TMI Blog1981 (4) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... n in his taxable income on account of the salary paid to Deo Dutt as also of the perquisites given to him for several years, This reduction in the respondent's taxable income was allowed for several years on appeal to the AAC and, on further appeal, to the Appellate Tribunal. Thereafter, the income-tax files of the respondent and of Deo Dutt were brought together and upon scrutiny of the particulars in the returns, it was found: (a) that he did not draw his full salary from the company, the major portion of which remained credited in his name in the company's books ; (b) that he granted a large loan to the managing director who was his sister's husband; (c) that out of this loan he made a gift to his sister, the wife of the managing director of the respondent, of Rs. 1,01,101 ; (d) that he made further gifts to his nephews and nieces; (e) that a major portion of his salary and other emoluments due to him which he bad not drawn from the respondent went back to the managing director and the members of the family either as loan or as gifts. In these facts, the ITO came to the conclusion that respondent's income had escaped assessment as he had obtained reduction on account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the Delhi branch of the respondent, was paid salary, commission, bonus and perquisites by the respondent. It was further alleged that the total amount of such payment was Rs. 27,000 per year and that Deo Dutt was paid a salary of Rs. 12,000 per year, commission at 1 per cent. on the sales of the Delhi branch, annual bonus equal to 3 months' salary and fixed perquisites of Rs. 480 per year. It was also alleged that between 1st April, 1949, and 31st March, 1962, the respondent was given deduction on account of such payment to Deo Dutt Sharma amounting to Rs. 3,51,000. According to the appellant, after the above assessments of the respondent the assessment files of the respondent and the various persons connected with it were brought together, compared and from this comparison certain facts emerged from the perusal of the files which were not known at the time of the assessments. According to the appellants, the material facts which provided reasons to believe that income had escaped assessment are as follows: " (a) Deo Dutt is the brother-in-law of Ganga Saran Sharma, managing director of the company, which is a one man show of Ganga Saran Sharma. (b) Deo Dutt had disposed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be borne in mind that the only point for consideration of this court is whether there was reason for the ITO to form the belief that the assessee had been allowed excessive relief due to non-disclosure of material facts. At this stage, it is not for this court to come to a conclusion as to whether there has been actual failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. That is a question which was to be decided at the time of the assessment itself. The only question now before this court is whether there was reason for the ITO to believe that the respondent had been allowed excessive relief in its assessment proceedings. Dr. Pal, on the other hand, argued that the respondent had disclosed its books of account and evidence from which material facts could be discovered and that it was under no obligation to inform the ITO about the possible inferences that might be raised against his client. It was further argued that it was for the ITO to draw the inference and if he had not done so in the original assessment, the income that escaped assessment could not be brought to tax under s. 147 of the Act. In support of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the appeal are a little important and they may be briefly stated as follows. Prior to March, 1947, one Deo Dutt Sharma carried on business in Delhi in the name of Sharma Trading Company. The business was quite prosperous one and the record shows that Deo Dutt Sharma was making an average profit of about Rs. 36,000 per year. In March, 1947, the assessee was incorporated as a private limited company with Ganga Saran Sharma as its managing director and it took over the business of Sharma Trading Company as a going concern in consideration of allotment of 1,703 shares in the share capital of the assessee to Deo Dutt Sharma. The share capital of the assessee consisted of 8,500 shares out of which 1,703 shares were allotted to Deo Dutt Sharma, 5 shares were held by Ganga Saran Sharma and 3,500 shares, by a company called Narendra Trading Company controlled by Ganga Saran Sharma and his wife. It may be pointed out at this stage that Deo Dutt Sharma was the brother-in-law of Ganga Saran Sharma. When the business of Deo Dutt Sharma was taken over by the assessee, Deo Dutt Sharma was appointed director of the assessee along with two other persons. Deo Dutt Sharma was placed in charge of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7-58, the ITO once again disallowed a part of the remuneration paid to the managing director as also the amounts of interest paid to the directors on the balances lying to the credit of their respective accounts with the assessee on account of undrawn remuneration. The AAC, in appeal, held that the interest paid to the directors on the balances lying to the credit of their respective accounts was an allowable expenditure but he sustained the disallowance of a portion of the remuneration paid to the managing director. The assessee thereupon preferred a further appeal to