Calcutta High Court
Mercury Travels Ltd. vs Deputy Commissioner Of Income Tax And ... on 12 September, 2002
Equivalent citations: (2003)179CTR(CAL)314
Author: Subhro Kamal Mukherjee
Bench: Subhro Kamal Mukherjee
JUDGMENT Subhro Kamal Mukherjee, J.
1. In this application under Article 226 of the Constitution of India (the writ petition in short), the writ petitioner questioned three notices issued under Section 148 of the IT Act, 1961 (the said Act in short), dt. 26th Sept., 1996, for the asst. yrs. 1989-90 and 1990-91 and dt. 20th Sept., 1996, for the asst. yr. 1991-92.
2. The relevant facts for the disposal of the writ petition are summarised as under:
(a) The petitioner, a public limited company, is engaged in businesses of travel agency and tour operation. The petitioner is an agent of the airlines for selling air tickets and for rendering such services, it receives commission from such airlines. Similarly, the petitioner acts as an agent for various hotels and it gets commission from such hotels for booking accommodations on behalf of the clients of the petitioner. Apart from the aforesaid businesses of acting as the agent of airlines and of hotels, the writ petitioner, also carries on business of tour operation. The writ petitioner, however, receives only the amount of commission, which the writ petitioner is entitled to receive from the said airlines and the hotels for rendering its services as the agent.
(b) Section 80HHD of the IT Act, 1961, was inserted by the Direct Tax Laws (Amendment) Act, 1989, w.e.f. 1st April, 1989, inter alia, for allowing deductions in respect of the earnings in convertible foreign exchange in respect of the business of a hotel or of a tour operator. In Sub-section (6) of the said section it has been provided that any deduction under the said section shall not be admissible unless the assessee furnishes, along with the return of income, the report of an accountant, as defined in the Explanation below Sub-section (2) of Section 288, certifying that the deduction has been correctly claimed.
(c) The writ petitioner duly filed its returns of income in respect of the asst. yrs. 1989-90, 1990-91 and 1991-92 and in each of the said assessment years, the writ petitioner claimed in its returns deductions under Section 80HHD and, as required under the said Act, for each of the said assessment years, the writ petitioner filed certificates, in the prescribed forms, from the chartered accountant, inter alia, certifying that the deductions have been correctly claimed. The said certificates issued by Ray and Ray, Chartered Accountants, and duly signed by one of its partners have been annexed to the writ application.
(d) The AO passed the orders of assessments in respect of the said three assessment years under Sub-section (3) of Section 143 of the said Act and allowed the petitioner deductions under Section 80HHD.
(e) The Dy. CIT issued three notices, as referred to hereinabove, under Section 148 of the said Act alleging that there has been escapement of assessment within the meaning of Section 147 of the said Act. The petitioner made several correspondences with the IT Department asserting that the assessments in respect of those assessment years have been correctly made and there has been no omission or failure of any nature whatsoever on the part of the petitioner to disclose fully and truly all material facts necessary for its assessment for those assessment years. The writ petitioner also requested for supply of the reasons for the proposal for reassessment.
(f) By a letter dt. 21st Aug., 1997, the Dy. CIT directed the writ petitioner to file fresh returns in respect of those assessment years overruling the contentions of the writ petitioner that the returns originally filed in respect of those assessment years could not be accepted even with modifications as the returns in compliance of the notices under Section 148 of the said Act. In the said letter, the writ petitioner was informed that the reasons as contemplated under Section 151 of the said Act have been recorded before obtaining the approval from the CIT. (g) The writ petitioner, thereafter, filed fresh returns in respect of the said assessment years in reply to the notices issued under Section 148 of the said Act. (h) Ultimately, on 13th Nov., 1997, the Dy. CIT furnished the copies of the recorded reasons.
3. Mr. R.N. Bajoria, learned senior advocate, appearing for the writ petitioner, submitted that where an assessment has been made under Sub-section (3) of Section 143 of the said Act, no action can be taken unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment for that assessment year. The provisions of Section 147 of the said Act, it is argued by Mr. R.N. Bajoria, do not contemplate a review on account of failure of the AO in doing his duties. Finally, it is argued by Mr. Bajoria that unless those conditions are satisfied, the AO gets no jurisdiction to issue notices.
4. Mr. Mukherjee and Mr. Nizamuddin, the learned advocates appearing for the Revenue, however, argued that where the statutory authority issuing show-cause notice has the jurisdiction to do so and where the party has the opportunity to explain the show-cause notice, such notice cannot and should not be quashed by the High Court at the very threshold in the exercise of the power under Article 226 of the Constitution of India. The said learned advocates cited the decision in the case of Indo Asahi Glass Co. v. ITO .
5. I have carefully considered the rival contentions advanced before me.
6. The Supreme Court of India in the case of Calcutta Discount Co. Ltd. v. ITO , while considering the provisions of Section 34 of the Indian IT Act, 1922, corresponding to Sections 147 and 148 of the said Act, observed that two conditions precedent must co-exist, namely, that the AO must have reason to believe (i) that income, profits or gains had been underassessed, and (ii) that such underassessment was due to non-disclosure of material facts by the assessee. The relevant observations of the Supreme Court of India are as under :
"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.
