High Court Of Calcutta
Income Tax Officer vs. Electro Steel Castings Ltd.
Sections 147(a), 148
Asst. Year 1968-69, 1969-70, 1970-71, 1971-72, 1972-73, 1973-74
Asok Kumar Ganguly & Debi Prasad Senguta, JJ.
FMA No. 255 of 1993
11th July, 2003
Counsel Appeared
Ram Chandra Prasad, for the Appellants : Debiprasad Pal with Ms. Manisha Seal & Malay Dhar, for the Respondent
JUDGMENT
ASOK KUMAR GANGULY, J. :
This appeal is directed against the judgment and order dt. 16th May, 1989, passed by a learned Judge of this Court in Civil Rule No. 3074(w) of 1977. By the said judgment and order, the learned Judge allowed the writ petition and quashed the notices issued under s. 148 of the IT Act. While passing the judgment under appeal, the learned Judge noted that the said rule was made ready in the year 1979 and the matter was directed to appear in the list on different dates for hearing. Directions were given for affidavits, but, as no affidavit was filed by the Revenue, time to file the said affidavit was further extended on 11th Jan., 1988. But, even then also, no affidavit was filed. Nor the records were produced which are normally produced in a proceeding relating to s. 148 notices. Since no materials were produced justifying the issuance of the notices, the learned Judge found that the case in the writ petition that the notices were issued without any materials and without formation of opinion could not be controverted and, as such, the writ petition was allowed and the notices were quashed.
This appeal was taken up for hearing before this Court on 12th Dec., 2002, but, at that time, nobody appeared for the appellant. This Court considering the order of the learned trial Judge and the non-appearance of the appellant at the time when the appeal was taken up, dismissed the appeal. But, before the order could be signed by this Bench, the learned counsel for the appellant mentioned for recalling the order and explained the circumstances for which he could not appear. Considering those facts the order was recalled and, therefore, the matter was fixed for hearing afresh. The learned counsel for the Revenue also prayed for an opportunity to file affidavit in connection with the writ petition. Pursuant to such prayer, liberty was given to file the affidavit and also to produce the records by the Court’s order dt. 25th Jan., 2003. The matter was fixed for hearing on 20th March, 2003. Thereafter, affidavits were filed, records were produced and the matter was heard before us on 20th March, 2003, and also thereafter.
After the affidavits were filed, we could have remanded the matter to the learned trial Judge for deciding the controversy afresh. But, since a long period of time has elapsed and both the parties prayed for a decision of the matter on merits by the appeal Court, we do so by this judgment.
The facts on the basis of which the writ petition was filed are summarised as follows : On or about 1st April, 1977, the respondent received six notices all dt. 19th March, 1977, and those notices were issued by the appellant under s. 148 of the IT Act (hereinafter referred to as the ‘Act’). Those notices were in respect of the asset. yrs. 1968-69, 1969-70, 1970-71, 1971-72 197273 and 1973-74. By those notices the appellant alleged that there is reason to believe that income chargeable to tax from the respondent for the said assessment years escaped assessment within the meaning of s. 147 of the Act and as such it was proposed to reopen the assessment and reassess the income of the respondent for which the respondent was called upon to file return within 30 days from the date of receipt of the notices. It appears from the said notices relating to the asst. yrs. 1968-69, 1969-70, 1970- 71, 1971-72 that they were issued after obtaining the satisfaction of the CIT, Orissa, Bhubaneswar and those said notices were sent by registered post with A.D. at the head office of the respondent at 4, Dalhousie Square East, Calcutta.
5. The respondent is a company registered as a public limited company under the Indian Companies Act, and the business of the respondent company consists of manufacturing of steel castings, grinding media and spun pipes and its sale. For the purpose of carrying on the said manufacturing activities the respondent has a factory at Khardah in West Bengal. For the asst. yrs. 1973-74 the respondent also opened a separate unit at Ghaziabad, U.P. The case of the respondent is that in order to sell its product, the respondent was required to maintain a large number of staff and in order to face competition in engineering goods, the respondent had to pay brokerage commission ranging from 2 per cent to 5 per cent. It is their further case that in order to organize its business on or about 5th Dec., 1966, the respondent entered into an agreement in writing with one M/s ECL Sales Corporation and the respondent appointed the said Corporation as the sole selling agent regarding the sale of products of the respondents in India for a period of five years w.e.f. 4th Dec., 1966. It is also the case of the respondent that the said sold selling agent was appointed in accordance with the provision of s. 294 of the Companies Act and the approval of the shareholders was obtained in the general meeting of the respondent held on 28th March, 1967. Under the said agreement, the respondent was to pay the said sole selling agents a commission of 3 per cent by way of remuneration. The said agreement was renewed for a further period of five years w.e.f. 4th Dec., 1971. It has been further stated by the respondents that on or about 1st Feb., 1972, the said firm, that is, M/s ECL Sales Corporation was converted into a private limited company and was named as Electro Casts Sales (India) (P) Ltd. and by another agreement dt. 17th Feb., 1972, between the said firm and the respondents, the respondents appointed the said firm as the sole selling agent of the respondents.
