Vildirect: IncomeTax-caselaws-1982-VIL-33-ITAT-ART

1982-VIL-33-ITAT-ART

Equivalent Citation: ITD 002, 092,

Income Tax Appellate Tribunal AMRITSAR

Date: 24.02.1982

JOLLY ENGINEERS & CONTRACTORS (P.) LTD.

INCOME TAX OFFICER.

BENCH

Member(s) : K. C. SRIVASTAVA., U. S. DHUSIA.

JUDGMENT

Per Shri K.C. Srivastava, Accountant Member --- This appeal by the assessee-company is against the order of the Commissioner (Central), Ludhiana, passed under section 263 of the Income-tax Act, 1961 ('the Act'), for the assessment year 1974-75. The assessee-company had purchased a fleet of twenty passenger buses from New Suraj Transport Co. Ltd. "the vendor company" for an amount of Rs. 14,50,000. This was in accordance with the agreement with the vendor-company and the assessee-company had claimed a depreciation on these passenger buses purchased in this year. The claim of depreciation had been duly allowed in the original assessment. The purchase had taken place on 10-1-1973. The original assessment had been made on 14-9-1977.

2. The seller of these buses, the vendor-company, had claimed before the ITO that the total sale consideration included the price for 24 route permits as well as goodwill and the price of goodwill was estimated at about Rs. 5,00,000 and was claimed to be exempt. This claim was, however, rejected by the ITO in the case of the vendor-company and the total consideration of Rs. 14,50,000 was taken for the purpose of working out profits under section 41(2) of the Act. This order in the case of the vendor-company was passed on 21-8-1977 and the vendor-company filed an appeal before the appellate authorities and by an order dated 18-5-1979 the Tribunal held that the amount of Rs. 5,00,000 represented the value of route permits and other rights required by the seller-company and that was not to be taken into consideration for working out the taxable income of the vendor-company. On the basis of this decision of the Tribunal, the case was brought to the notice of the Commissioner stating that the assessee-company had been allowed larger depreciation than would be proper if the amount of Rs. 5,00,000 is excluded from the consideration paid for the buses. It was in these circumstances that the Commissioner assumed jurisdiction under section 263 and passed his order which is challenged before us. Various objections were raised before the Commissioner and it was contended that at the time of the assessment of the vendor-company the ITO had taken a consistent view and the later order of the Tribunal passed on 18-5-1979 was not before the ITO who had made assessment in this case. It was, therefore, submitted that the decision of the Tribunal in the case of the vendor-company could not make the order of assessment erroneous. Reliance was placed on the decision of the Calcutta High Court in the case of Ganga Properties v. ITO [1979] 118 ITR 447. Reliance was further placed on the agreement and it was submitted that the agreement showed the consideration of Rs. 14,50,000 for the buses. It was also pointed out that it was not possible to transfer route permits just by delivery and both the parties have to file affidavits before the motor vehicle authorities and on the passing of such by the motor vehicle authorities the route permits can be transferred. It was also pointed out that both the companies had filed a joint affidavit stating that no payments had been made for route permits. It was also denied that any part of the payment was for goodwill or route permits. It was further pointed out that the order of the Tribunal in the case of the vendor-company is a subject-matter of reference before the High Court, where the Commissioner has taken the view that the whole consideration was for the buses. It was, therefore, contended that there was no error in the order of the ITO when he passed it and it should not be interfered with.

3. The Commissioner did not accept the plea of the assessee and he held that the ITO at the time of making the assessment should have taken into consideration the contention of the vendor-company and should have on the basis of that contention reduced the consideration in the hands of the assessee and allowed depreciation on the reduced amount while stating that this assessment would be protective in nature. The Commissioner observed that the ITO should have anticipated an appeal in the case of the vendor-company and should have taken recourse to protective assessment to safeguard the revenue. In this connection, he made reference to the decision of the Calcutta High Court in the case of Jagannath Harnamdas. The Commissioner, therefore, held that the error in the order of the ITO was in not making the protective assessment and this error was prejudicial to the interests of revenue. He, therefore, set aside the order of the ITO with the directions of making a protective assessment in the case of the assessee-company on the basis of his order.

