9911796707
TMI Blog1973 (7) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... , free of tax and with other benefits and perquisites as therein provided. It was one of the terms of the agreement as per the document filed before the taxing authority that the employment was for a definite period of 25 years commencing from April 1, 1943. The agreement also contained a provision as to what was to happen in case of premature termination of his employment. The case of the petitioner was that should the services of the petitioner be terminated before the expiry of 25 years the petitioner would be entitled to compensation calculated at the rate of Rs. 48,000 for each unexpired year of the duration of his employment. According to the petitioner his employment was terminated with effect from November 30, 1949. As a result of a mutual agreement, notwithstanding the fact that the compensation payable to him pursuant to the agreement came to a larger figure, the petitioner was to be paid Rs. 7 lakhs as compensation for the cessation of his employment. When the petitioner was being assessed for the assessment year 1950-51, the question whether the sum of Rs. 7 lakhs received by him was to be regarded as income and subjected to tax, was gone into. The Income-tax Officer to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to tax under section 7 of the Indian Income-tax Act ?" The income-tax reference was heard by the High Court and decided in favour of the assessee. The judgment of the High Court is reported in [1965] 56 I.T.R. 724. Against the order of the High Court answering the question referred to above an application for leave to appeal to the Supreme Court was presented to the High Court, but later on it was withdrawn. On December 23, 1965, the petitioner was served with a letter of the same date by the respondent, inter alia, informing him that information has come to his possession that the basis on which the decision was taken treating the sum of Rs. 7 lakhs as capital receipt was incorrect and that in the light of the information that has come to his possession thereafter, which has been considered by him, he has come to the conclusion that there has been under-assessment for the assessment year 1950-51, as a result of which he contemplated action under section 147(a) of the Act after obtaining approval from the Central Board of Direct Taxes. By this letter the attention of the petitioner was invited, to the finding of the Vivian Bose Enquiry Commission that the letter appointing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... days after the above notice was issued, on March 26, 1966, the respondent wrote another letter to the petitioner informing him that after obtaining the approval from the Central Board of Direct Taxes, proceedings under section 147(a) have been started. The main reasons for starting these reassessment proceedings are the receipt of Rs. 7 lakhs from the company and the loan given to V.G. Pettie and the interest thereon. The petitioner was requested to file the return within the prescribed period of 35 days from the date of service of the notice. On April 5, 1966, the petitioner sent his reply to the respondent calling upon him to withdraw the notice and informing him that in case his request was rejected, he would adopt appropriate proceedings to restrain him from taking further action. It was thereafter that on April 11, 1966, the petition was filed in this court under article 226 of the Constitution contending that the notice issued by the respondent and the action of the respondent in proposing to bring to tax the said amount of Rs. 7 lakhs and the said loan of Rs. 2 lakhs and the interest thereon are void, illegal, without or in excess or improper exercise of jurisdiction, compe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t all primary facts before the Income-tax Officers and it is for the officers to draw their conclusions and inferences. Upon disclosure of all the primary facts both the Appellate Assistant Commissioner and the Tribunal have taken the view that the payment of Rs. 7 lakhs was compensation for premature termination of services and the finding of the Income-tax Officer that it was with a view to rewarding the past meritorious services was not accepted. The submission in short was that as this question in relation to the sum of Rs. 7 lakhs being regarded as part of income or as capital receipt was finally gone into by the taxing authorities at the time of the original assessment, it was not permissible to the Income-tax Officer to initiate the reassessment proceedings. Secondly, he submitted that there is no material produced by the respondent to show that he formed a reasonable belief that the sum of Rs. 7 lakhs in respect of which he initiated the reassessment proceedings was a part of the income of the assessee and, lastly, he submitted that if regard be had to the notices given from time to time by the Income-tax Officer by reopening the assessment, it is quite apparent and clear t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the part of an assessee to make a return of his income under section 22 ; or (ii) omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment for that year. Both these conditions were conditions precedent to be satisfied before the Income-tax Officer could have jurisdiction to issue a notice for the assessment or reassessment beyond the period of four years, but within the period of eight years, from the end of the year in question. The words "omission or failure to disclose fully and truly all material facts necessary for the assessment for that year" used in section 34 postulated a duty on every assessee to disclose fully and truly all material facts necessary for his assessment. What facts were material and necessary for assessment differed from case to case. In every assessment proceeding, the assessing authority would, for the purpose of computing or determining the proper tax due from an assessee, require to know all the facts which help him in coming to the correct conclusion. From the primary facts in his possession, whether on disclosure by the assessee, or discovered