Punjab-Haryana High Court
Oriental Carpet Manufacturers (India) ... vs Income-Tax Officer And Ors. on 3 December, 1986
JUDGMENT I.S. Tiwana, J.
1. The petitioner company, admittedly a 100% subsidiary of Oriental Carpet Manufacturers (London) Ltd. impugns the notice dated March 27, 1976 (annexure P-1), purported to have been issued to it under Section 148 of the Income-tax Act, 1961 (for short "the Act"). It carries on the business of manufacturing and dealing in woollen and worsted fabrics, blankets, shawls, woollen and worsted yarns and carpets in Amritsar District. Its assessment of tax under the Act (section 143(3)) for the year 1967-68 was finalised by the Income-tax Officer, Amritsar, on October 14, 1968. It concededly was assessed at a lower rate of tax on account of the fact that it was a company in which the public was substantially interested within the meaning of Section 2(18) of the Act or was a widely held company. Thereafter, the Income-tax Officer served it with a notice dated March 25, 1970, under Section 148 of the Act and it filed its return under protest. During these reassessment proceedings, the Income-tax Officer, vide his order dated March 22, 1971 (annexure P-4), came to the conclusion that the word "public" as occurring in Section 2(18) of the Act was confined to the Indian public and not to the entire mankind and thus even if it were to be accepted that O.C.M. Ltd., London, was a widely held company in which the public were substantially interested, that would not entitle the petitioner to be given a special treatment or to be assessed at the reduced rate of tax. This order of the Income-tax Officer was primarily based on another order of assessment pertaining to the petitioner for the assessment year 1966-67. The petitioner successfully impugned these orders of the Income-tax Officer before the Appellate Assistant Commissioner, who, disagreeing with the above-noted reasoning of the Income-tax Officer, cancelled the said assessment orders. Still later, the petitioner was served with the present impugned notice, annexure P-1. It has been issued on the ground that the authorities under the Act have reasons to believe that the income of the petitioner for the assessment year 1967-68 had escaped assessment within the meaning of Section 147 of the Act and it was proposed to reassess the same. The petitioner has been asked to deliver its return in the prescribed form. It has also been mentioned in this notice that the same was being issued by the Income-tax Officer after obtaining the necessary satisfaction of respondent No. 3, i. e., the Commissioner of Income-tax, Amritsar. The petitioner, through its different communications, annexures P-6, P-7 and P-8, protested to the Income-tax Officer that the impugned notice had been issued without any basis as it had disclosed fully and truly all the material facts in its earlier return and in the absence of disclosure of any reasons or any other information, the respondent-Income-tax Officer could not proceed to reframe assessment against it. In reply to the above-noted communications, though the Income-tax Officer persistently asked the petitioner to disclose the list of the shareholders of its parent company, i. e., O. C. M. (London) Ltd., yet, vide letter dated November 13, 1979, respondent No. 2, i. e., the Inspecting Assistant Commissioner, Amritsar, informed the petitioner as follows:
"Enclosed please find certain extracts from the correspondence that passed between the auditors (M/s. Ford, Rhodes & Parks, Calcutta) and the management of the parent company, M/s. O.C.M., London (later known as M/s. Ralli International, London), inasmuch as the fact that it is a widely held company is not established. From the extracts, it will be seen that certain vital information revealing the nature of the shareholdings of the parent company was suppressed before the Income-tax Officer, Mirzapur, who held jurisdiction over the case in the relevant years. On going through the extracts, it is quite clear that the claim of the parent company, being a company in which public are substantially interested as defined under Section 2(18) of the Income-tax Act, 1961, was false and could not be substantiated. Since the O.C.M. (India) Ltd. was a 100% subsidiary of the London company, as such you have wrongfully enjoyed the benefit of lower rate of taxation applicable to widely held companies. You are, therefore, requested to prove with the help of documentary evidence that the parent company is a company in which the public are substantially interested within the meaning of Section 2(18) of the Income-tax Act. Your case is fixed for hearing on November 25, 1979."
2. While disputing the fact that the abovesaid correspondence could lead to an adverse inference against the O.C.M., London, that it was not a widely held company or that the petitioner had suppressed any information revealing the nature of the shareholdings or that the petitioner had wrongly enjoyed any benefit of lower rate of tax, it impugns the notice, annexure P-l, on the following grounds:
(i) that the impugned notice has been issued after more than four years from the end of the assessment year 1967-68 ;
(ii) that such a notice could be issued only if it fulfilled the precondition that the Income-tax Officer had reason to believe that by reason of omission or failure on the part of the assessee :
(a) either to make a return under Section 139 for any assessment year, or
(b) to disclose fully and truly all material facts necessary for the assessment, income chargeable to tax has escaped assessment. According to the petitioner, the facts in the instant case do not justify any such "reason to believe" with the Income-tax Officer ;
(iii) that in any case, the reasons disclosed to the petitioner for the contemplated action have no relevant bearing or rational connection to the belief the Income-tax Officer is alleged to have formed. In other words, the grounds or the material relied upon in the letter dated November 13, 1979, referred to above do not support or substantiate the allegations contained in the said letter; and
(iv) that the Income-tax Officer had failed to obtain the satisfaction of respondent No. 3 as alleged in the impugned notice. According to the petitioner, there was no such material on the basis of which respondent No. 3 could have satisfied himself to come to the conclusion that this was a fit case for the issuance of the impugned notice.
