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TMI Blog1982 (6) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... e business and could not be allowed is business expenditure ? 4. Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the payments made to Shri A. V. Birla, Smt. Sunanda Devi Birla and Smt. Priyamvada Devi Birla as salaries were not for any service rendered by them to the assessee-company but was only due to extra-commercial consideration is based on any relevant material and evidence and not perverse ? " For the assessment year 1968-69 the following questions have been referred to this court : For the year 1968-69 1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that there was no relationship of and employee between the assessee-company and Shri A. A. Birla, Smt. Priyamvada Devi Birla and Smt. Sunanda Devi Birla ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the remuneration paid to Shri A. V. Birla, Smt. Sunanda Devi Birla and Smt. Priyamvada Devi Birla were not incidental to the business and could not be allowed as business expenditure ? 3. Whether, on the facts and in the circumstances of the case, the finding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of salary to the following persons: Rs. (1) Shri A. V. Birla 24,000 (2) Smt. Priyamvada Devi Birla 24,000 (3) Smt. Sunanda Devi Birla 18,000 He noticed that the above persons were connected with the management directly or indirectly either as shareholders or otherwise. The ITO gave opportunity to the assessee to prove whether they rendered any services to the assessee-company. The assessee was required to produce Shri A. V. Birla but the assessee-company in its letter dated December 5, 1969, informed the ITO that there was no necessity for his personal appearance. In the letter dated September 9, 1969, the assessee-company stated that the above persons were executives who looked after the general administration. When the ITO required the assessee-company to produce documentary evidence for their performing duties the company in its letter dated December 4, 1969, stated " it is to say the least, unusual for advisory services of such a nature to be represented by paper work which can be produced for examination ". The ITO in his letter dated February 4, 1970, gave opportunity to the assessee to explain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Devi Birla and Smt. Priyamvada Devi Birla had been fully discussed in the assessment order for 1968-69, and for the same reasons given therein he disallowed the payment of salary to the above three persons in the assessment years 1961-62 to 1967-68 in the reassessment orders. The assessee preferred appeals before the AAC who passed a separate order for the assessment year 1968-69, and a consolidated order for the assessment years 1961-62 to 1967-68. In his order for 1968-69, he held that the ITO was justified in disallowing the salaries paid to Shri A. V. Birla and Smt. Sunanda Devi Birla. In coming to this conclusion, he gave the following reasons : I have reached this conclusion for the following reasons: (i) Shri A. V. Birla and Smt. Sunanda Devi Birla stay in Bombay where Shri A. V. Birla is working full-time for another company. The assessee-company has neither any branch office nor any business in Bombay. (ii) No evidence has been produced to establish that either of them did any work for the business carried on by the assessee-company. Further, there is no evidence to show that any one of them gave any specific advice with regard to the investments of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yees. It was also urged that the assessments had been reopened due to change of opinion. It was further urged that the conditions precedent for reopening the assessment u/s. 147(a) had not been satisfied and thus the reassessment proceedings were illegal and invalid. It was further submitted that the Commissioner did not apply his mind before giving necessary sanction for reopening the assessments and in a mechanical way he had granted sanction and no reasonable man would have given sanction on the basis of the reasons recorded by the ITO. Reliance was placed on the decision of the Supreme. Court in Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191, and also in the case of CIT v. Burlop Dealers Ltd. [1971] 79 ITR 609 (SC) and Chhugamal Rajpal v. S. P. Chaliha [1971] 79 ITR 603 (SC). It was further urged that Shri A. V. Birla was appointed as an executive of the company by a resolution passed by the board of directors at the meeting held on February 20, 1958. Similarly, Smt. Sunanda Devi Birla and Smt. Priyamvada Devi Birla were also appointed as executives of the company by resolution passed by the board of directors at the meeting held on April 12, 1960, and they were employees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntire payments to all the three persons should have been allowed. The Tribunal thereafter examined the facts of the case and held Ls under : " According to the assessee, Shri A. V. Birla was appointed as executive by a resolution passed at the meeting of the board of directors held on 20-2-1958, which reads as follows : 'The board decided that Shri Ashok Vardhan Birla be appointed with effect from 1st April, 1958, to look after the business of the company on salary of Rs. 1,000 per month and that the payment of the above sum he made to him by the, Calcutta office of the company. In respect of the appointment of Smt. Priyamvada Devi Birla and Smt. Sunanda Devi Birla, as executives, a resolution is said to have been passed at the meeting of the board of directors held on 12th April, 1960, which is as follows: 'The board decided that in view of the increase in the business of company Smt. Priyamvada Devi Birla and Smt. Sunanda Devi Birla be appointed with effect from 1st April, 1960, on a remuneration of Rs. 1,000 per month each to look after the business of the company and that the remuneration of Shri A.V. Birla be increased with effect from the aforesaid date from Rs. 1,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ames of these three employees and found that they were not employees of the assessee-company and the payments made towards their salaries were not incidental to the business. He found in the course of enquiries for the assessment year 1968-69 that similar payments were made to the above three employees in the assessment years 1961-62 to 1967-68 also, which were not allowed as business expenditure as these persons, according to him, were not in the service of the assessee-company. Thus, he noticed that in the assessment years 1961-62 to 1967-68, the assessee failed to disclose the material facts and hence he had reasons to believe that the income chargeable to tax in those years had escaped assessments due to the omission or failure on the part of the assessee to disclose the material facts and, accordingly, the Income-tax Officer reopened the assessments under section 147(a). The Income-tax Officer had prima facie grounds to reopen the assessments for the years 1961-62 to 1967-68, due to the omission and failure to disclose the primary facts fully and truly by the assessee in the original assessment proceedings. The sufficiency of the reasons cannot be questioned by the assessee. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reasons and also stated that due to assessee's failure to disclose material facts, the assessee-company has been under-assessed. The Commissioner, after agreeing with the reasons recorded by the Income-tax Officer, had accorded sanction by affixing his signature. In these circumstances, the case cited by the learned counsel is not applicable to the instant case. The decision in the case of Commissioner of Income-tax v. Burlop Dealers Ltd. [1971] 79 ITR 609 (SC), relied on by the learned counsel, is also clearly distinguishable. In that case, in the original assessment, the assessee had disclosed the agreement and claimed that the payment of Rs. 87,927, being half of the profit earned from H. Manory Ltd., was paid to Ratiram Tansukhrai under a partnership agreement. The, Income-tax Officer accepted the claim by the assessee and allowed the same in the original assessment. The assessment was reopened under section 34(1)(a) of the Indian Income-tax Act, 1922. On those facts, their Lordships of the Supreme Court held that it was a case which would appropriately fall under section 34(1)(b) but not tinder section 34(l)(a). In the instant case, the names and the details of payments to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the formation of belief that due to failure or omission on the part of the assessee to disclose fully and truly all material or relevant facts, the income of the assessee had escaped assessment. Now, that reason may, under certain circumstances, come to the knowledge of the ITO through information received by him subsequently or otherwise and on that basis he can change his opinion on the original assessment. It is well settled that a mere change of opinion would not sustain the assessment. The change of opinion is based on the formation of a belief that there was failure or omission on the part of the assessee to disclose fully and truly all relevant and material facts at the time of original assessment and that belief, which is based upon relevant and material facts, could be a ground for reopening and whether in a particular case those relevant or material facts have rational nexus to the formation of belief has also to be examined. Now, as mentioned hereinbefore, whether in a particular case, there was failure or omission on the part of the assessee to disclose fully and truly all relevant or material facts, in the facts and circumstances of a case, is essentially and primaril ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um of Rs. 1,10,000 on October 15, 1954. The order was upheld by the AAC but the Tribunal, after considering the account books and examiner's report, reversed this order on the ground that it could not be said in the facts and circumstances of the case that there was any omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the year 1945-46. An application for reference to the High Court was rejected by the Tribunal. There, the question posed before the Tribunal was as follows : " Whether, on the facts and in the circumstance of the case, and having particular regard to the fact that the return and the statements accompanying the return furnished by the assessee during the course of the assessment proceedings for 1945-46, did not indicate such a large transaction as Rs. 1,10,000 by a single bank draft, the Income-tax Officer was right in starting proceedings under section 34(1)(a) on the receipt of the information about the above transaction, to make a reassessment for 1945-46 ? " The Supreme Court at p. 730 of the said report (44 ITR) observed as follows We agree with the view expressed by the Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment made under section 34(1)(a) of the Income-tax Act was justified in law ? " By its judgment dated September 12, 1963, the High Court answered the question in the negative and in favour of the assessee. The Supreme Court had observed that it appeared to the High Court that the ITO could have no reason on the materials before him to believe that there was any omission on the part of the assessee to disclose fully and truly all material facts necessary for the assessment, as stated, and the High Court was further of the view that the finding of the Tribunal in this regard was not justified. Regarding this aspect, the Supreme Court observed at p. 161 of the report as follows : " It is well established that the High Court is not L court of appeal in a reference under section 66 of the Act and it is not open to the High Court in such L reference to embark upon a reappraisal of the evidence and to arrive at findings of fact contrary to those of the Appellate Tribunal. It is the duty of the High Court to confine itself to the facts as found by the Appellate Tribunal and answer the question of law in the setting and context of those facts. It is true that the finding of fact wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hundis were bogus and no interest was paid by the respondent to any of the creditors and interest was wrongly allowed. The respondent challenged the validity of the notice by filing a writ petition in the High Court. On December 5, 1968, the ITO in his counter-affidavit declined to disclose the facts on the ground that if such facts were disclosed it would cause great prejudice to the interests of the Revenue and would frustrate the object of reopening the assessment. Thereafter, he filed a further affidavit on January 27,1970, stating that in the course of the assessment of the respondent for the assessment year 1963-64 it was discovered that various items shown as loans against the security of hundis in the respondent's books of account for the assessment year 1959-60, were in fact fictitious and credits against the names of certain persons were found not to be genuine, and that in that premise it appeared to the ITO that the respondent had failed to disclose fully and truly all material facts necessary for its assessment and by reason of such failure, a portion of its income had escaped assessment. Learned single judge of the High Court dismissed the writ petition but on appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at any part of the income of the respondent had escaped assessment by reason of its failure to make a full and true disclosure of material facts, the ITO did not disclose in his affidavit any material on the basis of which it could be said that he had come to the requisite belief. All that the ITO stated in his affidavit was that he discovered that the transactions of loan against security of hundis were not genuine and that the credits against the names of certain persons who were alleged to have advanced loans were bogus. The ITO merely stated his belief but did not set out any material on the basis of which he had arrived at such belief so that the court could decide for itself whether there was any material on the basis of which the ITO could reasonably entertain such belief. " In those circumstances and in conjunction with other facts mentioned in the judgment of the Supreme Court, the Supreme Court was not at all satisfied with the affidavit of the ITO and came to the conclusion that there was no reason to believe that the income of the assessee-respondent had escaped assessment. There is another aspect of the matter. Controversy arose in that matter whether there was omi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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