It has been averred by the respondents in the writ petition that they paid to the said firm commission amounting to Rs. 11,12,694 for the period beginning from 1st Feb., 1972 to 30th Feb., 1972, and claimed the said amount as admissible deduction from the computation of income of the respondents under the said Act. It has also been averred in the writ petition that in course of the assessment proceedings for the asst. yr. 1968-69, the ITO made a specific query relating to the commission paid by the respondents to the said sole selling agent and the respondents were required to produce the copies of the agreement. By a letter dt. 24th Feb., 1970, the writ petition duly produced the copy of the said agreement. In paras 5 to 10 of the writ petition, the respondents have stated the particulars of the return filed by them for the asst. yrs. 1968-69, 1969-70, 1970-71, 1971-72, 1972-73 and 1973- 74. Along with those particulars, the respondents have also disclosed the assessment orders for each assessment year which has been issued by the Revenue.
6. In the affidavit by the appellants before this Court, the appellant have produced the recorded reasons for initiating the proceeding for reopening of assessment. The substance of such reasons are : (a) The affairs of the respondent company were controlled by one Ghanshyam Kejriwal and his family members. On 5th Dec., 1968, which is relevant for the asst. yr. 1968-69, the respondent-company entered into an agreement with said firm, namely M/s ECL Sales Corporation. According to the Revenue, the said firm consists of two partners, namely, J.P. Kejriwal and B.B. Kejriwal, both of whom are brothers of Ghanshyam Kejriwal, who is the managing director of the respondent-company. The said firm subsequently was converted into a private limited company in the year 1972 and the respondent-assessee paid huge sums of selling agency commission to the said firm from the asst. yr.1968-69. It has been stated that two minor sons of Ghanshyam Kejriwal, the managing director of the respondent- company, were also admitted into the benefits of the partnership of the said firm. (b) The expenditure towards the sole selling agency commission was claimed as legitimate business expenses of the respondent-company and the same was allowed by the IT authority without proper scrutiny. The huge payment of commission to the said firm, which consists of the family members of the managing director of respondent-company, amounted to about Rs. 38,00,000 for six assessment year. (c) Subsequently through investigation, further affairs of the assessee- company came to light. It appears that the said selling agency firm consists of brothers and minor sons of the managing director, namely Sri Ghanshyam Kejriwal and is nothing but an extension of Ghanshyam’s own establishment and the said firm was set up to divert a portion of the income earned by the said respondent- company. It has been alleged by the appellant that the setting up of the said firm was a device employed by the managing director of the assessee-company to pass on pecuniary benefits to his son and relatives.
7. The appellants submitted that the aforesaid conclusion has been arrived at by them on the basis of the following facts : (i). The said partnership firm was established for the first time in the year 1966 to act as a sole selling agent of the assessee-company. Prior to that, it was functioning as an organisation. After the appointment of the said firm as the selling agent, the assessee-company transferred to the said partnership-firm, its employees who were working as its sales executives. One of the conditions of such transfer was that the said firm will take over such members of the staff in a manner which will be decided by the respondent-company. As a result of this agreement, the majority members of the staff of the respondent-company were transferred to the firm in the year 1966. (ii) The entire staff of the respondent-company were doing jobs in the said firm but were getting their salary from the respondent-company. (iii) The said firm as the sole selling agent of the respondent-company did not maintain any separate correspondence or file.(iv) The selling agency agreement suffered from various defects like absence of clauses for procuring minimum sales by the agents. (v) Further investment into correspondence of the assessee- company revealed that persons who are officially in the employment of the selling agency firm were, as a later stage, doing various jobs on behalf of the respondent-company like. (a) signing letters issued from the respondent- company, (b) directly addressing the chief engineer of the respondent-company in various important matters, (c) discharging functions of the respondent-company by giving release order of productions, etc.It has been alleged that these are the functions of the respondent-company and not functions of the said selling agency firm. Further instances have also come to light showing that the employees of the selling agency firm were discharging the functions of the respondent-company and particulars of which are as follows : (i) One Sri G.S. Mishra, who was in the employment of the selling agency firm on 19th Dec., 1974, signed a letter of the respondent-company addressed to the chief foundry engineer of M/s Durgapur Projects Ltd. (ii) The said Sri G.S. Mishra, while in the employment of the said selling agency firm signed for the respondent company on an invoice issued by the respondent-company to M/s Durgapur Projects Ltd. on 3rd April, 1975. (iii) In a letter dt. 2nd April, 1975, the said firm asked the chief foundry engineer for his comments on any defect noticed in certain goods supplied by the respondent-company. It has been revealed from investigation that the said selling agency firm used to settle all negotiations with the customers including various terms and conditions regarding supply and price fixation.