3. The respondent authorities controvert the abovenoted grounds on the plea that the second or the impugned notice dated March 27, 1976, was issued to the petitioner as a result of the facts which came to light after an investigation of the material discovered through search and seizure at the premises of the petitioner at Amritsar and its auditors in Calcutta in February/March, 1973. The correspondence that took place between the petitioner and its aforesaid auditors, M/s. Ford, Rhodes, Parks & Co., Calcutta, revealed that the petitioner-company had deliberately kept back important information bearing on the matter of their claim that the London company was a widely held company. During the, course of earlier assessment proceedings, the Income-tax Officer had required the petitioner company to let him have the list of the shareholders of the London company along with the relationship of the shareholders in order to establish that it was not being controlled by less than six persons during the relevant assessment year or onwards. This requisition of the Income-tax Officer had a direct bearing on the matter for determination as to whether the parent company of the petitioner was a public company in which the public were substantially interested as defined in Section 2(18) of the Act. This information was never furnished by the petitioner, rather it was deliberately withheld by it. While dealing with the matter in question, the auditors of the company expressed themselves in the following manner :
"But what worries us more is that if the Commissioner of Income-tax persists in his present opinion, higher rates of tax will be levied for all subsequent years also.
But the fact that the equity shares in O.C.M. (London) Ltd. are bearer shares poses a great difficulty in regard to evidence which will establish that that company is itself a company in which the public are substantially interested within the meaning of Section 2(18) of the Income-tax Act. The Income-tax Officer may well call for such evidence and if this evidence cannot be produced, it will make a complete end of your case for taxation at the lower rate of tax applicable to a company in which the public are substantially interested. We are giving this matter our earnest consideration and we shall write to you separately thereon as we do not want to delay our present letter.
We note that you have given the Income-tax Officer only an extract of a part of Messrs. Gardiner, Hunter & Co.'s certificate. If you consider any documents, paper or letter to be privileged or confidential as against the Income-tax Officer, we strongly advise you not to give him any extract therefrom because he will then be entitled to call for the entire text and to enforce its production by recourse to Section 131."
4. A true copy of this letter is annexure R-1 to the written statement. Another letter (annexure R-2) relied upon by these authorities in support of their stand, completely disclosing the working of the petitioner's mind at the relevant time, was addressed by the petitioner company to Mr. R. V. Nathan of the aforesaid auditors. It opens with a reference to the auditors' letter, annexure R-l, and then some of its material parts are extracted as follows :
"2. Accordingly, Mr. D. N. Sehgal and myself met the Income-tax Officer and all three of us went very carefully through the reply drafted by you. He appeared to be substantially impressed by the exhaustive reply and the case law quoted and the impression given to us is that he agrees with our contentions.
3. However, it seems that he is bound by the instructions of the Commissioner and he feels that he has to proceed with reassessment. In the meantime, he has received transfer orders to Central Circle, Calcutta.
4. We saw him again on the 24th June, and he has recommended that we should approach the Central Board of Direct Taxes at an early date, particularly in view that he has now received a reminder from the Auditor-General asking what action has been taken to recover the tax.
5. We have, therefore, decided to make a representation to the Board and have addressed the Income-tax Officer under our letter No. 11352 dated June 24, 1970, copy enclosed for your information and record. This letter will enable the Income-tax Officer to reply to the Auditor-General's letter that the company is approaching the Central Board of Direct Taxes and thereby time will be gained during which also his transfer would become effective.
6. Although we have decided to make a representation to the Central Board of Direct Taxes, we are also considering to have an unofficial meeting with the Commissioner of Income-tax, Punjab, to sound his views in this matter, since eventually the CBDT (Central Board of Direct Taxes) will refer the matter to him again.
7. I am writing this to keep you informed of developments and to request if you have any further advice to give me on the action we are taking or should take."
5. It was as a result of scrutiny of these two letters, annexures R-1 and R-2, and the other voluminous material seized during the course of the above referred to raids at the premises of the petitioner-company by the Central Directorate of Inspection (Investigation) that the respondents came to realise that the parent company of the petitioner had wrongly been accepted as a public company. After obtaining the approval of respondent No. 3, which was granted by him in the light of the exhaustive note put up by the Income-tax Officer for the purpose, dealing therein with the whole background of the case and his tentative conclusion that the asses-see had failed to fully and truly disclose all the facts necessary for the assessment of its income, the present notice was issued. It is also the case of these authorities that respondent No. 3 was fully aware of the entire developments as he was in the picture throughout since the year 1974 when the Director of Inspection (Investigation) had made his first report dated June 11, 1974, dealing with the whole matter.
6. Having heard learned counsel for the parties at length, I feel that the submissions mentioned at (i) and (iv) above deserve to be summarily dismissed in the light of the detailed narration of the facts recorded above.
