JUDGMENT
R.K. Agrawal, J.
1. The Income-tax Appellate Tribunal, Allahabad has referred the following question of law under Section 256(1) of the Income-tax Act, 1961, hereinafter referred to as ‘the Act’, for opinion to this Court.
Whether on the facts and in the circumstances of the case the Appellate Tribunal was justified in law in quashing the reopening of the assessment by the Income-tax Officer for the assessment year 1958-59 on the basis that the amount received by the assessee as a result of the settlement dated 17.5.61 was not in the nature of the reduction in the price of the machinery but of the nature of damages agreed to by the suppliers as compensation for breach of warranty and that this accrued to the assessee only on 17.5.61 when the matter was settled between the parties.
2. The present reference relates to the Assessment year 1958-59.
3. Briefly stated that facts giving rise to the present Reference are as follows:
The respondent-assessee is a public limited company, hereinafter referred to as ‘the Company’ and is engaged in the manufacture of jute products. Its previous year is calendar year i.e. the period of twelve months ending on 31st December, of that year. In the year 1957 it had purchased certain items of machinery from M/s. Spinpau G.M.B.H., hereinafter referred to as “the German firm”, for Rs. 4,89,318/-. The machinery was delivered on 7th June, 1957 and the entire purchase price was also paid by the Company to the German firm. During the Assessment Year 1958-59, it claimed depreciation and development rebate in respect of this machinery, which was duly allowed by the Income-tax Officer. In February, 1958, a dispute arose between the parties about the unsatisfactory performance of some of the items of machinery as a result of which the production was seriously affected. The Company called upon the German firm to set right the machinery so that it could meet its production requirement and also informed that if it failed to carry out the necessary modifications, then it would be liable to pay compensation for losses incurred by the Company due to its failure to carry out its contractual obligations. Suits were also filed in Kanpur (India) and in Germany making claim upon the German firm towards breach of warranty. On 17th March, 1961 an out of court settlement was reached between the Company and the German firm according to which the German firm agreed to pay to the Company a sum of D.M. 2,50,000/- which in Indian currency was equivalent to Rs. 2,69,433/-. It was mutually agreed that the Company would withdraw all legal proceedings instituted against the German firm and each party would bear its own cost for their attorneys and court fees, etc. The settlement was to be considered as definite and was not subject to any modification and was in full and final settlement of all mutual claims arising out of the contract concluded between the parties in respect of the machinery. The Company had received a sum of Rs. 92,102/- in the year 1962 and Rs. 1,77,331/- in the year 1963. The Company credited the above amount to the ‘Machinery Account” and for the Assessment Years 1963-64 and 1964-65 it claimed depreciation and development rebate on such reduced value of the machinery. The Income-tax Officer was of the view that as the Company had got back Rs. 2,69,433/- from the German firm, which was the supplier of the machinery, it should have reduced that amount from the original price of Rs. 4,89,318/- and should have claimed depreciation and development rebate only on such reduced amount in the Assessment Year 1958-59. According to him, the settlement was arrived at between the parties during the pendency of the assessment for the Assessment Year 1958-59 (which was made on 20th March, 1963) and it was obligatory for the Company to have brought this fact to the notice of the Income-tax Officer when he completed the original assessment for the Assessment Year 1958-59. As this was not done, the Income-tax Officer was of the view that the Company was given depreciation and development rebate on a higher price of Rs. 4,89,318/-, which represented excessive allowance. He reopened the assessment under Section 147(a) of the Act treating the amount of Rs. 2,60,433/- received by the company as a reduction in price of machinery given by the German firm. He also completed the reassessment, vide order dated 27th December, 1974, on the above basis.
4. Feeling aggrieved the Company preferred an appeal before the Appellate Assistant Commissioner who vide order dated 16th August, 1975 had confirmed the action of the Income-tax Officer. The Company preferred a second appeal before the Tribunal. Before the Tribunal there was a difference of opinion between the learned Members who constituted the Bench. While the Accountant Member did not accept the plea advanced by the Company, the Judicial Member was of the opinion that the action taken by the Income-tax Officer under Section 147(a) of the Act was misconceived. Thereupon the learned Members referred the following question under Section 255(5) of the Act to the third Member for his opinion.
