TMI Blog1963 (7) TMI 106X X X X Extracts X X X X X X X X Extracts X X X X ..... : The petitioners are a private limited company which was incorporated on May 6, 1943, with a paid up capital of Rs. 20,00,000. The Apollo Mills Co. Ltd. of Bombay with a capital of Rs. 50,00,000 divided into 25 lakhs share of Rs. 2 each had as its managing agents Messrs. E.D. Sassoon Co. Ltd., who, for the sake of brevity, will be referred to in this judgment as the Sassoons . They held 19,76,000 shares out of the 25 lakhs. The promoters of the petitioners' company entered into an agreement with the Sassoons on April 27, 1943, by which the Sassoons agreed to transfer their managing agency of the Apollo Mills for Rs. 12? lakhs and the whole of their holding of 19,76,000 shares at Rs. 4-4-0 per share, i.e., for Rs. 83,98,000, to the promoters of the petitioners' company. These shares were to be transferred to the petitioners' company which was being floated. By clause (3) of the agreement the sale of the managing agency and the transfer of the shares was agreed to be simultaneously completed. On November 1, 1943, a tripartite agreement was entered into between the Sassoons as assignors, the promoters of the petitioners' company as confirming parties and the pet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the petitioners' liability for the above period to excess profits tax, notices dated December 6, 1945, under section 13(1) of the Excess Profits Tax Act were issued by B.S. Nadkarni, the then Excess Profits Tax Officer. The petitioners filed two returns both dated December 15, 1945, on or about December 19, 1945. The matter of the petitioners' liability to excess profits tax was not considered by B.S. Nadkarni and it appears that one C.H. Mehta was in charge of the proceedings for the excess profits tax liability. On May 10, 1946, C.H. Mehta wrote to the petitioners requesting them for interview to enable him to complete the excess profits tax assessment. The petitioners were requested to find out the standard profit of the Sassoons for the Apollo Mills' agency. The petitioners informed C.H. Mehta that they were unable to get such standard profit of the Sassoons and that they should be given percentage of standard profit. C.H. Mehta then made excess profits tax assessment order dated October 12, 1946, for the period ending October 31, 1944. That order is not annexed to the petition. A copy of the order is now tendered and is marked exhibit 1. The relevant part of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n on March 20, 1953, and the Supreme Court on April 12, 1961. After the High Court had given its decision, the question of validity of section 5 of the Taxation on Income (Investigation Commission) Act was argued before the Supreme Court in the case of Suraj Mall Mohta and Co. v. Visvanatha Sastri [1954] 26 I.T.R. 1; [1955] 1 S.C.R. 448 . By its decision given in that case on May 28, 1954, the Supreme Court held the provisions of section 5(4) of the above Act to be ultra vires the Constitution as infringing article 14. Within short intervals, in other matters which reached before it, the Supreme Court held certain other provisions of the Act to be ultra vires the Constitution. It appears that to meet with the situation which arose having regard to the above decisions of the Supreme Court, on June 17, 1954, the Central Government enacted Ordinance VIII of 1954 and followed it up with Act XXXIII of 1954. The promulgation of the Ordinance was necessitated by the decision of the Supreme Court in Suraj Mall Mohta's case [1954] 26 I.T.R. 1; [1955] 1 S.C.R. 448 . The Ordinance and the Act inserted two new sub-sections into section 34 of the Indian Income-tax Act. By the new sub- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xcess Profits Tax Act for the periods ending October 31, 1943, and October 31, 1944, S.V. Nerurkar, being Excess Profits Tax Officer, Central Circle II-C, Bombay, recorded that in consequence of definite information that had come into his possession, he had discovered that profits of the chargeable accounting periods chargeable to excess profits tax had escaped assessment and had been under-assessed and called upon the petitioners to deliver to him returns in the forms attached to the notices for reassessment purposes. Thereafter, K.T. Thakore, Income-tax Officer, Central Circle II-C, Bombay, served four notices dated May 5, 1960, under section 34(1)(a) on the petitioners for reassessment purposes respectively for the years 1945 to 1949. By these notices he recorded that he had reason to believe that income assessable to income-tax for these years had escaped assessment and had been under-assessed. He called upon the petitioners to file returns in the forms attached to the notices for reassessment purposes. Thereafter, the Supreme Court gave its decision on April 12, 1961, in the petitioners' appeal, as already related above. By correspondence that took place in June/July, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ively) to this petition. By the order reassessing the petitioners to excess profits tax, the officer recorded the following: The assessee's contentions that the notices under section 15 of the Excess Profits Tax Act have been issued without jurisdiction and beyond the prescribed