The members of the staff of the respondent-company who were transferred to the said firm mentioned above enjoyed complete protection and they were subsequently bought back to the parent assessee-company on 1st Sept., 1976, and the selling agency firm became defunct.
The learned counsel for the appellant submitted that all these facts taken together will lead a prudent man to form an opinion that the said firm was a part of the respondent-company and did not have a separate and distinct entity. Apart from the aforesaid facts, the ITO has also recorded some more additional grounds and reasons for reopening the assessment for the asst. yr. 1969-70.
The respondent-firm being a public limited company, during the asst. yr. 1969-70, paid remuneration of Rs. 18,000 to its managing director. This is in excess of the limit prescribed under s. 198 of the company Act. Any amount which is paid in excess of the statutory provision makes the recipient of the said amount, liable to refund the same and the company cannot waive its right to receive the same amount. The recipient of the excess amount that is managing director, is to be treated as holding the said amount in trust for the company until the same is refunded. Similarly, the amount of Rs. 4,880 was paid towards the rent of the house of the managing director in excess of the limit for the asst. yrs. 1968-69 and 1969-70.
The appellants further contended that on the basis of the aforesaid materials, not only the ITO, but CIT also applied his mind before formation of opinion and recorded reasons for reopening the assessment for the asst. yrs. 1968-69 to 1973-74. It was also urged by the appellants that in due compliance of the provisions laid down under ss. 149 to 153 of the Act, the ITO sent a draft proposal to the CIT for granting approval on the said recorded reasons. Initially, the CIT did not grant approval to the first draft proposal and returned the same to the ITO with a direction to send a fresh draft proposal. Thereafter, the ITO sent a fresh proposal for the reopening of the said assessment and then, the CIT duly applied his mind and on being satisfied with the recorded reasons granted approval to the said proposal for reopening of the assessment for the aforesaid assessment years. An affidavit-in- reply was filed by the respondent-company before the appeal Court. In that affidavit-in-reply the stand which has been taken by the said company is that within a span of 20 days from passing the assessment order in respect of the asst. yr. 1976-77 the same ITO issued the impugned notice of reassessment on 19th March, 1997, for the asst. yrs. 1968-69 to 1973-74, on identical reasons on the basis of which the selling agency commission was disallowed in the assessment order dt. 28th Feb., 1977. Therefore, the stand taken is that the reason for which the selling agency commission was disallowed in the assessment order dt. 28th Feb., 1977, are the same reasons on the basis of which the notices to reopen assessment were issued.
It has been also stated in the reply that against the said disallowance of selling agency commission in the assessment order dt. 28th Feb., 1977, the respondents preferred an appeal before the AAC. The CIT, however, confirmed the findings of the AO. Then the respondent preferred an appeal before the Tribunal, Calcutta. The said Tribunal, after considering the facts and circumstances of this case came to a finding that there is no dispute that the legitimate needs of the business of the respondent-company required the service of the commission agent and the assessee derives benefit from such service. It has been stated categorically in the reply that the Tribunal after detailed scrutiny of the matter and the findings in the order of the AO and the AAC held that no case is made out for disallowing any portion of the selling agency commission. It has also been stated that simultaneously the same question came up before the Tribunal in respect of assessment of subsequent asst. yrs. 1977-78 and 1978-79 for selling agency commission paid to the same firm M/s Electro Casts Sales (India) (P) Ltd. and the Tribunal following its earlier order allowed the claim of the respondent-company in respect of the entire selling agency commission. It has also been stated in the reply that against the order of the Tribunal the Department did not prefer any application for reference or any appeal and as such those orders of the Tribunal have become final and binding.