Whether on the facts and in the circumstances of the case, the Appellate Assistant Commissioner was justified in confirming the order of the I.T.O. reopening the case Under Section 147(a) of the I.T. Act, 1961 for the assessment year 1958-59?
5. The third Member agreed with the findings recorded by the learned Judicial Member that the amount received by the Company as a result of the settlement dated 17th May, 1961 was not in the nature of a reduction of price of machinery accruing to the Company in the year 1957 but was in the nature of damages agreed to by the German firm to be paid as compensation for breach of warranty which claim accrued to the Company only on 17th May, 1961 when the matter was settled between the parties. He was, therefore, of the view that there was no question of the Company reducing this amount from the original purchase price for the purpose of claiming depreciation and development rebate for the assessment year in question. Consequently, he was of the view that it cannot be said that the Company had either furnished inaccurate particulars of its income or withheld any material particulars in regard to the aforesaid claims. The Tribunal in consonance with the view taken by the majority of the Members allowed the appeal and quashed the order of reassessment passed by the Income-tax Officer.
6. We have heard Sri Shambhu Chopra, learned Standing Counsel for the Revenue and Sri Ravi Kant, learned Senior Counsel, assisted by Sri R.S. Agrawal, learned Counsel on behalf of the Company.
7. Sri Chopra, learned Standing Counsel, submitted that admittedly the Company had received a sum of Rs. 2,69,433/- from the German firm towards the settlement of its claim during the pendency of the original assessment for the Assessment year 1958-59. It was obligatory on the part of the Company to bring this fact to the notice of the Income-tax Officer. According to him, the aforesaid sum represented reduction of the cost of the machinery and, therefore, the depreciation and development rebate was admissible only on the reduced amount of the cost of the machinery i.e. Rs. 2,19,885/- and not on the entire amount of Rs. 4,89,318/- as claimed and allowed in the original assessment order. According to him, the proceedings under Section 147(a) of the Act had rightly been initiated as there has been failure on the part of the Company to disclose fully and truly all material facts. He further submitted that the Company itself has treated the aforesaid amount of Rs. 2,69,433/- which it had received from the German firm, as reduction in the cost of price of the machinery and that is why it has credited the said amount in the ‘Machinery Account” resulting in reduction of the cost of price of the machinery. Referring to the discussion on Revenue receipts at page 875 of Sampath Iyengar’s Law of Income Tax, Vol.I, 10th Ed., he submitted that damages received for breach of contract in respect of a contract relating to purchase of a capital asset will be on capital account. The conduct of the Company in claiming depreciation and development rebate during the Assessment Years 1963-64 and 1964-65 on the reduced price would also establish that the Company had also treated the said amount to represent refund of cost of price of the machinery and was not towards damages. In support of his various pleas he has relied upon the following decisions:
i) Commissioner of Income-tax v. P.N. Srinivasa Rao
ii) Phool Chand Bajrang Lal and Anr. v. Income-tax Officer and Anr.
iii) Citibank N.A. v. S.K. Ojha and Ors. .