by him on the basis of the facts disclosed, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive satisfaction on the part of the Income-tax Officer. The belief must be held in good faith ; it cannot be merely a pretence. It is open to the court to examine whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section. To this limited extent, the action of the Income-tax Officer in starting proceedings under section 34 of the Act is open to challenge in a court of law. It is also pointed out in this case that there is no requirement in any of the provisions of the Act or any section laying down as a condition for the initiation of the proceedings that the reasons which induced the Commissioner to accord sanction to proceed under section 34 must also be communicated to the assessee. In proceedings under article 226 of the Constitution challenging the jurisdiction of the Income-tax Officer to issue a notice under section 34(1)(a) the High Court is only concerned to decide whether the condition which invested the Income-tax Officer with power to reopen the assessment did exist : it is not within the province of the High Court to record a final decision about ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing period was disclosed to the assessing authority and whether it was liable to tax or not was considered by all the authorities in their respective orders. There is some controversy between the parties whether the original letter of appointment dated October 11, 1943, was filed before the Income-tax Officer or a mere copy thereof was filed, but one thing is clear that in the document that was produced before the Income-tax Officer there was a term in the letter as regards the period of the service and as to what was to happen in case of premature termination of services before the expiry of the scheduled period. The document that was filed showed that the period of service was fixed at 25 years and it further provided that in case the services were to be terminated before the expiry of the scheduled period, provision was made for payment of a further sum at the rate of Rs. 48,000 for each unexpired year of the duration of employment. The petitiorier's services were terminated with effect from November 30, 1949, and during the relevant accounting period he received from the company a sum of Rs. 7 lakhs. In the order of the Income-tax Officer dated March 30, 1955, for the assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the income and he accordingly held that the said sum of Rs. 7 lakhs was received by the petitioner solely as compensation for loss of employment and tax was not attracted thereon. In an appeal by the revenue before the Income-tax Appellate Tribunal, the revenue wanted to challenge the genuineness of the letter which was said to ; be the basis of the arrangement between the assessee and the company. It was sought to be argued on behalf of the revenue that the letter or the copy which was produced on record was brought into existence at a later date. However, the Tribunal did not permit the revenue to go into this question as its genuineness was at no stage challenged before the Income-tax Officer. It is pointed oat that if the genuineness of the letter of appointment was questioned it was the duty of the Income-tax Officer to summon the assessee and examine him and as that was not done for the first time in appeal before the Tribunal the revenue was not permitted to challenge the genuineness of the document. The Tribunal observed that there was no material on record to justify a finding that the payment of Rs. 7 lakhs correlated to the past services rendered by the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 147(a) of the Act an express reference had been made to the findings arrived at by the Vivian Bose Enquiry Commission in relation to the letter of appointment and the payment of the sum of Rs. 7 lakhs to the petitioner. Even in the report submitted by the Income-tax Officer for obtaining the sanction of the Central Board of Direct Taxes there is an express reference to the findings of this Commission in relation to the letter of appointment and the payment of the sum of Rs. 7 lakhs to the petitioner. The Commission of Inquiry was appointed by the Central Government under notification S.R.O. No. 2993 of the Ministry of Finance (Department of Economic Affairs) on December 11, 1956, under the Commission of Inquiry Act (No. IX of 1952) to inquire into and report on the administration of nine companies, the nature and extent of the control, direct and indirect, exercised over such companies and firms or any of them by.....Shriyans Prasad Jain (i.e., the petitioner), their relatives, employees and persons concerned with them and other matters mentioned in clause 1 of the notification. This Commission was presided by Mr. Justice Vivian Bose, a judge of the Supreme Court. Chapter X (a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve gone against him". It was contended before the Commission that the question as to the genuineness of the document should not be gone into by it as the matter was sub judice. While dealing with this contention the Commission points out : " What we are considering is the genuineness of this document. What is before the courts is the consequences that will flow from the document for income-tax purposes on the assumption that it is genuine. In the income-tax Tribunals' proceedings the question of its genuineness is final, and cannot be reopened there. Actually there was no decision about this on the merits. Because of a slip at the original stage the question of its genuineness was shut out at the later stages. But, so far as we are concerned, it would not have mattered whether the matter was considered and finally decided on the merits or not. Even if there was a final decision on the merits it would be final only for the purposes of those tribunals and would not bind other tribunals or this Commission in investigating the matter afresh for another purpose." The Commission further pointed out that the question before the income-tax authorities was whether the receipt of Rs. 7 lak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the