-68 and to disallow the

claim for bad debt in the reassessment for the years 1966-67 and 1967-68 when period of limitation u/s 17(1)(b) had expired in respect of two

items. Admittedly the notice of reassessment was issued u/s 17(1)(a). On behalf of the assessee, it was contended that in reassessment

proceedings the WTO could not exercise the jurisdiction vested in him u/s 17(1)(b) after the expiry of the period of four years prescribed for

proceedings u/s 17(1)(b). Reliance was placed on a Bench decision of this Court in Veerappa Chettiar (supra). The matter was referred by the

Bench to a Full Bench in view of the apparent inconsistency between the ratio laid down in Pulavarthi Viswanadham (supra) and Veerappa

Chettiar (supra). Kondaiah, CJ. after referring to the decisions of the Supreme Court, among others, observed as follows:

From the aforesaid decisions, it is clear that reassessment wipes out the original assessment and the reassessment must be in respect of not only the

items that escaped assessment but the entire assessment for the year. The assessing authority, whether under the income tax Act or under the Sales

Tax Act, has a statutory duty and obligation, apart from having jurisdiction, to include all items that escaped assessment notwithstanding the fact

that he had mentioned in the notice only some and complete the assessment as if the reassessment proceedings are de novo and afresh.

It is again after referring to section 17(1) of the Wealth-tax Act and section 34(1) of the income tax Act, the learned Judge observed as follows:

On a careful reading of the provisions of section 17(1) of the Act, we are of the view that once an assessment is validly reopened u/s 17(1) no

distinction can be made between the items falling under clause (a) and clause (b) thereof, that the reassessment proceedings wipes out the original

assessment which results in obtaining the same position as it was prior to the completion of the original assessment and that the assessing authority

would, consequently, have jurisdiction to assess the items falling under clause (a) as well as clause (b) of section 17(1) of the Act. The expression

''and may proceed to assess or reassess such net wealth and the provisions of this Act shall, so far as may be, apply as if the notice had been

issued under that sub-section'' would indicate that the WTO has not only jurisdiction but has a duty and obligation to assess or reassess the entire

escaped net wealth chargeable to tax for that year irrespective of the fact that some of the items fall under clause (a) and others under clause (b) of

sub-section (1) of section 17.

The learned Judges dissented from the views expressed by this Court in Veerappa Chettiar (supra).

Mr. Uttam Reddi, however, emphasised upon the binding nature of the decision of this Court in Veerappa Chettiar''s case (supra). We are,

however, firmly of the opinion that insofar as the ratio laid down by the said decision runs contrary to the decision of the Supreme Court in V.

Jaganmohan Rao (supra), we are bound to follow the decision of the Supreme Court and that the said decision is not binding on us. In this

connection, it will be useful to refer to two decisions of the House of Lords. In Noble v. Southern Railway Co. (1940) 2 All ER 383, the question

arose whether a Court of Appeal would be bound to follow its own earlier decision notwithstanding the fact that the decision was inconsistent with

a decision of the House of Lords. In that case, the Court of Appeal followed its earlier decision not withstanding the fact it was contrary to a

decision of the House of Lords. In this context, it will be useful to refer to the observation of Lord Wright at page 392. ""On the Judge''s findings,

the case fell precisely within the ruling of M. Ferrin''s case and judge properly so held. His decision was, however, overruled by the Court of

Appeal, not on the facts, which it was not competent to the Court to question, but, so far as I can understand, on grounds completely inconsistent

with what this House decided in M. Ferrin''s case. I feel no doubt that the decision of the Court of Appeal was wrong. I can understand the

difficulty in which both the county court judge and the Court of Appeal were placed in the present case. What a court should do, when faced with

a decision of the Court of Appeal manifestly inconsistent with the decisions of this House, is a problem of some difficulty in the doctrine of

precedent. I incline to think that it should apply the law laid down by this House and refuse to follow the erroneous decision.

In Cassell & Co. Ltd. v. Broome (1972) 1 All ER 801, at page 874, Lord Diplock has observed as follows:

The Court of Appeal found themselves able to disregard the decision of this House in Rookes v. Barnard by applying to it the lable per incuriam.

That lable is relevant only to the right of an appellate court to decline to follow one of its own previous decisions, not to its right to disregard a

decision of a higher appellate court or to the right of a judge of the High Court to disregard a decision of the Court of Appeal.