8. Sri Ravi Kant, learned Senior Counsel, on the other hand submitted that the amount of Rs. 2,69,433/- which the Company had received from the German firm was not towards reduction of the price of the machinery but towards the damages for breach of warranty. In this connection he referred to the letters dated 1st February, 1958, 2nd July, 1958 and 17th May, 1961 to press home the point that the German firm had committed breach of contract. The amount was received towards damages and not towards reduction of the price of the machinery. Referring specially to the letter dated 1st February, 1958, he submitted that in the said letter the Company had informed the German firm about the breach of the contract giving it the option to either take back the entire machinery on refund of its price, freight, duty, interest and all other charges incurred by the Company or in the alternative to carry out the obligations by placing the machinery in successful production and in the event of failure to do so the German firm would be liable to pay the compensation for the losses incurred by the Company due to their failure to carry out their contractual obligation. The letter dated 2nd July, 1958 pointed out that an offer had been made to settle the dispute outside Court. Vide letter dated 17th March, 1971 written by the German firm, a settlement was arrived at between the parties outside the Court on the German firm agreeing to pay D.M. 25,0000/- in full settlement of the claims. He, thus, submitted that the amount received from the German firm is nothing but a settlement of all claims and is, therefore, in the nature of damages and cannot be termed as reduction in price of the machinery. According to him, condition and warranty in a contract are entirely two different things. Whereas the breach of a condition gives rise to a right to treat the contract as repudiated under Section 12(2) of the Sale of Goods Act, 1930, the breach of warranty gives rise to a claim for damages only under Section 12(3) of the aforesaid Act. Referring to Sub-section (2) of Section 13 of the of Sale of Goods Act, 1930, he submitted that as the Company has accepted the goods, breach of any condition to be fulfilled by the German firm can only be treated as breach of warranty and is not a ground for rejecting the goods and treating the contract as repudiated. He further submitted that under Section 59 of the Sale of Goods Act, 1930, the Company is entitled to set up against the seller the breach of warranty in diminution or extinction of the price or sue the seller for damages for breach of warranty. According to him, in the present case the Company had sued the German firm for damages for breach of warranty and there is nothing on record to show that the claim was for diminution in the price of the machinery supplied by the German firm. He, thus, submitted that by no stretch of imagination the amount received from the German firm can be treated as diminution in the price of the machinery. In support of his submission he has referred to the following decisions:
1. Union of India v. Raman Iron Foundry
2. Marwar Tent Factory v. Union of India and Ors.
3. Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd.
4. Xerox Modicorp Ltd. v. State of Karnataka (2005)7 SCC 380
9. He further submitted that merely because the Company had credited the amount received as damages in the ‘Machinery account’ and had claimed depreciation and development rebate at the reduced amount of cost of the machinery during the Assessment Years 1963-64 and 1964-65 would not make the said amount as having been received towards diminution in the price of the machinery. The true nature and character of the receipt has to be determined on its substance and not at the label given by the Company.
10. Sri Ravi Kant, learned senior counsel, however, very fairly stated that if this Court comes to the conclusion that the amount in question has been received towards diminution in the price of the machinery then there is no illegality in reopening of the assessment by the Income Tax Officer under Section 147(a) of the Act.
11. We have given our anxious consideration to the various pleas raised by the learned Counsel for the parties. At the outset it may be mentioned here that for reasons best known to the Company, it had not filed the copies of the plaint both at Kanpur (India) and in Germany before any of the authorities. Even they are not before us.
12. It may be mentioned here that in order to find out whether the amount received on account of compensation or on account of reduction in the value of the machine, the Appellate Assistant Commissioner had directed the company to produce the copy of the plaint of the suit filed by the company in Germany and the German supplier in India and the nature of correspondence which ensued between the parties in this connection. The company did not produce the copy of the plaint but only the correspondence file was produced before the Appellate Assistant Commissioner. The entire matter proceeded on the basis of the three letters, namely, 1.2.1958, 2.7.1958 and 17.5.1961, exchanged between the two parties before all the authorities including the Tribunal and we are also proceeding to decide the reference on the basis of the three letters, referred to above.
13. In the letter dated 1st February, 1958 written by the company to the German firm, the Company had specially stated that the German firm had committed breach of the contract though the compensation for losses incurred by the Company on the failure of the German firm to carry out the contractual obligation was also claimed. The relevant portion of the letter dated 1st February, 1958 is reproduced below.
2. You will observe from the said order that time was the essence of the contract in question as it was expressly agreed that the machinery in question will be delivered on Board the ship within 8 to 10 months from the date of confirmation of the order and also after the visit of our representative and also inspection of the plant in running condition. You will also observe that it was an essential part of the contract you will send your erector to erect that plant and put the same in perfect operation immediately the machinery had reached our mills. You will appreciate that object of inserting this condition, and making it an integral part of the contract in question, was that the machinery should be erected immediately after their arrival in the Mills and be put to successful production so that the benefits therefrom could be availed of by us.
