Delhi H.C : the jurisdictional pre-conditions mentioned in section 147 are not satisfied. The Tribunal in the impugned order has held that there was no failure or omission on the part of the respondent-assessee to disclose fully and truly all material facts

High Court Of Delhi

CIT vs. Cray Research India Ltd.

Assessment Years : 1990-91 To 1992-93

Section : 147

Sanjiv Khanna And R.V. Easwar, JJ.

IT Appeal Nos. 742, 743 And 744 Of 2011

February  10, 2012 

JUDGMENT

1. The Revenue in these appeals under section 260A of the Income-tax Act, 1961 (“the Act”, for short), impugns the order dated April 30, 2010, passed by the Income-tax Appellate Tribunal (for short, “the Tribunal”) in the case of Cray Research India Ltd. The appeals pertain to the assessment years 1990-91, 1991-92 and 1992-93.

2. The short question raised by the Revenue in the present appeals is whether the Tribunal was right in setting aside the reassessment proceedings on the ground that the jurisdictional pre-conditions mentioned in section 147 are not satisfied. The Tribunal in the impugned order has held that there was no failure or omission on the part of the respondent-assessee to disclose fully and truly all material facts.

3. Learned counsel for the Revenue has submitted that the order of the Tribunal requires interference as it has been wrongly observed that the assessee had made full and true disclosure of the material facts. In this connection, he submits that the agreement entered into between the respondent-assessee and the Department of Science and Technology, Government of India, was not filed before the Assessing Officer in the assessment proceedings for the assessment years 1990-91 and 1991-92. He submits that this is apparent if we read the letter dated November 9, 1994, filed by the respondent-assessee during the course of the assessment proceedings for the assessment year 1992-93. He submits that the other letter dated November 12, 1992, filed during the course of the assessment proceedings for the assessment year 1990-91 has been misconstrued and misinterpreted by the Tribunal.

4. The reasons recorded by the Assessing Officer at the time of reopening of the assessment for the three assessment years in question are identical except for the figures. For the sake of convenience, we are reproducing the reasons recorded by the Assessing Officer pertaining to the assessment year 1990-91 :

“Assessment in this case was completed under section 143(3). During the course of the assessment proceedings for the assessment year 1995-96, it was noticed that an agreement was entered into by the Department of Science and Technology, Government of India and M/s. Cray Research Inc., a corporate body organized under the laws of the United States of America for the purpose of purchase of computer equipment and maintenance service on May 5, 1988. The nature and scope of maintenance service is covered within the ambit of Explanation 2 to clause (vii) of sub-section (1) of section 9 of the Income-tax Act and is clearly technical services.”

5. It is an accepted and admitted position that for the three assessments years, scrutiny assessments under section 143(3) of the Act had taken place and assessment orders dated November 13, 1992, September 15, 1993, and November 22, 1994, in respect of the assessment years 1990-91, 1991-92, 1992-93, respectively, were passed. Thus, the assessment proceedings for the three assessment years in question have been held after issue of notice under section 143(2) of the Act and are regular assessments after verifications.

6. It may be relevant to reproduce here the following paragraphs of the assessment orders pertaining to the assessment years 1990-91 and 1991-92, which read as under :

Assessment year 1990-91

“The assessee-company is deriving income from maintenance service charges from the Department of Science and Technology. Total receipts during the year have been shown at Rs. 1,06,50,473. Necessary details of various expenses debited to the profit and loss account have been furnished and placed on record. After discussion total loss is computed as under :

  (Rs.) (Rs.)
Net loss as per the profit and loss account   (-) 251,62,415
Deduct :    
Entertainment expenses under section 37 (2A) 45,072  
Legal and professional fee 4,36,727  
In excess of limits under section 40A(12)    
Disallowance under rule 6D 20,000  
Payments to club as per the tax audit report 69,267 5,71,066
Total Loss : (-)   245,91,349″

Assessment year 1991-92

“The assessee-company continues to derive income from maintenance service charges from the Department of Science and Technology. During the year under consideration, the assessee has shown total receipts from maintenance service charges at Rs. 91,59,156. Necessary details have been furnished and placed on record. After discussion total loss is computed as under :

  (Rs.) (Rs.)
Net loss as per the profit and loss account   (-) 148,93,690
Deduct :    
Disallowance under section 37(2A) 42,897  
Legal and professional fee in excess of Rs. 10,000 as per the tax audit report 2,66,909  
Disallowance under rule 6D 1,52,648  
Disallowance under section 40A(3) 21006  
Depreciation for separate consideration 52,82,188  
Payments to club as per the tax audit report 5,2230 58,17,878
    (-) 90,75,812
Add : Depreciation as claimed   52,82,188
Total loss : (-)   143,58,000″

7. The quotes from the aforesaid two orders clearly indicate that what was the subject-matter considered and examined by the Assessing Officer. The subject-matter was the maintenance and service charges received by the respondent-assessee and the taxability of the said amount. The Assessing Officer was aware and conscious of the nature and why payment was received by the respondent-assessee from the Department of Science and Technology. The respondent-assessee had claimed expenses and the said aspect was examined and accordingly the income/loss was computed.

