Karnataka High Court
Canara Sales Corporation Ltd. vs Commissioner Of Income Tax on 18 November, 1988
Equivalent citations: ILR1989KAR3387, [1989]176ITR340(KAR), [1989]176ITR340(KARN), 1988(3)KARLJ348
JUDGMENT Rajendra Babu, J.
1. The assessee is a public limited company carrying on the business of purchase and sale of petrol and allied items and motor accessories, etc. For the assessment years 1957-58 to 1960-61, it was assessed on different incomes by separate orders. Later on, it was found that an employee of the assessee had embezzled certain amounts by using forged cheques. The purchase account had been inflated to the extent of the embezzled amounts, for each of the accounting years ending 31st March relevant to each of the assessment years. The total sum misappropriated was Rs. 48,346, Rs. 75,030, Rs. 74,366 and Rs. 60,413 respectively. On this information, the Income-tax Officer reopened the assessments. The assessee filed returns showing the income originally assessed, accompanied by a covering letter dated March 25, 1966, in which it challenges the proceedings initiated under sections 147(a) and 148 of the Income-tax Act, 1961 ("the Act" for short). The said returns were filed under protest and without prejudice to its contentions on the questions of jurisdiction to reopen the assessments. It was submitted that the amount misappropriated by the employee and now sought to be added should be allowed as a loss against the income of the assessee. The Income-tax Officer overruled these objections and held that the amounts embezzled could not be held as a loss as they were not incurred in the course of the normal duties of the employee and were incidental to his duties.
2. On appeal, the Appellate Assistant Commissioner found that the assessee had no information at the time of the original assessment about the misappropriation of the amount or inflation in the purchase account. It was only on a subsequent date that the facts abouts the misappropriation by the accountant came to light. Since there was definite information available with the Income-tax Officer, which was not originally within his knowledge, the action taken by him under section 147(a) of the Act was justified, that as the matter was still under litigation and it was not clear whether finally any amount could be recovered by the assessee from the Canara Bank was doubtful, that there was no reasonable prospect of the recovery of the same, and that too there was only a chance after several years and the Department could, by invoking section 41(1) of the Act, recover the tax if finally the embezzled amount is got back or recovered after the loss is allowed and, therefore, allowed the appeals on both the points.
3. The Department took the matter before the Tribunal in appeals which were disposed of by a common order. Before the Tribunal, the Revenue contented that since there was a reasonable prospect of the recovery of the amount from the bank, the loss could not be allowed in that year. Therefore, the order of the Appellate Assistant Commissioner has got to be set aside. On the assessee's contention that the reopening of the assessment under section 147(a) of the Act was wrong, the Tribunal held that the case of the assessee fell clearly under section 147(a) of the Act as it was a case of failure to disclose fully and truly all the material facts, and, therefore, the assessments were rightly reopened.
4. Aggrieved by the said order, at the instance of the assessee, this reference is made by the tribunal on the following questions :
"(1) Whether, on the facts and in the circumstances of the case, the reassessments for the years 1957-58 to 1960-61 were valid in law ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in its view that sums of Rs. 48,346, Rs. 75,030, Rs. 74,366 and Rs. 60,413 were not allowable as deduction in the assessment years 1957-58, 1958-1959, 1959-60 and 1960-61, respectively ?"
5. The Income-tax Officer had reason to believe that, 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 for that year, income chargeable to tax has escaped assessment for that year. The scope of section 147(a) of the Act has been the subject-matter of debate before us. While it is the contention of the assessee that omission or failure on the part of the assessee to disclose fully and truly must be of facts which are within his knowledge, it is the contention of the revenue that even inadvertent omission or failure to disclose fully and truly is covered by this clause and, therefore, reopening of the assessment was permissible. Learned counsel appearing on behalf of the assessee relied upon a decision in P. R. Mukherjee v. CIT (1956) 30 ITR 535, wherein the Calcutta High Court has observed as follows (at page 544) :
"It may well be said, and I should think, said correctly, that a person cannot be said to have omitted or failed to disclose something when, of such thing, he had no knowledge. A similar implication is carried by the word `disclose', because one cannot be expected to disclose a thing or said to have failed to disclose it, unless it is a matter which he knows ore knows of."
6. Indeed, this view was reiterated by the Calcutta High Court in ITO v. Calcutta Chromotype Pvt. Ltd. , and in this context the contention urged by learned counsel appearing in that case was referred to in the following manner (at page 60) :
"Mr. Ginwalla has submitted that no one, not even an assessee before the Income-tax Officer, can be expected to disclose to disclose what he does not know and was able to place before us an observation occurring in the judgment of a Division Bench of this court in P. R. Mukherjee v. CIT [1956] 30 ITR 535."
