TMI Blog1997 (2) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... 79, in Income-tax Reference No. 24 of 1970. The said judgment is reported in CIT v. Associated Stone Industries (Kotah) Ltd. [1981] 130 ITR 868. The High Court considered the validity of the reassessments made on the appellant for the years 1950-51 to 1956-57 as also the legality of the assessments made for the years 1957-58 to 1961-62 in its common judgment dated July 30, 1979 (ITR No. 24 of 1970). In deciding the legality and validity of the reassessments for the years 1950-51 to 1956-57 some aspects were decided in favour of the assessee/appellant. On a consolidated reference made by the Income-tax Appellate Tribunal in respect of the assessment years 1950-51 to 1961-1962, seven questions of law were referred for the decision of the High Court. Out of the same the following five questions of law, namely, questions Nos. 1, 2, 5, 6 and 7, which were answered against the assessee, are still in appeal before us : " 1. Whether, on the facts and in the circumstances of the case, the reassessments for the years 1950-51 to 1956-57, were validly made under section 34(1)(a) of the Indian Income-tax Act, 1922 ? 2. Whether, on the facts and in the circumstances of the case, the Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um royalty will be payable in four equal instalments in advance every quarter. Provided that if in any quarter the royalty payable calculated at the rate mentioned in sub-paragraph (i) exceeds the instalment of minimum royalty paid in advance for that quarter, the balance shall be made up within the next quarter. " The Kotah State merged with the United State of Rajasthan and the Indian Income-tax Act, 1922, was brought into force in the newly formed State of Rajasthan with effect from April 1, 1950. The assessee-company submitted an application to the Commissioner of Income-tax for a declaration that it was exempt from the payment of income-tax in accordance with the terms of the lease granted to it by the then Maharao of Kotah. But the aforesaid application was rejected. Thereafter, the assessee-company filed a civil suit in the court of the District Judge, Kotah, against the Union of India and the State of Rajasthan, seeking a declaration that it was exempt from payment of income-tax and that the royalty paid by it in excess of the minimum amount of Rs. 1,50,000 was in lieu of income-tax, super-tax, etc. The learned district judge by his decree and order dated August 23, 1957, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Income-tax Officer reassessed the income of the assessee-company for the years 1950-51 to 1956-57 and held that as the amount of royalty paid by the assessee-company in excess of the sum of Rs. 1,50,000 was in lieu of income-tax, etc., the same could not be allowed as deduction to the assessee-company and as such the amount of excess royalty allowed earlier as deduction was disallowed and was added back to the income of the assessee-company. The assessee-company preferred appeals before the Appellate Assistant Commissioner against the aforesaid orders of reassessment passed by the Income-tax Officer, Kotah, but the appeals were dismissed. Then the assessee-company filed appeals before the Income-tax Appellate Tribunal, which disposed of the seven appeals relating to the reassessment proceedings made under section 34(1)(a) of the Act, for the assessment years 1950-51 to 1956-57, by one consolidated order dated September 7, 1968. The Tribunal held that the proceedings under section 34 of the Act could not be initiated in view of the decision of the Supreme Court in Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191. It was held by the Tribunal that the assessee-company had disclo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssible deduction, although the amount of excess royalty representing its liability in respect of income-tax, super-tax and other direct taxes payable to the Union of India could not be deducted from the taxable income of the assessee-company, adopting the reasoning given by it in the earlier order passed on the same day, which has been referred to above. We are concerned only with the answers given by the High Court regarding questions Nos. 1,2, 5, 6 and 7, which are against the assessee. On question No. 1, the High Court held that the reassessment proceedings for the years 1950-51 to 1956-57 were initiated and concluded validly under section 34(1)(a) of the Act. On question No. 2, concerning the assessment years 1954-55, 1955-56 and 1956-57, the High Court found on the alternate plea, that the reassessments of the appellant-company for the said years could be justified under section 34(1)(b) of the Act. On question No. 5, the High Court held that the penal interest calculated and charged under section 18(6) or 18A(8) could only be challenged in an appeal against the order of assessment to tax and the assessee would be entitled to deny his liability to payment of penal interest