8. As noticed above, learned counsel for the Revenue has laid considerable emphasis on the question that the respondent-assessee had not filed a copy of the agreement dated May 5, 1988, entered into between the respondent-assessee and the Department of Science and Technology, Government of India and, thus, there was failure to disclose full and true of the material facts. The Assessing Officer, it is submitted, was prevented from forming an opinion on whether or not the income received was taxable as business income or was taxable as fees for technical services. This, it is submitted, was necessary as the respondent-assessee was a non-resident company based in the USA and had opened a project office in India, which constitutes a permanent establishment.

9. We may, at this stage, note that as far as the assessment year 1992-93 is concerned, it is not disputed that a copy of the agreement was filed with the Assessing Officer, vide letter dated November 9, 1994. Copy of the said agreement is also available in the assessment records of the said year. As noticed above, the assessment order for 1992-93 was passed on 22nd November, 1994, i.e., after the letter dated 9th November, 1994, was filed by the respondent-assessee enclosing therewith a copy of the said agreement. The contention raised by the Revenue for the said assessment year does not have any merit and has to be rejected.

10. For the assessment years 1990-91 and 1991-92 also, we are not inclined to accept the submissions made by the Revenue for the reasons stated below :

(i) Reasons to believe mentioned above do not record that a copy of the agreement was not on record and, therefore, there was failure or omission on the part of the respondent-assessee to make full and true disclosure of material facts. The case now made out by the Revenue is different from the grounds mentioned and recorded in the reasons to believe.
(ii) The only activity undertaken by the respondent-assessee in India related to maintenance and service of a super computer, which was sold by the respondent-assessee to the Government of India. The respondent-assessee had received service charges and maintenance charges in respect of the same and had incurred expenditure. This being the only activity, which was undertaken by the respondent-assessee in India, it is difficult to perceive and accept the contention of the Revenue that the nature and character of the maintenance and service charges paid and payments received was not within the knowledge of the Assessing Officer and gone into.
(iii) The assessment orders for the assessment years 1990-91 and 1991-92 clearly indicate that the Assessing Officer was aware of the nature and character of income, which was received by the respondent, i.e., payment was made by the Department of Science and Technology towards maintenance and service charges.
(iv) It is not alleged and no particular clause of the agreement has been highlighted or referred to in the reasons to believe, as a relevant/ material fact would have changed or mattered in the Assessing Officer forming an opinion. Even in the arguments, no specific clause of agreement has been relied upon. In the reasons to believe, and before us, it is not stated that a particular or specific clause in the agreement constitutes information regarding a new fact that was not in the knowledge of the Assessing Officer.
(v)

The reasons to believe recorded above indicate that the Assessing Officer was of the opinion that the assessee should have stated and disclosed that the income/payments made by the Department of Science and Technology were “fees for technical services” and not, therefore, taxable as business income. This, according to the “reasons to believe”, amounts to failure or omission on the part of the respondent-assessee to make full and true disclosure of material facts. This is misunderstanding of law under section 147 of the Act. The assessee is required to disclose full and true material facts and need not explain or interpret the law. Legal inference has to be drawn by the Assessing Officer from the facts disclosed by the assessee. This is different and cannot be regarded as an omission or failure on the part of the assessee to disclose material facts. The assessee is to disclose fully and truly all material facts. We may fruitfully reproduce the following observations made in the case of Calcutta Discount Co. Ltd. v.  ITO [1961] 41 ITR 191 (SC) in which it has been held as under (pages 199 to 201) :

 

“Before we proceed to consider the materials on record to see whether the appellant has succeeded in showing that the Income-tax Officer could have no reason, on the materials before him, to believe that there had been any omission to disclose material facts, as mentioned in the section, it is necessary to examine the precise scope of disclosure which the section demands. The words used are ‘omission or failure to disclose fully and truly all material facts necessary for his assessment for that year’. It postulates a duty on every assessee to disclose fully and truly all material facts necessary for his assessment. What facts are material, and necessary for assessment will differ from case to case. In every assessment proceeding, the assessing authority will, for the purpose of computing or determining the proper tax due from an assessee, require to know all the facts which help him in coming to the correct conclusion. From the primary facts in his possession, whether on disclosure by the assessee, or discovered by him on the basis of the facts disclosed, or otherwise-the assessing authority has to draw inferences as regards certain other facts ; and ultimately, from the primary facts and the further facts inferred from them, the authority has to draw the proper legal inferences, and ascertain on a correct interpretation of the taxing enactment, the proper tax leviable. Thus, when a question arises whether certain income received by an assessee is capital receipt, or revenue receipt, the assessing authority has to find out what primary facts have been proved, what other facts can be inferred from them, and taking all these together, to decide what the legal inference should be.