This was the main point which was urged by the learned counsel for the respondent while denying the factual assertion made by the learned counsel for the appellant in its affidavit-inopposition. Mr. Ram Chandra Prasad, the learned counsel for the appellant submitted that in the instant case, the reasons which have been recorded by the AO, were recorded in accordance with the law and after complying with all the requirements under the said Act. Apart from that, the learned counsel submitted that the reasons are valid and relevant reasons and it has not been urged by the respondent-company that there is any mala fide on the part of the AO in recording the reasons.
Mr. Prasad relied on the decision in the case of S. Narayanappa & Ors. vs. CIT (1967) 63 ITR 219 (SC). Relying on the said judgment the learned counsel urged that the existence of reason to believe in reopening an assessment may be justiciable but in the instant case, the factual existence of such reasons to believe has been amply demonstrated by production of recorded reasons before this Court. The learned counsel further submitted that adequacy of such reasons cannot be questioned by the Court.
The learned counsel also submitted, relying on the decision in Narayanappa (supra), that requirement under the relevant section is that the AO must entertain his reasons to believe in a good faith and the same cannot be a mere pretence.
The learned counsel submitted that in the instant case those requirements, which have been laid down by the judicial pronouncement in Narayanappa, have been fulfilled. The learned counsel submitted that though the decision in Narayanappa was rendered on construction of the provision of s. 34 of the 1922 Act, the statutory requirement under s. 147(a) of the Act is the same. This has not been disputed by the learned counsel for the appellant.
Mr. Prasad also relied on another decision of the Supreme Court in the case of Kantamani Venkata Narayana & Sons vs. ITO (1967) 63 ITR 638 (SC). Relying on the said decision the learned counsel submitted that the obligation of the assessee to disclose all material facts fully and truly, is not discharged by merely producing the books of accounts or other documents. The assessee must bring to the notice of the ITO particular items in the books of accounts or portions of the documents which are relevant for assessment. The learned counsel also very much relied on the other proposition laid down in Kantamani that if from the books produced the ITO, had been the officer circumspect and (supra) careful, could have found the truth. But that he has not been able to do so, and that failure on his part by itself will not prelude the officer from exercising his power to reassess income which has escaped assessment.
The learned counsel submitted that following the aforesaid ratio the action in the instant case is sustainable in law. The learned counsel relied on the said decision in Kantamani in order to point out that the proceeding prior to issuance of notice of reassessment are not quasi-judicial. But those proceedings namely, recording of reasons by the AO in reopening assessment is administrative in nature and at this stage, the assessee is not entitled to any notice.
The learned counsel for the appellant also relied on another decision in the case of CIT vs. A. Raman & Co. (1968) 67 ITR 11 (SC). The learned counsel relied on the said judgment in order to contend that the High Court in exercising its jurisdiction under Art. 226, can set aside a notice issued under s. 147 of the Act only if the conditions precedent to the exercise of jurisdiction in issuing the notice do not exist. In doing so the High Court may ascertain whether the ITO had in his possession any information and the Court may also consider whether from the information the ITO may have reasons to believe that income chargeable to tax has escaped assessment. The learned Judges in A. Raman have made it clear that the jurisdiction of the High Court is not extended any further. The learned Judges also made it clear whether on the information in the possession of the AO he would commence further proceeding for assessment or reassessment, that is to be decided by that officer and not by the High Court. The Court has made it clear that ITO is entrusted with the power to administer the Act. The learned counsel of course accepted the position that information in possession of the AO and the reasons disclosed for reopening assessment must have a reasonable nexus with the formation of opinion about escapement of tax. If the nexus is disclosed and the other statutory requirements are complied with by the AO, it is not possible for the High Court to interfere while exercising its power under Art. 226.
The learned counsel for the appellant also urged that the decision of the Constitution Bench of the Supreme Court in Calcutta Discount Co. Ltd. vs. ITO (1960) 41 ITR 191 (SC) also supports the case of the appellant and the judgment in the case of Kantamani (supra) was delivered relying on the judgment of the Constitution Bench in Calcutta Discount.
Dr. Pal, the learned counsel appearing for the respondent, very much relied on the decision in the case of Calcutta Discount and submitted that in view of the ratio in Calcutta Discount this Court should quash the impugned notices. Dr. Pal also submitted that in the instant case there has been disclosure of all material facts truly and fully by the respondent-assessee in the course of assessment. The inferences, which the AO has to draw from those facts, are not the headache of the assessee nor is the assessee responsible for the same.