period are not acceptable because there is 'definite information' available from the report of the Income-tax Investigation Commission that the profit on sale of Apollo Mills' shares had escaped assessment and because there is no time limit for issue of notice under section 15 of the Excess Profits Tax Act. By the impugned income-tax assessment order the Income-tax Officer found that Rs. 16,62,000 was a trading profit of the petitioners and as such was liable to be included in the income of the petitioners. On that very footing, the excess profits tax liability of the petitioners was determined. As regards the above notices and the assessment orders, at the hearing of this petition, two contentions have been made on behalf of the petitioners. The first contention of the petitioners is based on the provisions of section 15 of the Excess Profits Tax Act, the relevant part whereof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... graph 5 of the petition and the submission in paragraph 18, where it is stated that the petitioners say that they had made a full and true disclosure of all material facts necessary for their assessment at the time of the original assessment.... In paragraph 5 also the averment is: ...Excess Profits Tax Officer (reference being to Shri B.S. Nadkarni)...did not include the sum of Rs. 16,52,600 in the total income of the petitioners on the basis that the amount realised by sale of 13,74,000 shares of the Apollo Mills was not revenue profit and that the same was, therefore, not taxable as such, after the petitioner company had disclosed and placed before him all material facts necessary for their assessment, and recorded them in their letter to him dated the 29th October, 1945 . It is difficult to avoid observing that the petitioners have intentionally kept the whole petition vague as regards the information that they conveyed to the Excess Profits Tax Officer, C.H. Mehta. They failed to refer to him altogether. Even if it was their mistake in referring to B.S. Nadkarni in connection with this order, what they have mentioned regarding the facts disclosed to Nadkarni is also entirel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been made as the company is precluded from dealing in the business of shares by article 15 of the memorandum and that the assessee company in fact made arrangements whereby the parties to whom the surplus shares of the Apollo Mills Ltd. were sold took delivery of the shares direct from Messrs. E.D. Sassoon Co. Ltd. against cash payments and credit was (merely) given for these payments to the assessee company and its promoters in relief of their obligation to pay the price of the entire block of shares to Messrs. E.D. Sassoon Co. Ltd......... 5. Return of income and copies of the audited statements of accounts have been duly submitted........... Reference is then made to the profit and loss account. Without discussing any reasons in the final assessment order, B.S. Nadkarni has not referred to or considered the question of the sum of Rs. 16,52,600 being excess over the purchase price that was received by the petitioners and as to whether the sum was or was not business profit. Apparently, in the letter dated October 29, 1945, resale price of 13,00,000 odd shares is not mentioned. It is also clear from what I have quoted from the above assessment order that Mr. Bhabha c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon investigation of true facts. If the petitioners had not made their petition vague and had made specific allegations or averments of fact in the petition, the same might have been dealt with in the affidavits in reply. It was for the petitioners, in the first instance, to allege that C.H. Mehta, the Excess Profits Tax Officer, was given all materials and documents disclosing to him the fact that the petitioners had resold 13,00,000 odd shares at the price of Rs. 5-4-0 to Rs. 5-8-0 per share which was an excess over their purchase price of Rs. 4-4-0 per share. The petitioners altogether failed to refer to C.H. Mehta in the petition. The petition has wholly been made on the basis of information conveyed to B.S. Nadkarni by the above letter dated October 29, 1945. The respondents have by their affidavits in reply denied that all material facts had been disclosed by the petitioners to the officers concerned. Under those circumstances, it is difficult for me to make a finding that C.H. Mehta, who, in the first instance, assessed the petitioners to excess profits tax liability by his order dated October 12, 1946, had been furnished by the petitioners with all relevant information and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny facts relating to the 13,00,000 odd shares resold by the petitioners. It appears to be recorded that if there were sufficient particulars and averments in the petition as regards these questions of facts, I would have insisted on the respondents getting an affidavit of C.H. Mehta disclosing complete particulars of the documents and information that he had in his possession in connection with the assessment of the petitioners to excess profits tax. I have found it unnecessary to insist on such an affidavit of C.H. Mehta having regard to the absence of any substantial averments of particular facts in the