4. Before us, the learned counsel for the assessee, has submitted that the order of the Commissioner was assailable for more than one reason. He submitted that the assumption of jurisdiction by the Commissioner was invalid as there was no error in the order of the ITO who had taken a considered and consistent view in the case of the two assessees. He contended that the directions given by the Commissioner were also illegal insofar as he had directed for making a protective assessment though, in fact, his direction was for making an allowance of depreciation on a lower value and that was to be done on a protective basis till the question was finally decided in the case of the seller-company. It was contended by the learned counsel that at the time when the ITO passed the order, he did not commit any error and he read the agreement and found that Rs. 14,50,000 had been paid for the buses and adopted it as the basis for allowance of depreciation in the hands of the assessee. It was further contended by the learned counsel for the assessee that the error in the order of assessment has to be found as on the date of passing the order and the Commissioner cannot invoke his powers under section 263 in respect of an order which according to him had become erroneous on a latter date as a result of an appellate order passed in another case. Strong reliance was placed on the decision of the Calcutta High Court in the case of Ganga Properties. In this case, it was held that revisional jurisdiction under section 263 could not be exercised by the Commissioner on the basis of a subsequent valuation report and any such action could conflict with the jurisdiction of the ITO under section 147(b) or section 154 of the Act.

5. The learned counsel for the assessee further submitted before us that the assessee had filed an appeal against the assessment order before the AAC and that appeal was pending before the AAC when the learned Commissioner passed this order. He submitted that the AAC had jurisdiction to enhance the assessment and in view of this the jurisdiction of the Commissioner was barred. It was further contended that the learned Commissioner had set aside the whole assessment whereas what he wanted was that the written down value of the buses should be reduced in accordance with the claim of the vendor-company.

6. Coming to the merits of the case, the learned counsel drew our attention to the agreement between the assessee-company and the seller-company and pointed out that what had been transferred were the buses and the consideration was for those buses only. He further submitted that under the agreement twenty motor-buses had been transferred together with such route permits granted by the Punjab Government and these facts were very much before the ITO at the time of the original assessment. It was also submitted that the agreement had given the details of the value of each bus. He pointed out that under the law route permits could not be transferred by such an agreement but by both sides filing affidavits before the motor vehicle authorities and in this case no such procedure had been followed. It was, therefore, contended that there has been no consideration for the transfer of route permits in this case. In the alternative, it was submitted that the cost of such route permits should be taken as part of the cost of the buses. He submitted that plying buses on a particular route was an asset and in respect of such an asset, if a consideration has been paid, depreciation should be allowed on the whole of such consideration.

A reference was made to the decision of the Allahabad High Court in the case of CIT v. J.K. Cotton Spinning & Weaving Mills Ltd. [1975] 98 ITR 153 for the proposition that interest on the loan for purchase of machinery have to be capitalised for allowing depreciation. Reference was also made to the decision of the Supreme Court in the case of Challappalli Sugars Ltd. v. CIT [1975] 98 ITR 167.

7. In reply, the departmental representative submitted that the Commissioner had assumed jurisdiction rightly, as in the circumstances of the case, the ITO had not made a protective assessment. He pointed out that protective assessments have been accepted by the courts as valid. He further submitted that the error in the order of the ITO had to be seen by the Commissioner when he was passing the order and it is not to be limited to the time when the ITO passed the order. It was submitted that in view of the claim of the vendor-company the ITO should have protected the interest of revenue by accepting the view which appellate authority might take by accepting that company's plea. It was, therefore, submitted that there should have been a protective assessment insofar as the allowance of depreciation was concerned and in not doing so, the order of the ITO was erroneous and had caused prejudice to the revenue. He, therefore, supported the order of the learned Commissioner.

