TMI Blog1986 (5) TMI 272X X X X Extracts X X X X X X X X Extracts X X X X ..... otices in question were quashed. 3. The revenue being aggrieved preferred appeals before the division bench of the High Court. The division bench of the High Court reversed the findings of the learned trial judge and the notices were upheld. Hence these appeals. 4. The assets and liabilities of erstwhile the Assam Oil Company have since then vested in the Indian Oil Corporation and on an oral application having been made on behalf of the assessee, we have directed that the name of the Indian Oil Corporation be substituted. 5. The assessee at the relevant time was a company incorporated under the appropriate laws of the United Kingdom, and had its principal place of business at the relevant time in India at Digboi in the State of Assam. It carried on business, inter alia, in oils and lubricants. As the years involved were prior to the introduction of the Act in question, the assessee was all along assessed under the provisions of the Indian Income-Tax Act, 1922 (hereinafter called the '1922 Act'). In its assessment under the 1922 Act, the assessee had claimed deductions every year of certain expenses amounting to 1,00,000 or over as administrative charges incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 9th December, 1953 informed the Income-tax Officer that the assessee's London Principals had advised them that the total expenses of the London office for 1952 amounted to 2,75,000 of which 2,55,000 was charged out to the subsidiary companies for services rendered by the parent company. It was further informed that by far the bulk of these Head Office Expenses was comprised of salaries and office rents paid, and apart from a comparatively negligible amount of work not connected with the subsidiary companies, the whole of head office expenses might reasonably be allocated to the subsidiary trading companies. The Assam Oil Company's share of the amount charged out was 1,00,000 i.e. approximately 40% and the London office advised so. It was communicated to the assessee that this amount was a 'reasonable allocation having regard to the amount of work done on behalf of the assessee company'. It was, further, stated that Assam Oil. Company was the largest of the trading subsidiaries, and in addition was by far the major producing company in the group. In short the amount, according to the assessee, was a reasonable pro rata division of the total charge for Manage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of 1,10,000 for the year 1953. The Income-tax Officer drew attention of the assessee that the assessee had written that there was no correspondence with the parent company on this matter. The assessee was asked to explain the basis of the allocation and how it was fixed at 1,10,000 for the year 1953. The assessee was further asked to explain the item Purchase of plant and machinery in the list of services rendered by Head Office in addition to the service of central administration and overall control. 11. By another letter dated 3rd January, 1958, the Income-tax Officer informed the assessee that the assessee had not written what the assessee's London office had to say about basis on which the amount of 1,10,000 claimed as a deduction from the Indian profits, was arrived at. The Income-tax Officer further informed the assessee that in the absence of the required particulars he would have to disallow a part of the expenses claimed and also to capitalise a portion of the remaining part as relating to purchase of plant and machinery. To this the assessee by its letter dated 16th January, 1958 informed that regarding letter referred to hereinbefore it was difficult t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, 1956, asked for the details of the services rendered and to send a copy of correspondence between assessee and parent company regarding fixation of the amount of London charges. 15. The assessee on 12th July, 1957 by a letter objected to the suggestion that, London office charges were not allowable and pointed out that they had always been allowed in the past. In any event the assessee asked for time to furnish the details. 16. On 16th January, 1959, Shri D.G. Pradhan, Income-tax Officer, completed the assessment for the assessment year 1955-56 allowing the claim for London charges in full. On the same day, Shri Pradhan completed the assessment for the assessment year 1956-57 and 1957-58 and allowed London charges in full. 17. For the assessment year 1959-60, the assessee wrote on 27th July, 1961 to the Income-tax Officer pointing out that it did not incur any London office expenses as such. The Burmah Oil Co. Ltd. which had employed all the staff, incurred all the expenditure and passed to each subsidiary company a charge which was based on the proportion of the total work carried out in London for that subsidiary and which could be described as management charges. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held it was for the taxing authority either to accept the claim or to reject the claim either wholly or in part. After having accepted the claim in spite of the non-production of the relevant auditor's certificate which was asked for at one stage, it was held that the revenue could not later turn round and say that the income of the assessee had escaped assessment or been under assessed due to the failure of the assessee to disclose those very auditors' reports. The learned judge felt that the underassessment, if any, was due to the laches of the revenue and not due to any act or omission on the part of the assessee and notices under Section 148 had to be quashed. 