 

There can be no doubt that the duty of disclosing all the primary facts relevant to the decision of the question before the assessing authority lies on the assessee. To meet a possible contention that when some account books or other evidence has been produced, there is no duty on the assessee to disclose further facts, which on due diligence, the Income-tax Officer might have discovered, the Legislature has put in the Explanation, which has been set out above., In view of the Explanation, it will not be open to the assessee to say, for example-‘I have produced the account books and the documents : You, the Assessing Officer examine them, and find out the facts necessary for your purpose : My duty is done with disclosing these account-books and the documents’. His omission to bring to the assessing authority’s attention those particular items in the account books, or the particular portions of the documents, which are relevant, will amount to ‘omission to disclose fully and truly all material facts necessary for his assessment’. Nor will he be able to contend successfully that by disclosing certain evidence, he should be deemed to have disclosed other evidence, which might have been discovered by the assessing authority if he had pursued investigation on the basis of what has been disclosed. The Explanation to the section, gives a quietus to all such contentions ; and the position remains that so far as primary facts are concerned it is the assessee’s duty to disclose all of them-including particular entries in account books, particular portions of documents, and documents and other evidence, which could have been discovered by the assessing authority, from the documents and other evidence disclosed.

 

Does the duty, however, extend beyond the full and truthful disclosure of all primary facts ? In our opinion, the answer to this question must be in the negative. Once all the primary facts are before the assessing authority, he requires no further assistance by way of disclosure. It is for him to decide what inferences of facts can be reasonably drawn and what legal inferences have ultimately to be drawn. It is not for somebody else-far less the assessee-to tell the assessing authority what inferences, whether of facts or law, should be drawn. Indeed, when it is remembered that people often differ as regards what inferences should be drawn from given facts, it will be meaningless to demand that the assessee must disclose what inferences-whether of facts or law-he would draw from the primary facts.”

(See also Atma Ram Properties (P.) Ltd. v. Dy. CIT [2012] 343 ITR 141/[2011] 203 Taxman 408/16 taxmann.com 67 (Delhi), CIT v. Purolator India Ltd. [2012] 343 ITR 155/207 Taxman 76 (Mag.)/19 taxmann.com 167 (Delhi) and BLB Ltd. v. Asstt. CIT [2012] 343 ITR 129/206 Taxman 37 (Mag.)/19 taxmann.com 115 (Delhi) .

(vi) In the assessment order relating to the assessment year 1995-96, the Assessing Officer for the first time after examining the legal provisions had observed that the payments received from the Department of Science and Technology, Government of India were “fees for technical services” and, therefore, should be taxed accordingly and not as business income. In the assessment order it is not mentioned or recorded that any new fact or factual aspect was ascertained or found on examination of the agreement. The agreement was not specifically referred to, as the relevant document for ascertaining or forming the said legal inference. The Assessing Officer on the basis of the same facts and material reached a different conclusion by applying or interpreting the law.

(vii) (a) Letter dated November 12, 1992, was written by the assessee to the Assessing Officer in the course of the scrutiny proceedings for the assessment year 1990-91. The said letter states that the assessee was involved in the maintenance and operation of the super computer sold to the Government of India. It was stated that the assessee had only expatriate employees who were engineers and technicians. No sales and other contracts were effected that year. This letter dated November 12, 1992, has been shown to us and was also filed before the Tribunal.

(b) The contention of the Revenue is that in the second paragraph of the letter dated November 12, 1992, the assessee referred to “this agreement” which was ambiguous and equivocal and did not necessarily refer to the agreement between the assessee and the Department of Science and Technology. The second paragraph of the letter dated November 12, 1992, reads :

“the assessee is at present involved in maintenance and operation of the super computer sold to the Government of India (Department of Technology) as per the terms of this (sic. their as per Revenue) agreement”

As per the assessee, the Tribunal correctly interpreted the second paragraph of the letter dated November 12, 1992, and held that the agreement in question refers to the agreement dated May 5, 1988.

(c) The contention put forth by the Revenue was not raised before the Tribunal. The words “this” and “their” makes no difference to our mind. The assessee had referred to the agreement between the assessee and the Government of India and the nature and character of the obligation performed for which consideration was paid.

11. In view of the aforesaid, we are not inclined to entertain the present appeals. No substantial question of law arises. The appeals are accordingly dismissed. No costs.

[Citation : 343 ITR 212]

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