Calcutta High Court
Income-Tax Officer And Ors. vs Electro Steel Castings Ltd. on 11 July, 2003
Equivalent citations: [2003]264ITR410(CAL)
Author: Asok Kumar Ganguly
Bench: Asok Kumar Ganguly
JUDGMENT Asok Kumar Ganguly, J.
1. This appeal is directed against the judgment and order dated May 16, 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 Section 148 of the Income-tax Act, 1961. 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 January 11, 1988. But, even then also, no affidavit was filed. Nor were the records produced which are normally produced in a proceeding relating to Section 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.
2. This appeal was taken up for hearing before this court on November 12, 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, 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, thereafter, the matter was fixed for hearing afresh. 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 dated January 25, 2003. The matter was fixed for hearing on March 20, 2003. Thereafter, affidavits were filed, records were produced and the matter was heard before us on March 20, 2003, and also thereafter.
3. 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 the merits by the appeal court, we do so by this judgment.
4. The facts on the basis of which the writ petition was filed are summarised as follows :
On or about April 1, 1977, the respondent received six notices all dated March 19, 1977, and those notices were issued by the appellant under Section 148 of the Income-tax Act (hereinafter referred to as the "Act"). Those notices were in respect of the assessment years 1968-69, 1969-70, 1970-71, 1971-72, 1972-73 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 Section 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 assessment years 1968-69, 1969-70, 1970-71, 1971-72 that they were issued after obtaining the satisfaction of the Commissioner of Income-tax, Orissa, Bhubaneswar, and those said notices were sent by registered post with acknowledgement due 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 assessment year 1973-74, the respondent also opened a separate unit at Ghaziabad, U. P.
6. 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.-5 per cent. It is their further case that in order to organise its business on or about December 5, 1966, the respondent entered into an agreement in writing with one 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 with effect from December 4, 1966. It is also the case of the respondent that the said sole selling agent was appointed in accordance with the provision of Section 294 of the Companies Act, 1956, and the approval of the shareholders was obtained in the general meeting of the respondent held on March 28, 1967.
7. 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 with effect from December 4, 1971. It has been further stated by the respondents that on or about February 1, 1972, the said firm that is ECL Sales Corporation was converted into a private limited company and was named as Electro Cast Sales (India) Pvt. Ltd. and by another agreement dated February 17, 1972, between the said firm and the respondents, the respondents appointed the said firm as the sole selling agent of the respondents.
8. 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 February 1, 1972, to February 30, 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 the course of the assessment proceedings for the assessment year 1968-69, the Income-tax Officer 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 dated February 24, 1970, the writ petitioner duly produced the copy of the said agreement. In paragraphs 5 to 10 of the writ petition, the respondents have stated the particulars of the return filed by them for the assessment years 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.
9. 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 Ghan-shyam Kejriwal and his family members. On December 5, 1968, which is relevant for the assessment year 1968-69, the respondent-company entered into an agreement with the said firm, namely 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 the 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 assessment year 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 income-tax 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 years.
(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 sons and relatives.
10. 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 investigation into correspondence of the assessee-company revealed that the 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.
11. It has been alleged that these are the functions of the respondent-company and not functions of the said selling agency firm.
12. 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 December 19, 1974, signed a letter of the respondent-company addressed to the chief foundry engineer of 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 Durgapur Projects Ltd. on April 3, 1975.
(iii) In a letter dated April 2, 1975, the said firm asked the chief foundry engineer for his comments on any defect noticed in certain goods, supplied by the respondent-company.
13. 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.
14. 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 brought back to the parent assessee-company on September 1, 1976, and the selling agency firm became defunct.
15. 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 Income-tax Officer has also recorded some more additional grounds and reasons for reopening the assessment for the assessment year 1969-70.
16. The respondent-firm being a public limited company, during the assessment year 1969-70, paid remuneration of Rs. 18,000 to its managing director. This is in excess of the limit prescribed under Section 198 of the Companies 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.
17. 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 assessment years 1968-69 and 1969-70.
18. The appellant further contended that on the basis of the aforesaid materials, not only the Income-tax Officer, but the Commissioner of Income-tax also applied his mind before formation of opinion and recorded reasons for reopening the assessment for the assessment years 1968-69 to 1973-74. It was also urged by the appellants that in due compliance of the provisions laid down under Sections 149 to 153 of the Act, the Income-tax Officer sent a draft proposal to the Commissioner of Income-tax for granting approval on the said recorded reasons. Initially, the Commissioner of Income-tax did not grant approval to the first draft proposal and returned the same to the Income-tax Officer with a direction to send a fresh draft proposal. Thereafter, the Income-tax Officer sent a fresh proposal for the reopening of the said assessment and then, the Commissioner of Income-tax 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.
