Supreme Court of India
Indian Oil Corporation vs Income Tax Officer, Central Circle V, ... on 8 May, 1986
Equivalent citations: 1987 AIR 1897, 1986 SCR (2)1107, AIR 1987 SUPREME COURT 1897, 1986 3 SCC 409, 1986 TAX. L. R. 928, 1986 58 CURTAXREP 83, 1986 2 UJ (SC) 249, 1987 ALL TAX J 139, 1986 20 TAX LAW REV 457, 1986 2 SUPREME 349, 1986 SCC (TAX) 552, 1986 UPTC 942, (1986) 26 TAXMAN 336, 1986 UJ(SC) 2 1249, 1986 (159) ITR 956, 1986 TAXATION 81 (2) 46
Author: Sabyasachi Mukharji
Bench: Sabyasachi Mukharji, R.S. Pathak
PETITIONER:
INDIAN OIL CORPORATION
Vs.
RESPONDENT:
INCOME TAX OFFICER, CENTRAL CIRCLE V, CALCUTTA & ORS.
DATE OF JUDGMENT08/05/1986
BENCH:
MUKHARJI, SABYASACHI (J)
BENCH:
MUKHARJI, SABYASACHI (J)
PATHAK, R.S.
CITATION:
1987 AIR 1897 1986 SCR (2)1107
1986 SCC (3) 409 1986 SCALE (1)1022
ACT:
Income Tax Act, 1961 - S.147(1)(a) - Income escaping
assessment - Initiation of proceedings for reassessment -
Necessary conditions - What are.
HEADNOTE:
The assessee at the relevant time was a company
incorporated under the laws of the United Kingdom, and had
its principal place of business in India. The assessee was
all along assessed under the Indian Income Tax Act, 1922.
The assessee had claimed deductions every year of certain
expenses amounting to L 1,00,000 or over as administrative
charges incurred by the Burmah Oil Company Limited of London
for management and secretarial work carried on on behalf of
the assessee in London. L 1,00,000 represented approximately
40% of the head office expenses of the London Company which,
according to assessee, was a reasonable allocation having
regard to the work done by the London Office on behalf of
the assessee. As similar organisational work was done in
London through the London Company, the London office was
managing several companies and debiting prorata to the
companies whose affairs they were managing and thereafter
the assessment was completed on that basis.
During the assessment for the year 1953-54, the
assessee had furnished in support of its claim for London
Management expenses, certificate from the London Auditors
that the sum specified in the certificate was reasonable
having regard to the records and materials produced before
the auditors, which was about 10% of the total
administrative expenses incurred by the Burmah Oil Company
Limited, London. The Income-Tax Officer found that such
expenses debited actually in the earlier years were far in
excess of this percentage. The assessee was, therefore,
required to furnish a similar certificate for each of the
assessment years 1957-58, 1958-59 and 1959-60. No such
certificates were produced by the assessee and by three
notices dated November 25, 1965 under
1108
s.148 of the Income-tax Act 1961, the Income Tax Officer
notified that he had reason to believe that the assessee's
income chargeable to tax for each of the said assessment
year had escaped assessment within the meaning of s. 147(a)
and he proposed to reassess the income for the said years
and the assessee was required to furnish the returns.
The assessee challenged the said notices under Art. 226
of the Constitution on the ground that there was no material
to reopen the assessments. A Single Judge of the High Court
quashed the notices and held that all the facts in
possession of the assessee were placed before the taxing
authority prior to making of the assessment; that it was for
the taxing authority either to accept the claim or to reject
the claim either wholly or in part; that after having
accepted the claim in spite of non-production of the
relevant auditors' certificate which was asked for at one
stage the revenue could not later turn round and say that
the income of the assessee had escaped assessment or been
under-assessed due to the failure of the assessee to
disclose those very auditors' reports and that the under
assessment, if any, was due to the laches of the Revenue and
not due to any act or omission on the part of the assessee.
In the appeal filed by the Revenue, the Division Bench
set aside the decision of the Single Judge, upheld the
notices and held that the assessee had failed to disclose;
(1) the basis of allocation of expenses; (2) correspondence
between the London principal and the assessee company on the
relevant subject; (3) existence of auditors' certificate
fixing percentage that would be reasonable for allocation in
respect of the subsidiary companies including the assessee
and, therefore, there were prima facie materials to form the
belief that there was failure and omission in the part of
the assessee to disclose fully and truly all the relevant
and material facts which led to the escapement of income or
under assessment of income of the assessee company.
Allowing the appeals of the appellant-Corporation to
this Court,
^
HELD: 1. To confer jurisdiction under clause (a) of
s.147 of the Income Tax Act, 1961 beyond the period of four
1109
years but within a period of eight years from the end of the
relevant year under s. 148 of the assessment year, two
conditions were required to be fulfilled: first is that the
Income-tax Officer must have reason to believe that the
income profits or gains chargeable to tax had been
underassessed or escaped assessment; the second was that he
must have reason to believe that such escapement or
underassessment was occasioned by reason so far as relevant
for the present purpose to disclose fully and truly all
material facts necessary for the assessment of that year.
