India United Mills Ltd vs Commissioner Of Excess Profits Tax

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 160 of 1953

Decision Date: 28 October 1954

Coram: Venkatarm Ayyar, Mehar Chand Mahajan, Ghulam Hasan, Natwarlal H. Bhagwati

India United Mills Ltd filed a petition against the Commissioner of Excess Profits Tax, Bombay, and the Supreme Court of India delivered its judgment on 28 October 1954. The Bench that heard the matter comprised Justice Mehar Chand Mahajan, Justice Ghulam Hasan and Justice Natwarlal H. Bhagwati, with Justice Ayyar, T. L. Venkatarama also listed as a member of the Bench. The case is reported as India United Mills Ltd. v. Commissioner of Excess Profits Tax, AIR 1955 79 and SCR (1) 810, and it has been cited in later decisions such as R 1963 SC 1062, RF 1976 SC 313, R 1981 SC 1887, among others.

The dispute concerned the interpretation of the Excess Profits Tax Act (XV of 1940), particularly sections 15 and 26(3). The central question was the meaning and scope of the word “discovers” in section 15, and the effect of an allowance that had been granted to the assessee on the basis of a representation that later proved to be false. The headnote summarised the Court’s view that “discovers” was not confined to facts that existed during the chargeable accounting period for which the assessment was reopened; it also covered facts that were discovered after that period. The Central Board of Revenue had, under section 26(3), allowed a deduction for the chargeable accounting period during the war on the ground that certain buildings, plant and machinery used for the production of war material would no longer be required after the termination of hostilities. Subsequent investigation revealed that the same buildings, plant and machinery continued to be used by the assessee in the ordinary course of business after the war had ended. The Court held that the Excess Profits Tax Officer possessed sufficient authority to reopen the assessment and reassess the taxpayer under section 15 in light of the newly discovered facts.

The appeal arose from a judgment and order dated 1 April 1952 of the High Court of Bombay in Income‑Tax Reference No. 49 of 1951. The appeal, filed as Civil Appeal No. 160 of 1953, was taken by special leave. Counsel for the appellant were R. J. Kolah and Rajinder Narain, while counsel for the respondent included the Attorney‑General for India, assisted by G. N. Joshi and P. G. Gokhale. The judgment of the Court was delivered by Justice Venkatarama Ayyar. The matter before the Court concerned an appeal from the High Court’s decision on a reference made under section 66(1) of the Indian Income‑Tax Act, and the issue to be determined was whether the re‑assessments made under section 15 of the Excess Profits Tax Act were valid.

The Court noted that the legislation under consideration would be called the Act. In the assessment of excess profits for the year 1941, the appellant company filed an application for relief under section twenty‑six sub‑section three of the Act. For the purposes of this appeal, the Court reproduced the relevant wording of that provision. The provision states that if, upon an application made through the Excess Profits Tax Officer, the Central Board of Revenue is convinced that the computation of profits of a business for any chargeable accounting period, in accordance with Schedule I of the Act, would be inequitable because of certain circumstances, the Board may make a direction to allow adjustments in computing the profits for that period. One of the enumerated circumstances is the existence of buildings, plant or machinery that will not be required for the business after the termination of the present hostilities. The Board, after making such a direction, may also impose any conditions it considers appropriate.

The appellant’s application under section twenty‑six three was presented 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”. In that application the assessee explained that the production of khaki textiles for war purposes had necessitated the acquisition of additional plant in the company’s dye works. The assessee further observed that the need for canvas had required additional textile machinery for various doubling processes and extra winding machinery for the canvas waft. The assessee asserted that much of the additional plant purchased in 1941 fell within these two categories and that the bulk manufacture of such items would cease once the war ended, rendering the plant idle and destined for disposal. The application then listed the specific machinery and plant that would undoubtedly have to be scrapped after the war, noting that their post‑war value would be equivalent to scrap material. The assessee also set out the additional buildings, plant and machinery installed as a war measure and estimated their total value at rupees four lakh eighty‑five thousand six hundred thirty‑three.