19. 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 assessment year 1976-77 the same Income-tax Officer issued the impugned notice of reassessment on March 19, 1977, for the assessment years 1968-69 to 1973-74, on identical reasons on the basis of which the selling agency commission was disallowed in the assessment order dated February 28, 1977. Therefore, the stand taken is that the reason for which the selling agency commission was disallowed in the assessment order dated February 28, 1977, are the same reasons on the basis of which the notices to reopen assessment were issued.
20. It has been also stated in the reply that against the said disallowance of the selling agency commission in the assessment order dated February 28, 1977, the respondents preferred an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner, however, confirmed the findings of the Assessing Officer. Then the respondent preferred an appeal before the Income-tax Appellate 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 Assessing Officer and the Appellate Assistant Commissioner 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 the assessment of subsequent assessment years 1977-78 and 1978-79 for selling agency commission paid to the same firm, Electro Cast Sales (India) Pvt. 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.
21. This was the main point which was urged by learned counsel for the respondent while denying the factual assertion made by learned counsel for the appellant in its affidavit-in-opposition.
22. Mr. Ram Chandra Prasad, learned counsel for the appellant, submitted that in the instant case, the reasons which have been recorded by the Assessing Officer, were recorded in accordance with law and after complying with all the requirements under the said Act. Apart from that, learned counsel submitted that the reasons are valid and relevant reasons and it has not been urged by the respondent-company that there are any mala fides on the part of the Assessing Officer in recording the reasons.
23. Mr. Prasad relied on the decision in the case of S. Narayanappa v. CIT . Relying on the said judgment 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. Learned counsel further submitted that adequacy of such reasons cannot be questioned by the court.
24. Learned counsel also submitted, relying on the decision in S. Narayanappa's case , that the requirement under the relevant section is that the Assessing Officer must entertain his reason to believe in good faith and the same cannot be a mere pretence.
25. Learned counsel submitted that in the instant case those requirements, which have been laid down by the judicial pronouncement in S. Narayanappa's case have been fulfilled. Learned counsel submitted that though the decision in S. Narayanappa's case was rendered on construction of the provision of Section 34 of the 1922 Act, the statutory requirement under Section 147(a) of the Act is the same. This has not been disputed by learned counsel for the appellant.
26. Mr. Prasad also relied on another decision of the Supreme Court in the case of Kantamani Venkata Narayana and Sons v. ITO (First AM.) . Relying on the said decision 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 account or other documents. The assessee must bring to the notice of the Income-tax Officer particular items in the books of account or portions of the documents which are relevant for assessment. Learned counsel also very much relied on the other proposition laid down in Kantamani's case that if from the books produced the Income-tax Officer, had been the officer circumspect and careful, could have found the truth. But that he has not been also to do so, and that failure on his part by itself will not preclude the officer from exercising his power to reassess income which has escaped assessment.
27. Learned counsel submitted that following the aforesaid ratio the action in the instant case, is sustainable in law. Learned counsel relied on the said decision in Kantamani's case in order to point out that the proceedings prior to the issuance of notice of reassessment are not quasi-judicail. But those proceedings namely recording of reasons by the Assessing Officer in reopening assessment is administrative in nature and at this stage, the assessee is not entitled to any notice.
28. Learned counsel for the appellant also relied on another decision in the case of CIT v. A. Raman and Co. . Learned counsel relied on the said judgment in order to contend that the High Court in exercising its jurisdiction under Article 226, can set aside a notice issued under Section 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 Income-tax Officer had in his possession any information and the court may also consider whether from the information the Income-tax Officer may have reasons to believe that income chargeable to tax has escaped assessment. The learned judges in A. Raman and Co.'s case 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 Assessing Officer 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 the Income-tax Officer is entrusted with the power to administer the Act. Learned counsel of course accepted the position that the information in the possession of the Assessing Officer 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 Assessing Officer, it is not possible for the High Court to interfere while exercising its power under Article 226.