Both these conditions are conditions precedent to be
satisfied. [1121 G-H; 1122 A-B]
2. Section 147(a) postulates a duty on every assessee
to disclose fully and truly all material facts necessary for
the assessment. Therefore, the obligation is to disclose
facts; secondly those which are material; thirdly the
disclosure must be full and fourthly true. [1125 C-D]
3. What facts are material and necessary for assessment
will differ from case to case. In every assessment
proceedings, for computing or determining the proper tax due
from the assessee, it is necessary to know all the facts
which 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 once the primary facts are with the taxing
authority it is for him to draw inferences. It is not
necessary for the assessee to draw inferences for him. [1125
D-F]
Calcutta Discount Co. Ltd. v. Income-tax Officer,
Companies District I, Calcutta and Another, 41 ITR 191 at
199, S. Narayanappa and Others v. Commissioner of Income-
tax, Bangalore, 63 ITR 219, Commissioner of Income-tax, West
Bengal, and Another v. Hemchandra Kar and Others, 77 ITR 1,
Income-tax Officer, I-Ward, Hundi Circle, Calcutta and
Others v. Madnani Engineering Works Ltd., 118 ITR 1, Ganga
Saran & Sons P. Ltd. v. Income-tax Officer and others, 130
ITR 1 at 13, Income Tax Officer, I Ward, Distt. VI, Calcutta
and others v. Lakhmani Mewal Das, 103 ITR 437 and Sheo Nath
Singh v. Appellate Assistant Commissioner of Income-Tax
(Central), Calcutta and others, 82 ITR 147 at 153, relied
upon.
1110
P.R. Mukharjee v. Commissioner of Income-tax, West
Bengal, 30 ITR 535 and Hazi Amir Mohd. Mir Ahmed v.
Commissioner of Income-tax, Amritsar, 110 ITR 630, approved.
4.(i) The learned Trial Judge was right and the
Appellate Court was in error in holding that there were
materials from which it could reasonably be held that the
assessee was guilty in not disclosing the basic facts.[1127
F]
4.(ii) In the instant case, the assessee had all along
disclosed and the Revenue was aware that London management
expenses were incurred on behalf of the assessee by the
London Company who were managing the affairs and doing
certain works for the assessee as well as certain allied
companies belonging to Burmah Oil Corporation Group. The
expenses for these allied concerns were on pro-rata basis
charged by the London office and a certain proportion of the
expenses were allocated to different companies and they
debited certain portions, i.e.these amounts were realised
from the assessee and allied companies in proportion to
which the London company debited them those charges. This
fact was known all along to the Revenue while making the
original assessment for the relevant assessment years. The
audit report of the assessee company was supplied but it is
not clear whether the audit report of the London company was
supplied and was asked for. It is unlikely that when London
company was debiting the assessee company and other
companies in the audit report every year, there would be any
note that such debits by which the London company got
certain money which were excessive i.e. the London company
realised more than it had actually incurred of the expenses.
In any event, however, the amount realised would be
mentioned in the audit report as a basic fact. That has been
disclosed, to the Revenue at the time of the original
assessment. The nature and the quantum of the work done had
also been disclosed. Whether it was excessive or not was an
inferential fact. The Income-tax Officer, from time to time
had some doubts as to whether the entirety of the expenses
debited were really incurred for the assessee company by the
London company or whether that was unreasonable or excessive
having regard to the magnitude of the work done by the
London company but that would be a matter of opinion and on
inference drawn from the amount of the work in correlation
to the amount debited the fact what was done, what was being
claimed by the London
1111
office and the difficulties in producing the accounts or the
opinion of the auditors for which the Income-tax Officers
had called upon the assessee were all known to Income-tax
Officers at the time of making the original assessments. In
spite of the same, the Income-tax Officer chose to assess
the assessee in the manner he did. In the light of the
opinion of the Auditors for the assessment year 1963-64
wherein his opinion that ten per cent would be reasonable
charge might be good information for which the assessment of
the assessee could be reopened under clause (b) but on this
basis alone it could not be said that the assessee had
failed to disclose fully and truly all basic facts at the
time of the original assessment of the relevant assessment
years. There was no evidence or allegation that such an
opinion was there available with the assessee company the
time of the original assessments. Even if such an opinion as
opinion evidence be considered as a basic fact, a question
on which no opinion is required to be expressed, there was
no evidence that such opinion was with the assessee at the
time or before the completion of the original assessments
for the relevant assessment years. [1125 F-H; 1126 A-H; 1127
A]
4.(iii) All the basic facts in this case were
disclosed, it was however not disclosed as to what was the
opinion of the Auditor, as to what is reasonable allocation
share of the assessee having regard to the amount of work
done on behalf of the assessee company of the London office
expenses. There is no conclusive evidence that at the
relevant time i.e. at the time of filing of the return
before the assessments, such Auditors' opinion about the
reasonableness was there. Secondly, what would be reasonable
or not would be an inference of the auditor. The amount
spent, the nature of the work alleged to have been done by
London office on behalf of the assessee and the basis of the
allocation had been explained in reply to the queries made
by the Income-tax Officer before the assessment. The Income-
tax Officer had asked at one point of time for the auditors'
opinion. It was stated that such opinion could not be
supplied. In spite of the same, the Income-tax Officer did
not choose to make a best judgment assessment and did not
draw any adverse inference against the assessee. It cannot,
therefore, be held that there was failure to disclose fully
and truly all basic facts. [1127 A-E]
JUDGMENT:
CIVIL APPELLATE JURISDICTION : CIVIL APPEAL NOS. 1189- 1190 OF 1974 1112 From the Judgment and Order dated 7.12.1973 of the Calcutta High Court in Appln. No. 189 and 196 of 1971.