a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 34(1)(a) of the Act. (1) The Income-tax Officer should have reason to believe that income has escaped assessment, and (2) he must have reason to believe that such escapement is by reason of the omission or failure on the part of the assessee to make a return or to disclose fully and truly all material facts necessary for his assessment for the relevant year. It is now well-settled by the decisions of this court that the duty of the assessee is only to fully and truly disclose all material facts. The expression "material facts" contained in section 34(1)(a) of the Act refers only to primary facts, and the duty of the assessee is to disclose such primary facts. There is no duty cast on the assessee to indicate or draw the attention of the Income-tax Officer what factual or legal, or other inferences can be drawn from the primary facts disclosed. (see-Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191). In this case, the Appellate Tribunal found in paragraph 12 of its order (page 321 of the paper book) thus : " The primary fact in this case was the lease agreement and the terms and conditions thereof. This was before the Income-tax Officer from the beginning. He was awa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) of the 1922 Act were validly initiated and concluded. We are of the view that the approach and conclusion so made by the High Court are patently erroneous for the following reasons. The primary fact in this case is the lease agreement entered into by the appellant with the Maharao of Kotah State dated May 2, 1945. It was placed before the Income-tax Officer at the time of original assessments. It is not the duty of the assessee to draw the attention of the Income-tax Officer to any particular clause or portion of the document and invite him to draw any particular inference therefrom. Moreover, in the suit the Union of India and the State of Rajasthan were parties. The interim injunction passed by the court from assessing or levying any income-tax against the assessee-company was varied on the representation made by the Union of India, by later orders. Indeed, the Union of India and the Commissioner of Income-tax have filed written statements in the suit. The order of injunction was within the knowledge of the Income-tax Officer, as could be seen from the original assessments. The Income-tax Officer was aware of the triangular dispute between the assessee-company, the State of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see-company under clause 18 of the grant after the deduction of the income-tax, super-tax and excess profits tax, shall be payable to the State of Rajasthan. The State of Rajasthan will be entitled to the residue. The District Judge, however, dismissed the suit against the Union of India. In the appeal filed by the State of Rajasthan, it was held that the agreement dated May 2, 1945, became void on the coming into force of the Constitution of India on January 26, 1950, that the amount paid by the assessee-company in excess of the minimum of Rs. 1,50,000 was refundable to it. The Income-tax Officer held that the amount of royalty paid by the appellant-company in excess of Rs. 1,50,000 being in lieu of income-tax, super-tax and excess profits tax could not be allowed as deduction. In the reassessment proceedings, the amount of excess royalty allowed earlier as deduction was disallowed and added back to the income of the assessee-company. The appeals filed by the appellant-assessee before the Appellate Assistant Commissioner were dismissed. The Appellate Tribunal held that the proceedings are invalid under section 34(1)(a) of the Act for the years 1950-51 to 1956-57 and alternatively ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the proceeding initiated under section 34(1)(a) of the Act, which was found to be invalid for the assessment years 1954-55, 1955-56 and 1956-57 cannot be sustained under section 34(1)(b) of the Act. Strong reliance was placed on the decision of the Allahabad High Court in Raghubar Dayal Ram Kishan v. CIT [1967] 63 ITR 572. (2) The second plea was that the decision of the District Judge, Kotah, rendered in the civil case was only based on the lease deed. The lease deed as well as the decision of the District Judge were already available at the time of original assessment and cannot be considered to be fresh material or information sufficient to attract section 34(1)(b) of the Act. A look at section 34, clauses (a) and (b), will show that the said clauses deal with two different situations. Section 34 is only a machinery section. They cover different contingencies and situations, but they do not deal with two distinct and separate jurisdictions. Section 34 as a whole clause (a) or clause (b) deals with cases of reopening of income escaping assessment. Whereas section 34(1)(a) requires the formation of a belief by the Income-tax Officer, that there is a failure or omission on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equirements