29. Learned counsel for the appellant also urged that the decision of the Constitution Bench of the Supreme Court in Calcutta Discount Co. Ltd. v. ITO also supports the case of the appellant and the judgment in the case of Kantamani was delivered relying on the judgment of the Constitution Bench in Calcutta Discount Co.'s case .
30. Dr. Pal, learned counsel appearing for the respondent, very much relied on the decision in the case of Calcutta Discount Co. and submitted that in view of the ratio in Calcutta Discount Co.'s case 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 Assessing Officer has to draw from those facts, are not the headache of the assessee nor is the assessee responsible for the same.
31. Dr. Pal submitted that in connection with the assessment year 1968-69, the respondent-company disclosed to the Income-tax Officer, "A" Ward, a copy of the sole selling agency agreement with ECL Sales Corporation. It has been stated by Dr. Pal that the said agreement was a part of the letter dated February 24, 1970, given to the Income-tax Officer 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. 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, learned counsel relied on the Constitution Bench judgment of the Supreme Court in the case of Calcutta Discount Co. . 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 v. ITO .
32. The facts in Calcutta Discount Co.'s case , were that in the original assessment of the company for the assessment years 1942-43, 1943-44 and 1945-46 profits realised by the company by sales of shares were not assessed to tax. The Income-tax Officer proposed to initiate reassessment proceedings against the company under Section 34 of the Indian Income-tax Act, 1922, presently Section 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.
33. 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 materials facts which were disclosed in conjunction with the surrounding circumstances.
34. 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 Co.'s case , the assessee disclosed all primary facts regarding sale of shares. Therefore, the Supreme Court held that the 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 for the Assessing Officer to decide.
35. This court is of the opinion that the ratio in Calcutta Discount Co.'s case 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 Explanation 2 to Section 147. In Calcutta Discount Co.'s case , 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, the 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 Co.'s case does not support the case of the respondents.
36. 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 v. Madnani Engineering Works Ltd. . In that case the assessee in the original assessment proceeding produced all the hundies on the strength of which it had obtained loans 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 Income-tax Officer 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 Income-tax Officer that the hundies and the entries in the books of account 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's case , the Supreme Court quashed the reassessment notices on another ground, namely, that in the affidavit which the Income-tax Officer filed before the court, the Income-tax Officer 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 Income-tax Officer had reasons to believe that any part of the income of the respondent had escaped assessment by reason of its failure to make a true and full disclosure of the material fact. That is not the position here.
37. 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 the selling agency commission. Therefore, the decision in Madnani Engineering's case does not support the case of the respondent-company.
38. Reliance was also placed by Dr. Pal on the decision of the Supreme Court in the case of Ganga Saran and Sons P. Ltd. v. ITO . 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 income-tax 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 Section 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.
39. Reliance was also placed by Dr. Debi Pal on the judgment of the Supreme Court in the case of Indian Oil Corporation v. ITO . The facts of the case were that the Assam Oil Company, the assessee, was a company incorporated in the U. K. Its fixed assets and liabilities later on vested in the Indian Oil Corporation. The assessee had its principal place of business in Digboi in Assam. From the assessment year 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 on behalf of the assessee in London.
40. 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 the Burma Oil Company which were managing its affairs and doing certain works 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 second thoughts, reopen.
41. In view of these facts the court held that the opinion of the auditors for the assessment year 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 Clause (b) of Section 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 the original assessment. Therefore, the court held that the jurisdic-tional facts under Section 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.
42. 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 Corporation's case cannot be attracted.
43. Reliance was also placed by Dr. Pal on the decision of the Madras High Court in the case of Madras Auto Service v. ITO . In that case the assessment was sought to be reopened on the ground that by reason of the deduction of the entire interest paid on borrowing from the business profits, excessive relief had been granted.
44. 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 Service's case is not attracted to the facts of this case.
45. Reliance was also placed by Dr. Pal on a single Bench judgment of the Calcutta High Court in Dunlop Rubber Company Ltd. (London) v. ITO . 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 the 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 Income-tax Officer. All enquiries 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 Sections 147 and 148 of the Act. Therefore, the judgment rendered on the question of disclosure of facts by the assessee in a totally different factual background in Dunlop Rubber's case is not applicable to the facts in the present case.
46. Reliance was also placed by learned counsel for the assessee on another single Bench judgment of the Calcutta High Court in the case of Grindlays Bank Ltd. v, ITO . 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 Assessing Officer 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 what transpired in the 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. Learned counsel submitted that, in the instant case, the disclosures were made in the 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.