8. We have carefully considered the facts of the case and the arguments advanced by both the sides. We find force in the submissions of the learned counsel for the assessee. Section 263 contemplates action by the Commissioner where he finds that the order of the ITO is erroneous insofar as it was prejudicial to the interests of the revenue. Now in the case of the vendor-company the ITO had looked into the agreement regarding the transfer of the buses and had rejected the plea of the assessee that any part of the consideration was either for the route permits or for the goodwill. He had, therefore, proceeded to work out the profit under section 41(2) in the case of the seller-company. Taking the same view in the case of the assessee-company, he allowed the depreciation on the sale consideration for these buses. Now the Commissioner is of the view that the ITO should have anticipated the possible appeal by the assessee and a possible view which might be taken by any of the appellate authorities accepting the plea of the vendor-company. In view of this possibility, he wants that the ITO should not have taken the written down value after excluding the consideration which had been paid in respect of either the route permits or the goodwill. According to him, this action could have been taken on a protective basis so that the position could be set right as and when the matter was finally decided in the case of the vender-company. In the first place, we have to determine whether the order of the ITO was erroneous in this respect. The learned Commissioner appears to be of the view that while not accepting the claim of the vendor-company regarding the nature of the sale consideration the ITO should have taken that very stand which he had rejected there in the case of the assessee-company and should have allowed depreciation on a lower written down value after excluding Rs. 5,00,000 which was relateable to goodwill. He further wants this action to be taken not as the final decision of the ITO but only in view of a possible decision, in appeal, adverse to the revenue. In our opinion, the learned Commissioner was in error in holding that the ITO's order was erroneous in not allowing depreciation on a reduced written down value as a protective measure.

In fact, if the ITO had followed this procedure the order would have been erroneous, as it would have been against his interpretation of the agreement and against the view he had taken in the case of the vendor-company. The possibility of an error arising as a result of any future order of the appellate authorities cannot make the order of assessment itself erroneous. The order has to be found erroneous as on the day when the ITO passed that order and that error cannot depend on an uncertain factor like a possible decision in appeal. The Commissioner does not hold that on the reading of the agreement itself the action of the ITO in allowing depreciation on the amount of Rs. 14,50,000 was erroneous. What he had held is that the ITO should anticipate any possible appellate order and take action to safeguard the revenue. The reliance of the assessee on the decision of the Calcutta High Court in Ganga Properties is well taken and a decision of the Tribunal coming several years later in another case cannot be a part of the record of the proceedings for the purpose of section 263.

9. As regards the question of prejudice to the revenue, the order of the Commissioner shows that prejudice has been caused as a result of the order of the Tribunal and not as a result of the order of the ITO. If the order of the Tribunal had been otherwise, then the Commissioner could not come to the conclusion that the order of the ITO was prejudicial to the interest of revenue. In our opinion, this is entirely a wrong approach regarding the scope of section 263. The prejudice to revenue would disappear in case the decision of the Tribunal is upset by any judgment of the High Court or of the Supreme Court. The view that an order being prejudicial to the interest of revenue is dependent on the decision of the appellate authorities or the judgment of the High Court or the Supreme Court, is not a correct view and cannot be upheld. We, therefore, agree with the learned counsel for the assessee that the assumption of jurisdiction by the Commissioner in this case was wrong and the order under section 263 cannot be upheld.

10. While setting aside the order of the ITO and giving a direction for fresh assessment the Commissioner has propounded the theory of protective allowance or protective disallowance of a claim of expenditure or depreciation allowance. The law does accept the right of the department to make assessments on two persons, in respect of the same income, where there is a doubt regarding the person who is liable to tax in respect of that income. In such a case where a person claims that a particular income belongs to him the revenue can complete his assessment on that admission while giving a finding that in fact the income belongs to somebody else and assess the income in that person's hands. The Commissioner is of the view that this theory can be extended to the allowance of expenses or deductions in one hand or the other. In other words, wherever there are two parties to a transaction and one of those parties claims a particular position regarding the character of that expenditure the ITO should take a particular view in that case but to safeguard the revenue take an entirely different stand in another case. In our opinion, there is no provision in law which enjoins the ITO to follow this procedure and in actual practice also, this is not going to be found practicable. In this case, when the ITO had no doubt regarding the consideration for the buses he could not be expected to take any protective measure as contemplated by the Commissioner. We, therefore, hold that the direction given by the Commissioner in this case could not be considered to be a valid direction in the eyes of law.

11. The learned counsel for the assessee has also made a submission on the merits of the case and has submitted that even if the consideration was partly for the route rights, depreciation could be allowed on it. We do not consider it necessary to go into the matter and, in fact, we find that the decision of the Madras High Court in G. Vijayaranga Mudaliar v. CIT [1963] 47 ITR 853 is contrary to this claim of the learned counsel.

12. In view of the above discussion, we are of the view that the order of the Commissioner is wrong for the various reasons discussed and the same is, therefore, set aside. The appeal is allowed.

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