1986 (5) TMI 1 - SC - Income Tax

Whether the reopening of the assessments of the assessee under section 147(a) of the Indian Income-tax Act, 1961 was valid - Held, no because there is no failure on the part of assessee to disclose full and true facts

Summary

Issues Involved:
1. Validity of reopening assessments under Section 147(a) of the Indian Income-tax Act, 1961.
2. Whether there was failure or omission on the part of the assessee to disclose fully and truly all material facts.
3. Sufficiency of grounds for the Income-tax Officer to believe that income had escaped assessment.
4. The distinction between primary facts and inferential facts in the context of disclosure obligations.

Issue-wise Detailed Analysis:

1. Validity of Reopening Assessments under Section 147(a)
The primary issue was whether the reopening of the assessments for the years 1957-58, 1958-59, and 1959-60 under Section 147(a) of the Indian Income-tax Act, 1961, was valid. The initial reopening was challenged by the assessee on the grounds that there were no materials to initiate such reopening. The learned single judge of the High Court quashed the notices, but the Division Bench reversed this decision, leading to the present appeals.

2. Failure or Omission to Disclose Fully and Truly All Material Facts
The court examined whether the assessee failed to disclose all material facts necessary for the assessment. The assessee had consistently claimed deductions for London office charges, which were allowed by the Income-tax Officer in the original assessments. The Division Bench held that the assessee failed to disclose the system of certification by the auditor of the parent company fixing what percentage would be reasonable for debiting the assessee company in India. However, the Supreme Court found that all basic facts were disclosed, including the nature and quantum of work done by the London office and the basis of allocation of expenses.

3. Sufficiency of Grounds for the Income-tax Officer's Belief
The court reiterated that for reopening under Section 147(a), the Income-tax Officer must have reason to believe that income had escaped assessment due to the assessee's failure to disclose fully and truly all material facts. The Supreme Court noted that the mere production of evidence before the Income-tax Officer was not enough; there might be an omission or failure to make a full and true disclosure if some material for the assessment lay embedded in that evidence. However, in this case, the facts were disclosed, and the opinion of the auditors for the assessment year 1963-64 that 10% would be reasonable charges could not be considered a basic fact that was not disclosed.

4. Distinction Between Primary Facts and Inferential Facts
The court emphasized the distinction between primary facts and inferential facts. The obligation of the assessee was to disclose primary facts fully and truly. The Supreme Court found that the assessee had disclosed all primary facts, such as the nature of work done by the London office and the basis of allocation of expenses. Whether the expenses were reasonable or excessive was an inferential fact, which the Income-tax Officer had to determine based on the disclosed primary facts.

Conclusion:
The Supreme Court concluded that the reopening of assessments under Section 147(a) was not valid as the assessee had disclosed all primary facts fully and truly. The opinion of the auditors for the assessment year 1963-64 could not be considered a basic fact that was not disclosed. The Division Bench's decision was set aside, and the judgment of the learned single judge was restored. The assessee was entitled to the costs of the appeals.