1. Relief granted under Section 26(3) of the Excess Profits Tax Act based on anticipated postwar obsolescence of assets — subsequent discovery of continued asset use — re-assessment under Section 15. (Para 1 , 2 , 3 , 4 , 5 )
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1954 Supreme(SC) 146
SUPREME COURT OF INDIA
Mehr Chand Mahajan, CJI., S. R. Das, Ghulam Hasan, N. H. Bhagwati, T. L. Venkatarama Ayyar, JJ.
India United Mills Ltd. – Appellant
Versus
Commr. of Excess Profits Tax, Bombay – Respondent
Civil Appeal No. 160 of 1953
Decided On : 28-10-1954
Advocates appeared
Messrs. R. J. Kolah and Rajinder Narain, Advocate for Appellant; Mr. M. C. Setalvad, Attorney-General of India, (M/s. G. N. Joshi and P. G. Gokhale, Advocates with him), for Respondent.
Messrs. R. J. Kolah and Rajinder Narain, Advocate for Appellant; Mr. M. C. Setalvad, Attorney-General of India, (M/s. G. N. Joshi and P. G. Gokhale, Advocates with him), for Respondent.
The term "discovers" in Section 15 of the Excess Profits Tax Act includes the discovery of subsequent events that have a material bearing on the facts or circumstances upon which a previous assessment or relief was granted.
Headnote:(A) Excess Profits Tax Act - Sections 15 and 26(3) - Re-assessment - Discovery of facts - Scope of "discovers" - Relief granted under Section 26(3) on the ground that buildings, plant, or machinery would not be required after the termination of hostilities - Subsequent discovery that assets were used for business after the war - Whether such discovery allows re-assessment under Section 15 - The word "discovers" is of wide import and includes finding out facts that come into existence subsequent to the chargeable accounting period, especially where the relief was granted based on a future state of affairs. (Paras 6, 8, 9)
(B) Interpretation of Statutes - Machinery sections - A machinery section should be construed to effectuate the charging sections - Where relief is granted based on an anticipated future event, the machinery for revising such relief must necessarily include facts arising after the period of assessment. (Para 9)
Facts of the case:
An assessee obtained relief in computing profits for several accounting periods on the representation that certain buildings, plant, and machinery would not be required for business after the termination of hostilities. After the war ended, it was found that the assets were still being used for business. The tax officer reopened the assessments for the previous years on the ground that excessive relief had been granted under the Act.
Findings of Court:
The court found that the basis on which relief was granted had disappeared when the assets continued to be used after the war, resulting in the profits for the chargeable accounting periods being the subject of excessive relief.
Issues: Whether the power to re-assess under Section 15 of the Act is limited to the discovery of facts that existed during the chargeable accounting period, or whether it extends to facts that come into existence subsequently.
Ratio Decidendi: The term "discovers" in Section 15 is not limited to facts existing during the chargeable accounting period. Since relief under Section 26(3) is granted with reference to a future state of affairs, a finding that such relief was erroneously granted can only be reached based on subsequent facts. To hold otherwise would render the conditions of the relief provision unenforceable. (Paras 8, 9)
Result: Appeal dismissed.
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2. Whether discovery under Section 15 is limited to facts existing during the chargeable accounting period or includes subsequent events proving relief was excessive. (Para 7 )
3. Section 15 is a machinery section; relief under Section 26(3) depends on future events, making subsequent discovery essential to prevent excessive relief. (Para 6 , 8 , 9 , 10 , 11 , 12 , 13 )
4. The term discovers under Section 15 includes subsequent events that materially affect the basis of assessment or relief granted during the chargeable accounting period. (Para 14 )
5. Appeal dismissed. (Para 15 )
6. Does the term discovers in Section 15 of the Excess Profits Tax Act limit re-assessment to facts existing during the chargeable accounting period?