petition and the facts which are clear from reading the contents of the order dated October 12, 1946. In the impugned order for reassessment of excess profits tax dated July 29, 1961, the first respondent, whilst dealing with the contention of the petitioners as to want of jurisdiction, has stated that there is definite information available from the report of the Income-tax Investigation Commission that the profit on sale of the Apollo Mills' shares had escaped assessment. This ground has been developed by Mr. Joshi in the arguments advanced on behalf of the responden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion and as to whether in consequence of that definite information Nerurkar discovered that profits of the petitioners for the relevant accounting period chargeable to excess profits tax had escaped assessment or had been underassessed. Mr. Jhaveri contends that the petitioners had given to Nadkarni and C.H. Mehta all relevant information as to the transaction that the petitioners had made in connection with the sale of managing agency and shares of the Apollo Mills to the petitioners. He contends that all facts relevant to the resale of the block of 13,00,000 odd shares had been disclosed to these officers. Having brought to the notice of these officers all relevant facts as regards the above transaction, the petitioners had not kept back any information from these officers. These officers had formed their own opinions on the basis of all relevant facts disclosed by the petitioners and, accordingly, passed the assessment orders dated October 30, 1945, and October 12, 1946. The contention is further developed by submitting that there were no new facts before the Investigation Commission. The Commission made and formed its own opinion on the same facts as the petitioners disclosed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during the year of account in the acquisition of house properties was his share of profits of the partnership and added the sum to the income of the firm and assessed the firm to tax. On appeal, the Appellate Tribunal held that the sum could not be considered to be the income of the firm and reduced the assessment of the firm accordingly. Thereafter, the Income-tax Officer purported to issue reassessment notice and take further proceedings under section 34 of the Indian Income-tax Act and added the sum to the income of the assessee and assessed him afresh. The court held that a mere change of opinion based on the same facts and figures which were present to the mind of the Income-tax Officer at the time of the original assessment did not amount to discovery within the meaning of section 34 of the Income- tax Act (as existing before 1948). The court observed that the discovery must be the result of definite information, that is to say, new information that has come to the knowledge of the Income-tax Officer. The Income- tax Officer cannot act under the section even though the taxpayer has escaped assessment if he is acting on information which was already in his possession and wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-tax [1955] 28 I.T.R. 252 which were relied upon by Mr. Jhaveri. In the case of Haji Ahmad Haji Esak Co. v. Commissioner of Income-tax [1951] 19 I.T.R. 331 a notice for reassessment had been issued under section 15 of the Excess Profits Tax Act. The facts leading to the issue of that notice were as follows: The assessee was assessed to excess profits tax on Rs. 4,03,269 and for this purpose the accounts were scrutinised by an officer. The assessee preferred an appeal to the Appellate Assistant Commissioner on the ground that the Income-tax Officer was wrong in disallowing a certain sum. The Appellate Assistant Commissioner, however, forwarded the case to another Income-tax Officer (not the first officer who had made the assessment order) for careful scrutiny of the accounts and report. On the basis of this second officer's report, the assessee was assessed to income-tax on a sum of Rs. 13,99,095 for the same year. Notice was then issued to the assessee under section 15 of the Excess Profits Tax Act and the assessee was reassessed to excess profits tax on the sum of Rs. 13,99,095. The Excess Profits Tax Officer in making the reassessment only drew the relevant and imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the officer is information. Suspicion, opinion or apprehension is not enough. Information must consist of facts which for the first time he is apprised of, as a result of which he discovers that there has not been a proper assessment. After making the above observations, the learned Chief Justice examined the facts as arising in that case. By looking at the report of the Income-tax Officer who was appointed by the Appellate Assistant Commissioner to scrutinise the accounts of the assessee, several facts were pointed out. As regards these facts, the learned Chief Justice observed: There is a clear and explicit finding by the Tribunal that all these facts were fresh or new facts which came into the possession of the Excess Profits Tax Officer for the first time, as a result of which he made the discovery contemplated by section 15. It is also clear from the record that all the books which Mr. Dastur (the newly appointed officer) inspected