9911796707
TMI Blog2003 (7) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... he notices, the learned judge found that the case in the writ petition that the notices were issued without any materials and without formation of opinion could not be controverted and, as such, the writ petition was allowed and the notices were quashed. This appeal was taken up for hearing before this court on November 12, 2002, but, at that time, nobody appeared for the appellant. This court considering the order of the learned trial judge and the non-appearance of the appellant at the time when the appeal was taken up, dismissed the appeal. But, before the order could be signed by this Bench, learned counsel for the appellant mentioned for recalling the order and explained the circumstances for which he could not appear. Considering those facts the order was recalled and, thereafter, the matter was fixed for hearing afresh. Learned counsel for the Revenue also prayed for an opportunity to file affidavit in connection with the writ petition. Pursuant to such prayer, liberty was given to file the affidavit and also to produce the records by the court's order dated January 25, 2003. The matter was fixed for hearing on March 20, 2003. Thereafter, affidavits were filed, records were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respondent entered into an agreement in writing with one ECL Sales Corporation and the respondent appointed the said Corporation as the sole selling agent regarding the sale of products of the respondents in India for a period of five years with effect from December 4, 1966. It is also the case of the respondent that the said sole selling agent was appointed in accordance with the provision of section 294 of the Companies Act, 1956, and the approval of the shareholders was obtained in the general meeting of the respondent held on March 28, 1967. Under the said agreement, the respondent was to pay the said sole selling agents a commission of 3 per cent. by way of remuneration. The said agreement was renewed for a further period of five years with effect from December 4, 1971. It has been further stated by the respondents that on or about February 1, 1972, the said firm that is ECL Sales Corporation was converted into a private limited company and was named as Electro Cast Sales (India) Pvt. Ltd. and by another agreement dated February 17, 1972, between the said firm and the respondents, the respondents appointed the said firm as the sole selling agent of the respondents. It has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The huge payment of commission to the said firm, which consists of the family members of the managing director of respondent-company, amounted to about Rs. 38,00,000 for six assessment years. (c) Subsequently through investigation, further affairs of the assessee-company came to light. It appears that the said selling agency firm consists of brothers and minor sons of the managing director, namely, Sri Ghanshyam Kejriwal, and is nothing but an extension of Ghanshyam's own establishment and the said firm was set up to divert a portion of the income earned by the said respondent-company. It has been alleged by the appellant that the setting up of the said firm was a device employed by the managing director of the assessee-company to pass on pecuniary benefits to his sons and relatives. The appellants submitted that the aforesaid conclusion has been arrived at by them on the basis of the following facts: (i) The said partnership firm was established for the first time in the year 1966 to act as a sole selling agent of the assessee-company. Prior to that, it was functioning as an organisation. After the appointment of the said firm as the selling agent, the assessee-company transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supply and price fixation. The members of the staff of the respondent-company who were transferred to the said firm mentioned above enjoyed complete protection and they were subsequently brought back to the parent assessee-company on September 1, 1976, and the selling agency firm became defunct. Learned counsel for the appellant submitted that all these facts taken together will lead a prudent man to form an opinion that the said firm was a part of the respondent-company and did not have a separate and distinct entity. Apart from the aforesaid facts, the Income-tax Officer has also recorded some more additional grounds and reasons for reopening the assessment for the assessment year 1969-70. The respondent-firm being a public limited company, during the assessment year 1969-70, paid remuneration of Rs. 18,000 to its managing director. This is in excess of the limit prescribed under section 198 of the Companies Act. Any amount which is paid in excess of the statutory provision makes the recipient of the said amount, liable to refund the same and the company cannot waive its right to receive the same amount. The recipient of the excess amount that is managing director, is to be tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer. Then the respondent preferred an appeal before the Income-tax Appellate Tribunal, Calcutta. The said Tribunal, after considering the facts and circumstances of this case, came to a finding that there is no dispute that the legitimate needs of the business of the respondent-company required the service of the commission agent and the assessee derives benefit from