3… … …
4… … …
5. In contravention of the terms of the contract, you delayed the sending of your erector in the first instance. Only one erector arrived here as late as in the last week of October, 1957(or four months after the arrival of machinery in question). He knew erection of spinning machinery only whereas the machinery in question that had been ordered, comprised both of spinning and preparing section. This gentlemen started erecting the spinning frames, but reported that erection could not be completed for want of several machine parts which had not been sent along with the consignment of machineries. He, however, started erecting with whatever parts pertaining to spinning machineries that was available and he is still continuing the erection. We may, however, inform you that the machine parts which were wanting and which were required by the Erector have not yet arrived with the result that the erection of all spinning machines is incomplete. The said erector also reported that several of the machine parts that have actually arrived here were not in fit condition for being assembled and that they required machining and latheration in the workshop a process which is estimated to take another year. You will thus observe, that our grievance against you as far as the supply of the spinning Machinery is concerned is two fold, namely,
(a) That you failed to supply the complete machinery in accordance with the order and many spare parts were yet left to be supplied and that these spare parts have in spite of lapse of so much time and report of the erector have not been supplied as yet.
(b) That even out of the machine parts which had been supplied several were not in a fit condition to be assembled and as stated above needed further machining and alteration in the Workshop which is likely to take about a year more.
6. Another erector for erection Preparing Machinery arrived here as late as November, 1957 and after working for about a month he was called back to Calcutta by your firm for dismantling a similar plant you had supplied to Kharda Jute Mills at Calcutta which also could not run on account of defective machinery, and we understand is being shipped to Germany. The Calcutta job, however, has nothing to do with the present contract in question. The result is that the machinery pertaining to preparing process is also lying dormant. In short the result of your aforesaid conduct and dealing is, that they could not yet place the machinery in production as contracted for. Evidently this conduct of your has caused considerable loss and inconvenience to us for which we will hold you responsible.
7… …
8. The instalments under para 3(i) of this letter which you have drawn were payable after the machine were put in successful production. However, as you failed to carry out your obligations under the contract resulting in the machines having not been put into operation and production, you have drawn this money amounting to Rs. 9,986/- contrary to the terms of the contract. We, therefore, solicit your refunding this amount with interest immediately to the Chartered Bank as they are claiming the said amount from us. We must make it clear to you that in Clause (d) of the terms of payment the words “not later than 6 months after arrival” was embodied to protect you in case the machinery could not be out in to successful production, on account of our failing, but this did not absolve you from your responsibility of drawing this instalment only after the machines were put in production successfully. In this case you failed to carry out the obligation under the contract and therefore, you were not entitled to draw the said amount and are liable to refund the same with interest as already stated.
9. We, further call upon you to make good all the parts which you have not supplied or require alteration and to erect and put the machines into production in terms of the contract without any further loss of time.
10. Although you have committed a breach of the contract and as such you are liable to take back the entire machinery on refund of its price, freight duty interest and all other charges incurred by us, we are still prepared to give you a reasonable time of two months to carry out your obligations by placing the machinery in successful production in our hands. If you fail to do so, you will be liable to take the entire machinery against refund of its price, freight, insurance duty interest and all other charges incurred by us and you will be further liable to pay compensation for losses incurred by us due to your failure to carry out your contractual obligations.
