1980 (3) TMI 32 - HC - Income Tax

Summary

Issues Involved:
1. Validity of the notices issued under Section 147 of the Income Tax Act, 1961.
2. Applicability of Section 361 and Section 363 of the Companies Act, 1956, on the termination of the sole selling agency agreement.
3. Obligation of the appellant-company to disclose material facts to the Income Tax Officer (ITO).
4. Applicability of Section 147 of the Income Tax Act, 1961, based on the alleged omission or failure to disclose material facts.

Issue-wise Detailed Analysis:

1. Validity of the Notices Issued under Section 147 of the Income Tax Act, 1961:
The appellants challenged the validity of the notices issued under Section 147 of the Income Tax Act, 1961, for the assessment years 1959-60 to 1964-65. The notices were issued on the grounds that the appellant-company had failed to disclose fully and truly all material facts necessary for its assessments, leading to income escaping assessment.

2. Applicability of Section 361 and Section 363 of the Companies Act, 1956:
Section 361 of the Companies Act, 1956, provided for the statutory termination of all contracts, including selling agency agreements, to which a company or its managing agent or an associate of the managing agent is a party, effective from March 1, 1958. Section 363 mandated that any sum received by the managing agent or its associate in contravention of Sections 356 to 361 must be refunded to the company and held in trust until refunded.

3. Obligation of the Appellant-Company to Disclose Material Facts to the ITO:
The court examined whether the appellant-company was obligated to specifically disclose Clause 12 of the sole selling agency agreement to the ITO during the assessment proceedings. The court found that the appellant-company had disclosed all primary facts, including the termination of the sole selling agency agreement under Section 361 of the Companies Act. The agreement itself was on the ITO's file, and the appellant-company had consistently reported its income from the selling agency commission until the statutory termination.

4. Applicability of Section 147 of the Income Tax Act, 1961:
The court analyzed whether the conditions for invoking Section 147 were satisfied. The two conditions are: (1) the ITO must have reason to believe that income chargeable to tax had escaped assessment, and (2) such escapement was due to the omission or failure of the assessee to disclose fully and truly all material facts. The court held that no income by way of compensation under Clause 12 could accrue to the appellant-company due to the statutory prohibition under Section 363 of the Companies Act. Consequently, the first condition for the applicability of Section 147 was not met. Furthermore, the court found that the appellant-company had disclosed all primary facts, and there was no omission or failure on its part.

Conclusion:
The court concluded that the appellant-company was not entitled to receive any compensation under Clause 12 of the sole selling agency agreement due to the statutory prohibition under Section 363 of the Companies Act. Therefore, no income had accrued to the appellant-company, and there was no failure to disclose material facts. The notices issued under Section 147 of the Income Tax Act were deemed invalid, and the court allowed the appeal, setting aside the impugned order of the trial court. The respondents were ordered to pay the costs of the appeal and the petition in the trial court.