VENKATESA MILLS LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee is a public limited company carrying on business of manufacturing of yarn and cloth. THE previous year is the calendar year and in 1959, the assessee spent a sum of about Rs. 12,00,000 for the introduction of the casablanca conversion system in its spinning plant. It spent more sums of money on the value of conversion materials in the three succeeding years. It also incurred expenditure on acquiring some other items like spindles, pedestals, etc., in each of these years. For the assessment years 1960-61 to 3963-64, when the Income-tax Officer computed the profits and gains of the business of the assessee, he allowed development rebate on the cost of all the purchases referred to above. However, subsequently, the Income-tax Officer purported to reopen the assessments for all the four years under Section 147(b) of the Income-tax Act, 1961, hereinafter referred to as "the 1961 Act". THE reason for reopening of the assessments was that the income was under-assessed by giving deduction for the development rebate in the original assessments, while the assessee was not entitled to such development rebate at all. In appeals preferred by the assessee to the Appellate Assistant Commissioner, he held in respect of all the four assessment years, that the reopening of the assessments under Section 147(b) was not legal because it was based on nothing more than the change of opinion on the part of the Income-tax Officer. On merits, the Appellate Assistant Commissioner held that the assessee was entitled to deduction for the development rebate. In respect of all these four years, appeals were preferred by the department to the Income-tax Appellate Tribunal against the orders of the Appellate Assistant Commissioner. When the appeal in respect of the assessment year 1960-61, namely, I.T.A. No. 18964 of 1966-67 came up for hearing before the Tribunal, the departmental representative agreed, on the authority of the decision of the Supreme Court in Commissioner of Income-tax v. Mahalakshmi Textile Mills Ltd. [1967] 66 ITR 710, which we shall have occasion to refer to later, that the expenditure on conversion materials would be treated as admissible as revenue expenditure, subject to the development rebate allowed by the Appellate Assistant Commissioner being withdrawn. THE representative of the assessee conceded the departmental appeal on this basis and as a consequence depreciation as far as the items of conversion materials were concerned was also withdrawn and the Tribunal passed orders accordingly on November 20, 1968.

(2.) THE appeals relating to the other three years, namely, 1961-62, 1962-63 and 1963-64, came up for consideration before the Tribunal later. When those appeals were taken up for hearing as before, the departmental representative indicated that the department was agreeable to orders being passed similar to the one passed in respect of the assessment year 1960-61 on concession. However, the counsel for the assessee did not agree to such a suggestion and he wanted the matter to be disposed of on merits. It is thereafter the Tribunal disposed of those appeals on merits. THE Tribunal held that the reopening of the assessment under Section 147(b) of the 1961 Act was proper. At the same time it also held that on the basis of the decision of the Supreme Court in Commissioner of Income-tax v. Mahalakshmi Textile Mills Ltd. [1967] 66 ITR 710, referred to already, the conversion materials were not eligible for development rebate, but that the entire expenses could be allowed as admissible deduction and that since the proceedings were only reassessment proceedings, the total income originally assessed by the Income-tax Officer could not be reduced further and that, therefore, the effect of the withdrawal of the development rebate which was a smaller sum each year than the cost of the value of the conversion materials would be offset by the deduction which was admissible. It is on this basis that the Tribunal allowed the appeals preferred by the department in. part. THE allowing of the appeals in part resulted in the Tribunal holding that the assessee was entitled to have the entire expenses allowed as a deduction and that it was not entitled to the development rebate which was smaller, 25% or 20%, as the case may be, of the total expenses incurred by the assessee. It is against these orders of the Tribunal that the assessee applied for reference to this court of the questions of law said to arise out of the said orders and the Income-tax Appellate Tribunal, Madras Bench, under Section 256(1) of the 1961 Act, has referred the following questions of law for the opinion of this court:

(3.) THOUGH the questions referred to this court are five in number, the material points that arise for consideration are only two, namely, (1) whether the Income-tax Officer acted within the four corners of Section 147(b) of the 1961 Act when he reopened the assessments for the years 1961-62 to 1963-64? and (2) whether the expenses incurred by the assessee in respect of the three years referred to already were of such a nature as to be not eligible to obtain development rebate provided for by the statutory provisions referred to above ?