the Tribunal and after considering all the facts and circumstances of the case, the Tribunal came to the conclusion that the remuneration paid to the managing director as also to the other directors was not at all excessive and no portion of it could justifiably be disallowed. The result was that not only was the remuneration paid to the managing director and the other directors allowed in full as a permissible deduction but also the amount of interest paid on the credit balances in their respective accounts was allowed to be deducted as a permissible expenditure. Obviously, and this could not be disputed on behalf o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that there was no omission or failure on the part of the assessee to disclose any material facts at the time of the original assessment and that, in any event, there was no reason to believe that any part of the income of the assessee had escaped assessment by reason of such omission or failure. The writ petition was admitted and rule was issued by a single judge of the Calcutta High Court. The ITO, possibly on service of the rule, addressed a letter dated 29th June, 1968, to the assessee stating that the notice was issued by him because he had reason to believe that the payment of remuneration to Deo Dutt Sharma was bogus and false. The ITO also stated in the affidavit filed by him in reply to the writ petition that after the assessment of the assessee was completed for the assessment years up to 1963-64, the ITO came to learn that Deo Dutt Sharma was the brother-in-law of Ganga Saran Sharma, managing director, and that Deo Dutt Sharma had disposed of the income received by him by way of remuneration from the assessee, in the following manner : Rs. 1. On 31st July, 1957, he made a gift to Shri Narendra Sharma, son of Shri Ganga Saran Sharma, managing di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s justified. The assessee thereupon preferred the present appeal in this court after obtaining a certificate of fitness from the High Court of Calcutta. It is well settled as a result of several decisions of this court that two distinct conditions must be satisfied before the ITO can assume jurisdiction to issue notice under S. 147(a). First, he must have reason to believe that the income of the assessee has escaped assessment and, secondly, he must have reason to believe that such escapement is by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. If either of these conditions is not fulfilled, the notice issued by the ITO would be without jurisdiction. The important words under s. 147(a) are " has reason to believe " and these words are stronger than the words " is satisfied ". The belief entertained by the ITO must not be arbitrary or irrational. It must be reasonable or in other words it must be based on reasons which are relevant and material. The court, of course, cannot investigate into the adequacy or sufficiency of the reasons which have weighed with the ITO in coming to the belief, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee without any remuneration whatsoever. The actual remuneration paid to Deo Dutt Sharma was in fact found to be genuine and reasonable by the AAC while disposing of the appeal of the assessee for the assessment year 1949-50, as also by the Income-tax Tribunal while disposing of the appeal for the assessment year 1957-58. It is true that Deo Dutt Sharma was the brother-in-law of Ganga Saran Sharma, the managing director of the assessee, but this circumstance cannot by any stretch of imagination lead to an inference that the payment of remuneration to Deo Dutt Sharma who was solely managing and looking after the business of the Delhi branch of the assessee was sham and bogus. Even a close relative who is in management and charge of a business on a full-time basis is entitled to be paid remuneration and, in fact, it would be wholly unreasonable to expect him to work free of charge. The revenue, however, relied strongly on the fact that out of the total amount of renumeration of Rs. 3,51,000 received by Deo Dutt Sharma and credited to his account with the assessee, he had not withdrawn more than Rs. 4,000 per year for himself and an aggregate sum of Rs. 2,37,550 was expended by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made a gift of Rs. 12,550 to the son of Ganga Saran Sharma on 31st July, 1957, and given a loan of Rs. 2,25,000 to Ganga Saran Sharma on 25th August, 1958, and the ITO was fully aware that Ganga Saran Sharma was the managing director of the assessee. It is possible and we may assume it in favour of the revenue, that the subsequent gifts made by Deo Dutt Sharma to the wife and daughters-in-law of Ganga Saran Sharma were not disclosed to the ITO at the time of the original assessment, but these gifts being subsequent to the relevant accounting year, the assessee was not bound to disclose the same to the ITO. Moreover, it is difficult to appreciate how the assessee could be said to be under an obligation to disclose to the ITO in the course of its assessment as to how a director who was in sole charge of the management of the business of the assessee and who was being paid remuneration for the services rendered by him to the assessee, had utilised the amount of remuneration received by him. We do not think it possible to sustain the conclusion that the assessee omitted or failed to disclose fully and truly any material facts relating to its assessment. We must, in the circumstances, ..... 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