and scrutinised were not inspected by Mr. Killawalla who was the Excess Profits Tax Officer and who made the first assessment. As regards the contention of Sir Jamshedji that the books of account were present before the first o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could have once more made deeper investigation into the transaction of the petitioners as regards the above shares and found out the resale price of those shares. He might have, thereafter, also come to the conclusion that the sum of Rs. 16,52,600 was not business profit. The contents of the order dated October 12, 1946, however, are much too clear and prevent a finding that C.H. Mehta was aware of relevant facts relating to this sum of Rs. 16,52,600, or considered the question of the same being not revenue profits. In the case of Mohideen Thumby Co. v. Commissioner of Income-tax [1955] 28 I.T.R. 252 , Subba Rao C.J. discussed all the previous decisions and summarised the effect of those decisions at page 264 as follows: Section 34 was enacted both in the interests of the State and the subject. If it is necessary to prevent evasion of tax, it is equally important to protect a citizen from undue harassment by over-zealous officers. The Act does not contemplate piecemeal assessment and ordinarily it is expected of an Income-tax Officer to complete his assessment for a particular year once and for all. He cannot resort to the method of piecemeal and compartmental assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was obligatory on the department to take notice of the facts discovered by the findings made by the Commission as also by the opinion expressed by the High Court on the reference that was made to it at the instance of the petitioners. I find it unnecessary to give any opinion on that contention, as I am otherwise in favour of the respondents. The second contention made on behalf of the petitioners is that the re- assessment of the petitioners to income-tax under section 34(1A) by the order dated July 29, 1961, is also not sustainable. The contention is that from and after May 5, 1960, on which date notice under section 34(1)(a) had been issued and served on the petitioners, the prior notice dated March 29, 1956, issued under section 34(1A) was waived--not in existence--superseded. The further contention as regards this notice under section 34(1A) is that the section does not cover a case of change of opinion and notice cannot be issued under this section because another officer forms a different view. The third contention about this very notice was that proceedings under this sub- section (1A) can only be taken on rational belief that income, profits or gains chargeable to inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tioners for loss in cotton transactions. The purpose of the notice under section 34(1A) was different and to meet the contingency arising on the Supreme Court declaring the provisions of the Taxation on Income (Investigation Commission) Act invalid. The petitioners also treated both the notices in the above manner. The petitioners made two proposals, one for settlement of their claims and contentions regarding the loss in cotton transactions and the other for the above sum of Rs. 16,52,600. The Central Board of Revenue in fact accepted the petitioners' proposal for settlement in respect of the alleged loss in cotton transactions and that matter is now finally settled. The Central Board of Revenue rejected the petitioners' proposal for settlement regarding the sum of Rs. 16,52,600 in February, 1961. Much time had expired since the first notice of March 29, 1956. Formal proceedings against the petitioners were started after the Central Board of Revenue had considered both the proposals and rejected the proposal in connection with the sum of Rs. 16,52,600 in February, 1961. The petitioners were in June, 1961, given opportunity to appear before departmental officers in connecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income- tax Officer has not recorded his reasons for taking action under sub-section (1A) or that the Central Board of Revenue has not considered the reasons furnished to it by the Income-tax Officer or that the Central Board of Revenue was not satisfied or recorded reasons given to it by the Income-tax Officer that the petitioners' was a fit case for the issue of a notice. Mr. Jhaveri, for the petitioners, has clamoured before me that I should ask Mr. Joshi to give me the reasons submitted by the Income-tax Officer to the Central Board of Revenue and the action that the Central Board of Revenue directed in pursuance of those reasons by calling for these documents. I would have called for these documents if I had felt any doubts regarding the reasonableness of the reasons that must have been mentioned by the Income-tax Officer to the Central Board of Revenue. In that connection, I accept the statements made on behalf of the respondents in the affidavit in reply. From the facts of the petitioners' case as disclosed on the record of this case, I have no doubt, that having regard to the total failure of the machinery that had commenced with the Taxation on Income (Investigatio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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