If from primary facts more inferences than one could be drawn, it would not be possible to say that the assessee should have drawn any particular inference and communicated it to the assessing authority. How could an assessee be charged with failure to communicate an inference, which he might or might not have drawn?"
7. In Gemini Leather Stores v. ITO , it "has been observed that in the said case the assessee did not disclose the transactions evidenced by the drafts, which the ITO discovered. After this discovery the ITO had in his possession all the primary facts, and it was for him to make necessary enquiries and draw proper inference as to whether the amounts invested in the purchase of the drafts could be treated as part of the total income of the assessee during the relevant year, This the ITO did not do. It was plainly a case of oversight, and it could not be said that the income chargeable to tax for the relevant assessment year had escaped assessment by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts. The ITO had all the material facts before him when he made the original assessment. He could not now take recourse to Section 147 to remedy the error resulting from his own oversight.
8. In Parashuram Pottery Works Co. Ltd. v. ITO , the apex Court observed :
"It has been said that the taxes are the price that we pay for civilization. If so, it is essential that those who are entrusted with the task of calculating and realising that price should familiarise themselves with the relevant provisions and become well-versed with the law on the subject. Any remissness on their part can only be at the cost of the national exchequer and must necessarily result in loss of revenue. At the same time, we have to bear in mind that the policy of law is that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity. So far as the income-tax assessment orders are concerned, they cannot be reopened on the score of income escaping assessment under Section 147 of the Act of 1961 after the expiry of four years from the end of the assessment year unless there be omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment."
9. In Ganga Saran & Sons (P) Ltd. v. ITO , it has been observed "It is well settled as a result of several decisions of this Court that two distinct conditions must be satisfied before the ITO can assume jurisdiction to issue notice under Section 147(a). First, he must have reason to believe that the income of the assessee has escaped assessment and, secondly, he must have reason to believe that such escapement is by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. If either of these conditions is not fulfilled, the notice issued by the ITO would be without jurisdiction. The important words under Section 147(a) are has reason to believe' and these words are stronger than the words 'is satisfied'. The belief entertained by the ITO must not be arbitrary or irrational. It must be reasonable or in other words it must be based on reasons which are relevant and material. The Court, of course, cannot investigate into the adequacy or sufficiency of the reasons which have weighed with the ITO in coming to the belief, but the Court can certainly examine whether the reasons are relevant and have a bearing on the matters in regard to which he is retired to entertain the belief before he can issue notice under Section 147(a). If there is no rational and intelligible nexus between the reasons and the belief, so that, on such reasons, no one properly instructed on facts and law could reasonably entertain the belief, the conclusion would be inescapable that the ITO could not have reason to believe that any part of the income of the assessee had escaped assessment and such escapement was by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts and the notice issued by him would be liable to be struck down as invalid."
10. In Indian Oil Corporation v. ITO , it was observed that it was well settled now by the several authorities of the apex Court and of several High Courts that there must be materials to come to the conclusion that there was omission or failure to disclose fully and truly all material facts necessary for the assessment of the year. It demanded a duty on every assessee to disclose fully and truly all the material facts necessary for the assessment. Therefore, the obligation was to disclose facts; secondly, those which were material; thirdly, the disclosure must be full and fourthly true. What facts were material and necessary for assessment would differ from case to case. In every assessment proceedings, for computing or determining the proper tax due from the assessee, it was necessary to know all the facts, which could help the assessing authority 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 to certain other facts. But one of the primary tasks of the AO was to draw inferences. It was not necessary for the assessee to draw inferences for him.
11. A Division Bench of the Delhi High Court in the case of Jindal Photo Films Ltd. v. Dy. CIT , summed up the observations of the various authorities as, under :
(1) It is well settled that while submitting to the jurisdiction of an AO, it is the duty of the assessee to disclose all the primary facts (in contradistinction with inferential facts) which have a bearing on the liability of the income earned by the assessee being subjected to tax. It is for the AO to draw inferences from the facts and apply the law determining the liability of the assessee. The law does not require the assessee to state the conclusions that can reasonably be drawn from the primary facts. Once that is done and assessment order framed, the AO cannot at a later point of time merely on forming an opinion, by giving a second thought to the primary facts disclosed by the assessee, arrive at a finding that he had committed an error in computing the taxable income of the assessee and reopen the assessment by resorting to Section 147 of the said Act. Discovery of new and important matters or knowledge of fresh facts which were not present at the time of original assessment would constitute a reason to believe the income having escaped assessment within the meaning of Section 147. Here, also, such facts, which could have been discovered by the assessing authority but were not so discovered at the time of original assessment may not constitute new information.