On receipt of this application, the Central Board of Revenue issued an order. The order began by stating that the Board, having considered the application of E. D. Sasoon United Mills Ltd. under sub‑section three of section twenty‑six of the Excess Profits Tax Act, 1940, was satisfied that the following circumstance existed: the provision of buildings, plant or machinery that would not be required for the business after the termination of the present hostilities made the computation of profits for the chargeable accounting period commencing on first January 1941 and ending on thirty‑first December 1941, in accordance with Schedule I, inequitable. The First Secretary of the Central Board of Revenue then gave notice that the Board was directing the matter as set out in the subsequent part of the order.

The Central Board of Revenue directed that an allowance of Rs 4,06,394 be permitted in respect of the circumstances described, and that this allowance be taken into account when computing the profits for the relevant chargeable accounting period. The Board clarified that the allowance must include all depreciation that is allowable for excess profits tax purposes in relation to the assets concerned. Similar applications for relief under section 26(3) of the Act were made by the assessee for the accounting periods 1942 and 1943. The Board issued corresponding orders granting allowances of Rs 4,00,000 for the 1942 period and Rs 3,94,000 for the 1943 period. The hostilities formally ended on 31 March 1946. During an enquiry into the assessable profits of the company for the chargeable accounting period ending on that date, the Excess Profits Tax Officer discovered that the buildings, plant and machinery for which relief had previously been granted under section 26(3) were in fact being employed by the assessee in the conduct of its business after the war had ended. Acting on that discovery, the Officer decided to invoke section 15 of the Act and issued the required notices to reopen the assessments for the years 1941, 1942 and 1943. The assessee opposed this action, arguing that the facts uncovered pertained to a period after the years under assessment and therefore could not justify reopening those earlier assessments. Nevertheless, by an order dated 28 December 1948, the Excess Profits Tax Officer dismissed the objection and revised the assessments for the three years on the ground that there were no longer any grounds for granting relief under section 26(3). This revision was upheld on appeal by the Appellate Assistant Commissioner, but subsequently the Appellate Tribunal, by a majority, set aside the revision, holding that the Officer could not rely on section 15 to act upon facts that had arisen only after the relevant accounting periods.

Following the Tribunal’s decision, the respondent sought a reference under section 66(1) of the Income‑Tax Act and section 21 of the Excess Profits Tax Act. In response, the Tribunal referred a specific question of law to the High Court: whether the revised assessments for the chargeable accounting periods 1941, 1942 and 1943 should be cancelled on the basis that the Excess Profits Tax Officer erred in invoking section 15 of the Excess Profits Tax Act. The Tribunal also referred another question to the High Court, which was answered unfavourably to the appellant; however, because no argument on that point was presented before this Court, it was deemed unnecessary to discuss it further. The reference was placed before Chief Justice Chagla and Justice Tendolkar. Disagreeing with the Tribunal’s view, the two judges held that the fact that the assessee had obtained excessive relief, together with the subsequent discovery that the assets were being used for the assessee’s own business after the war, was sufficient to bring the matter within the scope of section 15. Accordingly, they answered the referenced question in the negative, concluding that the revised assessments could not be set aside on the basis advanced by the Tribunal.