47. 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 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 Assessing Officer 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 paragraph 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 herself as secretary and chief accountant of the petitioner/company. It has not been stated that he was the authorised representative mentioned in paragraph 12. The averments in paragraph 12 have been affirmed as true to the knowledge of the aforesaid deponent. But, in the absence any statement that the deponent was the authorized representative of the petitioner/company referred to in paragraph 12, it is not possible to accept the contention of 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 assessment years 1968-69 to 1973-74 would be in office till 2003 to swear an affidavit.
(c) It is well known that such Assessing Officers will retire and also may be transferred as Government servants. Apart from that in Grindlays Bank Ltd.'s case , the learned judge did not decide the issue on the question of affidavit only. From page 718 of the Report it is clear that the learned judge decided the matter on the merits. Therefore, the aforesaid point on affidavit is not the ratio of the decision in Grindlays Bank Ltd.'s case .
(d) From the various decisions of the 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 Assessing Officer. 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 cannot be satisfied on the basis of alleged disclosure in the course of verbal discussion. Therefore, on the question of principle also, this court is unable to accept the aforesaid contentions of Dr. Pal.
48. The last decision cited by Dr. Pal was in the case of Kantamani . 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's case show the obligation of the assessee in the matter of disclosure. Those observations are very pertinent and are set out below (page 643) :
"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 he produces 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 Income-tax Officer 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 Income-tax Officer, if he had been circumspect, could have found out the truth, the Income-tax Officer may not on that account be precluded from exercising the power to assess income which had escaped assessment."
49. 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 the selling agency commission by mere disclosure of the selling agency agreement.
50. The last point urged by Dr. Pal is that against the assessment order dated February 28, 1977, disallowing the selling agency commission, the assessee went up in appeal and ultimately, the Income-tax Appellate 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 infructuous and academic.
51. 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 facts as existed on the date of assumption of the jurisdiction and not on the ultimate result of any reassessment proceeding. See the decision of the Division Bench judgment of this court in the case of CIT v. Assam Oil Co, Ltd. [1982] 133 ITR 204. Speaking for the court, Justice Sabyasachi Mukherji (as his Lordship then was) made the following observations at page 210 of the Report :
"In order to determine whether the Income-tax Officer 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 Appellate Assistant Commissioner would not either confer jurisdiction if the Income-tax Officer had not originally the jurisdiction at the time of the issuance of the notice or defeat the jurisdiction of the Income-tax Officer if he had it at the time of the issuance of the notice. This proposition is well settled by the scheme of the Income-tax Act and for this no authority is needed."
52. The same view was taken by the Gujarat High Court in the case of CIT v. Maneklal Harilal Spinning and Manufacturing Co. Ltd. . See the observations of the learned judges at page 31 of the Report. The same view has been taken by the Bombay High Court in the case of Dilip S. Dahanukar v. Samir Tekriwal, Asst. CIT [2001] 248 ITR 147. Please see the observation of the learned judges at pages 150 and 151. The judgment of the Calcutta High Court in Assam Oil's case was relied on by the Allahabad High Court in the case of J. K. Charitable Trust v. WTO . And the court held the once the reassessment proceedings were validly initiated by issue of notices in question, subsequent reversal of the finding by the Income-tax Appellate Tribunal will not affect the validity of the notices. The same view has been taken by the Supreme Court also in Raymond Woollen Mills Ltd. v. ITO .
53. From various judicial pronouncements cited in this case relating to exercise of power for reopening assessment, it appears well settled that the powers under Section 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 Assessing Officer cannot institute a roving enquiry with the object of fishing out materials. The existence of the belief may be justiciable 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 Assessing Officer from which, the Assessing Officer may have reasons to believe that there has been escapement of income, in that case the Assessing Officer can proceed under this section. The decisive language used in the section is "reason to believe". Thereby on the basis of such reasons to believe the Assessing Officer in exercising his power can rely on direct and even circumstantial evidence. But the Assessing Officer cannot act on mere whisper, scoop or rumour.
54. In view of the aforesaid principles and for the reasons discussed above, we allow the appeal, set aside the judgment of the learned single judge and dismiss the writ petition. The notices issued for reopening of the assessments are upheld.
55. There will be no order as to costs.
Debi Prasad Sengupta, J.
56. I agree.