such service. It has been stated categorically in the reply that the Tribunal after detailed scrutiny of the matter and the findings in the order of the Assessing Officer and the Appellate Assistant Commissioner held that no case is made out for disallowing any portion of the selling agency commission. It has also been stated that simultaneously the same question came up before the Tribunal in respect of the assessment of subsequent assessment years 1977-78 and 1978-79 for selling agency commission paid to the same firm, Electro Cast Sales (India) Pvt. Ltd., and the Tribunal following its earlier order allowed the claim of the respondent-company in respect of the entire selling agency commission. It has also been stated in the reply that against the order of the Tribunal the Department did not prefer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ducing the books of account or other documents. The assessee must bring to the notice of the Income-tax Officer particular items in the books of account or portions of the documents which are relevant for assessment. Learned counsel also very much relied on the other proposition laid down in Kantamani's case [1967] 63 ITR 638 (SC) that if from the books produced the Income-tax Officer, had been the officer circumspect and careful, could have found the truth. But that he has not been also to do so, and that failure on his part by itself will not preclude the officer from exercising his power to reassess income which has escaped assessment. Learned counsel submitted that following the aforesaid ratio the action in the instant case, is sustainable in law. Learned counsel relied on the said decision in Kantamani's case [1967] 63 ITR 638 (SC) in order to point out that the proceedings prior to the issuance of notice of reassessment are not quasijudicial. But those proceedings namely recording of reasons by the Assessing Officer in reopening assessment is administrative in nature and at this stage, the assessee is not entitled to any notice. Learned counsel for the appellant also relie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly by the respondent-assessee in the course of assessment. The inferences, which the Assessing Officer has to draw from those facts, are not the headache of the assessee nor is the assessee responsible for the same. Dr. Pal submitted that in connection with the assessment year 1968-69, the respondent-company disclosed to the Income-tax Officer, "A" Ward, a copy of the sole selling agency agreement with ECL Sales Corporation. It has been stated by Dr. Pal that the said agreement was a part of the letter dated February 24, 1970, given to the Income-tax Officer by the respondent-company. According to Dr. Pal, the disclosure of that sole selling agency agreement is sufficient disclosure of all material facts truly and fully. Learned counsel further submitted that since such disclosures have been made, inferences, which are to be drawn from such disclosure, are for the Revenue to consider and the assessee has no further obligation to disclose any inferential fact. In support of the aforesaid contention, learned counsel relied on the Constitution Bench judgment of the Supreme Court in the case of Calcutta Discount Co. [1961] 41 ITR 191. Learned counsel further submitted that the law, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the ratio in Calcutta Discount Co.'s case [1961] 41 ITR 191 (SC) undoubtedly correctly sums up the legal position. But the said ratio cannot be applied to this case. It cannot be said that from the mere disclosure of the sole selling agency agreement all the facts relevant to assessment were truly and fully disclosed by the assessee. This court comes to this conclusion especially in view of Explanation 2 to section 147. In Calcutta Discount Co.'s case [1961] 41 ITR 191 (SC), the learned judges opined that what facts were material or necessary for assessment differs from case to case and in every assessment proceeding, the assessing authority, for the purpose of computing the tax due from an assessee is required to know all the facts which help him in coming to a correct conclusion. Therefore, the assessee's duty to make a full and truthful disclosure of all primary facts, in my judgment, has not been discharged in this case by mere production of the sole selling agency agreement. Therefore, the ratio of Calcutta Discount Co.'s case [1961] 41 ITR 191 (SC) does not support the case of the respondents. Dr. Pal has also relied on various other judgments which the court now propos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, the assessee had discharged his obligation of disclosing truly and fully all primary facts and the court held that the assessee is under no obligation to disclose to the income-tax authority how the director who was in sole charge of the management of the business, had utilised the amount of the remuneration received by the director. Therefore, on those facts, the Supreme Court held that there is no failure on the part of the assessee in disclosing fully and truly all material facts. In that view of the said finding, the notices under section 147(a) were quashed. But the facts in this case are totally different and there has not been true and full disclosure by the assessee of all the material facts relevant for assessment in connection with selling agency commission. Reliance was also placed by Dr. Debi Pal on the judgment of