TMI Blog1963 (11) TMI 100X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted a report to the Commissioner of Income Tax. He stated in his report that in the course of the investigation in connection with the assessment for 1950-51, it came to light that although the assessee had effected on outright sale of the distribution rights of the pictures and had also collected in full the sale consideration, the company had spread out the receipts over a period of three to five years on the plea that the distribution rights had been leased out on the basis of annual hire. It was also stated in the report that there had been benami transfers of lease of distribution rights. In relation to the year of assessment 1946-47, the Income Tax Officer also stated that the distribution rights of two new pictures Rajarajeswari and Burma Rani had been sold outright but that only a fifth part of the consideration had been brought to tax. Another instance of such concealment of the true nature of the transaction was, according to the Income Tax Officer, in relation to the transaction with Ganga Films Co. The Income Tax Officer accordingly thought that there had been a suppression of the real income liable to be taxed. He sought the sanction of the Commissioner for re-op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een a concealment and under assessment, the application of section 34(1)(a) was properly invoked. 5. In its statement of the case, the Tribunal conceded the position that, in the course of the assessment proceedings of the year 1946-47, the then Income Tax Officer did call for copies of the agreements with the lessees in respect of the pictures and that the assessee produced those agreements. The view taken by the Appellate Assistant Commissioner that these agreements were kept back by the assessee accordingly loses its force. 6. The question stated above were referred by the Tribunal under section 66(1) of the Act. The assessee came before us with an application under section 66(2) of the Act and sought for a reference of a further question. Accordingly to it, in the notice that was issued to it pursuant to the proceedings under section 34(1)(a), only two agreements were referred to and the Income Tax Officer sought to re-open the assessment only on the basis of any suppression of income in relation to these two agreements. But in the final order made by the Income Tax Officer, he included such income in respect of the other agreements as well. The assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome Tax Officer. If, therefore, the agreements themselves disclose that the assessee had received the full amount of consideration for the leases, and the accounts also displayed receipt of such amounts, there was no failure to disclose any material fact. The then Income Tax Officer must be held to have accepted the position that the assessee was legally entitled to receive only a part of the lease amount during the account year relevant to the assessment year and that the advance receipt of the balance of the amount, for whatever other reasons it might be, was not income referable to that year. Mr. Seshadri urges that the assessee follows the mercantile system of accounting. In such a system, whether the assessee receives any amount or not, if legal right to receive the amount accrues, it is brought in and taxed. Equally, he claims that the receipt in advance of any amount to which he was not entitled in law cannot be brought to tax till the legal right to receive it accrues. 10. It would be useful to set out the instances of such receipt. In the case of the film Chow Chow under the agreement with the Ganga Films Co., Salem, the assessee received a sum of Rs. one la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liable to be so treated. But the Income Tax Officer added the balance of ₹ 22,000 as suppressed income. In the case of the firm Rajarajeswari, under an agreement with Balu Co., dated December 1, 1944, the lease was for a period of five years and the rent was ₹ 1,25,000 payable in five annual equal installments of ₹ 25,000 on the first of January of every year beginning from January 1, 1945. In accordance with its practice, the assessee brought to tax the sum of ₹ 25,000 being the lease amount for the first year which fell within the account year relevant to the assessment year. The balance of Rs. One lakh has now been added by the Income Tax Officer. According to the learned counsel, in the case of companies like the assessee who produce films, it is the normal practice to demand and accept from persons, with whom leases are entered into, payments in advance which are utilised for the production of films. The parties who pay these advance amounts are entitled to receive copies of the films for exhibition. Mr. Seshadri very pertinently asks what would happen if the films are not produced and the agreements fail. It cannot for a moment be contended that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessees intention being an inferential fact, the assessees omission to state its true intention behind the sale of shares was held not to amount to a failure or omission to disclose any material facts. This decision is of considerable importance as it emphasises the scope of the action under section 34(1)(a). While it is no doubt true that under the Explanation to that section the mere production of accounts and other evidence from which material facts could have been discovered by the Income Tax Officer will not necessarily amount to disclosure within the meaning of the section, when, as a matter of fact, all the necessary documents were placed before the Income Tax Officer and the Income Tax Officer himself of his volition called for certain other documents which had a material bearing upon the question which he had to decide, the matter is taken out of the scope of the Explanation. Here is accordingly a case where the Income Tax Officer thought it necessary to determine whether the entire amount received by the assessee was income of that year or only a part thereof notwithstanding that the whole of it had been received by the assessee. But for his need to arrive at a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as disallowed by the department and that is how the question came before the Supreme Court. Their Lordships held that, since the undertaking to effect improvements involved a liability which accrued on the date of the sale itself, though the liability was to be discharged on a later date, the appellant was entitled to estimate the expenditure and debit the accounts. It was not a conditional liability as contended for by the department. The precise application of this decision is not clear. The learned counsel for the department contends that the converse of the proposition laid down by their Lordships in this case should justify the view that the advance payments should be regarded as income. We are unable to agree. On the other hand, this decision really emphasises the legal incidents of the mercantile system of accounting. We may now refer to two agreements. In the case of the agreement with G. L. Roche, dated May 3, 1945, the lease was for a period of five years in respect of one picture and three years for another. The total rental was ₹ 44,000. The agreement specified that this rent was payable in a certain manner provided therein. On the date of the agreement a sum of & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee, these amounts should have been brought to tax. 15. Notwithstanding these features, however, it is not open to the department, in the light of what we have stated earlier, to bring these amounts to tax in section 34 proceedings. The assessing authority, when he made the assessment, took a particular view of the legal liability of the assessee to be assessed in respect of these amounts, and since there was no default on the part of the assessee or failure to disclose truly and fully the state of things, section 34(1)(a) cannot apply. We have, nevertheless, thought it fit to refer to this part of the original proceeding to indicate the nature of the rights and liabilities of the assessee. It should follow from what we have stated that the circumstances do not warrant the view that the assessee has failed to disclose fully and truly all the material facts necessary for the assessment. On the facts also, the proper inference in law to be made would be that the entire amount did not represent the income of the assessee during the year. The reassessment made in these circumstances cannot be supported. Both the question are answered in favour of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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