No. The term is of wide import, meaning the finding out of something previously unknown. It includes subsequent events that have a material bearing on the facts and circumstances on which the assessment was made or relief was granted. (Para 8 , 14 )
7. Can Section 15 be used to revise assessments where relief was granted under Section 26(3) based on future expectations?
Yes. Since relief under Section 26(3) relates to a future state of affairs, a finding that such relief was erroneously granted can only be reached based on facts arising subsequent to the chargeable accounting period. (Para 9 )
8. How does the court distinguish between a valuation of an asset at the time of assessment and relief based on future events?
A valuation de praesenti is judged by facts and probabilities at the time. Conversely, relief based on future events is contingent on those events occurring, allowing subsequent facts to justify re-assessment under Section 15. (Para 13 , 14 )
Judgement
VENKATARAMA AYYAR J. : This is an appeal from the judgment of the High Court of Bombay on a reference under Section 66(1) of the Indian Income-tax Act, and the question for determination is as to the validity of certain re-assessments made under Section 15 of the Excess Profits Tax Act. which will hereafter be referred to as the Act.
2. In proceedings for assessment of excess profits for the year 1941, the appellant Company applied for relief under S. 26(3) of the Act, which so far as is material for the purpose of this appeal, runs as follows :
"If on an application made to it through the Excess Profits Tax officer the Central Board of Revenue is satisfied that the computation in accordance with the provisions of schedule I of the profits of a business during any chargeable accounting period would be inequitable, owing to any of the following circumstances, namely-
* * *
(b) the provisions of buildings, plant or machinery which will not be required for the purposes of the business after the termination of the present hostilities;
* * *
The Central Board of Revenue may direct that such allowances shall be made in computing the profits of the business during that chargeable accounting period as the Central Board of Revenue thinks just :
Provided that in making such direction the Central Board of Revenue may impose such conditions as it deems appropriate".
In their application under Section 26(3) under the heading "Buildings, Plant and Machinery provided for the production of War Materials, which will not be required for the purposes of the business after the termination of the present hostilities", the assessees stated that the production of khaki textiles for war purposes had "necessitated additional plant in the Company s Dye Works": that the requirements as to canvas had "necessitated additional Textile machinery for the various doubling processes and additional winding machinery for the Canvas waft"; that "much of the additional plant purchased by the Company in 1941 comes under these two headings"; and that "their manufacture in bulk will cease once the war is over and the plant bought for their manufacture will be idle and will have to be disposed of". The assessees then proceeded to give particulars of the machinery and plant which "will undoubtedly have to be scrapped after the war", and whose "postwar value would be as scrap material". Then they set out "the additional buildings, plant and machinery which have been installed as a war measure", and estimated their value at Rupees 4,85,633.
3. On this application, the Central Board of Revenue passed the following order :
"The Central Board of Revenue having considered the application of E. D. Sassoon United Mills Ltd. under sub-section (3) of Section 26 of the Excess Profits Tax Act. l940, that, by reason of the following circumstances, viz.-
That the provision of buildings, plant or machinery which will not be required for the purposes of the business after the termination of the present hostilities,
the computation of the profits of that business during the chargeable accounting period commencing 1st January 1941 and ending 31st December 1941, in accordance with the provisions of Schedule I of the Act would be inequitable.
I (the First Secretary, Central Board of Revenue) hereby give you notice that the Central Board of Revenue has directed that,
allowance of Rs. 4,06,394/- shall be made in respect of such circumstances, in computing the profits of such chargeable accounting period, -such allowance to be inclusive of all depreciation allowable for excess profits tax purpose in respect of the assets in question."
There were similar applications by the assessees for relief under Section 26(3) of the Act for the accounting periods 1942 and 1943, and similar orders were passed by the Central Board of Revenue granting allowance respectively of Rs. 4,00,000/- and Rs. 3,94,000/-.
4. The war terminated on 31-3-1946. In the course of enquiry into the assessable profits of the Company