Dr. Pal submitted that in connection with the asst. yr. 1968-69 the respondent-company disclosed to the income- tax, ‘A’ Ward a copy of the sole selling agency agreement with M/s E.C.L. Sales Corporation. It has been stated by Dr. Pal that the said agreement was a part of the letter dt. 24th Feb., 1970 given to the ITO by the respondent- company. According to Dr. Pal the disclosure of that sole selling agency agreement is sufficient disclosure of all material facts truly and fully. The learned counsel further submitted that since such disclosures have been made, inferences, which are to be drawn from such disclosure, are for the Revenue to consider and the assessee has no further obligation to disclose any inferential fact. In support of the aforesaid contention the learned counsel relied on the Constitution Bench judgment of the Supreme Court in the case of Calcutta Discount (supra). The learned counsel further submitted that the law, which has been settled in Calcutta Discount in 1961, is still followed by the Supreme Court in Coca-Cola Export Corporation vs. ITO & Anr. (1998) 146 CTR (SC) 250 : (1998) 231 ITR 200 (SC).
The facts in Calcutta Discount (supra) were that in the original assessment of the company for the asst. yrs. 1942- 43, 1943-44 and 1945-46 profits realised by the company by sales of shares were not assessed to tax. The ITO proposed to initiate reassessment proceeding against the company under s. 34 of the IT Act, 1922, presently s. 147 of the said Act. The stand of the Revenue was that at the time of original assessment, the representation which was made on behalf of the company was that the sales of shares were casual transactions and in the nature of mere change of investment and that was accepted. But the result of the company’s trading from year to year, however, shows that the company had really been systematically carrying on a trade in the sale of investment and as such the company failed to disclose the true intention behind the sale of shares. As such notices were issued.
On those facts, the Supreme Court held that it is the duty of the assessee-company to disclose all facts, which had a bearing on the question. But whether the assessee had the intention to make a business profit as distinguished from the intention to change the form of investment was really an inference to be drawn by the assessing authority from the material facts which were disclosed in conjunction with the surrounding circumstances.
The Constitution Bench of the Supreme Court held that the expression “material facts” only refers to primary facts and the duty of the assessee is only to disclose primary facts and there is no obligation on him to show what factual or legal inferences should be properly drawn from the primary facts. In Calcutta Discount (supra), the assessee disclosed all primary facts regarding sale of shares. Therefore, the Supreme Court held that action of reopening assessment could not be taken on the ground that the assessee had claimed it to be a mere change of investment and had not disclosed the true intention behind the sale. The Supreme Court held that the inference whether the sale was a capital transaction or a trading transaction was not for the AO to decide. This Court is of the opinion that the ratio in Calcutta Discount (supra) undoubtedly correctly sums up the legal position. But the said ratio cannot be applied to this case. It cannot be said that from the mere disclosure of the sole selling agency agreement all the facts relevant to assessment were truly and fully disclosed by the assessee. This Court comes to this conclusion especially in view of Expln. 2 to s. 147. In Calcutta Discount the learned Judges opined that what facts were material or necessary for assessment differs from case to case and in every assessment proceeding, the assessing authority, for the purpose of computing the tax due from an assessee is required to know all the facts which help him in coming to a correct conclusion. Therefore, assessee’s duty to make a full and truthful disclosure of all primary facts, in my judgment, has not been discharged in this case by mere production of the sole selling agency agreement. Therefore, the ratio of Calcutta Discount does not support the case of the respondents.
Dr. Pal has also relied on various other judgments which the Court now proposes to consider. The next judgment on which reliance was placed was rendered in the case of ITO & Ors. vs. Madnani Engineering Works Ltd. (1979) 12 CTR (SC) 144 : (1979) 118 ITR 1 (SC). In that case the assessee in the original assessment proceeding produced all the Hundis on the strength of which it had obtained loan from the creditors. It had also produced all the entries in the books of account showing payments of interest. After these disclosures have been made it was for the ITO to investigate and determine whether these documents are genuine or not. The learned Judges held that the obligation of the assessee to make a true and full disclosure of material facts does not include an obligation upon him to confess before the ITO that the Hundis and the entries in the books of accounts were bogus. Therefore, the Supreme Court held that since there has been a full and true disclosure of material facts there is no other legal obligation of the assessee. Apart from that in Madnani Engineering (supra), the Hon’ble Supreme Court quashed the reassessment notices on another ground namely that in the affidavit which the ITO filed before the Court, the ITO merely stated his belief but did not set out any material on the basis of which he had arrived at such a belief. Therefore, no material was produced before the Court on which it could be satisfied that the ITO had reasons to believe that any part of the income of the respondent had escaped assessment by reasons of its failure to make a true and full disclosure of the material fact. That same is not the position here.
