Judgement

BOSE J.: The following question was referred to the High Court of Madras by the Income-tax Appellate Tribunal under S. 66(1) Income-tax Act, 1922:

"Whether on the facts and in the circumstances of the case when an assessment has been made under section 23(1) of the Indian Income-tax Act, determining the assessee company s income as nil and when proceedings under section 34 were subsequently started to assess the income which the Income-tax Officer believed to have escaped assessment the assessee company is entitled to claim that the loss of profits and gains (including depreciation allowance) sustained by it in the previous year should be determined in the course of such proceedings."

2. We are concerned in this case with the assessment year 1941-42. The assessee is the Anglo-French Textile Company, a company which is incorporated in the United Kingdom. It owns spinning and weaving mills at Pondicherry in French India and manufactures yarn and cloth there. The raw materials necessary for the manufacture, or at any rate much of it, such as cotton, used to be purchased in what was then the British India, through their agents Best & Company Ltd., of Madras. The bulk of their manufactured goods were also sold in British India, the rest being sold elsewhere. But in the year material to this case it did no business in British India and accordingly it submitted no return to the Income-tax authorities.

3. On 25-4-1941 the Income-tax Officer issued a notice to the assessee and called for a return.

The assessee replied on 9-6-1941 that it had

"at all times material to the assessment year no business in British India" and consequently no profits arose or accrued or were received in British India and therefore the assessee

"was not liable to comply with the provisions of the Indian Income-tax Act."

The assessee added-

"In the circumstances the company is not liable to make a return but with a view to preserve the right of the company to appeal against any order that may be passed by you, if necessary, we submit herewith without prejudice a nil return receipt at which kindly acknowledge."

Appended to the letter was a piece of paper which has been called a "nil" return. It is the usual printed form in which returns are normally made but the only entry in the whole form is the word "nil". The following declaration was also added :

"I further declare that the company was not resident in British India during the previous year etc.. . . . . . . .. . "

4. On 25-3-1942 the Income-tax Officer made the following order which he called an Assessment Order :

The company made a nil return of income, obviously for the reason that it is not carrying on any business in British India..... I accept the return of income filed by the company and declare it is not liable to tax for the year 1941-42."

5. A year later, namely on 9-3-1943, the Income-tax Officer sent the assessee a notice under section 34 (1) (b) in the following terms :

"Whereas in consequence of the definite information which has come into my possession I have discovered that your income assessable to income-tax for the year ending 31st March 1942 has

(a) escaped assessment.

I therefore propose to assess the said income that has

(a) escaped assessment.

I hereby require you to deliver to me not later than, .....a return in the attached form of your total income and total world income assessable for the said year...."

6. In reply to this the assessee again submitted the same "nil" return and filed a statement showing a loss of Rs. 3,92,357 on its total world income. This was on 31-5-1944.

7. The income-tax Officer passed orders on this on 2-6-1944. He stated that the assessee was a non-resident company and that during the year no sales were effected in British India and concluded as follows :

"As the net result for the world business is only a loss, there can be no question of profits attributable to operation in British India under sections 42(1) and 42(3) in respect of cotton purchases. The Nil