14. From the reading of the letter reproduced above, we find that the company had made a claim against the German firm for breach of contract. In the letter dated 2nd July, 1958 written by the Company to the German firm various defects in the machinery have been pointed out and efforts for finding a satisfactory solution without pursuing the matter in law courts was stressed. In another letter of even date, the Company had informed the German firm that the second drawing was not at all workable and its erectors had failed to put it in satisfactory operation and there is no alternative except that it should agree to take it back. Again some other suitable proposals had been invited to end the dispute. In the letter dated 17th May, 1961 written by the German firm to the Company it appears that there was a personal meeting between the representatives of the two parties and two proposals were considered. The second proposal providing for payment of D.M. 2,50,000/- was accepted in full and final settlement of all the claims. The terms of the acceptance as mentioned in the letter dated 17th May, 1961 are reproduced below:
1. M/s. J.K. Jute Mills Co. Ltd. will at once withdraw their legal proceedings and suits initiated against SPINBAU or any person of Spinnbau before the Court at Kanpur as well as before the German Court at Bremen.
2. Each party will bear their own costs for their attorney’s and court fees.
3. The machines will remain the property of M/s. J.K. Jute Mills Co. Ltd. inclusive of all accessories and all spare parts which have been supplied by Spinbau.
4. Spinbau will pay DM 2,50,000/- (in full letters: Two hundred and fifty thousand) in five equal half years’ instalments of DM 50,000 – each. The first payment will be effected immediately after the withdrawal of the legal proceedings and suits initiated before the courts at Kanpur and Bremen against Spinnbau or any person of Spinnbau. For these payments Spinnbau will procure a banker’s guarantee.
5. This settlement will be considered by both parties as definite and will not be subject to any modifications or further measure of whatever kind. It settles all mutual claims out of the contract concluded between J.K. Jute Mills Co. Ltd., and Spinnbau according to the order confirmation dated Jan. 7th 1956 (order No. 011 800).
15. From the reading of the aforesaid terms, we find that the payment of D.M. 2,50,000/- equivalent to Rs. 2,69,433/- in Indian currency claimed above settled all claims between the two parties, which have arisen out of the said contract. From the correspondence placed on record it does not appear that there was any claim for damages and the claim was entirely for breach of the contract. In the present case as the Company had accepted part of the goods supplied by the German firm in view of the provisions of Section 13(2) of the Sale of Goods Act, 1930 any breach of the condition of the contract can only be treated as breach of warranty. It may not be a ground for rejecting the goods and treating the contract as repudiated meaning thereby that the aggrieved party can only have a right to claim damages for not repudiating the contract. It can also sue against the seller for diminution in or extinction of the price or sue the seller for damages for breach of warranty. In the present case we find that there is nothing on record to indicate that the Company had sued the German firm for damages for breach of warranty. On the other hand from the various correspondence which has been brought on record and the relevant portions, which have been reproduced hereinabove, we find that a case has been set up for diminution of the price of the machinery supplied. This fact is also corroborated from the entries made in its books of account immediately on receipt of the instalment from the German firm. The treatment given by the Company by reducing the cost of machinery supplied by the German firm establishes beyond doubt that the amount received by the Company was towards diminution in the price of the machinery. Thus, the cost of machinery ought to have been reduced by the amount given by the German firm.
16. In the case of Raman Iron Foundry (supra) the Apex Court has held that the claim for damages for breach of contract is not a claim for a sum presently due and payable and the purchaser is not entitled to recover the amount of such claim by appropriating other sum due to the contractor.
17. In the case of Marwar Tent Factory (supra) the Apex Court was considering a case of delivery of goods F.O.R. at the place of destination and had held that the property in the goods together with the risk passed from the seller to the buyer as soon as the goods were loaded in the railway wagon as per terms of delivery at the place of dispatch. The buyer was, therefore, liable for short delivery and its price could not be deducted from the other bills of the consignor.
18. In the case of Oil & Natural Gas Corporation Ltd. (supra) the Apex Court has, in paragraph 46 of the report, held as follows:
46. From the aforesaid Sections, it can be held that when a contract has been broken, the party who suffers by such breach is entitled to receive compensation for any loss which naturally arise in the usual course of things from such breach. These sections further contemplate that if parties knew when they made the contract that a particular loss is likely to result from such breach, they can agree for payment of such compensation. In such a case, there may not be any necessity of leading evidence for proving damages, unless the Court arrives at the conclusion that no loss is likely to occur because of such breach. Further, in case where Court arrives at the conclusion that the term contemplating damages is by way of penalty, the Court may grant reasonable compensation not exceeding the amount so named in the contract on proof of damages. However, when the terms of the contract are clear and unambiguous then its meaning is to be gathered only from the words used therein. In a case where agreement is executed by experts in the field, it would be difficult to hold that the intention of the parties was different from the language used therein. In such a case, it is for the party who contends that stipulated amount is not reasonable compensation, to prove the same.