22. In answer to the rule nisi issued, the respondents Income - tax Officers who affirmed the affidavits in opposition were not the Income-tax Officers who had made the original assessments nor were they the Income-tax Officers who had issued notices for the reassessment. The respondent Income-tax Officers who affirmed the affidavits in opposition could only make the statements on the basis of the information received from the records and the only way they. could show cause was by repeating that in view of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on that basis reopen the assessment. The learned single judge was of the view that this might have been a good ground for action under Clause (b) of Section 147 of the said Act but it could not be treated as good ground for reopening under Clause (a) of Section 147 on the ground that there was failure or omission on the part of the assessee to disclose fully and truly all relevant and material facts. It is true as the learned Judge accepted the position and was reiterated here that if on the records it appeared that there were some materials to form the belief that there was omission or failure on the part of the assessee to disclose fully and truly all relevant and material facts, the initiation of the proceedings under Clause (a) of Section 147 cannot be questioned. 23. Aggrieved by the said decision of the learned trial judge, as mentioned hereinbefore, the revenue had challenged the decision before the division bench of the Calcutta High Court. The division bench after setting out the relevant facts and the contentions and after referring to the judgment of the learned trial judge and to the correspondence, observed that the assessee was guilty In the facts and circumstanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits or gains chargeable to tax had been under assessed or escaped assessment; the second was that he must have reason to believe that such escapement or under-assessment was occasioned by reason so far as relevant for the present purpose to disclose fully and truly all material facts necessary for the assessment of that year. Both these conditions are conditions precedent to be satisfied. See in this connection the observations of this Court in Calcutta Discount Co. Ltd. v. Income-tax Officer. Companies District I, Calcutta and Anr., [1961]41ITR191(SC) . The obligation, therefore, of the assessee primarily was to disclose fully and truly all material and relevant facts; that the obligation was only of disclosing the basic facts but not obligation to disclose what inference had to be drawn from such facts. It was further observed by Hidayatullah, J. as the learned judge then was, that the mere production of evidence before the Income-tax Officer was not enough and there might be an omission or failure to make a full and true disclosure, if some material for the assessment lay embedded in that evidence which the assessee could uncover but did not. If there was such a fact, it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 included the sum of ₹ 19,000 in the reassessment of the family and the sum of ₹ 1,10,000 separately in the assessments of the five members in respect of the respective notes encashed by them. Two days later, i.e. on 2nd February, 1955, the Income-tax Officer issued a notice under Section 34(1)(a) of the Income-tax Act, 1922, seeking to include the sum of ₹ 1,10,000 in the hands of the family. The Tribunal, being satisfied that the notes encashed by the five members belonged to the Hindu undivided family, had held that the notice issued was valid. On a reference the High Court held that the notice issued on 2nd February, 1955 was not valid, since it was found that when the first assessment was made the primary facts necessary for reassessment of the family were in the possession of the Income-tax Officer; that these facts came into his possession not by virtue of any disclosure made by the family but were discovered by him otherwise; that at the time of the first reopening of the assessment of the Hindu undivided family and of the individual members the question of assessment of the entire amount represented by the high denomination notes was under direct conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Income-tax Officer, I Ward, Distt. VI, Calcutta and Ors. v. Lakhmani Mewal Das, [1976]103ITR437(SC) where this Court observed that it was the duty of the assessee to disclose fully and truly all primary facts. It must further be reiterated that before an action is taken under Clause (a) of Section 147, there must he reason to believe that there was failure or omission on the part of the assessee to disclose fully and truly all primary facts. See in this connection the observations of this Court in the case of Sheo Nath Singh v. Appellate Assistant Commissioner of Income-tax (central), Calcutta, and Ors., [1971]82ITR147(SC) . But reason to believe is not the same thing as reason to suspect. 33. As is well-settled now by the several authorities of this Court and of several High Courts, that there must be materials to come to the conclusion that there was 'omission or failure to disclose fully and truly all material facts necessary for the assessment of the year'. It postulates a duty on every assessee to disclose fully and truly all material facts necessary for the assessment. Therefore, the obligation is to disclose facts; secondly those which are material; thirdly the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s an inferential fact. It is true that the Income-tax Officer, from time to time as would be evident from the correspondence noted before, had some doubts as to whether the entirety of the expenses debited were really incurred for the assessee company by the London company or whether that was unreasonable or excessive having regard to the magnitude of the work done by the London company but that would be a matter of opinion and an inference drawn from the amount of the work in correlation to the amount debited. The facts what was done, what was being claimed by the London office and the difficulties in producing the accounts or the opinion of the auditors for which the Income-Tax Officers had called upon the assessee, were all known to Income-tax Officers at the time of making the original assessments. In spite of the same, the Income-tax Officer choose to assess the assessee in the manner he did. In the light of the opinion of the auditors for the assessment year 1963-64 wherein his opinion that ten per cent would be reasonable charge might be good information for which the assessment of the assessee could be reopened under Clause (b) but on this basis alone it could not be said t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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