the Supreme Court in the case of Indian Oil Corporation v. ITO [1986] 159 ITR 956. The facts of the case were that the Assam Oil Company, the assessee, was a company incorporated in the U. K. Its fixed assets and liabilities later on vested in the Indian Oil Corporation. The assessee had its principal place of business in Digboi in Assam. From the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of the Madras High Court in the case of Madras Auto Service v. ITO [1975] 101 ITR 589. In that case the assessment was sought to be reopened on the ground that by reason of the deduction of the entire interest paid on borrowing from the business profits, excessive relief had been granted. In the instant case, the reopening of the assessment has not been done on the ground of giving excessive relief, but, on a different ground, viz., non-disclosure of relevant facts fully and truly. Therefore, the ratio in Madras Auto Service's case [1975] 101 ITR 589 (Mad) is not attracted to the facts of this case. Reliance was also placed by Dr. Pal on a single Bench judgment of the Calcutta High Court in Dunlop Rubber Company Ltd. (London) v. ITO [1971] 79 ITR 349. In that case, the court found that in the assessment proceedings for several years of the Indian company, the question of admissibility for the purpose of deduction of the contribution made by the Indian company to the expenditure incurred by the parent company on account of research, described as liaison expenditure was disclosed and considered by the Income-tax Officer. All enquiries relating to the liaison expenditure made b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter was discussed by the authorised representative of the petitioner. The writ petition has been affirmed by one Shermadevi, who described herself as secretary and chief accountant of the petitioner/company. It has not been stated that he was the authorised representative mentioned in paragraph 12. The averments in paragraph 12 have been affirmed as true to the knowledge of the aforesaid deponent. But, in the absence any statement that the deponent was the authorised representative of the petitioner/company referred to in paragraph 12, it is not possible to accept the contention of learned counsel, assuming but not admitting such contentions could be accepted otherwise. (b) In the facts of this case it is clear that the affidavits were not filed before the learned trial judge. Affidavits were filed only in 2003 before the appeal court pursuant to its leave. It is not expected that the officers who carried on the assessment proceeding in the assessment years 1968-69 to 1973-74 would be in office till 2003 to swear an affidavit. (c) It is well known that such Assessing Officers will retire and also may be transferred as Government servants. Apart from that in Grindlays Bank Ltd.'s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Income-tax Officer may not on that account be precluded from exercising the power to assess income which had escaped assessment." Following the aforesaid ratio, we are unable to accept that there has been full and true disclosure of all material facts relating to the payment of the selling agency commission by mere disclosure of the selling agency agreement. The last point urged by Dr. Pal is that against the assessment order dated February 28, 1977, disallowing the selling agency commission, the assessee went up in appeal and ultimately, the Income-tax Appellate Tribunal gave a finding in favour of the assessee. Therefore, Dr. Pal, relying on the said finding of the Tribunal which has become final urged that the reopening of the assessment on the self-same ground is of no consequence and in fact the attempt of the Revenue to reopen is by and large infructuous and academic. This court is unable to accept the said contentions. It is well settled that if reopening proceedings have been validly initiated as has been done in this case, then it cannot be struck down solely on the ground that the issue with reference to which escapement of income has been alleged was later on decid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alidity of the notices. The same view has been taken by the Supreme Court also in Raymond Woollen Mills Ltd. v. ITO [1999] 236 ITR 34. From various judicial pronouncements cited in this case relating to exercise of power for reopening assessment, it appears well settled that the powers under section 147 are wide in nature, but the power is conditioned by certain jurisdictional facts. In other words, in the name of exercising this power, the Assessing Officer cannot institute a roving enquiry with the object of fishing out materials. The existence of the belief may be justiciable but not its adequacy. The belief must be bona fide and have a reasonable nexus with the issues involved in the assessment, it cannot be a mere pretence or a ruse. But at the same time it is true if in the course of carrying on the assessment proceeding for subsequent years, some items of information come to the notice of the Assessing Officer from which, the Assessing Officer may have reasons to believe that there has been escapement of income, in that case the Assessing Officer can proceed under this section. The decisive language used in the section is "reason to believe". Thereby on the basis of such re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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