19. Referring to its earlier decision in the case of Raman Iron Foundry the Apex Court has held that in the aforesaid case the Court has not referred to the earlier decision rendered by the five Judge Bench in Fateh Chand’s case or the decision rendered by the three Judges’ Bench in Maula Bux’s case. Further, in H.M. Kamaluddin Ansari and Co. v. Union of India and Ors. , three Judges’ Bench of this Court has overruled the decision in Raman Iron Foundry’s case (supra) and the Court while interpreting similar term of the contract observed that it gives wider power to Union of India to recover the amount claimed by appropriating any sum then due or which at any time may become due to the contractors under other contracts and the Court observed that Clause 18 of the Standard Contract confers ample powers on the Union of India to withhold the amount and no injunction order could be passed restraining the Union of India from withholding the amount.
20. Summing up the position regarding determination of compensation, the Apex Court, in paragraph 68 of the report, has held as follows:
69. From the aforesaid discussions, it can be held that:
(1) Terms of the contract are required to be taken into consideration before arriving at the conclusion whether the party claiming damages is entitled to the same;
(2) If the terms are clear and unambiguous stipulating the liquidated damages in case of the breach of the contract unless it is held that such estimate of damages/compensation is unreasonable or is by way of penalty, party who has committed the breach is required to pay such compensation and that is what is provided in Section 73 of the Contract Act.
(3) Section 74 is to be read along with Section 73 and, therefore, in every case of breach of contract, the person aggrieved by the breach is not required to prove actual loss or damage suffered by him before he can claim a decree. The Court is competent to award reasonable compensation in case of breach even if no actual damage is proved to have been suffered in consequences of the breach of a contract.
(4) In some contracts, it would be impossible for the Court to assess the compensation arising from breach and if the compensation contemplated is not by way of penalty or unreasonable, Court can award the same if it is genuine pre-estimate by the parties as the measure of reasonable compensation.
21. In the case of Xerox Modicorp Ltd. (supra) the Apex Court has held that under the Sale of Goods Act when specific goods in deliverable state are delivered, the property in the goods passes and it takes place before the goods are consumed.
22. Reliance placed by the learned Counsel for the company on the aforesaid decisions does not advance the case any further except that the title in the machinery passed to the company upon its delivery and compensation has to be determined in terms of the contract. However, as the company had not filed the copy of the plaint and had deliberately withheld it inspite of a specific direction having been given by the Appellate Assistant Commissioner, the inevitable conclusion is that the claim was towards diminution in the price of machinery, which had ultimately been settled between the parties.
23. The submission of Sri Ravi Kant that the entries made in the books of account or the treatment given by the company is not determinative of the actual entry of the transaction, is misconceived. The company itself had credited the amount received from the German firm in the machinery account and reduced its price while claiming depreciation and development rebate in the assessment years 1963-64 and 1964-65 wherein it had claimed depreciation and development rebate on reduced price. This is a relevant factor while determining the true nature of the receipt.
24. It is well settled that the damages received for breach of contract in respect of a contract relating to purchase of capital assets, will be on a capital account and, therefore, the amount so received was towards capital account meaning thereby that the price of the machinery would stand reduced to that extent.
25. In the case of P.N. Sreenivasa Rao (supra) the Kerala High Court was considering a case where the assessee had not disclosed the relinquishment of his right and the capital account arising therefrom when he had filed his return for the assessment year 1971-72. The Kerala High Court has held that the fact of relinquishment was a crucial factor which the assessee has failed to disclose at any stage of the assessment proceeding. The Revenue was held to be justified in reopening the assessment under Clause (a) of Section 147 of the Act.