7. The said provision consists of different parts : (i) that the Income-tax Officer must have reason to believe that income chargeable to income-tax has escaped assessment for that year; (ii) that he must have reason to believe that such escapement has occurred by reason of either (a) omission or failure on the part of the assessee to make a return of his income, or (b) omission or failure on the part of the assessee to disclose fully and truly all the material facts necessary for his assessment for that year. We are concerned only with the first part and the latter part of the second part. The question is whether there has been an omission or failure on the part of the assessee to disclose fully necessary for assessment for that year. The omission or failure can arise only when there is a duty to act. The duty on the assessee is to disclose fully and truly all material facts. Omission or failure to do this duty will attract the wrath of these provisions. The duty to disclose fully and truly arises only when an assessee has knowledge of the facts. An assessee who does not have the knowledge of the facts cannot possibly such facts. The question is whether a person can be said to have omitted or failed to disclose some thing of which he had no knowledge.
8. The implication of the word "disclose" is that one is expected to disclose a thing or is said to have failed to disclose the facts only if it is a matter which one knows. Further, this view gets reinforced by looking at clause (b) of section 147. Clause (b) deals with a situation where there is no omission or failure as mentioned in clause (a). Therefore, in case where there is no such omission or failure, then the obligation to disclose fully and truly does not arise and in such a case, there is no omission or failure. Even in the absence of such omission or failure, clause (b) would be attracted. However, Sri Srinivasan, learned counsel for the Revenue, contended that since the expressions "omission", "failure" and "disclose" are used in the provision, each of them will have to be given a separate meaning and hence omission or failure have to be linked up with a disclosure to be made, and failure on the part of an assessee arises only when there is a pre-existing obligation and omission arises when there no such pre-existing obligation to disclose. He relied upon the decision in K. P. Arthanariswamy Chettiar v. First ITO , wherein the expression "true" and "full" have been explained and it was contended that what is contemplated under section 147(a) is a true and full disclosure, that is, the disclosure must be fully true. If, factually, the information furnished by the assessee is not true, even for an inadvertent reason, that section is attached inasmuch as, the material particulars furnished by the assessee are found to be either false or incomeplete. This argument, in our view, is fallacious and has to fail. As explained earlier, the duty on the part of the assessee is to disclose fully and truly all material facts. Omission or failure to discharge this duty also will attract the section and not otherwise. If, factually, the information is untrue not for a reason or on account of the omission or failure to disclose fully and truly, this would attract section 147(b) and not section 147(a). Hence, we reject this contention. However, Sri Srinivasan contended that we should not place an interpretation on the provision which may result in public mischief, inasmuch as, in each case, the assessee will have to be attributed with the knowledge of the information furnished by him in the return in order to invoke section 147(a) of the Act. We are afraid this contention is misconceived. The requirement of the section is that there is a duty cast upon the assessee to disclose fully and truly all material facts. That duty can be said not to have been discharged only when he does not place all the material facts necessary for the assessment or falsely states the facts in the returns. Therefore, if the facts stated are false, then there is no question of attributing any knowledge to the assessee because when stating that the matter is false that by itself will indicate that the assessee had knowledge of the same. So far as incomplete particulars being furnished is concerned, inasmuch as the assessee had no knowledge of the same, he could not have furnished them, as in the case on hand. Hence, we have no hesitation in rejecting this contention.
9. The Tribunal, however, relied upon the decision in Lakhmani Mewal Das v. ITO [FB], to hold that a statment which is not true could be false and that the assessee had filed returns for these four years not knowing that there was inflation of purchase which came to light only after when it was discovered that its employee had embezzled the money during all these years. Once this facts was discovered, it was held that the assessee cannot be said to have disclosed fully and truly all material facts necessary for the assessment. According to it, the question whether the assessee is aware of the true state of affairs or not is immaterial in making the assessment and the obligation to disclose fully and truly will not be discharged. We are afraid this reasoning of the Tribunal is erroneous. The assessee will be in a position to disclose only the information within his knowledge and could never be expected to disclose the information which is not within his knowledge. It is certainly relevant material in order to find out whether the assessee had disclose fully and truly all material facts and whether there is failure or omission on his part to do so. Otherwise, clause (b) of section 147 would not have been enacted at all. Hence, this view of the Tribunal cannot be held to do correct. Thus, on the reasoning set forth above, we conclude that the first question referred to us in each of these cases has got to be answered in the negative and in favour of the assessee.
10. On the second question referred to us, we are of the view that in view of the decision of the Supreme Court in the case of Associated Banking Corporation of India Ltd v. CIT , to the effect that so long as there a reasonable prospect of recording the amounts embezzled, loss cannot be allowed in the year in question. Therefore, in the present case, when the assessee had succeeded in all the courts as to the recovery of the amounts embezzled against the defendant which is a nationalised or difficult, we are of the view that the Tribunal was right in its conclusion that there was a reasonable prospect of the recovery of the amount by the assessee and, therefore, the loss could not be allowed in that year. Our answer to the second question in each of these cases is in the affirmative and against the assessee.