very important fact that during this period there were similar payments of compensation for the supposed breaches of managing agency and selling agency agreement in a number of other cases, we are entitled to draw the conclusion that this is one more instance of the device adopted to evade and avoid payment of substantial income-tax." The Commission has in this Chapter also summarised the circumstances on the basis of which these findings have been arrived at. The Income-tax Officer has studied and scrutinised the findings of the Commission contained in Chapter X in relation to the sum of Rs. 7 lakhs. If upon that material he has prima facie accepted the view or the finding of the Commission that the letter of appointment was forged and antedated, inter alia, with a view to provide for a term of duration of service and for payment of compensation in the event of premature termination, it cannot be said that he had no material before him to come to a reasonable belief that the assessee at the time of his original assessment omitted or failed to disclose truly and fully all material and primary facts. In that view of the matter, in our opinion, condition precedent No. 1 ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at escaped assessment could not be brought to tax under section 34(1)(a). Thus, in this case the test laid down in Calcutta Discount Co.'s case was applied that as the assessee had disclosed primary facts relevant to the assessment there was no obligation for him to instruct the Income-tax Officer about the inference which he may raise from those facts. The question then arises whether it is established in the present case that before issuing the impugned notice the Income-tax Officer had reason to believe that income had escaped assessment. It is contended by Mr. Kolah that in no view of the matter the sum of Rs. 7 lakhs could be regarded as income and if that is so, the Income-tax Officer cannot form a reasonable belief that the income has escaped assessment. At the outset we may point out that such a plea does not find, itself in the petition. Rule 6 of Order 6 of the Code of Civil Procedure requires that any condition precedent, the occurrence of which is intended to be contested, shall be distinctly specified in his pleading by the plaintiff. Such a principle will equally apply to a writ petition and it was necessary for the petitioner to plead such a ground in the petition. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easonable belief that income has escaped assessment, it will not be open to him to initiate reassessment proceedings. While considering this question, the basis on which the initial orders were passed at the time of the original assessment ougth not to be overlooked. At the time of the original assessment, the Income-tax Officer, the Appellate Assistant Commissioner, the Income-tax Tribunal and the High Court proceeded on the footing that the contract of employment of the petitioner contained a term that the duration of his service was 25 years and there was a provision to pay him the amount upon premature termination as referred to in those orders. If as a result of the finding of the Vivian Bose Inquiry Commission the Income-tax Officer has prima facie material to entertain a reasonable belief, that in the original letter of appointment or the contract of appointment there was no provision as regards the duration of service or payment of compensation for premature termination, then can he honestly and reasonably entertain a belief that what has escaped assessment is income ? At this stage, we are not expressing any final view upon the question whether the receipt of Rs. 7 lakhs i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t would not fall within the expression "profit received in lieu of salary". Reliance is placed by Mr. Kolah upon the decision of the Supreme Court in Commissioner of Income-tax E. D. Sheppard. In this case the Supreme Court had occasion to consider the provisions of Explanation 2 as then existed prior to the amendment in the year 1955. The Supreme Court by a majority judgment his taken the view that "compensation" in Explanation 2 to section 7(1) of the Income-tax Act does not mean compensation which is payable or compellble at law. Compensation for loss of employment is a well-known term : it means a payment to the holder of an office as compensation for being deprived of profits to which as between himself and his employer he would but for an art of deprivation by his employer or some third party such as the legislature, have been entitled. When the deprivation is by the legislature there can be no question of liability or compellability to pay damages at law. The emphasis is on the act of deprivation, which may or may not give rise to any liability at law. Explanation 2 to section 7(1) did not treat every payment received by an assessee from his employer or former employer as in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er those under section 147(a). Action under section 147(b) can be taken if notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the a the Income-tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year. The phrase "notwithstanding that there has been no omission or failure as mentioned in clause (a)" in this sub-section is very relevant. If upon consideration of material before him the Income-tax Officer takes a prima facie view and entertains a reasonable belief that the assessee omitted or failed to disclose truly and fully all material and primary facts, then action under section 147(a) is always justified. It is conceivable that such resonable belief as to omission or failure to disclose may arise as a result of information which may come to his knowledge, but even in such cases if the has omitted or failed to disclose truly and fully all material and primary facts, it will always be open to take action under section 147(a). Under section 151(1) no notice shall be issued under section 148 after the expiry of eight years from the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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