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TMI Blog1986 (5) TMI 38X X X X Extracts X X X X X X X X Extracts X X X X ..... e reopening itself was time barred. 3. The learned Commissioner (Appeals) failed to appreciate the fact that the entire income of the assessee in each of the assessment years 1965-66, 1966-67, 1968-69 and 1969-70 which was prior to the issue of notice under section 148 of the Income-tax Act, had escaped assessment in so far as the entire income had been taxed at too low a rate. Further, the total income each of the years exceeded Rs. 50,000 and, thus, the conditions stipulated in section 149(1) (a) (ii) of the Income-tax Act were satisfied." 2. The assessee is a company having its registered office at Ranavav, near Porbander, in the State of Gujarat. It carries on mainly the business of manufacture and sale of portland cement. The original assessments were completed for the respective years under appeal, by treating the assessee as a company in which public are substantially interested, as follows : Assessment year Date 1965-66 21-7-1969 1966-67 30-9-1969 1968-69 26-3-1971 1969-70 20-3-1972 The ITO accordingly levied the tax on the assessee-company as a company in which the public are substantial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in holding that the assessee was a widely held company. It was, thus, pointed out that the ITO had no jurisdiction both in law and on facts in reopening the assessments in question. 2.2 The above objections were overruled by the ITO by pointing out, viz., that the notice were issued with the previous sanction of the Board. Therefore, the action was validly initiated. The ITO also pointed out that the assessment at too low a rate is deemed to be escapment of income within the meaning of section 147 and, therefore, the conditions of escapment of income exceeding Rs. 50,000 was not required to be satisfied, in the instant case, as pointed out by the assessee. This was a case, the ITO observed, where the entire income has escaped the assessment having been charged at too low a rate by assessing the same as a closely held company. The ITO, therefore, concluded that in the instant case, the tax was required to be recovered at the rate applicable to the closely held domestic company for the respective years under appeal and in this view of the matter, he levied the tax accordingly on the said income as was previously assessed for the respective assessments under appeal. 3. Being agg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... called for by the ITO beyond what was asked for under its said letter. The ITO having considered the particulars filed by the assessee had come to the conclusion in course of original assessment proceedings that the assessee was widely held company. Therefore, according to the Commissioner (Appeals), the present action of the ITO to reopen the assessment was merely a change of opinion and, as such, the action under section 147(a) was not in order. Secondly, according to the Commissioner.(Appeals), the time limit for reopening the assessment also required careful consideration. In the instant case, there was no escapment of income exceeding Rs. 50,000 and, as such, as per section 149(1) (a) (ii) the action could not be taken under the provision of section 147(a). Thirdly, the ITO had initiated the action on the basis of the report of the audit party. This report could not could only enable the ITO to take action under section 147(b) by treating the same as 'information', but in no case the ITO could take recourse to the provisions of section 147(a). Fourthly, the ITO had applied a won criteria in deciding the question of status as aforesaid. In this connection, the Commissioner (App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o an agreement with another non-resident company, viz., Roy Nominees Ltd. ('Roy') and under the agreement, the Roy was to hold the shares of UTEL. Thus, the dividend declared by the assessee-company was paid to Roy for the assessment year 1966-67. Now Roy was declared as a 'company' by the Board by its order dated 2-3-1967. The UTEL, in the meanwhile, entered into another agreement on 1-10-1965 with a newly floated company in New Jersey, viz., Jagmi Investment Ltd. ('Jagmi') and out of 5,000 equity shares of 1 pounds each 4,979 shares were acquired by UTEL. Jagmi had approached the Board for being declared as a company under section 2(17) and Roy had applied for a no objection certificate for transfer of shares to Jagmi. But these applications were still pending. Having regard to this background, the learned departmental representative submitted that the question was whether UTEL was a company in which the public are substantially interested. 99 per cent of the shares of UTEL were held by one Mehta group, i.e., family members of Shri Nanji Kalidas Mehta. Having regard to this fact, therefore, the assessee-company was required to be treated as closely-held company for 1958-59. 4.3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y a group of person, if the assessee-company were to be held as a closely-held company. The ITO had applied the rate of 50 per cent applicable to a non-manufacturing company which was not in order. As a result, the conclusion reached by the ITO in this regard was erroneous and, accordingly, unsubstainable in law. The action of the ITO also should be held to be invalid as he has applied a wrong criteria without application of mind. 5.1 On the legal ground, Shri Sharda reiterated his contentions relating to the provisions of section 149(1) (a) (ii), which we have set out earlier. 5.2 On merits Shri Sharda submitted that the assessee was registered as a public limited company. It shares exceeding 40 per cent were held by the public and the share were quoted on the recognised stock exchange. Therefore, the requisite criteria to treat the company as a widely-held company is fully satisfied in the instant case and the conclusion reached by the ITO to the contrary was accordingly unsubstainable. 