26. In the case of Phool Chand Bajrang Lal (supra) the Apex Court has held that where the transaction itself, on the basis of subsequent information, was found to be a bogus transaction, the mere disclosure of that transaction at the time of original proceeding could not be said to be a disclosure of true and full facts and the officer would have jurisdiction to reopen the concluded assessment in such a case. The Apex Court, after considering various decisions, has summed up the position as follows:
From a combined review of the judgments of this Court, it follows that an Income-tax Officer acquires jurisdiction to reopen an assessment under Section 147(a) read with Section 148 of the Income-tax Act, 1961, only if on the basis of specific, reliable and relevant information coming to his possession subsequently, he has reasons, which he must record, to believe that, by reason of omission or failure on the part of the assessee to make a true and full disclosure of all material facts necessary for his assessment during the concluded assessment proceedings, any part of his income, profits or gains chargeable to income-tax has escaped assessment. He may start reassessment proceedings either because some fresh facts had come to light which were not previously disclosed or some information with regard to the facts previously disclosed comes into his possession which tends to expose the untruthfulness of those facts. In such situations, it is not a case of mere change of opinion or the drawing of a different inference from the same facts as were earlier available but acting on fresh information. Since the belief is that of the Income-tax Officer, the sufficiency of reasons for forming the belief is not for the court to judge but it is open to an assessee to establish that there in fact existed no belief or that the belief was not at all a bona fide one or was based on vague, irrelevant and non-specific information. To that limited extent, the court may look into the conclusion arrived at by the Income-tax Officer and examine whether there was any material available on the record from which the requisite belief could be formed by the Income-tax Officer and further whether that material had any rational connection or a live link for the formation of the requisite belief. It would be immaterial whether the Income-tax Officer, at the time of making the original assessment, could or could not have found by further enquiry or investigation, whether the transaction was genuine or not if, on the basis of subsequent information, the Income-tax Officer arrives at a conclusion, after satisfying the twin conditions prescribed in Section 147(a) of the Act, that the assessee had not made a full and true disclosure of the material facts at the time of original assessment and, therefore, income chargeable to tax had escaped assessment.
27. In the case of CITIBANK N.A. (supra) the Bombay High Court was considering a case where the Bank had earned an amount of Rs. 40,23,45,387/- over and above the amount paid to its customers on account of an oral agreement under portfolio management scheme of the Bank. The agreement stipulated payment of a fix return @ 18% interest on the fund invested by the customer in the Bank. The Bank did not disclose the amount actually earned on such transaction in its return of income. On these facts, the Bombay High Court has held that the Bank had failed to disclose the primary facts justifying the reopening of the assessment under Section 147 of the Act.
28. From the aforesaid decisions, it follows that the primary duty of the assessee is to disclose the filing of the suit and the claim for compensation towards price, either in the return filed by it for the assessment year 1958-59 or during the course of assessment proceeding which concluded on 20.3.1963. We have already come to the conclusion that the amount of Rs. 2,69,433/- received by the company from the German firm represented diminution in the price of the machinery. The said amount was settled between the parties on 17.5.1961 when the assessment proceedings were pending and the company was under a duty to bring this fact to the notice of the Assessing Authority. Having not done so, we are of the considered opinion that the company has failed to make a full and true disclosure regarding the price of the machinery on which development rebate and investment allowance had been claimed. The reassessment proceedings under Section 147(a) of the Act had rightly been initiated.
29. The question of accrual on 17.5.1961 when the amount was agreed between the parties, would arise only in case it is found that the amount was towards compensation for breach of warranty and not for diminution of price of machinery. As we have already come to the conclusion that the amount received was towards diminution of price of machinery, this has become only academic.
30. In view of the foregoing discussions, we answer the question referred to us in the negative, i.e., in favour of the Revenue and against the assessee. However, on the facts and in the circumstances of the case, there shall be no order as to costs.