The High Court had held that the assessment revisions for the chargeable accounting periods of 1941, 1942 and 1943 did not fall within the scope of section 15 of the Excess Profits Tax Act, and therefore answered the reference question in the negative. This judgment is now being challenged before the Supreme Court by way of a special leave appeal. The appellant argues that, when section 15 is properly construed, the Excess Profits Tax Officer, based on the facts that were established, possessed no authority to revise the assessments for the said accounting periods. The court reproduced the full text of section 15, which provides that if, as a result of definite information that comes into the officer’s possession, he discovers that the profits of any chargeable accounting period have escaped assessment, have been under‑assessed, or have been the subject of excessive relief, he may serve a notice containing any or all of the requirements that could be included in a notice under section 13, and may then proceed to assess or reassess the amount of such profits, with the provisions of the Act applying as if the notice had been issued under that section. The court explained that for the provisions of section 15 to be invoked, two conditions must be satisfied: first, the profits of a chargeable accounting period must have escaped assessment, have been under‑assessed, or have been the subject of excessive relief; second, that such a circumstance must have been discovered by the officer as a consequence of definite information. The court noted that there is no dispute that the first condition was fulfilled on the facts found. The appellant had obtained relief under section 26(3) on the representation that its buildings, plant and machinery would not be usable after the war, and that representation was the sole basis for granting relief. When the appellant subsequently continued to use the machinery for business after the war ended, the basis for the relief disappeared, rendering the assessable profits for the relevant periods the subject of excessive relief. The dispute therefore turned on whether, on the facts, the officer could be said to have discovered a grant of excessive relief. Counsel for the appellant, Mr Kolah, submitted that discovery under section 15 must relate only to facts existing during the chargeable accounting period, and that any facts arising after that period could not be used as a basis for reassessing the profits of the earlier period. On the other side, counsel for the respondent, the learned Attorney‑General, argued that the phrase “if the Excess Profits Tax Officer discovers” in section 15 merely means that the officer finds or is satisfied of a circumstance, and that there is no justification for importing a limitation that discovery must be limited to facts existing in the chargeable period. The Attorney‑General further contended that once the officer found that the appellant’s buildings, plant and machinery were being used after the war, and therefore that excessive relief had been granted, the requirements of section 15 were fully met.

There was no justification for inserting into section fifteen a restriction that the discovery must relate only to facts existing during the chargeable accounting period. The Court observed that once the Excess Profits Tax Officer had found that the buildings, plant and machinery were being used after the war, and consequently that excessive relief had been granted, the conditions laid down in the section were fully satisfied. In examining the language of section fifteen, the Court found it difficult to support the appellant’s contention. The provision is phrased in general terms and is intended to apply whenever, on the basis of definite information, the Officer discovers that chargeable profits have escaped assessment, have been under‑assessed, or have been the subject of excessive relief. The wording contains nothing that would exclude its operation when the discovery rests on facts that became known only after the chargeable period. The appellant, Mr Kolah, argued that the word “discovers” may be used only when the facts on which the discovery is made were in existence during the chargeable accounting period. The Court held that, in its natural and ordinary sense, “discovers” does not carry such a limitation. The Oxford English Dictionary defines the term as “the finding out or bringing to light that which was previously unknown” (Vol. III, p. 133). Accordingly, when a person becomes aware of a fact that was previously unknown, he discovers that fact, whether his lack of knowledge was due to the fact not existing during the material period or simply because it had not been known to him even though it might have existed. Because the word has a broad import, its meaning in any particular statute must be derived from the surrounding context. Therefore the Court proceeded to examine the Act for indications that would clarify the precise connotation of “discovers” in section fifteen.

The Court emphasized that section fifteen is not a charging provision but a machinery provision, and it must be interpreted so as to give effect to the charging sections. Its purpose is to vest the Excess Profits Tax Officer with the power to amend an assessment when it is found that the relief granted exceeds what the law permits. One of the sections that can confer such relief is section twenty‑six sub‑paragraph three, which provides relief when the assessee’s buildings, plant or machinery would not be required for business after the war. Consequently, section fifteen must be read as conferring on the Officer the authority to revise an assessment where relief has been erroneously granted under that provision. Section twenty‑six sub‑paragraph three contemplates relief being granted in anticipation of a future state of affairs, namely that the assets will not be needed after the war. Therefore, a finding that the relief was wrongly granted can only be reached on the basis of facts that arise after the chargeable accounting period. The Court concluded that the Act supplies the necessary machinery, through section fifteen, to correct such erroneous grants, and that the term “discovers” is not limited to facts existing during the chargeable period.

