1993 (6) TMI 19 - HC - Income Tax

Accounting Year, Assessment Proceedings, Bonus Shares, Failure To Disclose Material Facts, Reassessment Proceedings

Issues Involved:
1. Legality and validity of the notice issued under section 148 of the Income-tax Act, 1961.
2. Whether the bonus shares received by the petitioner should be treated as dividend under section 2(6A)(c) of the Indian Income-tax Act, 1922.
3. Whether there was a failure on the part of the petitioner to disclose fully and truly all material facts necessary for the assessment.

Issue-wise Detailed Analysis:

1. Legality and Validity of the Notice Issued Under Section 148:
The petitioner challenged the legality and validity of the notice dated March 19, 1976, issued under section 148 of the Income-tax Act, 1961, for the assessment year 1959-60. The court examined whether the conditions precedent for the issuance of the notice under section 147(a) of the new Act were satisfied. The court directed the respondents to produce the reasons recorded for the initiation of the proceedings under section 148. The reasons indicated that the Income-tax Officer believed that the premium amount represented accumulated profits of the defunct company, Rajasthan Trading Co. Ltd., which were distributed in the form of bonus shares by the new company, Rajasthan Industries Ltd., in March 1959. The court found that the reasons recorded did not show materials that could furnish a live link with or rational bearing on the belief that income had escaped assessment due to the failure on the part of the petitioner to disclose all primary facts. Consequently, the court held that the initiation of proceedings under section 147(a) and the issuance of the notice under section 148 were devoid of initial jurisdiction.

2. Treatment of Bonus Shares as Dividend Under Section 2(6A)(c):
The court analyzed whether the bonus shares received by the petitioner should be treated as dividend under section 2(6A)(c) of the old Act. The petitioner argued that the bonus shares issued by the new company were not dividend within the meaning of section 2(6A)(c) as they were not received on the liquidation of the new company, nor did they represent any accumulated profits of the new company. The court noted that the facts regarding the issue of bonus shares and their consolidation with existing shares were fully and truly disclosed in the original assessment proceedings. The court found that the capitalisation of the share premium by the new company and the issue of bonus shares were not distribution of accumulated profits by the defunct company on its liquidation, which took place a decade before the issue of bonus shares. Therefore, the court concluded that the bonus shares could not be treated as dividend under section 2(6A)(c) of the old Act.

3. Disclosure of Material Facts by the Petitioner:
The court examined whether there was any failure on the part of the petitioner to disclose fully and truly all material facts necessary for the assessment. The petitioner contended that all material and primary facts relating to the receipt of the shares, both original and bonus shares, were fully and truly disclosed in the original assessment proceedings. The court observed that the original assessment order and the balance-sheet disclosed the receipt of the bonus shares. The court referred to the Supreme Court's decision in Calcutta Discount Co. Ltd. v. ITO, which distinguished between primary facts and inferential facts. The court noted that the primary facts, such as the liquidation of the defunct company, the receipt of the original shares, and the issue of bonus shares, were all disclosed and on record. The court held that the petitioner had no duty beyond making full and truthful disclosure of all primary facts. Therefore, there was no failure on the part of the petitioner to disclose material facts necessary for the assessment.

Conclusion:
The court concluded that the initiation of proceedings under section 147(a) and the issuance of the notice under section 148 were without jurisdiction as the conditions precedent laid down in section 147(a) were not satisfied. The court quashed the reassessment proceedings and annulled the assessment if completed. The rule was made absolute, and there was no order as to costs.

← Previous Next →