In the instant case, in the affidavit the entire recorded reasons have been disclosed. Apart from that this Court has already held that there has not been a true and full disclosure of all the material facts by the assessee by mere production of the agreement for payment of selling agency commission. Therefore, the decision in Madnani (supra) does not support the case of the respondent company. Reliance was also placed by Dr. Pal on the decision of the Supreme Court in the case of Ganga Saran & Sons (P) Ltd. vs. ITO & Ors. (1981) 22 CTR (SC) 112 : (1981) 130 ITR 1 (SC). In that case the assessee had disclosed fully and truly the salary paid to the director. Since all these facts relating to payment of salary and remuneration to the director were disclosed, the assessee had discharged his obligation of disclosing truly and fully all primary facts and the Court held that the assessee is under no obligation to disclose to the IT authority how the director who was in sole charge of the management of the business, had utilised the amount of the remuneration received by the director. Therefore, on those facts, the Supreme Court held that there is no failure on the part of the assessee in disclosing fully and truly all material facts. In that view of the said finding, the notices under s. 147(a) were quashed. But the facts in this case are totally different and there has not been true and full disclosure by the assessee of all the material facts relevant for assessment in connection with selling agency commission. Reliance was also placed by Dr. Debi Pal on the judgment of the Supreme Court in the case of Indian Oil Corporation vs. ITO & Ors. (1986) 58 CTR (SC) 83 : (1986) 159 ITR 956 (SC). The facts of the case were that the Assam Oil Company, the assessee, was a company incorporated in U.K. Its fixed assets and liabilities later on vested in the Indian Oil Corporation. The assessee had its principal place of business in Digboy in Assam. From the asst. yr. 1951-52 onwards, the assessee claimed deduction of certain expenses as administrative charges incurred by the Burma Oil Company, London for the management and secretarial work carried on behalf of the assessee in London.
It is not in dispute that the assessee had all along disclosed to the Revenue that for the London management expenses were incurred on behalf of the assessee by Burma Oil Company which were managing its affairs and doing certain work for the assessee and certain other allied companies. It is also not in dispute that this fact was known all along to the Revenue while the original assessments were made. The nature and quantum of work done was also disclosed. Therefore, all the primary facts were disclosed fully and truly. The question whether the entirety of the expenses debited were really incurred for the assessee-company by the London company or whether that was unreasonable and excessive having regard to the nature of the work done by the London company is an inferential fact from the facts which have been disclosed. That was a matter of opinion. Therefore, the Court held that Revenue at the time of making the original assessment having chosen to assess by allowing the entire amount as deduction, cannot subsequently, on a second thought, reopen.
In view of these facts the Court held that the opinion of the auditors for the asst. yr. 1963-64 that 10 per cent would be a reasonable charge might be good information for which the assessment of the assessee could be reopened under cl. (b) of s. 147, but, on that basis it could not be said that the assessee had failed to disclose fully and truly all the basic facts at the time of original assessment. Therefore, the Court held that the jurisdictional facts under s. 147(a) of the Act to reopen an assessment were not present and the notices of reopening assessment were quashed. It should be noted that while doing so, the learned Judges observed what facts are material and necessary for the assessee to disclose will differ from case to case.
In the instant case, since the Court holds that there has not been full and true disclosure of all material facts for assessment in connection with payment of selling agency commission, the ratio of Indian Oil (supra) cannot be attracted.
27. Reliance was also placed by Dr. Pal on the decision of the Madras High Court in the case of Madras Auto Service vs. ITO (1975) 101 ITR 589 (Mad). In the case the assessment was sought to be reopened on the ground that by reason of deduction of the entire interest paid on borrowing from the business profits, excessive relief had been granted.
In the instant case, the reopening of the assessment has not been done on the ground of giving excessive relief, but, on a different ground, viz. non-disclosure of relevant facts fully and truly.