5.3 Referring to the shareholdings (to which we shall refer little later), Shri Sharda pointed out that the shares exceeding 40 per cent were held by the public as pointed out earlier. Shri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome chargeable to tax has escaped assessment amount or is likely to exceed Rs. 50,000 or more, notice under section 148 could only be issued with the previous sanction of the Board. Now it is contended that the 'income escaping assessment' for the purpose of section 147 includes by fiction enacted in Explanation 1, inter alia, such income which has been assessed at too low a rate. Thus, it is the submission of the learned representative that by virtue of Explanation 1, as appended to section 147 which creates the aforesaid fiction does not find place in section 149. It is over simplification of the assessee to state that in absence of deeming provision, the expression 'escaped assessment' for purpose of section 149 should be construed so as to exclude the income which has been assessed at too law a rate. In other words, the fiction of section 147, Explanation 1 would not operate in construing the provisions of section 149. It is, necessary, in our opinion, to give a harmonious construction to provisions contained in sections 147, 149 and 151. These sections are admittedly machinery sections. Therefore, they must be so interpreted as to make the provisions workable and, as such, a b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany which claims to be one in which public are substantially interested, were furnished by the assessee in course of assessment for the years 1965-66 as also 1966-67 by letter dated by 9-8-1967 and 21-10-1969. In other words, the list of shareholders as on 30-6-1963 was furnished on 9-8-1967 to the ITO in connection with the assessment for the year 1964-65 and this list contain the names and addresses of all the shareholders and according to the practice followed in subsequent year only the changes were indicated. Thus, the information relating to the list of shareholders was already with the ITO and formed part of his record. Again, the ITO asked for further details regarding certain shareholders by letter dated 25-8-1969 and this information was furnished on 21-10-1968. Therefore, on the basis of material on record, it should not be said that the assessee has withheld any primary facts from the ITO. 6.7 According to their Lordships of the Supreme Court in case of CIT v. Bhanji Lavji [1971] 79 ITR 582, section 34(1) (a) of the Indian Income-tax Act, 1922 does not cast any duty upon the assessee to instruct the ITO on question of law. When the primary facts necessary for assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asonably inferred that the prime mover for commencement of the proceedings was the audit report. Now, the note of revenue audit in certain situation may constitute information from the external source for the purpose of taking action under section 147(b). But, by no stretch of imagination the audit objection could give lever to the department to take action under section 147(a). Thus, without going into the nature of the audit objection was in the nature of 'information', the jurisdiction to commence such proceedings would lie under the provisions of section 147(b) and as the time limit for taking such action being 4 years has already elapsed, it could not permit the taxing authorities to take recourse to the provisions of section 147(a). Now, coming to the merit of the case, i.e., the second part of the controversy, as stated earlier, the assessee can be treated as a widely-held company, if it was registered as a public limited company as required under section 2(18). The relevant conditions in this regard are as follows : (a) firstly it should not be a private company as defined in Companies Act, 1956; (b) Secondly shares other than preference shares carrying not less than 50 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted the following working of the shareholders to support his contention that more than 60 per cent of voting power was in the hands of five or less persons. The working given by the learned departmental representative is reproduced here under : (a) Uganda Tea Estate Ltd. 50,000 (b) Jagdish Inds. (P.) Ltd. 8,950 (c) Jaibharat 1,000 (d) Nanjibhai Kalidas Mehta 500 (e) Shri Khimji Nanjibhai Mehta 520 ------ 60,970 --------- It is claimed on the basis of the above working that more than 60 per cent shares were held in the name of five persons. This submission made by the learned departmental representative is devoid of substance because the shareholding is not an exercise in arithmetic. According to the principles enunciated by their Lordships of the Hon'ble Supreme Court, the five persons holding the voting power must act in concert, as laid down in CIT v. Jubilee Mills Ltd. [1963] 48 ITR 9, it is stated as follows : "... Normally managing agencies are not formed by parties exce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Nanjibhai Mehta 50 (d) Nirmalaben Ranvir Khatau 50 (e) Khimjibhai Nanjibhai Mehta 520 ------ 51,180 ------ Even assuming for the sake of argument that the above parties holding 51,180 share could acting concert, even then more than 40 per cent shares were held by the public which would substantiate the assessee's case for treating as a widely-held company. Thus, even on merit the conclusion reached by the taxing authorities cannot be sustained. As pointed out earlier, through inadvertence the basis of shareholders was taken as fifty per cent and not forty per cent or sixty per cent though the assessee was a manufacturing company. 8. In light of our above discussion, we uphold the conclusion reached by the Commissioner (Appeals) that the assessee was rightly treated as a widely-held company by the ITO in course of original assessment. In our opinion, the reassessment proceedings were rightly held to be bad in law and on facts, for the reasons stated by us here in before. 9. The appeals are dismissed. - - TaxTMI - TMITax - Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X
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