In the matter before the Court, it was pointed out that when a taxpayer obtained relief under section 26(3) and subsequently employed the buildings, plant and machinery in his business after the war, he had in effect secured a benefit to which he was not entitled under the statute. The question then arose as to where the statutory mechanism for imposing the correct charge was located, if not in section 15, and how that provision could be invoked if the term “discovery” were confined solely to facts that existed during the chargeable accounting period. The Court observed that the relief contemplated in section 26(3) is inherently premised on a future state of affairs; consequently, a determination that the relief was erroneously granted can be made only on the basis of facts that arise after the chargeable accounting period. To hold that no remedial action could be taken in such circumstances under section 15 would amount to a finding that the statute contains no machinery for giving effect to the conditions prescribed in section 26(3). It was further argued that the Central Board of Revenue, acting under the proviso to section 26(3), might have imposed suitable conditions to protect its interests before granting relief, and that a failure to observe those conditions should lead the respondent to act solely under that proviso, rendering action under section 15 incompetent. The Court rejected this line of reasoning, describing it as a misconception of the true scope of section 26(3). It explained that if a condition imposed under the proviso were subsequently breached, the only permissible step would be to commence reassessment proceedings, disregarding the relief granted under section 26(3); the appropriate procedural machinery for such a step is found exclusively in section 15 of the Act. Because the two sections have distinct scopes, the proviso to section 26(3) cannot be interpreted as limiting, in any measure, the jurisdiction conferred by section 15. The Court then turned to the authorities cited by counsel for the petitioner. In Dodworth v. Dale, the taxpayer Dale had married Kathleen Richards in 1921 and lived with her until 1933, when a decree nullifying the marriage on the ground of her incapacity was obtained. Between 1921 and 1932 Dale claimed deductions under section 18(1) of the Finance Act, which allowed a deduction where, for the year of assessment, the taxpayer’s wife lived with him or was solely maintained by him. In 1934 the Inspector of Taxes issued additional assessments for the deductions claimed for the years 1928 to 1932, arguing that because the marriage had been declared void ab initio, Dale had obtained deductions not authorized by the Act.

In the case under consideration, the Court examined the application of section 125 of the Income Tax Act, 1918, to the additional assessments imposed on the taxpayer. The Court noted that Justice Lawrence had ruled that those additional assessments were not justified under section 125 because a decree declaring a marriage to be a nullity did not erase the past or undo the actions that had been taken previously, and because, under section 18(1) of the Finance Act, the entitlement to relief was based on a de facto marriage. The appellant then relied upon certain observations that were quoted at length. The quoted passage stated that there existed “another difficulty in the way of the Crown,” and expressed the view that it was not lawful for either an additional assessment or an original assessment to be made on the basis of facts that arose after the year of assessment. The passage further observed that this reasoning was in line with the decision of Rowlatt J. in Anderton and Halstead Ltd. v. Birrell, and concluded that it was incompetent for revenue authorities to make a fresh assessment on the ground of a fact that actually occurred after the year of assessment. Although at first sight those observations seemed to support the contention of the appellant, the Court carefully examined them and concluded that they did not have the effect claimed. The Court cited the authorities (1) [1936] 2 K.B. 503; 20 Tax Cas. 285 and (2) [1932] 1 K.B. 271; 16 Tax Cas. 200, and observed that the taxpayer had been granted relief for the years 1928 to 1932 because, during that period, he was in fact living with his wife or maintaining her. The decree that was passed in 1933 could not alter those established facts. Consequently, if the taxpayer was entitled to relief for those years under section 18(1) of the Finance Act, there was no question that he had obtained a deduction to which he was not entitled, and therefore no basis for a further assessment under section 125. The Court held that the 1933 decree could not be characterised as a “discovery” on which action could be taken under section 125, not merely because it was a subsequent event, but because it could not affect relief that depended on facts existing at the relevant time. The ratio of the decision was illustrated by passages from the judgment, which expressed that there was no distinction between an original assessment and an additional assessment under section 125. For the purpose of illustration, the Court explained that section 125 of the Income Tax Act, 1918, and section 18 of the Finance Act, 1920, related to the facts as they existed at the time of the assessment. The person chargeable had proven, within the terms of section 18 of the 1920 Act, that his wife was living with him, and he was rightly allowed a deduction at that time.