Therefore, the ratio in Madras Auto (supra) is not attracted to the facts of this case. Reliance was also placed by Dr. Pal on a Single Bench judgment of the Calcutta High Court in the Dunlop Rubber Company Ltd. vs. ITO (1971) 79 ITR 349 (Cal). In that case, the Court found that in the assessment proceedings for several years of the Indian company, the question of admissibility for the purpose of deduction of contribution made by the Indian company to the expenditure incurred by the parent company on account of research, described as liaison expenditure was disclosed and considered by the ITO. All enquires relating to the liaison expenditure made by the Revenue were answered by the assessee, and it was also found in the facts of that case that the question of taxability in respect of the aforesaid expenditure were gone into earlier. But, those proceedings were dropped on the satisfaction of the Revenue that those amounts were not taxable. So taking into account the entire conspectus
of the facts and circumstances, the learned Judge held that there is no omission or failure on the part of the assessee in disclosing material facts to justify an action under ss. 147 and 148 of the Act. Therefore, the judgment rendered on the question of disclosure of fact by the assessee in a totally different factual background in Dunlop Rubber (supra) is not applicable to the facts in the present case. Reliance was also placed by the learned counsel for the assessee on another Single Bench judgment of the Calcutta High Court in the case of Grindlays Bank Ltd. vs. ITO & Ors. (1979) 116 ITR 710 (Cal), Dr. Pal relied on the said judgment for the proposition that when in the writ petition, it is averred that all facts were disclosed by the petitioner’s authorised representative to the AO in the course of discussion, such assertions in the writ petition can only be controverted in affidavit-in-opposition if it is sworn by a person who had personal knowledge of the what transpired in course of discussion in the original proceedings. In the absence of any such affidavit, there could be no denial of the averments in the writ petition.
The learned counsel submitted that, in the instant case, the disclosures were made in course of conversations, which have been averred in the writ petition. But the same could not be controverted by affidavit, which has been filed in the appeal Court.
It is difficult to accept the aforesaid contention in the instant case. In para 12 of the writ petition affirmed in 1997, it has been stated that the authorised representative of the petitioner discussed with the respondent No. 1 all the relevant and material facts, documents and records and on that basis assessment was made. Dr. Pal submitted that since those averments have not been denied by the AO before whom the discussion took place, those averments must be accepted. This Court is unable to accept the aforesaid contentions for the following reasons : (a) In para
12 what has been stated is that the matter was discussed by the authorised representative of the petitioner. The writ petition has been affirmed by one Shermadevi, who described hereself as secretary and chief accountant of the petitioner/company. It has not been stated that he was the authorised representative mentioned in para 12. The averments in para 12 have been affirmed as true to the knowledge of the aforesaid deponent. But, in the absence any statement that the deponent was the authorised representative of the petitioner/company referred to in para 12, it is not possible to accept the contention of the learned counsel, assuming but not admitting such contentions could be accepted otherwise. (b) In the facts of this case it is clear that the affidavits were not filed before the learned trial Judge. Affidavits were filed only in 2003 before the appeal Court pursuant to its leave. It is not expected that the officers who carried on the assessment proceeding in the asst. yrs. 1968-69 to 1973-74 would be in office till 2003 to swear an affidavit. (c) It is well-known that such AOs will retire and also may be transferred as Government servants. Apart from that in Grindlays Bank Ltd. (supra), the learned Judge did not decide the issue on the question of affidavit only. From p. 718 of the report it is clear that the learned Judge decided the matter on merits. Therefore, the aforesaid point on affidavit is not the ratio of the decision in Grindlays Bank Ltd. (d) From the various decisions of the Hon’ble apex Court which have been cited before us it is clear that the question relating to true and full disclosure of primary facts has not been decided on the basis of the verbal discussion which transpired between the authorised representative of the assessee and the AO. It is difficult to decide on the requirement of the statute on the basis of verbal discussions. (e) In other words, when the statute requires a disclosure of all primary facts fully and truly, such requirement read with Explanation referred to above can not be satisfied on the basis of alleged disclosure in course of verbal discussion. Therefore, on the question of principle also, this Court is unable to accept the aforesaid contentions of Dr. Pal.
31. The last decision cited by Dr. Pal was in the case of Kantamani (supra). The said decision does not support the contentions of Dr. Pal. On the other hand, the said decision supports the contentions of the Revenue on the question of true and full disclosure of all primary facts. The following observations made by the Supreme Court in Kantamani shows the obligation of the assessee in the matter of disclosure. Those observations are of the assessee in the matter of disclosure. Those observations are very pertinent and are set out below : “From the mere production of the books of account it cannot be inferred that there had been full disclosure of the material facts necessary for the purpose of assessment. The terms of the explanation are too plain to permit an argument being reasonably advanced, that the duty of the assessee to disclose fully and truly all material facts is discharged when which he produced the books of account or other evidence which has a material bearing on the assessment……. It is the duty of the assessee to bring to the notice of the ITO particular items in the books of account or portions of documents which are relevant. Even if it be assumed that from the books produced, the ITO, if he had been circumspect, could have found out the truth, the ITO may not on that account be precluded from exercising the power to assess income which had escaped assessment.” Following the aforesaid ratio, we are unable to accept that there has been full and true disclosure of all material facts relating to the payment of selling agency commission by mere disclosure of selling agency agreement.