(2) Where the ITO (very often successor-officer) attempts to reopen the assessment because the opinion formed earlier by himself (or more often, by a predecessor-ITO), was, in his opinion, incorrect; judicial decisions have consistently held that this could not be done.
(3) The power to reopen an assessment was conferred by the legislature, but not with the intention to enable the ITO to reopen the final decision made against the Revenue in respect of questions that directly arose for decision in earlier proceedings. If that were not the legal position it would result in placing an unrestricted power of review in the hands of the AOs depending on their changing moods.
(4) If an expenditure or a deduction was wrongly allowed while computing the taxable income of the assessee, the same could not be brought to tax by reopening the assessment merely on account of subsequently the AO forming an opinion that earlier he had erred in allowing the expenditure or the deduction.
(5) If a notice under Section 148 has been issued without the jurisdictional foundation under Section 147 being available to the AO, the notice and the subsequent proceedings will be without jurisdiction and liable to be struck down in exercise of writ jurisdiction of the High Court, if reason to believe was available, the writ Court will not exercise its power of judicial review to go into the sufficiency or adequacy of the material available, but in case of absence of jurisdiction in the AO to initiate the proceeding under Section 147 of the said Act, the writ Court will surely exercise its power of judicial review.
12. In the background of such settled position, let me now consider the reasons recorded for reopening of the assessments. The said reasons are as under:
"Deduction under Section 80HHD is allowable on total profit of the business by multiplying by ratio of total receipt of convertible foreign exchange to total receipt of whole business carried on by the assessee.
To calculate total receipt of the business, the assessee has taken gross receipt of foreign exchange + net receipt of domestic business in respect of commission/service charges. Thus, the assessee has claimed excess deduction under Section 80HHD. In fact the total receipt of the business should be taken as gross receipt of foreign exchange receipt + gross receipt of domestic business. Thus, the assessee has claimed excess deduction under Section 80HHD and to this extent income has escaped assessment, However, the assessee has taken by estimate 80 per cent of the total receipt as foreign exchange receipt (note 10 of notes to profit and loss account). Thus pending final certificate and reconciliation of records benefit under Section 80HHD was claimed on estimated receipt only in respect of foreign exchange receipt.
Thus, I have reason to believe that income has escaped assessment by wrongly claiming deduction under Section 80HHD by an amounting to Rs. 13,48,788."
13. My reading of Section 147 of the said Act is that a proceeding for reopening of an assessment, made under Sub-section (3) of Section 143 of the said Act, can be initiated when any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment for that assessment year. Where expressly deduction under Section 80HHD was claimed and it was examined and granted by the assessing authority, there was no omission or failure on the part of the assessee to disclose any material fact necessary for the assessment. In the case in hand, at the time of submission of the original returns, as per the requirements of the law, the assessee submitted certificates from the chartered accountant in the prescribed forms claiming such exemptions. Thus, the primary facts were before the AO when he made the assessments under Sub-section (3) of Section 143 and it was not open to him to invoke the provisions of Section 147 of the said Act to reopen the assessments because he might have omitted to notice certain facts by oversight. For change of opinion, the provisions of Section 147 of the said Act cannot be put to service. In the reasons for reopening the assessments it has not been alleged that there has been any omission or failure on the part of the assessee to disclose fully and truly all the material facts necessary for the assessments for those assessment years. It is not even noted in the recorded reasons as to what other primary facts were required to be disclosed by the assessee before the AO at the time of assessments made under Sub-section (3) of Section 143. I am, therefore, clearly of the view that the assessee disclosed all the primary facts before the AO at the time of original assessments under Sub-section (3) of Section 143 of the Act and there was no omission or failure on the part of the assessee to disclose fully and truly all the material facts necessary for the assessment for those assessment years. Therefore, the notice issued under Section 148 was illegal and without jurisdiction as the conditions precedent to reopen the assessment are not available in the recorded reasons. I hold that no income chargeable to tax had escaped assessment for those assessment years due to failure of the assessee to disclose fully and truly all material facts necessary for its assessment.
14. In my view, this is one of the exceptional cases where this Court should exercise its power under Article 226 of the Constitution of India for quashing the said notice as I am of the opinion that on the face of the recorded reasons palpably the initiation of the proceedings are wholly unwarranted and the reasons recorded do not satisfy the requirements of the law to invoke the jurisdiction of the AO under Section 147. The entire course of reassessment proceedings will be an exercise in futility. It has been observed by the apex Court in Calcutta Discount Co. Ltd. 's case (supra) that the High Courts have ample powers under Article 226 of the Constitution of India, and are in duty bound thereunder, to issue such appropriate orders or directions as are necessary in order to prevent persons from being subjected to lengthy proceedings and unnecessary harassment by an executive authority acting without jurisdiction. The alternative remedies that are provided by the IT Act, 1961, cannot always be a sufficient reason for refusing quick relief in a fit and proper case.
Accordingly, the writ petition is allowed. The three notices under Section 148 of the IT Act, 1961, and all the proceedings relating thereto are quashed.
15. The parties are, however, directed to bear their respective costs.