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TMI Blog1980 (3) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... Mills Ltd. for a term of 20 years commencing from May 16, 1951. The second appellant is a director of the appellant-company and has joined in filing this writ petition. The particular clause of the said agreement which is material for our purpose is cl. 12. The said cl. 12 is in the following terms: " 12. IT IS ALSO FURTHER AGREED AND DECLARED THAT in case this agreement is terminated for any reasons whatever including Government intervention but except those mentioned in clause 9 hereof the agency company (that is, the appellant-company) will be entitled to its commission at the rate aforesaid (that is, at the rate of Rs. 1-2-0 (rupee one and annas two) per Rs. 100 on the amount of the sale proceeds of its entire products) on all proceeds realised from the sale of products manufactured by the company (that is, the Godavari Sugar Mills Ltd.) by way of compensation for the loss of business during the residuary term and such commission shall be paid to them in the month of June following by way of compensation for the loss of business during the residuary term and such commission shall be paid to them in the month of June following the termination of each of the remaining sugar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eipt of any such remuneration, rebate, commission, expenses or other payment in contravention of the prohibition contained in s. 363 was not an offence, However, on December 28, 1960, the Companies (Amendment) Act, 1960, came into force. By this Amendment Act a new section, namely, s. 629A, was inserted in the Companies Act under which, inter alia, if a company or any other person contravened any provisions of that Act, for which no punishment was provided elsewhere in the Act, the company and every officer of the company who was in default was punishable with fine which may extend to Rs. 500 or where the contravention was a continuing one, with a further fine which may extend to Rs. 50 for every day after the first day during which the contravention continued. Admittedly, the appellant-company was an associate of the managing agents of the Godavari Sugar Mills Ltd. and, consequently, in view of the provisions of the said s. 361, the sole selling agency of the appellant-company stood terminated on March 1, 1958, Ind by reason of the provisions of s. 629A, on and after December 28, 1960, any receipt of compensation by the appellant-company in respect of the termination of its sol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the appellant-company in terms of cl. 12 of the said sole selling agency agreement. In the said letter this agreement was described as " subsisting up to 28-2-1958 ". It was further stated in the said letter that in terms of the said cl. 12 the commission due on sales effected by the Godavari Sugar Mills Ltd. for, a period of five years was payable to the appellant-company notwithstanding the termination of the said agreement and that no case of waiver born out of commercial expediency had been established, and no disclosure of material facts in that behalf had been made by the appellant-company in the course of the original assessments for the assessment years 1958-59 and 1959-60, and as income which had accrued during the period March 1, 1958, to May 31, 1958, and thereafter, had escaped assessment, the provisions of cl. (a) of S. 147 were attracted. By its' reply dated March 12, 1969, the appellant-company pointed out that as it had become an associate of the managing agents of the Godavari Sugar Mills Ltd. by reason of the provisions of s. 361 of the Companies Act, the s aid sole selling agency agreement was deemed to have been terminated on March 1, 1958, and as it stood t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt was on the record of the ITO. The learned judge further held that unless the accounts were reopened it would not be possible for the I.T. authorities to ascertain whether or not the appellant-company had received commission to which under the said cl. 12 it was entitled. It is an admitted position that the impugned notices have been issued on the ground that the appellant-company has omitted or failed to disclose fully and truly all material facts necessary for its assessments for the years in question. The relevant provisions of s. 147 of the I.T. Act provide as follows: " 147. Income escaping assessment.If (a) the Income-tax Officer has reason to believe that, by reason of the omission or failure on the part of an assessee...... to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year ...... he may, subject to the provisions of sections 148 to 153, assess or reassess such income...... for the assessment year concerned ........" Under s. 148(1) of the I.T. Act before making the assessment, reassessment or recomputation under s. 147, the ITO has to serve on the assessee a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company and the company was not to waive the recovery of any sum so refundable to it unless permitted by the Central Govt. By reason of the provisions of s. 363 it was not open to the appellant-company to receive any compensation from the Godavari Sugar Mills Ltd. as compensation or otherwise in respect of the statutory termination of its sole selling agency, and if it received any such compensation by reason of s. 363 it was under a statutory obligation to refund that amount to the Godavari Sugar Mills Ltd. and till the time of such refund to hold it as trustees for the Godavari Sugar Mills Ltd. Thus, no part of the amount of such compensation would belong to or form the income of the appellant-company. If so, it cannot be said that the amount of such compensation was income chargeable to tax which had accrued to it, and the very first condition for the applicability of s. 147 of the I.T. Act would be absent. Mr. Kotwal, learned counsel for the respondent, however, submitted that under the said cl. 12 the appellant-company had the right to receive compensation in respect of the termination of their sole selling agency for any reason whatever other than termination under cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e paid to a managing agent as buying or selling agent of other concerns and the conditions which circumscribe such payment. Section 361, as we have seen, statutorily terminates with effect from March 1, 1958, all contracts in force at the commencement of the Companies Act, namely, April 1, 1956, in which a company or the managing agent or an associate of a managing agent of a company is a party. Thus, this group of sections deals with different payments, and the payments which could be made in contravention of these sections cannot be described by one word alone. It would also have left a loophole for unscrupulous managing agents or an associate of an agent not to make the wording of s. 363 wide enough to prevent them from receiving any payment which ss. 356 to 361 were intended to prevent. Therefore, what s. 363 did was to prohibit any such payment made " whether directly or indirectly ", and cover all payments which may not be included within the expression " by way of remuneration, rebate, commission, expenses " by adding thereto the words " or otherwise ". In this connection, we may as well deal with few other arguments advanced by Mr. Kotwal. Mr. Kotwal urged that the sole sel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant-company was advised that it had no legal right whatever to receive any compensation under the said clause 12, and as a matter of prudence and commercial expediency it thought it wiser and better not to throw away good money after bad by fighting a hopeless litigation, for, after all, one must bear in mind that when a private party litigates it litigates at its own expense and not at the cost of the public exchequer. If as we have held above no income whatever by way of compensation under cl. 12 of the said agreement accrued to the appellant-company, the question of its omission or failure to disclose the fact that it was not entitled to receive compensation on such termination cannot possibly arise. This question can arise only if the appellant-company was entitled to compensation under the said cl. 12. Since, however, the case before the trial court proceeded upon the basis of cl. 12 only, we will deal with this question also on the assumption that the appellant-company was entitled to compensation. Even in such an event what was it that the appellant-company was bound to disclose to the ITO ? It was said that it was for the appellant-company to have pointed out that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e drawn, it would not be possible to say that the assessee should have drawn any particular inference and communicated it to the assessing authority. How could an assessee be charged with failure to communicate an inference, which he might or might not have drawn ?" It must also be borne in mind that having all the materials before it if the assessee failed to disclose any facts, equally the ITO failed to notice the facts which were already on his record and which had been disclosed to him. A case very similar to the present one, assuming that some income accrued by way of compensation to the appellant-company, came up for decision before the Gujarat High Court. That case was Ahmedabad Cotton Mfg. Co. Ltd. v. Union of India [1974] 95 ITR 639. In that case, excess depreciation had been allowed to the assessee. This was by reason of the failure on the part of the assessee to disclose the amount of initial depreciation at the time of the assessments for the relevant years. The question that arose was whether by reason of the allowance of such excess depreciation income chargeable to tax had escaped assessment by reason of the omission or failure on the assessee's part to disclose fu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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