The Court explained that the guiding rule in this matter is that a tax assessment may not be reopened merely because of events that occur after the assessment date, provided that those later events do not alter the factual situation on which the assessment was originally based. In support of this rule the Court referred to the decision in Gray (H. M. Inspector of Taxes) v. Lord Penrhyn (1). In that case the Court held that Section 125 could be invoked with reference to subsequent events only when those events were directly related to the facts that formed the foundation of the assessment. The assessee in Gray was the proprietor of a slate quarry and had reported various payments to labourers as business expenses in his income‑tax returns. It later emerged that officers employed by the assessee had misappropriated a sum of £5,201, which therefore had not been expended as claimed. The misappropriation was discovered only after the relevant years, and in 1934 the assessee recovered the amount from his auditor and insurer as damages for negligence. The Income‑Tax Inspector attempted to revise the assessments for the years 1930 to 1933 on the ground that the £5,201 had been wrongly deducted in those years, and alternatively sought to assess the recovered amount as business income for 1934. The Commissioner ruled that the assessments for 1930 to 1933 could not be reopened on the basis of the 1934 receipt, characterising the receipt as a subsequent event unrelated to the original factual matrix, and relied on Dodworth v. Dale (1) for support. Justice Finlay, however, dissented. He first held that the amount could be treated as a business receipt and then observed, “If I felt any difficulty about that, which I do not, I should be prepared to say that there is nothing in the authorities which prevents that reopening which manifestly ought to be made, if necessary, and that if necessary the previous years ought to be re‑opened.” The Court then considered the earlier authority of Anderton and Halstead Ltd. v. Birrell (2), which had been cited in Dodworth v. Dale (1) and relied upon by counsel. In Anderton the assessee had written off certain debts as irrecoverable in 1921 and 1922, and the Inspector of Taxes, after reviewing all the facts, accepted that classification and based the assessments on the premise that the debts were bad. Subsequently the assessee continued to deal with the same debtors and extended further credit to them in later years. On this basis the Inspector sought to revisit the earlier assessments, arguing that the debts were in fact not bad. Justice Rowlatt rejected this contention, stating that the word “discover” does not, in his view, encompass a mere change of opinion on the same facts and figures (1) [1936] 2 K.B. 503; 20 Tax Cases 285, (2) [1932] 1 K.B. 271; 16 Tax Cases 200, (3) [1936] 2 K.B. 503: 20 Tax Cases 285, when the question concerns a matter of accountancy and is merely a question of opinion, and that under the Rules the earlier assessment should not be altered.

In this case the Court observed that estimating the extent to which a debt is bad is not a prophecy to be judged after events occur. Instead it is a present‑time valuation of an asset based on uncertain future outcomes, assessed according to the facts and probabilities then existing. The Court further held that once such an estimate is made it cannot be revised in later years on the same material. The Court noted that some observations in the earlier judgment had been discussed by Finlay J. in Williams v. Trustees of W. W. Grundy (1934) 1 K.B. 524, 533. Those observations were also considered by the Court of Appeal in Commercial Structures Ltd. v. Briggs (1948) 2 A.E.R. 1041 at 1045, 1048 and 1049. However the Court emphasized that the earlier decision does not apply to the present facts because the present matter does not involve a present‑time valuation of a debt deemed bad. Instead the issue concerns a relief granted with reference to a state of facts that were anticipated to arise only in the future. The Court also referred to the English cases Inland Revenue Commissioners v. Pearson (1936) 2 K.B. 533 and Anderton and Halstead Ltd. v. Birrell (1932) 1 K.B. 271, 16 Tax Cases 200. Those cases dealt with section 125 of the English Income‑Tax Act of 1918. There is considerable literature on the meaning of the word “discovers” in that provision and in similar provisions of other English income‑tax statutes. Indian courts have also examined the term in section 34 of the Indian Income‑Tax Act as it stood before the 1948 amendment. Although the Court did not feel bound to give a final opinion on how the term would be interpreted under the Indian Income‑Tax Act, it considered the nature and scope of the Excess Profits Tax Act. In particular the Court looked at section 26(3) and held that the word “discovers” in section 15 of that Act is sufficiently wide. It therefore includes subsequent events that materially affect the facts and circumstances on which an assessment or relief was originally made. Consequently when the Excess Profits Tax Officer discovers that an assessee who received relief under section 26(3) has used the buildings, plant or machinery in business after the war has ended, and therefore the officer may proceed under section 15 of the Act to recover the amount of relief previously granted. For these reasons the Court concluded that the appeal fails, dismissed it with costs, and ordered the appeal dismissed.