1985 (9) TMI 78 - HC - Income Tax

Summary

Issues Involved:
1. Validity of reassessment proceedings under section 147(a) of the Income-tax Act, 1961.
2. Disclosure of primary facts by the assessee.
3. Burden of proof on the Revenue.
4. Obligation of the assessee to disclose accumulated profits of the company.
5. Applicability of section 2(6A)(e) read with section 12(1B) of the Indian Income-tax Act, 1922.

Detailed Analysis:

1. Validity of Reassessment Proceedings under Section 147(a):
The primary issue was whether the reassessment proceedings initiated under section 147(a) of the Income-tax Act, 1961, were valid. The Tribunal had held that the proceedings were not validly initiated, as the assessee had made a full and true disclosure of all material facts at the time of the original assessment. The High Court, however, disagreed, concluding that the assessee had failed to disclose all necessary facts, specifically the balance-sheet of the company, which was crucial for determining the applicability of section 2(6A)(e) read with section 12(1B) of the Indian Income-tax Act, 1922.

2. Disclosure of Primary Facts by the Assessee:
The court emphasized the duty of the assessee to disclose fully and truly all material facts necessary for the assessment. It was found that the assessee did not furnish the company's balance-sheet, which contained information on accumulated profits. This non-disclosure was deemed a failure to disclose primary facts, thus justifying the reassessment proceedings. The court referenced the Supreme Court's decision in Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191, which underscored the necessity of full and truthful disclosure of all primary facts by the assessee.

3. Burden of Proof on the Revenue:
The court addressed the preliminary objection regarding the burden of proof, stating that the Revenue was not required to produce the reasons recorded at the time of obtaining the Commissioner's sanction for issuing the notice under section 147(a) until the hearing of the reference. This was contrasted with the case of S.P. Divekar and A.P. Divekar v. CIT [1986] 157 ITR 629, where the burden was on the Revenue to prove the validity of the reassessment notice. The court concluded that the reasoning in Divekar's case could not be applied here, as the primary issue was whether all material facts had been fully and truly disclosed by the assessee.

4. Obligation of the Assessee to Disclose Accumulated Profits of the Company:
The court held that the assessee was obliged to disclose the company's accumulated profits, as this was a material fact necessary for the assessment. The court referred to the Supreme Court's decision in Malegaon Electricity Co. P. Ltd. v. CIT [1970] 78 ITR 466, which stated that even if the Income-tax Officer could have obtained the information through diligence, the duty to disclose still lay with the assessee.

5. Applicability of Section 2(6A)(e) read with Section 12(1B) of the Indian Income-tax Act, 1922:
The court examined whether the loan taken by the assessee from the company could be treated as a deemed dividend under section 2(6A)(e) read with section 12(1B). The court directed the Tribunal to determine whether the loan was made in the ordinary course of business, whether the company was engaged in money-lending, and whether this constituted a substantial part of its business income. The Tribunal was also instructed to consider all other relevant submissions from both the assessee and the Revenue.

Conclusion:
The High Court concluded that the reassessment proceedings were validly initiated due to the assessee's failure to disclose all material facts, specifically the company's accumulated profits. The Tribunal was directed to reassess the merits of the case, including the nature of the loan and the company's business activities, to determine the applicability of section 2(6A)(e) read with section 12(1B) of the Indian Income-tax Act, 1922. The question posed was answered in the negative, favoring the Revenue, with no order as to costs.