The law as regards the binding nature of the decision of the Court of Appeal and Divisional Courts is stated thus in Halsbury''s Laws of

England, 3rd Edition, Volume 22, page 799:

The decisions of Court of Appeal upon questions of law must be followed by Courts of first instance and are as a general rule considered by the

Court of Appeal to be binding on itself, until a contrary determination has been arrived at by the House of Lords. There are, however, three

exceptions to this rule, viz.: that (1) the court is entitled and bound to decide which of two conflicting decisions of its own it will follow; (2) the

court is bound to refuse to follow a decision of its own which, though not expressly overruled cannot, in its opinion, stand with a decision of the

House of Lords; (3) the Court is not bound to follow a decision of its own if given per incuriam. A decision is given per incuriam when the court

has acted in ignorance of a previous decision of its own or of a court of co-ordinate jurisdiction which covered the case before it, or when it has

acted in ignorance of a decision of the House of Lords. In the former case it must decide which decision to follow and in the latter it is bound by

the decision of the House of Lords.

Article 147 of the Constitution of India states that the law declared by the Supreme Court shall be binding on all Courts within the territory of

India.

In the circumstances, when the judgment of a High Court is found to be inconsistent with the decision of the Supreme Court, the Court on a

later occasion is bound to follow the decision of the Supreme Court and is not bound by the earlier decision of its own when it cannot stand with

the decision of the Supreme Court. In the circumstances, we are unable to follow the ratio of this Court in Veerappa Chettiar''s case (supra) as, in

our opinion, the same can not stand consistently with the decision of the Supreme Court in V. Jaganmohan Rao (supra).

Mr. Uttam Reddi then sought to make out a distinction on the wording of the language of section 34(1) and the language of section 147 of the

1961 Act. In this connection, the learned counsel laid emphasis upon the words ''subject to the provisions of sections 148 to 153'' found in section

147 of the 1961 Act, which were not present in section 34 of the 1922 Act. This, in our opinion, cannot in any manner affect the decision that we

may have to arrive at in this case. Section 153 only prescribes the time limit for completing the assessment and reassessment. Section 153(2) reads

as follows:

No order of assessment, reassessment or re-computation shall be made u/s 147-

(a) where the assessment, reassessment or recomputation is to be made under clause (a) of that section after the expiry of four years from the end

of the assessment year in which the notice u/s 148 was served;

(b) where the assessment, reassessment or. recomputation is to be made under clause (b) of that section, after-

(i) the expiry of four years from the end of the assessment year in which the income was first assessable, or

(ii) the expiry of one year from the date of service of the notice u/s 148,

whichever is later.

This section only deals with the maximum period within which a reassessment has to be completed once reassessment proceedings are initiated

either u/s 147(1)(a) or u/s 147(1)(b). This section does not in any manner fetter the power of the ITO to bring to charge items falling u/s 147(1)(b)

in a given case where reassessment proceedings are validly started by the issue of a notice u/s 147(1)(a). It, therefore, follows that once

reassessment proceedings are validly initiated u/s 147(1)(a), the ITO will have jurisdiction to assess the entire income in the hands of the assessee

irrespective of the fact whether the items of income fall u/s 147(1)(a) or 147(1)(b). In other words, when once reassessment proceedings are

initiated there cannot be any distinction between items falling u/s 147(1)(a) or u/s 147(1)(b). Thus, when once an assessment has validly been

opened by a notice u/s 147(1)(a), the ITO will have jurisdiction to assess items falling u/s 147(1)(b) even though the issue of a notice u/s 147(1)(b)

would be barred by the expiry of the period of limitation prescribed, therefor, u/s 149. To hold otherwise would be to go against the principle of

''one year one assessment'' stated by one of us in Indian Refrigeration (supra) and also the long catena of decisions to the effect that the effect of

the reopening of the assessment would be that the original assessment would stand automatically set aside and the ITO would be entitled to start

assessment proceedings afresh. We, therefore, answer Question Nos. 2 and 4 in the negative and in favour of the revenue and against the

assessee.

We now take up the question whether the assessee is entitled to depreciation in respect of the buildings described as administrative buildings.

Section 32(1)(ii) provides for determination of depreciation allowance in the case of buildings, machinery, plant or furniture, other than ships

covered by clause (i). Rule 5 of the income tax Rules dealing with depreciation states that depreciation of buildings shall be calculated at the

percentage specified in the second column of the table in Part I of Appendix I to the Rules. Item 1 of Appendix 1 to the Rules refers to buildings.

In respect of first class substantial buildings of selected materials the rate of depreciation is 2.5 percent. The third column states that an assessee

will be entitled to depreciation allowance at double the rates for factory buildings excluding offices, godowns, officers'' and employees'' quarters.