The last point urged by Dr. Pal is that against the assessment order dt. 28th Feb., 1977, disallowing the selling agency commission, the assessee went up in appeal and ultimately, the Tribunal gave a finding in favour of the assessee. Therefore, Dr. Pal, relying on the said finding of the Tribunal which has become final urged that the reopening of the assessment on the self-same ground is of no consequence and in fact the attempt of the Revenue to reopen is by and large infractuous and academic. This Court is unable to accept the said contentions. It is well settled that if reopening proceedings have been validly initiated as has been done in this case, then it cannot be struck down solely on the ground that the issue with reference to which escapement of income has been alleged was later on decided in favour of the assessee and as such, there cannot be allegation of escapement. This Court is of the view and it is well settled that the validity of initiation of a proceeding or assumption of jurisdiction in the initiation of a proceeding has to be Judged on the basis of reasons as recorded on the date of assumption of the jurisdiction. If reasons so recorded on the date when jurisdiction was assumed are valid then initiation of such proceeding cannot become invalid on account of subsequent facts. In other words, the validity of proceedings has to be Judged on the basis of the facts as existed on the date of assumption of the jurisdiction and not on the ultimate result of any reassessment proceedings. See the decision of the Division Bench judgment of this Court in the case of CIT vs. Assam Oil Company Ltd. (1982) 133 ITR 204 (Cal). Speaking for the Court, Justice Sabyasachi Mukherjee (as His Lordship then was) made the following observations at p. 210 of the report : “In order to determine whether the ITO had jurisdiction to issue the impugned notice we must consider the facts as these were on the date when the impugned notice was issued. ………………. Subsequent decision of the AAC would not either confer jurisdiction if the ITO had not originally the jurisdiction at the time of the issuance of the notice or defeat the jurisdiction of the ITO if he had it at the time of the issuance of the notice. This proposition is well settled by the scheme of the IT Act and for this no authority is needed.”
The same view was taken by the Gujarat High Court in case of CIT vs. Maneklal Harilal Spinning and Manufacturing Co. Ltd. (1977) 106 ITR 24 (Guj). See the observations of the learned Judges at p. 31 of the report. The same view has been taken by the Bombay High Court in the case of Dilip S. Dahanukar vs. Samir Tekrwal, Asstt. CIT & Anr. (2001) 167 CTR (Bom) 72 : (2001) 248 ITR 147 (Bom). Please see the observation of the learned Judges at p. 150 and 151. The judgment of the Calcutta High Court in Assam Oil was relied on by the Allahabad High Court in the case of J.K. Charitable Trust vs. WTO & Ors. (1997) 139 CTR (All) 114 : (1996) 222 ITR 523 (All). And the Court held once the reassessment proceedings were validly initiated by issue of notices in question, subsequent reversal of the finding by the Tribunal will not affect the validity of the notices. Since view has been taken by the Supreme Court also in Raymond Woollen Mills Ltd. vs. ITO & Anr. (1999) 152 CTR (SC) 418 : (1999) 236 ITR 34 (SC).
From various judicial pronouncements cited in this case relating to exercise of power for reopening assessment, it appears well settled that the powers under s. 147 are wide in nature, but the power is conditioned by certain jurisdictional facts. In other words, in the name of exercising this power, the AO cannot institute a roving enquiry with the object of fishing out materials. The existence of the belief may be justifiable but not its adequacy. The belief must be bona fide and have a reasonable nexus with the issues involved in the assessment, it cannot be a mere pretence or a ruse. But at the same time it is true if in the course of carrying on the assessment proceeding for subsequent years, some items of information come to the notice of the AO from which, the AO may have reasons to believe that there has been escapement of income, in that case the AO can proceed under this section. This decisive language used in the section is “reason to believe”. Thereby on the basis of such reasons to believe the AO in exercising his power can rely on direct and even circumstantial evidence. But the AO cannot act on mere whisper, scoop or rumour.
In view of the aforesaid principles and for the reasons discussed above, we allow the appeal, set aside thejudgment of the learned Single Judge and dismiss the writ petition. The notices issued for reopening of assessment are upheld.
There will be no order as to costs.
Debi Prasad Sengupta, J. :
I agree
11th July, 2003
A prayer has been made for stay of operation of this judgment and order. The said prayer is considered and rejected.
[Citation : 264 ITR 410]
