- (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.;