7. It is patent in the light of the phraseology of Section 147 of the Act that the power to take proceedings under this section is not confined to cases where the assessee had concealed his income. It also extends to cases where though there was no concealment by the assessee, the Income-tax Officer has reason to believe in consequence of the information in his possession that income had escaped assessment. As is well indicated by the detailed narration of facts noticed above, it is a case where the Income-tax Officer has reason to believe that the petitioner has been assessed at too low a rate for failure on its part to disclose fully and truly all material facts for the assessment year 1967-68 (April 1, 1967, to March 31, 1968). As per Section 151, a notice under Section 148 can be issued after the expiry of four years (as envisaged by Section 149) but before the expiry of eight years with the prior sanction of the Commissioner and in view of this, the impugned notice dated March 27, 1976 (annexure P-1), is well within time as it has been issued within eight years from the expiry of the assessment year, i.e., with effect from March 31, 1968. Similarly, it is manifest from the affidavit of the respondent authorities as also the material placed on record that respondent No. 3 had enough material before him to record his satisfaction for the issuance of the impugned notice. I, therefore, repel these submissions of the petitioner.
8. The other two contentions of the petitioner recorded at (ii) and (iii) above are equally meritless. Firstly, it is contended on its behalf that in its return, the petitioner had disclosed all the primary facts including the one that the company, i.e., O.C.M. (London) Ltd., of which it was a 100% subsidiary, was a widely held company or was one in which the public were substantially interested, which were relevant for purposes of taxing its income. Secondly, the material and primary letters on which the respondent authorities seek to rely (material parts of these letters have already been reproduced above) for issuance of the impugned notice are not relevant to the question in issue as the petitioner had, during the course of assessment proceedings, placed on record a certificate issued by Messrs Gardiner, Hunter & Co. to show that the parent company, i.e., O.C.M. (London) Ltd., was a widely held company and the Income-tax Officer acting on the basis of that, had finalised the assessment on October 14, 1968. In case that piece of evidence is now sought to be ignored for purposes of reopening the case in pursuance of the impugned notice, then it is merely a case of change of opinion and the petitioner cannot be accused of having failed to disclose fully and truly all material facts necessary for the assessment of its income. In support of this stand, it is further contended that even the Appellate Assistant Commissioner, vide his order dated March 6, 1972 (annexure P-5), against the orders dated March 22, 1971, to which reference has been made in the earlier part of the judgment, had conclusively held that O.C.M. (London) Ltd., was a company in which the public were substantially interested within the meaning of Section 2(18) of the Act. According to the petitioner, the Income-tax Officer or the authorities under the Act cannot now ignore this conclusion of the Appellate Assistant Commissioner, the same having assumed finality.
9. Taking up the last mentioned contention first, it may be stated that what confers jurisdiction on the Income-tax Officer to issue a notice like the impugned one, is that he has reason to believe in consequence of certain information in his possession that income chargeable to tax has escaped assessment for any particular assessment year and the fact at what level the assessment had earlier been finalised--may be at his level or at the appellate level--does not in any manner affect his jurisdiction to issue such a notice. It is, therefore, futile to contend that merely because the Appellate Assistant Commissioner had finalised the assessment, vide his order, annexure P-5, the Income-tax Officer had no jurisdiction to issue the impugned notice. It is more so when the information now in his possession was not before the Appellate Assistant Commissioner.
10. So far as the other aspect of the matter that the petitioner had disclosed all the primary facts at the time of the filing of the return and had supported its plea that O.C.M. (London) Ltd. was a widely held company with a certificate issued by Messrs Gardiner, Hunter & Co. is concerned, it may be observed that the moment it is held that there were certain material facts the non-disclosure of which has materially affected the question of validity or effecting the quantum of assessment, the Income-tax Officer would have sufficient justification and jurisdiction to issue the impugned notice. Whether this information or ground is adequate or not is not a matter for the court to investigate as, to my mind, the sufficiency of the grounds which induced the Income-tax Officer to act in the manner he has done in initiating the proceedings, is not justiciable by this court. To my mind, the Income-tax Officer can reopen the assessment even after he had treated certain transactions as genuine on the basis of the documents or the material disclosed at the time of the initial assessment. What facts are material and necessary for assessment would differ from case to case. In the instant case, as will appear from the facts set out heretofore, the basis for the initiation of the proceedings is the non-dis-elosure of certain facts as contained in the documents now seized from the premises of the assessee-company and its auditors in Calcutta. I am satisfied that the non-disclosure of the facts contained in these documents is to be considered as failure to disclose the relevant and material facts fully and truly on the part of the petitioner-company. In the light of these documents, the Income-tax Officer was justified or had reason to believe that the assessee was underassessed due to its failure or omission to disclose truly and fully certain facts at the time of the earlier assessment. A bare reading of the letters, annexures R-1 and R-2, clearly discloses the working of the petitioner's mind at the time of the earlier assessment and how there was a concerted effort on its part in consultation with its auditors to suppress certain facts to avoid the proper assessment of tax.
11. In the light of the foregoing discussion, I find no merit in this petition and thus dismiss the same with costs which I determine at Rs. 1,000.