There is no definition of a factory building in the Act or the Rules. In the circumstances, the contention of the learned standing counsel is that in

order to constitute a factory building actual manufacturing business should be carried on. It cannot be said that in the administrative block with

which we are concerned or the canteen, any manufacturing is being carried on. It is equally argued that the compound walls are not a necessary

adjunct to the factory buildings inasmuch as they are not in any way needed for carrying on a manufacturing process. We are unable to accept the

argument of the learned standing counsel. From the very nature of things and from the very object which they are intended to subserve, we have no

doubt that a canteen, fire service station, pump house, overhead tank and wells, overhead line and street lights, new stores and co-operative stores

buildings are essential adjuncts to the factory premises. It is impossible to conceive of a factory building without a fire service station, pump house,

overhead tank and wells, overhead line and street lights. No special reasons need be mentioned to characterise these items as factory buildings.

Similar, is the case with canteen, new stores and co-operative stores buildings. The administrative block is admittedly said to consist of office of the

Chief Engineer, Industrial Engineering Department, drawings office methods and progress latrines, compound walls, token workers gate. It is not

disputed that in this block what is being done is to make the necessary drawings in connection with the work of the factory. As already stated, the

assessee is engaged in manufacturing automobiles. The assessee''s business involves the drawing of the necessary designs and sketches to enable

the workmen to execute the design. The presence of the Chief Engineer in the factory premises also is essential. If that be so, the Chief Engineer

has to be provided with the necessary accommodation to enable him and his assistants to work in comfort. We cannot, therefore, characterise the

Chief Engineer''s Office as partly any administrative building. It can only be seemed to be part and parcel of the factory building. No reasons are

called for to find that latrines and token workers gate also form part of the factory building. We are in agreement with the finding of the Tribunal

that even compound wall is an essential part of the factory building, as it is highly necessary to protect the factory premises with a compound wall.

Otherwise, it will be easy for trespassers to enter the premises of the factory and also it will be easy for workers to get in and get out of the factory

premises as and when they like without being watched by the workman at the gates. Though it is not necessary to support our conclusion with any

decided precedents on the subject it is, but, appropriate to refer to two decisions which highlight the principles to be followed in such cases. In

Commissioner of Income Tax, Madras Vs. A. V. Meyyappa Chettiar, a Bench of this Court speaking through Ramachandra Iyer, CJ. held that

studio building came within the category of factory building. The learned Chief Justice held as follows:

Whether a building is a ''factory building'' within the meaning of rule 8 of the income tax Rules, 1922 (which allows a depreciation of 15 percent in

respect of such buildings), is a question of fact. A cinema studio building consisted of studio sheds, painting and make up work, a laboratory for

editing films, synchronising sound, etc., and a carpentry section, where there were lathes, sewing machines, etc., which were operated by electric

motors... were factory buildings.

The test to find out whether a particular building is a factory building or not has been again laid down by a Bench of this Court in Commissioner of

Income Tax, Tamil Nadu-III Vs. Engine Valves Ltd.,

The head note of the decision reads as follows:

The proper view-points from which one must approach the question of interpretation of the term ''factory building'', with respect to depreciation

allowable under the income tax Act and Rules, would be to look at the operative words functionally as intending to provide for wear and tear of

depreciable assets. Therefore, one must exclude from consideration judicial interpretation of the term ''factory'', occurring in other enactments such

as the Factories Act, 1948.

A canteen, by virtue of its purpose and function, is susceptible to a higher rate of wear and tear than ordinary buildings, although the wear and tear

may not approach the high rate which would affect parts of a building where plant and machinery and other moving parts engaged in the process of

manufacture are fixed...Moreover, it is common knowledge and also part of the statute law governing the running of factories, that every factory

has within its precincts a canteen run for the benefit of the workers employed therein. In this respect, the canteen must be considered as a part and

parcel of the factory premises and the canteen building must be regarded as a factory building. A canteen building is, therefore, in the proper sense

of the term, a ''factory building'' for the purpose of depreciation allowance.

In the said decision this Court relied upon a number of precedents. In Commissioner of Income Tax, Bombay City-I Vs. Colour-chem Ltd.,

Commissioner of Income Tax Vs. Lucas-T.V.S. Ltd. (No. 2), and Hukamchand Mills Ltd. v. CIT [1978] 114 ITR 870 (Bom.), it was held that a

road inside a factory complex, laid out for the purpose of aiding and assisting the manufacturing processes, must be regarded as a building for the

purpose of depreciation. In INDIAN ALUMINIUM CO. LTD. Vs. COMMISSIONER OF Income Tax, WEST BENGAL-II., the Calcutta

High Court had no hesitation in holding that constructions relating to fencing, culverts and drainage inside an aluminium manufacturing factory

formed part of factory buildings. In the light of the above decisions, to find out, whether a particular structure or construction falls within the

category of factory building or not, we have to approach the question from the functional point of view. Viewed in that light, we have no doubt that

the above items cannot be considered to be otherwise than part of factory building. We the affirmative. There will be no order as to therefore,

answer Question Nos. 1, 3 and 5 in cost.