under section 34(1)(b) are satisfied. The same High Court in Nirmala Birla (Smt.) v. WTO [1976] 105 ITR 483 [FB] has followed its earlier decision. To similar effect is the decision of the Delhi High Court in Ganga Saran and Sons (HUF) v. ITO [1981] 130 ITR 212. A Division Bench of the Bombay High Court in Rajabally Hirji Meghani v. S. N. Sahane [1988] 170 ITR 614 has concurred with the decision of the Delhi High Court in Ganga Saran's case [1981] 130 ITR 212 in the context of a writ petition filed to strike down notices issued under section 148 of the Income-tax Act. The other decisions which take similar view are T. M. Kousali v. Sixth ITO [1985] 155 ITR 739 (Kar), CIT v. Banwari Lal and Sons Ltd. [1982] 137 ITR 91 (Delhi) ; Mysore Tobacco Co. Ltd. v. CIT [1986] 157 ITR 606 (Kar) and CIT v. Surendra Kumar Bhadani [1987] 164 ITR 323 (Patna). Regarding the second plea, it is now fairly settled that the information obtained by the Income-tax Officer need not be one outside the record ; it may be one obtained from the assessment records already available. The law on this point has been laid down in Salem Provident Fund Society Ltd. v. CIT [1961] 42 ITR 547 (Mad) and Uni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if and when its existence is realised and its implications recognised. " We hold that though the proceedings of the three years 1954-55, 1955-56 and 1956-57 cannot be sustained under section 34(1)(a) of the Act, they could be sustained or justified under section 34(1)(b) of the Act, since the materials on record disclose that the conditions required to be fulfilled under section 34(1)(b) are satisfied. With great respect, we hold that the decision to the contrary of the Allahabad High Court in Raghubar Dayal Ram Kishan v. CIT [1967] 63 ITR 572 is not good law. We are next concerned with question No. 5 which deals with the appealability of an order levying penal interest under section 18A of the Act for the assessment years 1957-58 to 1961-62. The High Court has rightly answered question No. 5, stating that the penal interest calculated and charged under section 18A(6) or 18A(8) can be challenged in an appeal filed by the assessee against the order of assessment to tax and the assessee would be entitled to deny his liability to payment of penal interest also, while denying his liability to be assessed to tax, under section 18A of the Act. It was opined that no appeal would lie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that the amount of excess royalty paid cannot be deemed to have been paid to the Union of India in respect of the tax liability of the appellant-company, since no amount at all was paid to the Union of India by the appellant-company. It was also held that the excess royalty paid to the State Government cannot be said to be paid on behalf or as an agent of the Union of India. It was, therefore, held that the assessee-company was not entitled to get credit for any amount of the excess royalty, said to have been paid by the assessee-company to the State Government. In answering question No. 7, the High Court held that the amount equal to the tax liability of the appellant-company for the relevant years, out of the excess royalty, was not a permissible deduction. The remaining portion or residue out of the excess royalty would partake of the same character as the minimum royalty of Rs. 1,50,000 and is a permissible deduction. It was made clear that the amount equal to the tax liability of the assessee-company, out of the excess royalty, said to have been paid in lieu of income-tax, super-tax, etc., is not a permissible deduction. It was argued before us that the High Court erre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... including the component of income-tax and super-tax, etc., was deposited in the court of the District Judge, Kotah, under its order in Civil Suit No. 17 of 1953 and when the entire amount was withdrawn by the State of Rajasthan under the orders of the district court subject to final decision of the suit and when the court of the District Judge at the conclusion of the suit ordered the State of Rajasthan for the payment of Rs. 23,99,474 to the Union of India in respect of its income-tax demand for the relevant assessment years, the High Court ought to have held that payment of the aforesaid amount was made to the Union of India and the assessee-company was entitled to the credit of the amount from the income-tax authorities. It was also stated that the High Court has not considered the matter from the point of view of section 10(2)(xv) of the Indian Income-tax Act, 1922, nor was the earlier decision of this court inter-parties (Associated Stone Industries (Kotah) Ltd. v. CIT [1971] 82 ITR 896) adverted to in this regard. (The earlier decision reported in [1971] 82 ITR 896 was relating to the assessment years 1948-49 and 1949-50, when there was no law imposing income-tax, super-tax, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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