Dr. Devi Pal, Ms. M. Seal, D.N. Gupta, H.K. Datt and Miss Mridul Ray for the Appellant.
C.M. Lodha, Dr. V. Gaurishankar, Miss A. Subhashini and C.V. Subba Rao for the Respondents.
The Judgment of the Court was delivered by SABYASACHI MUKHARJI, J. Whether the reopening of the assessments of the assessee under section 147(a) of the Indian Income Tax Act, 1961 (hereinafter referred to as the 'Act') was valid, is the question involved in these appeals by special leave from the Bench decision of Calcutta High Court dated 7th December, 1973. The assessment years involved are 1957-58, 1958-59 and 1959-60.
It may be mentioned that on notices being issued for reopening of the assessments under section 148 of the Act under condition 147(a) of the said Act, the assessee challenged the said notices on the ground that there were no materials to initiate such reopening. Such challenge was upheld by the learned single judge of the High Court and the notices in question were quashed.
The revenue being aggrieved preferred appeals before the division bench of the High Court. The division bench of the High Court reversed the findings of the learned trial judge and the notices were upheld. Hence these appeals.
The assets and liabilities of erstwhile the Assam Oil Company have since then vested in the Indian Oil Corporation and on an oral application having been made on behalf of the assessee, we have directed that the name of the Indian Oil Corporation be substituted.
The assessee at the relevant time was a company incorporated under the appropriate laws of the United Kingdom, and had its principal place of business at the relevant time in India at Digboi in the State of Assam. It carried on business, inter alia, in oils and lubricants. As the years involved were 1113 prior to the introduction of the Act in question, the assessee was all along assessed under the provisions of the Indian Income-Tax Act, 1922 (hereinafter called the '1922 Act'). In its assessment under the 1922 Act, the assessee had claimed deductions every year of certain expenses amounting to # 1,00,000 or over as administrative charges incurred by the Burmah Oil Company Limited of London for management and secretarial work carried on on behalf of the assessee in London. For the assessment year 1951-52, it might be mentioned, the Income-tax Officer wrote a letter to the assessee asking for certain informations and one of the informations asked for was regarding London charges. The assessee was asked to furnish a schedule in respect of the London charges and also to let the Income-tax Officer know whether any reserve had been debited to this account of London charges. The letter was dated 19th December, 1952. The assessee by its letter replied to that query where it informed the Income-tax Officer that as advised in connection with the 1950-51 assessment, London charges being about # 1,00,000 represented approximately 40% of the head office expenses of the London Company being the charges made by the Burmah Oil Company for management and secretarial work carried out on behalf of the assessee company in London covering Stores Purchasing, Accounting, Staff, Geological and other Departments. The assessee further informed the taxing authorities that it had been advised by its London office that the amount represented a reasonable allocation having regard to the work done by the London office on behalf of the assessee. As the point in question in these appeals is whether there was failure or omission on the part of the assessee it is necessary to refer in detail to the correspondence. For the assessment year 1951-52 in response to the enquiries the assessee made it clear that the London charges represented the charges made by the Burmah Oil Company which managed the assessee company along with other companies in respect of the management work and secretarial work carried out in London covering the various items indicated before. In other words as similar organisational work were done in London through the London company, the London office was managing several companies and debiting pro-rata to the companies whose affairs they were managing. The assessment was completed thereafter apparently on the said basis.
Similarly for the assessment year 1953-54, it appears 1114 that there was discussion between the Income-tax Officer and the assessee and certain queries were made in respect of the London office charges amounting to # 1,00,000 included in the trading account for 1952. The assessee by its letter dated 9th December, 1953 informed the Income-tax Officer that the assessee's London Principals had advised them that the total expenses of the London office for 1952 amounted to